8 May

April job numbers in Canada!

General

Posted by: Jeannie Stace-Smith

Not surprising given the shutdown,  however this will be awesome to pull up in a year and see where we are sitting!

HISTORIC JOB LOSSES IN APRIL IN CANADA AS THE ECONOMY BOTTOMS

Pandemic Batters Canadian Jobs Market

A Recession Like No Other

The Canadian economy has been put in a medically induced coma. Never before in modern history have we seen a forced shutdown in the global economy so, not surprisingly, the incoming data for April is terrible. There is a good chance, however, that April will mark the bottom in economic activity as regions begin to ease restrictions.

The economy will revive, but the psychological shock is perhaps the most unnerving. Rest assured, however that, as severe as this is, there are real opportunities here along with the challenges. There are economic winners, not just losers. More on that later.

Employment in Canada collapsed in April, with 2 million jobs lost, taking the unemployment rate to 13.0%, just a tick below the prior postwar record of 13.2% in 1982 (see chart below). The record decline is on the heels of the 1 million job loss in March, bringing the cumulative two-month total to 15.7% of the pre-virus workforce.

Economists had been expecting double the job destruction–a 4 million position decline in April–in reaction to the reports that over 7 million Canadians had applied for CERB. Today’s news reflected labour market conditions during the week of April 12 to April 18. The applications for CERB are more recent, so we may well see these additional losses reflected in the May report.

The 13% unemployment rate underestimates the actual level of joblessness. In April, the unemployment rate would have been 17.8% if the labour force participation rate had not fallen. Compared to a year ago, there were 1.5 million more workers on permanent layoff not looking for work in April – and so not counted as unemployed.Also, the number of people who were employed but worked less than half of their usual hours for reasons related to COVID-19 increased by 2.5 million from February to April. As of the week of April 12, the cumulative effect of the COVID-19 economic shutdown—the number of Canadians who were either not employed or working substantially reduced hours—was 5.5 million, or more than one-quarter of February’s employment level.

In April, both full-time (-1,472,000; -9.7%) and part-time (-522,000; -17.1%) employment fell. Cumulative losses since February totalled 1,946,000 (-12.5%) in full-time work and 1,059,000 (-29.6%) in part-time employment.

Decline In Employment is Unprecedented

The magnitude of the decline in employment since February (-15.7%) far exceeds declines observed in previous labour market downturns. For example, the deep 1981-1982 recession resulted in a total employment decline of 612,000 (-5.4%) over approximately 17 months.

More of the drop in employment now is the result of temporary layoffs. In April, almost all (97%) of the newly-unemployed were on temporary layoff, whereas in previous recessions, most of the dismissals were considered permanent.

In April, more than one-third (36.7%) of the potential labour force did not work or worked less than half of their usual hours, illustrating the continuing impact of the COVID-19 economic shutdown on the labour market. But job losses were also still weighted, on balance, more heavily in lower-wage jobs. Average wage growth for those remaining in employment spiked sharply higher as a result to 11% above year-ago levels.

All Provinces Have Been Hard-Hit

Employment declined in all provinces for the second month in a row. Compared with February, employment dropped by more than 10% in all regions, led by Quebec (-18.7% or -821,000).  Quebec leads the country in the number of COVID-19 cases and deaths.

The unemployment rate rose markedly in all provinces in April. In Quebec, the rate rose to 17.0%, the highest level since comparable data became available in 1976, and the highest among all provinces (see table below). The number of unemployed people increased at a faster pace in Quebec (+101.0% or +367,000) than in other regions.

Employment dropped sharply from February to April in each of Canada’s three largest census metropolitan areas (CMAs). As a proportion of February employment, Montréal recorded the largest decline (-18.0%; -404,000), followed by Vancouver (-17.4%; -256,000) and Toronto (-15.2%; -539,000).

In Montréal, the unemployment rate was 18.2% in April, an increase of 13.4 percentage points since February. In comparison, the unemployment rate in Montréal peaked at 10.2% during the 2008/2009 recession. In Toronto, the unemployment rate was 11.1% in April (up 5.6 percentage points since February), and in Vancouver, it was 10.8% (up 6.2 percentage points).

Employment Losses by Sector

In March, almost all employment losses were in the services-producing sector. In April, by contrast, employment losses were proportionally larger in goods (-15.8%; -621,000) than in services (-9.6%; -1.4 million). Losses in the goods-producing sector were led by construction (-314,000; -21.1%) and manufacturing (-267,000; -15.7%).

Within the services sector, employment losses continued in several industries, led by wholesale and retail trade (-375,000; -14.0%) and accommodation and food services (-321,000; -34.3%).

Industries that continued to be relatively less affected by the COVID-19 economic shutdown included utilities; public administration; and finance, insurance and real estate.

In both the services-producing and the goods-producing sectors, the employment decreases observed in the two months since February were proportionally larger than the losses observed during each of the three significant labour market downturns since 1980.

As economic activity resumes industry by industry following the COVID-19 economic shutdown, the time required for recovery will be a critical question.

After the previous downturns, employment in services recovered relatively quickly, returning to pre-downturn levels in an average of four months. On the other hand, it took an average of more than six years for goods-producing employment to return to pre-recession levels following the 1981-1982 and 1990-1992 recessions. After the 2008-2009 global financial crisis, it took 10 years for employment in the goods-producing sector to return to pre-crisis levels.

Green Shoots

As bad as things are, there is some evidence that the economy is approaching a bottom. Business shutdowns are easing in most provinces, and while it will be some time before we see a complete reopening, early signs of improvement are evident. Business sentiment appears to have improved somewhat towards the end of April, as evidenced by data from the Canadian Federation of Independent Business. The Royal Bank economists report that credit card spending looked less weak at the end of April. Housing starts for April held up better than expected. And, most importantly, the spread of Coronavirus has eased, and regions are starting to relax some of the rules to flatten the curve.

