25 Sep

Debts

General

Posted by: Bill Yeung

Are fears about Canada’s level of debt overblown?

by CMP 25 Sep 2018

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Robert McLister
“Stat after stat confirms Canada’s debt risk. Surging home prices are the number-one issue – the average Toronto home costs nearly 10 times Toronto’s median household income – but there’s also a growing proclivity to spend. Take car loans, for example. Over half are now seven-plus years, with some up to 10 years – on a depreciating asset!

Mortgage carrying costs are comparable to 1988, but the ability of borrowers to withstand unemployment or rate spikes is worse. That said, none of this justifies over-tightening mortgage regulations on everyone or undermining mortgage competition, which is what regulators have done.”

 

 

Ron Butler
“More Canadian families are at their debt limit now than ever in the past. But how to approach the problem? Increased mandatory financial literacy is required: multiple semesters in high school, public service ads in the media.

With mortgages, we need better policy. The qualifying rate makes sense – except for renewals and transfers – but increasing capital requirements and limiting bulk coverage at the mortgage insurers is dumb because lower rates always help consumers. Mortgage debt provides a roof over Canadians’ heads; keeping mortgage rates low is the right government policy.”

 

 

Daniel Johanis
“Canada is nearing the end of the latest economic cycle, and we need to look at ways to de-leverage ourselves to help weather the change.

The Bank for International Settlements and the OECD recently identified Canada as one of the top three nations at risk of a banking crisis based on several indicators, including household debt. Even though Stats Canada has come out lately with some positive news on consumer spending habits and lower quarterly debt levels, other factors such as tariffs, crossborder trade wars and rising interest rates could see Canadians biting off more debt than they can chew.”

25 Sep

B Business

General

Posted by: Bill Yeung

B channel solutions requiring long terms

B channel solutions requiring long termsAs business in the B channel has soared this year, exit strategies for clients need recalibrating.

“Now that the dust has settled on the new rules, strategy and structure are more important than ever with mortgage brokering and lending. It’s about structure and strategy, and not just the interest rate,” said Frances Hinojosa, a managing partner with Tribe Financial. “

It used to be that borrowers in the B channel spent around a year or two there while they improved their financial standing in preparation for a shift to an A lender. However, that path is rockier than it used to be, and Hinojosa says planning a few years beyond the norm is a requirement for many borrowers.

“As brokers, we have to coach our clients on why taking a longer term in the B space makes more sense because then they can work strategically with their accountant to balance off their reportable income so that they can eventually hit the A space, but they need at least two years of reportable income to hit that threshold,” said Hinojosa.

“The spread between a one-, or two-, or three-year rate in the B space isn’t that big,” she continued. “But where the difference comes into play is the renewals: If I put a client into a one-year term in the B space to get a 0.25% difference in the interest rate, when they come up for renewal in a year you run the risk of putting them in the position of having to pay a lender fee again. If I calculate the cost of that fee and my APR works out to be more by switching them than taking the 0.25% higher interest rate, obviously I’ll take the 0.25% higher interest rate because it will save the client more in the long run.”

Before this year, 98% of Broker One Financial’s Rhakee Dhingra’s funding was comprised of AAA business. This year, however, about 50% of her clients’ funding is from B lenders.

“That means tapping resources for secure private financing at affordable rates with conservative fees, as well, hence strengthening our relationships with our B lenders,” said the broker. “I’ve built a really strong reputation with our A lenders we build a proper business case for every application that comes through our door to ensure that we position it for exception financing when we need it. We get the exception to our ratios quite often to secure financing where it may not meet traditional ratios.”

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17 Sep

Home Sales

General

Posted by: Bill Yeung

Four-Month Home Sales Gain Despite Weak B.C. Markets
The Canadian housing market showed continued signs of stabilizing last month with sales edging upward and prices easing a bit. National home sales increased 0.9% in August, the fourth consecutive monthly gain. Sales in Toronto advanced 2.2% while they rose 2.9% in Vancouver. Nevertheless, the pace of sales activity remains below levels in most other months going back to 2014 (see chart below). As well, recent monthly sales increases are diminishing, which could mean that the recent rebound, particularly in Ontario, could be running out of runway.

The housing market has been recovering from steep sales declines early this year after federal regulators imposed stricter mortgage lending rules and the central bank raised borrowing costs. Home sellers also seem to be lowering prices for homes, fueling demand.

Roughly half of all local markets posted an increase in sales from July to August, led again by the Greater Toronto Area (GTA), along with gains in Montreal and Edmonton. Sales in the major urban areas of B.C. declined by 3.8% year-over-year (y/y) in August. The housing market in B.C. has slowed considerably since the February provincial budget hiked the foreign purchase tax and suggested a speculation tax could be introduced in the fall.

New Listings

The number of newly listed homes was unchanged between July and August, as new supply gains in the Greater Vancouver Area (GVA) and Montreal offset declines in the GTA and Winnipeg.

With sales up slightly and new listings unchanged, the national sales-to-new listings ratio edged up to 56.6% in August compared to 56.2% in July. The long-term average for this measure of market balance is 53.4%.

Based on a comparison of the sales-to-new listings ratio with the long-term average, about two-thirds of all local markets were in balanced market territory in August 2018.

There were 5.2 months of inventory on a national basis at the end of August 2018, right in line with the long-term average for the measure.
Home Prices

The Aggregate Composite MLS® Home Price Index (MLS® HPI) was up 2.5% y/y in August 2018, well below the booming pace in 2016 and early 2017. Benchmark home prices fell by 0.6% from July to August, the biggest decline since August of last year. The price decline was driven by Vancouver, where prices dropped 1.4%, the most significant monthly drop in a decade. Toronto home prices fell 0.3% in August.

Condo apartment units posted the most substantial y/y price gains in August (+9.5%), followed by townhouse/row units (+4.3%). Meanwhile, one-storey and two-storey single-family home prices were little changed on a y/y basis in August (+0.4% and -0.4% respectively).

Trends continue to vary widely among the 17 housing markets tracked by the MLS® HPI. Home price gains are diminishing on a y/y basis in the Lower Mainland of British Columbia (GVA: +4.1%; Fraser Valley: +10.7%). Prices in Victoria were up 8.5% y/y in August. Elsewhere on Vancouver Island, prices climbed 13.6%.

Among the Greater Golden Horseshoe (GGH) housing markets tracked by the index, home prices were up from year-ago levels in Hamilton-Burlington (+7.2%), the Niagara Region (+6.6%), Guelph (+5.5%), the GTA (+1.4%) and Oakville-Milton (+1.2%). By contrast, home prices remained down on a y/y basis in Barrie (-2.7%).

In the Prairies, benchmark home prices remained down on a y/y basis in Calgary (-2.2%), Edmonton (-2.1%), Regina (-4.8%) and Saskatoon (-2.3%).

Meanwhile, home prices rose by 7.1% y/y in Ottawa (led by an 8.2% increase in two-storey single-family home prices), by 5.9% in Greater Montreal (driven by a 6.3% increase in two-storey single-family home prices) and by 4.8% in Greater Moncton (led by a 7.5% increase in two-storey single-family home prices). (see Table below)

Bottom Line

Housing markets continue to adjust to regulatory and government tightening as well as to higher mortgage rates. The speculative frenzy has cooled, and multiple bidding situations are no longer commonplace in Toronto and surrounding areas. The housing markets in the GGH appear to have bottomed, and supply constraints may well stem the decline in home prices in coming months. The slowdown in housing markets in the Lower Mainland of B.C. accelerated last month as the sector continues to reverberate from provincial actions to dampen activity, as well as the broader regulatory changes and higher interest rates.

Since the implementation of new mortgage standards, non-price lending conditions for mortgages and home equity lines of credit have also tightened. Additional rate hikes by the Bank of Canada are coming this fall, likely in late-October if the NAFTA negotiations appear to be progressing. The economy is running at full capacity, unemployment is low, and incomes are rising. Inflation is expected to return to the Bank of Canada’s 2% target, and uncertainty regarding trade with the U.S. remains, but the central bank will continue to cautiously raise its trend-setting interest rate through the end of next year.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drcooper@dominionlending.ca
7 Sep

Canadian Job

General

Posted by: Bill Yeung

Dr. Sherry Cooper
This announcement available in Autopilot as “SC 20180907 Canadian Jobs Plunge in August As Unemployment Rises”

French translation of this email will be available by 5pm ET Monday Sept. 10.
La traduction en français de cet e-mail sera disponible avant 17 h HE septembre 10.

Canadian Jobs Plunge in August As Unemployment Rises
In a real shocker, Statistics Canada announced this morning that employment dropped by 51,600, retracing most of the 54,100 gain in July. Economists had been expecting a much stronger number, but the Labour Force Survey is notoriously volatile, and job gains continue to average 14,000 per month over the past year. Full-time employment growth has run at about twice the pace at an average monthly increase of 27,000. Labour markets remain very tight across the country.

The unemployment rate returned to its June level of 6.0%, ticking up from 5.8% in July. July’s jobless figure matched a more than four-decade low. At 6.0%, the unemployment rate is 0.2 percentage points below the level one year ago.

All of the job loss last month was in part-time work, down 92,000, while full-time employment rose by 40,400. The strength in full-time jobs is a sign that the labour market is stronger than the headline numbers for August suggest.

On a year-over-year basis, employment grew by 172,000 or 0.9%. Full-time employment increased (+326,000 or +2.2%), while the number of people working part-time declined (-154,000 or -4.3%). Over the same period, total hours worked were up 1.6%.

Statistics Canada commented that monthly shifts in part-time employment could result from movements between part-time and full-time work, the flux of younger and older workers in and out of the labour force, changes in employment in industries where part-time work is relatively common, or deviations from typical seasonal patterns.

By industry, the decline was broadly based and included a loss of 16,400 jobs in construction and 22,100 in the professional services sector. The number of people working in wholesale and retail trade declined by 20,000, driven by Quebec and Ontario.

Job losses were huge in Ontario as employment increased in Alberta and Manitoba. Employment was little changed in the other provinces.