Concerning the housing market, before the pandemic, we were going into the spring season with the prospect of record sales activity in much of the country. Aside from oil country–Alberta and Saskatchewan–all indications were for a red-hot housing market. So the underlying fundamentals for housing remain positive as the economy recovers. How long that will take depends on the course of the virus and whether we see a second wave in late fall.

Interest rates have plummeted. Thanks to the 150 basis point decline in the prime rate, variable rate mortgage rates have fallen for the first time since late 2018. Once the Bank of Canada was able to establish enough liquidity in financial markets, even fixed-rate mortgage rates have fallen.

The posted mortgage rate appears stuck at 5.04%, far above contract rates; but with any luck at all, this qualifying rate for mortgage stress tests will ease in the coming months. The Bank of Canada will remain extremely accommodating. In my view, interest rates will not rise until 2022.

Opportunities–There Will Be Winners

Even now, some businesses are enjoying a surge in revenues and profitability. Just to put a more positive note on this period of rapid change, I jotted down a list of companies that are thriving. Top of the list is Shopify, a Canadian company that helps businesses provide online shopping services. Shopify is now the most highly valued company in Canada, as measured by its stock market valuation, surpassing the Royal Bank.

Many who never relied on online shopping have become converts during the lock-down. Amazon is another business that is benefiting, but Amazon needs more competition, and many Canadians would welcome some homegrown online rivals.

Loblaws, with its groceries and drug stores, is booming. So are the cleaning products companies like Clorox and paper products company Kimberly Clark. Staying at home has boosted sales at Wayfair, the online furniture and home products site. Peloton and suppliers of dumbbells and other fitness equipment are seeing increased revenues as people look for in-home alternatives to the locked-down gyms and health clubs.

Demand for cloud services has boosted revenues at Microsoft and Dropbox. Home entertainment is booming, think Netflix and YouTube. Zoom and Cisco (Webex) are also big winners. Qualcomm stands to gain from a more rapid move to 5G. And Accenture and Booz Allen, among other business and government consultants, are busy helping companies reinvent their operations in a post-pandemic world.

In times of enormous uncertainty and volatility, people need expert advice and hand-holding, particularly concerning their finances. That’s where mortgage professionals come in along with financial planners, realtors, accountants and tax lawyers.

DR. SHERRY COOPER

Chief Economist, Dominion Lending Centres
Sherry is an award-winning authority on finance and economics with over 30 years of bringing economic insights and clarity to Canadians.


5 May

Amortization over rate???

General

Posted by: Jeannie Stace-Smith

Here is an interesting article about taking a little higher rate and longer amortization.  Investing the payment difference could pay off!

MORTGAGES TO THE POWER OF 30 – HOW YOU CAN BE BETTER OFF WITH A HIGHER RATE

Every now and then markets remind us why some times cash is king. Setting up your mortgage with a 30 year amortization that reduces your monthly cash outflow is a powerful and beneficial financial strategy that can increase your overall wealth, despite often having a higher interest rate than a 25 year amortization. Yes this is contrary to many advisors that say you should pick a lower amortization period so you can pay off your mortgage as fast as possible, and it’s contrary to borrower sentiment to go after the lowest rate. But a 30 year amortization strategy can allow you to pay off your mortgage at the end of 25 years and have additional savings remaining where a 25 year amortization would not.

Let’s take a couple who are both 35 years old that have the option of a 25 year amortization at a rate of 3.5% for a mortgage of $500,000 or a 30 year amortization at a higher rate of 3.75%. The 25 year amortization will have a monthly payment of approximately $2,500 per month and the 30 year amortization will have a lower monthly mortgage payment of $2,315 which results in a cash flow savings of approximately $2,250 per year. If the cash flow savings are invested, by the end of 25 years this savings can allow the borrowers to pay off their 30 year mortgage and have approximately $12,000 of additional wealth remaining, assuming the savings are invested at annual return of 7%. By this time the couple is 60 years old and now have an additional $12,000 to put towards their retirement or other interests.

Of course, the results depend on the rate assumptions used for investments and mortgages over the life of the mortgage, so are the rates in this analysis reasonable? Well, the average annual return for the S&P500 stock market index over any 20 to 30 year period, as well as since inception, has been between 7% and 10%. As far as future mortgage rates go, variable mortgage rates have hovered between 2% and 2.75% over the last 10 years. Fixed rates tend to be correlated to government bond yields and at the time of writing the 5-year government bond yield is around 0.40%, and the 30-year government bond yield is around 1.15%, which doesn’t add much of a premium over the long term. In fact, you can lock in a 10-year fixed rate mortgage with a 30 year amortization period right now for 3.75%. In addition, the Bank of Canada Governor Stephen Poloz recently stated that he expects global interest rates to remain low for years to come.

Equally beneficial with the 30 year amortization strategy is the flexibility it offers by preserving cash flow to manage other financial obligations. The preservation of cash can help meet unexpected expenses or a temporary loss of income that can often arise at various times in life. At these times, many borrowers are often turning to higher interest credit lines or high interest credit cards, carrying along expensive balances which could otherwise be avoided or minimized by using the cash preserved from the 30 year amortization strategy.

Smart investors know how to use leverage to increase their wealth and better manage their finances and the 30 year amortization mortgage product plays right into that. It matters not that you have the knowledge, it’s what you do with the knowledge. If you would like a mortgage partner to help execute your financial strategies through smart mortgage structuring, contact me or your local DLC mortgage professional.

TODD SKENE
Dominion Lending Centres – Mortgage Professional
Todd Skene is a mortgage professional with DLC Clear Trust Mortgages in Vancouver, BC.
23 Apr

7 top misconceptions about reverse mortgages

General

Posted by: Jeannie Stace-Smith

Do own your home?  Are you over 55? If you answered yes to these questions give me a call!

THE TOP 7 MISCONCEPTIONS ABOUT REVERSE MORTGAGES

The Top 7 Misconceptions About Reverse Mortgages

How much do you really know about reverse mortgages? Maybe you know that reverse mortgages can help Canadians 55+ access the equity in their home, tax-free. Maybe you know that tens of thousands of Canadians are using a reverse mortgage as part of their financial plan. But did you know that there are 7 common misconceptions when it comes to understanding reverse mortgages in Canada. As Canada’s leading provider of reverse mortgages, HomeEquity Bank can help set the record straight.

  1. If you have a reverse mortgage, you no longer own your home

Nothing could be further from the truth. You always maintain title, ownership and control of your home – HomeEquity Bank simply has a first mortgage on the title.

  1. You will owe more than the value of your home in the end

Also, untrue. Every CHIP Reverse Mortgage from HomeEquity Bank comes with a No Negative Equity Guarantee(1) which states that as long as you – the homeowner – have met your obligations, the amount you will have to pay on the due date will not exceed the fair market value of your home. In fact, over 99% of HomeEquity Bank’s customers retain equity in their home when they decide to sell, with over 50% of the home’s value remaining after the loan is paid back (on average).

  1. Only people younger than 62 can apply for a reverse mortgage

In Canada, the CHIP Reverse Mortgage is available to Canadian homeowners aged 55 and older. In fact, as you age you are more likely to qualify for a higher amount on your loan. A reverse mortgage is a lifetime product and as long as the property taxes and insurance are in good standing, the property remains in good condition, and the homeowner is living in the home full-time, the loan won’t be called even if the house decreases in value.

  1. Failure to make payments can result in eviction

This myth is one of the most common when it comes to reverse mortgages. The CHIP Reverse Mortgage does not require any monthly payments, meaning you can’t miss payments in the first place.

  1. Arranging a reverse mortgage is very expensive

This is also untrue. Much like a conventional mortgage, an appraisal of your property and independent legal advice is required, and your responsibility to pay for. The only remaining cost is a one-off closing and administration fee. When you compare this to the costs of “rightsizing” to another home, you will find a much more affordable option in a reverse mortgage.

  1. Reverse mortgages have much higher interest rates than conventional mortgages

While it’s generally true that interest rates are a bit higher than a traditional mortgage, the difference is not excessive. Plus, making monthly mortgage payments is simply not a viable option for many retired Canadians, and – even if it were – many would struggle to qualify for a traditional mortgage in the first place. For these reasons, many retired Canadians are choosing reverse mortgages over conventional solutions.

  1. You won’t be able to pass on your home to your children

The idea that your children won’t be able to inherit your home is a complete myth. Your heirs will always have the option of keeping the property by paying off your reverse mortgage after you pass away. Plus, HomeEquity Bank’s No Negative Equity Guarantee, (1) states that if the home depreciates in value and the mortgage amount due is more than the gross proceeds from the sale of the property, HomeEquity Bank covers the difference between the sale price and the loan amount. Therefore, you will never owe more than the fair market value of the home.

To find out how much you could qualify for, try our reverse mortgage calculator, or contact your DLC Mortgage Broker.

[1] The guarantee excludes administrative expenses and interest that has accumulated after the due date.

 

Posted by: Agostino Tuzi
National Partnership Director, Mortgage Brokers
HomeEquity Bank

15 Apr

As expected home sale are down in March

General

Posted by: Jeannie Stace-Smith

HOME SALES AND LISTINGS PLUNGE IN MARCH AS THE BANK OF CANADA STEPS UP ECONOMIC SUPPORT

Housing Market Another Victim of the Virus  

Data released this morning from the Canadian Real Estate Association (CREA) showed national home sales fell 14.3% on a month-over-month (m-o-m) basis in March, the first national indication of the early impact of social isolation. The economic disruption and massive layoffs caused both buyers and sellers to increasingly retreat to the sidelines over the second half of the month.

Transactions were down on a m-o-m basis in the vast majority of local markets last month. Among Canada’s largest markets, sales declined in the Greater Toronto Area (GTA) (-20.8%), Montreal (-13.3%), Greater Vancouver (-2.9%), the Fraser Valley (-13.6%), Calgary (-26.3%), Edmonton (-13.2%), Winnipeg (-7.3%), Hamilton-Burlington (-24.9%) and Ottawa (-7.9%).

Actual (not seasonally adjusted) sales activity was still running 7.8% above a quiet March in 2019, although that was a considerable slowdown compared to the y-o-y gain of close to 30% recorded in February.

“March 2020 will be remembered around the planet for a long time. Canadian home sales and listings were increasing heading into what was expected to be a busy spring for Canadian REALTORS®,” said Jason Stephen, president of CREA. “After Friday the 13th, everything went sideways. REALTORS® are complying with government directives and advice, all the while adopting virtual technologies allowing them to continue showing properties to clients already in the market, and completing all necessary documents.”

“Numbers for March 2020 are a reflection of two very different realities, with most of the stronger sales and price growth recorded during the pre-COVID-19 reality which we are no longer in,” said Shaun Cathcart, CREA’s Senior Economist. “The numbers that matter most for understanding what follows are those from mid-March on, and things didn’t really start to ratchet down until week four. Preliminary data from the first week of April suggest both sales and new listings were only about half of what would be normal for that time of year.”

New Listings

The number of newly listed homes declined by 12.5% in March compared to the prior month. As with sales, the declines were recorded across the country.

With sales and new listings each falling by similar magnitudes in March, the national sales-to-new listings ratio edged back to 64% compared to 65.4% in February. While this is down slightly, the bigger picture is that this measure of market balance was remarkably little changed considering the extent to which current economic and social conditions are impacting both buyers and sellers.