After two consecutive monthly increases, employment in Ontario fell by 80,000 in August, which was the province’s most significant job loss since 2009. All of the decline was in part-time work. On a year-over-year basis, Ontario employment increased by 79,000 (+1.1%). The Ontario unemployment rate rose 0.3 percentage points in August, to 5.7% (see table below).

In Ontario, full-time employment held steady compared with the previous month, with year-over-year gains totalling 172,000 (+3.0%). Part-time jobs fell by 80,000 in August, following a roughly equivalent rise in July. In the 12 months to August, part-time work decreased by 93,000 (-6.7%).
Employment in Alberta rose by 16,000, and the unemployment rate remained at 6.7% as more people participated in the labour market. Compared with August 2017, employment grew by 53,000 (+2.3%), mostly in full-time work.

In Manitoba, employment rose by 2,600, driven by gains in part-time work, and the unemployment rate was 5.8%. On a year-over-year basis, employment in the province was unchanged, while the unemployment rate increased 0.8 percentage points as more people looked for work.

In British Columbia, employment edged up and the unemployment rate increased 0.3 percentage points to 5.3% as more people searched for work. Compared with a year earlier, employment was virtually unchanged.

Wage gains decelerated to their lowest level this year as average hourly earnings were up 2.9% y/y, the slowest pace since December.

There is no real urgency for the Bank of Canada to hike interest rates as the economy shows little risk of overheating. So far in 2018, the economy has shed 14,600 jobs, but the number masks a 97,300 gain in full-time work. Part-time employment is down by 111,900 this year.

The economy is running at or near full-employment as job vacancies continue to mount. If a NAFTA agreement comes to fruition, it is still likely the Bank of Canada will raise interest rates once again at the policy meeting in October. The Bank of Canada guided in that direction yesterday when Senior Deputy Governor Carolyn Wilkins said the central bank’s top officials debated this week whether to accelerate the pace of potential interest rate hikes, before finally choosing to stick to their current “gradual” path.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drcooper@dominionlending.ca
5 Sep

Canadian Bank Rate

General

Posted by: Bill Yeung

Poloz Holds The Line On Rates
As expected, the Bank of Canada held its key overnight rate this morning at 1.5%, asserting that July’s surprising spike in CPI inflation to 3% was in large part because of a jump in airfares. The Bank expects inflation to move back towards 2% in early 2019, as the effects of past increases in gasoline prices dissipate. The Bank’s core measures of inflation remain firmly around 2%, consistent with an economy that has been bumping up against full capacity for some time. Wage growth, as well, remains moderate.

Incoming information on the global economy is consistent with the Bank’s forecast in the July Monetary Policy Report (MPR). The U.S. economy has been particularly strong, growing at a 4.2% rate in the second quarter. This compares to Canada’s growth rate of 2.9% last quarter, which follows a 1.4% pace of economic expansion in Q1. Second quarter growth in the U.S. was boosted by strong consumer spending and business investment. In Canada, third quarter growth is expected to slow temporarily, mainly because of fluctuations in energy production and exports.

Indeed, this morning, Statistics Canada reported that Canada’s trade deficit all but disappeared. A sharp export gain to the U.S. combined with a decline in imports took Canada’s overall merchandise trade deficit to its lowest level since December 2016.

Canada’s merchandise trade surplus with the U.S., targeted by President Donald Trump in NAFTA negotiations, grew to the widest in a decade. Stats Canada said that gains in global exports were led by automobiles and energy, almost all of which were bound for the U.S. Crude oil led the energy gains as prices rose 9.4% in July. The import decline was driven by aircraft and metal ores.

These figures are likely to impact the resumption of bilateral talks in Washington regarding NAFTA, as the Trump administration has negotiated a new deal with Mexico and has threatened to leave Canada out and impose stiff auto tariffs if Prime Minister Justin Trudeau’s government does not make concessions, especially on dairy supply management and dispute mechanisms.

The Bank of Canada highlighted that “elevated trade tensions remain a key risk to the global outlook and are pulling some commodity prices lower…The Bank is also monitoring the course of NAFTA negotiations and other trade policy development closely, and their impact on the inflation outlook.”

It was wise of the Bank of Canada to hold its powder dry at today’s policy meeting given the continued uncertainty on the NAFTA front. An agreement on NAFTA would provide the central bank with more comfort in moving ahead with a hiking cycle that has already lifted the benchmark overnight rate four times since mid-2017.

Noting that “activity in the housing market is beginning to stabilize as households adjust to higher interest rates and changes in housing policies”, the Bank reaffirmed that the economy is doing well enough to require higher interest rates in the future to achieve the inflation target. Another rate hike could come as soon as the next policy meeting on October 24th.

It is widely expected that a NAFTA deal will have come to fruition by then, opening the way for the Bank to resume monetary tightening. According to Bloomberg News, “Investors see near-certain odds that by October, the Bank of Canada will raise borrowing costs for the fifth time since the hiking cycle began in July 2017, with as many as two additional increases by mid-2019.”
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drcooper@dominionlending.ca