Based on a comparison of the sales-to-new listings ratio with the long-term average, two-thirds of all local markets were in balanced market territory in March 2020. Virtually all of the remainder continued to favour sellers.

There were 4.3 months of inventory on a national basis at the end of March 2020. While this is up from the almost 15-year low of 3.8 months recorded in February, it remains almost a full month below the long-term average of 5.2 months. With the overall number of listings on the market continuing to fall in March, the m-o-m decline in the months of inventory measure was entirely the result of the outsized drop in sales activity.

The number of months of inventory is well above long-term averages in the Prairie provinces and Newfoundland & Labrador. By contrast, the measure is running well below long-term averages in Ontario, Quebec and the Maritime provinces. The measure remains in balanced territory in British Columbia.

Home Prices

With measures of market balance at this point, little changed from recent history, and most of the impact on sales and listings from the COVID-19 situation only showing up towards the end of March, the impact on housing prices will likely take a little longer to become apparent. Price measures for March 2020 were strongly influenced by very tight markets and a very strong start to the spring market in many parts of Canada before physical distancing measures were implemented.

The Aggregate Composite MLS® Home Price Index (MLS® HPI) rose 0.8% in March 2020 compared to February, marking its 10th consecutive monthly gain.

The MLS® HPI was up in March 2020 compared to the previous month in 16 of the 19 markets tracked by the index. (See the Table below)

Looking at the major Prairie markets, home price trends have ticked downwards in Calgary and Edmonton to start 2020 but have generally been stable since the beginning of last year. Prices in Saskatoon have also been stable over the last year, while those in Regina have continued to trend lower. Prices in Winnipeg have been on a slow upward trend since the beginning of 2019.

Meanwhile, the recovery in home prices has been in full swing throughout British Columbia and in Ontario’s Greater Golden Horseshoe (GGH) region. Further east, price growth in Ottawa, Montreal and Moncton continues as it has for some time now, with Ottawa and Montreal prices accelerating to start 2020.

Bottom Line: Clearly this is only the beginning, but the plunge in sales and new listings in the second half of March is indicative of the stall out in housing market activity likely until social distancing is removed and people feel safe enough to resume normal activities. No doubt, at that point, there will be buying opportunities, but right now, housing is just another contributor to the collapse in the economy.

DR. SHERRY COOPER
Chief Economist, Dominion Lending Centres
1 Apr

April Fool history!

General

Posted by: Jeannie Stace-Smith

Happy April Fools Day Everyone!

In the midst of what is happening this year I wanted to post something unrelated to COVID-19!

Here is the history of April Fools!

UPDATED:
ORIGINAL:

April Fools’ Day

April Fools’ Day—celebrated on April 1 each year—has been celebrated for several centuries by different cultures, though its exact origins remain a mystery. April Fools’ Day traditions include playing hoaxes or practical jokes on others, often yelling “April Fools!” at the end to clue in the subject of the April Fools’ Day prank. While its exact history is shrouded in mystery, the embrace of April Fools’ Day jokes by the media and major brands has ensured the unofficial holiday’s long life.

April Fools

Some historians speculate that April Fools’ Day dates back to 1582, when France switched from the Julian calendar to the Gregorian calendar, as called for by the Council of Trent in 1563. In the Julian Calendar, as in the Hindu calendar, the new year began with the spring equinox around April 1.

People who were slow to get the news or failed to recognize that the start of the new year had moved to January 1 and continued to celebrate it during the last week of March through April 1 became the butt of jokes and hoaxes and were called “April fools.” These pranks included having paper fish placed on their backs and being referred to as “poisson d’avril” (April fish), said to symbolize a young, easily caught fish and a gullible person.

READ MORE: 9 Outrageous Pranks That People Actually Fell For

Hilaria

Historians have also linked April Fools’ Day to festivals such as Hilaria (Latin for joyful), which was celebrated in ancient Rome at the end of March by followers of the cult of Cybele. It involved people dressing up in disguises and mocking fellow citizens and even magistrates and was said to be inspired by the Egyptian legend of Isis, Osiris and Seth.

Vernal Equinox

There’s also speculation that April Fools’ Day was tied to the vernal equinox, or first day of spring in the Northern Hemisphere, when Mother Nature fooled people with changing, unpredictable weather.

History of April Fools’ Day

April Fools’ Day spread throughout Britain during the 18th century. In Scotland, the tradition became a two-day event, starting with “hunting the gowk,” in which people were sent on phony errands (gowk is a word for cuckoo bird, a symbol for fool) and followed by Tailie Day, which involved pranks played on people’s derrieres, such as pinning fake tails or “kick me” signs on them.

April Fools’ Day Pranks

In modern times, people have gone to great lengths to create elaborate April Fools’ Day hoaxes. Newspapers, radio and TV stations and websites have participated in the April 1 tradition of reporting outrageous fictional claims that have fooled their audiences.

In 1957, the BBC reported that Swiss farmers were experiencing a record spaghetti crop and showed footage of people harvesting noodles from trees. In 1985, Sports Illustrated writer George Plimpton tricked many readers when he ran a made-up article about a rookie pitcher named Sidd Finch who could throw a fastball over 168 miles per hour.

In 1992, National Public Radio ran a spot with former President Richard Nixon saying he was running for president again… only it was an actor, not Nixon, and the segment was all an April Fools’ Day prank that caught the country by surprise.

In 1996, Taco Bell, the fast-food restaurant chain, duped people when it announced it had agreed to purchase Philadelphia’s Liberty Bell and intended to rename it the Taco Liberty Bell. In 1998, after Burger King advertised a “Left-Handed Whopper,” scores of clueless customers requested the fake sandwich. Google notoriously hosts an annual April Fools’ Day prank that has included everything from “telepathic search” to the ability to play Pac Man on Google Maps.

For the average trickster, there is always the classic April Fools’ Day prank of covering the toilet with plastic wrap or switching out sugar and salt.

Sources

A Brief, Totally Sincere History of April Fools’ Day. Washington Post.

History’s Greatest April Fools Jokes. National Geographic.

Some of the greatest April Fools’ pranks of all time. CNN.

15 Best April Fools’ Day Hoaxes. CBS.

30 Mar

Why are mortgage rates rising?

General

Posted by: Jeannie Stace-Smith

Here is some great information that explains why rates are rising when the overnight rate is dropping!

WHY ARE MORTGAGE RATES RISING?

Why Are Mortgage Rates Rising?

Over the past month, the Bank of Canada has lowered its overnight rate by a whopping 1.5 percentage points to a mere 0.25%. Many people expected mortgage rates to fall equivalently. The banks have reduced prime rates by the full 150 basis points (bps). But, since the second Bank of Canada rate cut on March 13, banks and other lenders have hiked mortgage rates for fixed- and variable-rate loans. That’s not what happens typically when the Bank cuts its overnight rate. But these are extraordinary times.

The Covid-19 pandemic has disrupted everything, shutting down the entire global economy and damaging business and consumer confidence. No one knows when it will end. This degree of uncertainty and the risk to our health is profoundly unnerving.

Most businesses have ground to a halt, so unemployment has surged. Hourly workers and many of the self-employed have found themselves with no income for an indeterminate period. All but essential workers are staying at home, including vast numbers of students and pre-school children. Nothing like this has happened in the past century. The societal and emotional toll is enormous, and governments at all levels are introducing income support programs for individuals and businesses, but so far, no cheques are in the mail.

In consequence, the economy hasn’t just slowed; it has frozen in place and is rapidly contracting. Travel has stopped. Trade and transport have stopped. Manufacturing and commerce have stopped. And this is happening all over the world.

What’s more, the Saudis and Russians took advantage of the disruption to escalate oil production and drive down prices in a thinly veiled attempt to drive marginal producers in the US and Canada out of business. This has compounded the negative impact on our economy and dramatically intensified the plunge in our stock market.

Many Canadians are now forced to live off their savings or go into debt until employment insurance and other government assistance kicks in, and even when it does, it will not cover 100% of the income loss. The majority of the population has very little savings, so people are resort to drawing on their home equity lines of credit (HELOCs), other credit lines or adding to credit card debt. Businesses are doing the same.

The good news is that people and businesses that already have loans tied to the prime rate are enjoying a significant reduction in their monthly payments. All of the major banks have reduced their prime rates from 3.95% to 2.45%. So people or businesses with floating-rate loans, be they mortgages or HELOCs or commercial lines of credit, have seen their monthly borrowing costs fall by 1.5 percentage points. That helps to reduce the burden of dipping into this source of funds to replace income.

So Why Are Mortgage Rates For New Loans Rising?

These disruptive forces of Covid-19 have markedly reduced the earnings of banks and other lenders and dramatically increased their risk. That is why the stock prices of banks and other publically-traded lenders have fallen very sharply, causing their dividend yields to rise to levels well above government bond yields. As an example, Royal Bank’s stock price has fallen 22% year-to-date (ytd), increasing its annual dividend yield to 5.31%. For CIBC, it has been even worse. Its stock price has fallen 30%, driving its dividend yield to 7.66%. To put this into perspective, the 10-year Government of Canada bond yield is only 0.64%. The gap is a reflection of the investor perception of the risk confronting Canadian banks.

Thus, the cost of funds for banks and other lenders has risen sharply despite the cut in the Bank of Canada’s overnight rate. The cheapest source of funding is short-term deposits–especially savings and chequing accounts. Still, unemployed consumers and shut-down businesses are withdrawing these deposits to pay the rent and put food on the table.

Longer-term deposits called GICs, which stands for Guaranteed Investment Certificates, are a more expensive source of funds. Still, owing to their hefty penalties for early withdrawal, they become a more reliable funding source at a time like this. As noted by Rob Carrick, consumer finance reporter for the Globe and Mail, “GIC rates should be in the toilet right now because that’s what rates broadly do in times of economic stress. But GIC rates follow a similar path to mortgage rates, which have risen lately as lenders price rising default risk into borrowing costs.”

To attract funds, some of the smaller banks have increased their savings and GIC rates. For example, EQ Bank is paying 2.45% on its High-Interest Savings Account and 2.55% on its 5-year GIC. Other small banks are also hiking GIC rates, raising their cost of funds. Rob McLister noted that “The likes of Home Capital, Equitable Bank and Canadian Western Bank have lifted their 1-year GIC rates over 65 bps in the last few weeks, according to data from noted housing analyst Ben Rabidoux.”

The banks are having to set aside funds to cover rising loan loss reserves, which exacerbates their earnings decline. An unusually large component of Canadian bank loan losses is coming from the oil sector. Still, default risk is rising sharply for almost every business, small and large–think airlines, shipping companies, manufacturers, auto dealers, department stores, etc.

Lenders have also been swamped by thousands of applications to defer mortgage payments.

Hence, confronted with rising costs and falling revenues, the banks are tightening their belts. They slashed their prime rates but eliminated the discounts to prime for new variable-rate mortgage loans. Some lenders will no doubt start charging prime plus a premium for such mortgage loans. Banks have also raised fixed-rate mortgage rates as these myriad pressures reducing bank earnings are causing investors to insist banks pay more for the funds they need to remain liquid.

An additional concern is that financial markets have become less and less liquid–sellers cannot find buyers at reasonable prices. The ‘bid-ask’ spreads are widening. That’s why the central bank and CMHC are buying mortgage-backed securities in enormous volumes. That is also why the Bank of Canada has started large-scale weekly buying of government securities and commercial paper. These government entities have become the buyer of last resort, providing liquidity to the mortgage and bond markets.

These markets are crucial to the financial stability of Canada. Large-scale purchases of securities are called “quantitative easing” and have never been used before by the Bank of Canada. It was used extensively by the Fed and other central banks during the 2008-10 financial crisis. When business and consumer confidence is so low that nothing the central bank can do will spur investment and spending, they resort to quantitative easing to keep financial markets functioning. In today’s world, businesses and consumers are locked down, and no one knows when it will end. With so much uncertainty, confidence about the future diminishes. The natural tendency is for people to cancel major expenditures and hunker down.

We are living through an unprecedented period. When the health emergency has passed, we will celebrate a return to a new normal. In the meantime, seemingly odd things will continue to happen in financial markets.

DR. SHERRY COOPER
Chief Economist, Dominion Lending Centres

20 Mar

Unprecedented Market News!

General

Posted by: Jeannie Stace-Smith

16 MAR 2020

STOCK AND BOND YIELDS PLUMMET AFTER SUNDAY FED CUT

Fed Cuts Overnight Rate One Percentage Point But Markets Plummet

In an unprecedented Sunday afternoon meeting, the US Federal Reserve cut their key policy rate by 100 basis points (bps) to a level of 0%-to-0.25% (see chart below). Also, the Committee announced increased access to the discount window where the Fed makes loans to banks. The Fed is the lender-of-last-resort and is signalling that it will provide liquidity wherever needed. As well, with interest rates already so low, the Fed is well aware that rate cuts can only do so much. Thus, they are returning to quantitative easing–the buying of large volumes of U.S. government Treasury bills and bonds as well as mortgage-backed securities (MBS), to inject liquidity into the financial system.

The Treasury and US MBS markets are usually the deepest, most liquid markets in the world. But over the past two weeks, liquidity has dried up. Financial instability has risen sharply with the high level of volatility. Banks have experienced significant withdrawals as consumers are hoarding cash like everything else. The cost of funds to banks has risen sharply because of the enhanced perception of risk. With the collapse in oil prices, banks exposed to the oil sector are building up reserves for nonperforming loans. As businesses everywhere in nearly every sector shutdown, the risk of delinquencies rises further. Consumers who are housebound spend less money, and those who are freelancers or hourly wage earners might not get paid. Moreover, the shuttering of schools puts an added burden on parents who have no other daycare options for their kids.

All of this disruption, which according to the Center for Disease Control, could last months–the CDC recommended yesterday the shutdown of meetings of more than 50 people for eight weeks–has led to rising concern about the riskiness of banks. Bank shares have plummeted, and the yields on bank bonds have surged. Besides, banks and other mortgage lenders are fearful of being inundated with requests for refinancings, especially in the US, where penalties for breaking a mortgage are much lower than in Canada. Because of the refinancing surge in the US, the price of MBSs has fallen sharply, raising their yields and making the market highly illiquid.

The rising risk premiums, likely recession and illiquidity are causing banks in Canada and the US to raise some mortgage rates. Lenders are tightening the discount off the prime rate on variable-rate mortgage loans. Some fixed rates have edged higher as well. Such spread widening between mortgage rates and government yields happened during the financial crisis. Bank balance sheets will expand as troubled businesses and consumers extend their borrowings on their open lines of credit. Many will be unable to make timely interest payments. Loan loss reserves, already climbing, will rise further. Liquid deposits will be depleted as many are forced to live off of savings while shying away from selling stocks at markedly depressed prices.

These are not normal times. The Fed’s actions did nothing to calm markets. Indeed, stocks and bond yields plummeted in overnight trade, and the stock markets opened sharply lower in North America. The S&P 500 opened down over 8% while the TSX opened down 11%, triggering a circuit-breaker time out. This is the third time in a week the circuit breaker has hit. The TSX is down roughly 35% from its recent high (see chart below). The S&P 500 is down over 20%. The relative underperfomance of the Canadian stock market reflects our out-sized representation of the energy sector. The two weakest sectors in the TSX are the energy and financial sectors.

The world knows that the Fed and other central banks are running out of ammunition. Governor Powell said yesterday that he would not take the key fed funds rate into negative territory but instead would use “forward guidance” and asset purchases (quantitative easing) going forward.

The good news is that the banks are highly capitalized and much more resilient than during the financial crisis. Central banks since that time have put in place measures to monitor financial stability. Last Friday, the Canadian Office of the Superintendent of Financial Institutions (OSFI) reduced the capital requirements for Canadian banks to free up $300 billion for banks to support troubled borrowers. OSFI warned against the use of these funds to buy back stocks or raise dividends.

OSFI also suspended the proposed revision in the qualifying mortgage rate slated to begin April 6. The posted mortgage rate, published weekly by the Bank of Canada, will remain the qualifying mortgage rate. It is currently 5.19%, but it is expected to fall this week to around 4.95%.

But in these extraordinary times, there is a loss of confidence in the financial system. Some are calling for a full shutdown of the stock markets–but imagine the panic if no one could sell assets. There would truly be a run on the banks. Now is not a time to panic.

THE CANADIAN HOUSING MARKET

The Canadian Real Estate Association announced this morning that home sales recorded over the Canadian MLS Systems rose 5.9% in February, marking one of the more substantial month-over-month gains of the past decade. Actual (not seasonally adjusted) sales activity stood 26.9% above year-ago levels–keeping in mind that activity was quite weak one year ago. February 2019 marked a decade-low for the month, so a good part of the significant y-o-y gain reflects low levels of activity recorded at the time. February 2020 also benefited from an additional day due to the leap year.

The CREA President, Jason Stephen, said, “Home prices are accelerating in markets where listings are in increasingly short supply, specifically in Ontario, Quebec and the Maritimes which together account for about two-thirds of national sales activity. Meanwhile, ample supply across the Prairies and in Newfoundland and Labrador means increased competition among sellers.”

The number of newly listed homes jumped 7.3% in February compared to January, more than erasing the declines of late last year. New supply gains were posted in some large markets, including the Fraser Valley, Calgary, Edmonton, the GTA, Hamilton-Burlington, Kitchener-Waterloo, Windsor-Essex, Ottawa and Montreal.

The Aggregate Composite MLS® Home Price Index (MLS® HPI) rose 0.7% in February 2020 compared to January, marking its ninth consecutive monthly gain. The actual (not seasonally adjusted) national average price for homes sold in February 2020 was around $540,000, up 15.2% from the same month the previous year. See the table below for the regional move in prices.

But this is old news, particularly given all that has happened in the past two weeks. What comes next for the housing market? That depends on the course of the pandemic. Lower interest rates would typically be great news for the housing market, particularly for first-time homebuyers. But social distancing is hardly consistent with open houses and home shopping.

Moreover, volatility and instability reduce consumer confidence. Buyers that parked their downpayment savings in the stock markets have lost nearly a third of their money on paper. And how many sellers want a trail of strangers wandering through their homes during the pandemic. So the housing market, like everything else, is likely going to slow over the near term.

The Bank of Canada is hopeful that its rate cuts will stabilize the housing market from what might have otherwise been a substantial shutdown. Lower rates will filter through to lower monthly payments for floating-rate mortgage borrowers. Expect the Bank to cut rates again to near-zero levels, following in the footsteps of the Fed. So far, as of this writing, the Canadian banks have not responded to Friday’s BoC rate cut. The prime rate went down a full 50 bps on March 5 after the Bank cut its key rate by that amount on March 4. But so far, the Big-Six banks have not responded to the 75 bps cut three days ago.

DR. SHERRY COOPER
Chief Economist, Dominion Lending Centres
9 Mar

How to qualify for a rental investment!!!

General

Posted by: Jeannie Stace-Smith

ADDBACKS AND OFFSETS: QUALIFYING FOR RENTAL INVESTMENTS

It may sound like we’re talking about football formations here, but if you are considering the purchase of a rental property or already own a rental property, knowing about addbacks and offsets is an important concept to understand when qualifying for your next mortgage. Addbacks and offsets are two different methods for accounting for the rental income from an investment property.

Before I explain the differences and provide an example of how these two methods impact your mortgage qualification, note that regardless of the method, lenders use only a percentage of the rental income in the equation and for most lenders this percentage is 50% of the rental amount. This is just fine if your employment income is high enough and you have a significant down payment and a small amount of other debts. But this treatment isn’t going to make the investment opportunity work for many people. As a mortgage broker and a real estate investor myself, I feel the frustration of this 50% approach. Imagine a strategy to own a rental property for 10 years but assuming it will be vacant for 5 of those years. That’s what the 50% assumption would suggest, and that just doesn’t make sense. Fortunately, some lenders use 60% of the rental income, a few use 80%, and I know of one lender that actually uses 100% of the rental income. The difference between 50% and 100% has a significant impact on your overall qualification as 50% of the rental income can make a rental property look like it’s losing money when it’s actually cash flow positive.

Similarly, there is also a big difference between the addback and offset methods. Many lenders use the addback method to account for the rental income on investment properties. What this means is that they will add the rental income to the rest of your income in order to calculate your ability to make payments on the mortgage and other debts, hence the term addback. Now if rent is $1,600 a month ($19,200 per year), this is not going to add a lot to the mortgage amount you qualify for. On the other hand, an offset approach does far more for you to qualify and is the more favorable of the two approaches. An offset applies the monthly rental income against the monthly housing costs, and only the difference must be covered by your other income. The monthly rental income used in the calculation is based on the percentage of income used by that particular lender, and the housing costs refer to the mortgage payments, property tax, heating costs, and half of the maintenance fees if the investment property is a condo or townhome.

An example is the best way to understand the real impact of these two methods: Assume a couple earn $100,000 a year in household income, the rental property they wish to purchase is a condo for $380,000 with expected rental income of $1,600, and they are requesting a mortgage of $300,000. Factoring in some reasonable estimates for their existing property, a car loan, and the property tax, heat, and maintenance fees on the rental property, the addback approach using 50% of the rental income would result in their mortgage application being declined. In fact, it would suggest they need to earn $110,000 per year to qualify. Yet the offset approach using 50% of the rental income would indeed allow them to qualify. In fact, it would allow them to qualify if they earned $96,000 per year. Touchdown! The offset method versus the addback method can be the make or break of whether an investment opportunity becomes a reality for this couple trying to get ahead in building their wealth through real estate. Their employment income would need to be $14,000 or 15% higher under the addback method – when was the last time you got a 15% raise?

Mortgage brokers like myself know the policies of each lender we work with and can balance the likelihood of qualification under different rental income treatments while finding a mortgage that prioritizes the four mortgage strategies that every mortgage should consider: lowest cost, lowest payment, maximum flexibility, and lowest risk.

Give myself or your local Dominion Lending Centres mortgage broker a call to assess how to finance your rental investments!

TODD SKENE
Dominion Lending Centres – Mortgage Professional
6 Mar

Canada Decreases Overnight Rate!

General

Posted by: Jeannie Stace-Smith

Canada followed the US and lowered rate by 50 BPS.  Great news for variable mortgages!

INTEREST RATES NOSEDIVE AS BANK OF CANADA CUTS RATES 50 BPS

The Bank of Canada Brings Out The Big Guns

Following yesterday’s surprise emergency 50 basis point (bp) rate cut by the Fed, the Bank of Canada followed suit today and signalled it is poised to do more if necessary. The BoC lowered its target for the overnight rate by 50 bps to 1.25%, suggesting that “the COVID-19 virus is a material negative shock to the Canadian and global outlooks.” This is the first time the Bank has eased monetary policy in four years.

According to the BoC’s press release, “COVID-19 represents a significant health threat to people in a growing number of countries. In consequence, business activity in some regions has fallen sharply, and supply chains have been disrupted. This has pulled down commodity prices, and the Canadian dollar has depreciated. Global markets are reacting to the spread of the virus by repricing risk across a broad set of assets, making financial conditions less accommodative. It is likely that as the virus spreads, business and consumer confidence will deteriorate, further depressing activity.” The press release went on to promise that “as the situation evolves, the Governing Council stands ready to adjust monetary policy further if required to support economic growth and keep inflation on target.”

Moving the full 50 basis points is a powerful message from the Bank of Canada. Particularly given that Governor Poloz has long been bucking the tide of monetary easing by more than 30 central banks around the world, concerned about adding fuel to a red hot housing market, especially in Toronto. Other central banks will no doubt follow, although already-negative interest rates hamper the euro-area and Japan.

Canadian interest rates, which have been falling rapidly since mid-February, nosedived in response to the Bank’s announcement. The 5-year Government of Canada bond yield plunged to a mere 0.82% (see chart below), about half its level at the start of the year.

Fixed-rate mortgage rates have fallen as well, although not as much as government bond yields. The prime rate, which has been stuck at 3.95% since October 2018 when the Bank of Canada last changed (hiked) its overnight rate, is going to fall, but not by the full 50 bps as the cost of funds for banks has risen with the surge in credit spreads. A cut in the prime rate will lower variable-rate mortgage rates.

Many expect the Fed to cut rates again when it meets later this month at its regularly scheduled policy meeting, and the Canadian central bank is now expected to cut interest rates again in April. Of course, monetary easing does not address supply-chain disruptions or travel cancellations. Easing is meant to flood the system with liquidity and improve consumer and business confidence–just as happened in response to the financial crisis. Expect fiscal stimulus as well in the upcoming federal budget.

All of this will boost housing demand even though reduced travel from China might crimp sales in Vancouver. A potential recession is not good for housing, but lower interest rates certainly fuel what was already a hot spring sales market. Data released today by the Toronto Real Estate Board show that Toronto home prices soared in February, and sales jumped despite low inventories. The number of transactions jumped 46% from February 2019, which was a 10-year sales low as the market struggled with tougher mortgage rules and higher interest rates. February sales were up by about 15% compared to January.

DR. SHERRY COOPER
Chief Economist, Dominion Lending Centres
Sherry is an award-winning authority on finance and economics with over 30 years of bringing economic insights and clarity to Canadians.
3 Mar

Emergency US Fed rate reduction!

General

Posted by: Jeannie Stace-Smith

Doesn’t happen very often, but the US Fed met today in an emergency meeting and cut rates…Will the government of Canada follow?  Stay tuned!

FEDERAL EMERGENCY 50 BP RATE CUT

The Fed Brings Out The Big Guns

In a remarkable show of force, the US Federal Reserve jumped the gun on its regularly scheduled meeting on March 18 and cut the target overnight fed funds rate by a full 50 basis points (bps) to 1%-to-1.25%. This now stands well below the Bank of Canada’s target rate of 1.75% and may well force the Bank’s hand to cut rates when it meets tomorrow, possibly even by 50 bps.

The Fed has not cut rates outside of its normal cycle of meetings since October 8, 2008, as the collapse of Lehman Brothers roiled financial markets. Such moves are rare, but not unprecedented.

The BoC is conflicted, in that such a dramatic rate cut would fuel household borrowing and the housing market, which the Bank considers to be robust enough.

The Federal Open Market Committee (FOMC, the Fed’s policymaking group) released the following statement: “The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate by 1/2 percentage point, to 1 to 1‑1/4 percent. The Committee is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy.”

In an 11 AM (ET) news conference, Chairman Powell said the broader spread of the virus poses an evolving risk to the economy that required immediate action. The FOMC judged the risk to the economy had worsened. The Fed acted unilaterally, in contrast to the coordinated central bank move taken during the financial crisis in 2008.

However, the Fed is in active discussion with other central banks around the world, and the European Central Bank indicated earlier today that they would take any necessary actions. Central banks in the euro-area and Japan have less scope to follow with rates already in negative territory.

Governor Carney said earlier today that the Bank of England would take steps needed to battle the virus shock. Carney hinted at the complexity of dealing with the trauma for central banks in assessing whether the impact falls on demand — which they have more capacity to address — or supply — which is harder to for central banks to treat.

G-7 finance chiefs and central bankers are scheduled to have a rare conference call today.

With election tensions running strong in the US–after all, today is Super Tuesday–it’s easy to imagine that this move by the Fed is as much political as economic. It comes amid public pressure for a rate cut by President Trump. Moreover, following today’s dramatic move, the president called for more, demanding in a tweet that the Fed “must further ease and, most importantly, come into line with other countries/competitors. We are not playing on a level field. Not fair to USA.” 

Politicizing the Fed is dangerous and reduces the global credibility of the US central bank.

Stock markets around the world reversed some of today’s earlier losses on the news. The US stock markets opened today with a significant selloff following a rally yesterday. Bond yields continued to decline on the news.

Bottom Line for Canada: The key government of Canada 5-year bond yield has fallen sharply today to 0.925% and falling at the time of this writing. The 5-year yield was 1.04% before the Fed’s announcement. The Bank of Canada will likely cut overnight rates tomorrow for the first time since October 2018–but by how much? I would guess by 25 bps given Poloz’s concern about household debt.

DR. SHERRY COOPER
Chief Economist, Dominion Lending Centres
Sherry is an award-winning authority on finance and economics with over 30 years of bringing economic insights and clarity to Canadians.