Toronto Homebuyer Learns Expensive Lesson About Unconditional Offers

An Ontario Court of Appeal delivered an expensive lesson to a GTA homebuyer who made an unconditional offer that was later retracted.

Back in 2017, Shahla Sheikhtavi had made an unconditional offer on an East Gwillimbury, Ontario, home for $1,871,000. Following the introduction of the province’s 15% Non-Resident Speculation Tax (NRST), Sheikhtavi found herself in the midst of a market downturn and unable to sell her current home to obtain mortgage financing for her new purchase.

As a result she was unable to close the deal, forcing property owners Richard and Sylvia Perkins to re-list their home for $1,251,888—nearly $620,000 below the original offer.

A lower Ontario court ordered Sheikhtavi to pay damages of $619,112, despite pulling out of the purchase offer. She appealed the judgment and just last month an Ontario Court of Appeal sided with the lower court and ordered the original payment, plus $15,019 in legal costs.

“In this case, the appellant deliberately chose not to include a condition that she had to be able to sell her home and obtain mortgage financing before closing as a term of her offer to purchase,” the court wrote in its judgment.

“She would reasonably have known that there was a risk her home would not sell at the price she sought but made an unconditional offer to purchase the respondents’ home because she wanted her offer to be accepted (although she was not the highest bidder)…The appellant’s contract was not frustrated; it was breached by the appellant.”

Lesson Learned

It was an expensive lesson for this homebuyer, but one that other buyers should take into consideration when making unconditional offers.

Buyers can’t rely on “supervening events” like mortgage regulations or regional foreign homebuyer taxes to provide grounds for backing out of a mortgage contract,” noted Brendan Monahan of Babin Bessner Spry in a review of the case.

“However, because the appellant’s offer was not subject to any conditions, the announcement of the NRST (however unexpected it may have been) did not force the appellant to do something different than what she agreed to.”

–Steve Huebl

SIGH OF RELIEF AS DECEMBER JOBS REPORT REBOUNDS

Welcome Rebound in Labour Markets in December

For this notoriously volatile data series, it is particularly true that ‘one month does not a trend make.’ Following last month’s dismal employment report, job growth rebounded in December, erasing almost half of the earlier decline (even more if you exclude transitory factors in November). As well, the unemployment rate reversed much of its November spike, capping the second-best year of job growth since the recession and supporting the Bank of Canada’s view that the Canadian economy is resilient.

Canada’s economy created 35,200 net new jobs in December, bringing the total number of jobs added to 320,300 in 2019, the second-most since 2007. The jobless rate ticked down three basis points to 5.6% and wage gains decelerated to a still-healthy 3.8% from a year earlier.

All of the job creation was in full-time employment in the private sector. Provincially, employment gains in December were led by Ontario and Quebec; British Columbia led declines. Construction jobs increased markedly, with BC and Ontario contributing the most to the rise. Following two months of decline, employment in manufacturing was little changed in December. The trade war has hit manufacturing hard, and even though a trade deal will be signed by China and the US next week, it does not eliminate the bulk of the tariffs imposed in the past year.

In December, BC continued to have the lowest jobless rate in the country at 4.8% (see Table below). Ontario and Quebec are now running neck-in-neck following a period of stronger job growth in Quebec. Atlantic Canada remains in the last place with secularly high unemployment rates–a long-standing situation.

Bottom Line: the December employment report confirms the Bank of Canada’s current policy stance that despite headwinds, the Canadian economy remains relatively resilient and that further interest rate cuts are unnecessary. This assessment can change on a dime in today’s uncertain world, but for now, the central bank is likely to remain on hold. Interest rates have risen in the past six-to-eight weeks owing to market forces. The fourth-quarter GDP growth in Canada has slowed markedly on weakness in consumer and business spending; hence the Bank will be monitoring closely upcoming data. We are forecasting roughly 1.8% growth in the economy in 2020, about in line with the 2019 pace. With very tight labour markets, the output gap has closed, and the economy will run at the longer-run potential growth pace consistent with our forecast.

Consumer Confidence Down

Canadian consumers appear to be less sanguine about the outlook than economists. In an end-of-year survey for Bloomberg News by Nanos Research Group, 55% of Canadians said there’s at least a “somewhat likely” chance of a recession this year. Only 33% reported a recession is unlikely, with 12% unsure. According to Bloomberg News, ” the downbeat perceptions reflect a pervasive sense of caution that has dogged the country’s households for more than a year and impacted their behaviour.”

Excluding housing, annual growth in total household consumption has averaged 1.1% in real terms over the past four quarters, the slowest pace outside recession since at least 1962. Another sign of cautiousness: savings rates are inching higher and are now at their highest level since 2015.

Bloomberg reports that “there are also indications that consumer worries have levelled off. The results are little changed from a similar poll taken at the end of November. A separate gauge of consumer confidence — the Bloomberg Nanos Canadian Confidence Index — saw a rebound in December from a two-month slide, as stock markets surged at the end of last year and sentiment around real estate recovered.”

Not surprisingly, recession concerns are most pronounced in prairie provinces like Alberta, where almost three-quarters of households see a chance of a 2020 contraction. Alberta has been hard hit by the plunge in oil prices since mid-2014 and is only slowly recovering. A majority of respondents in British Columbia and Ontario are also concerned a downturn is imminent. Quebec was the only province where optimists outnumbered pessimists.

Consumer confidence in the US has also declined, yet the stock markets in both countries continue to post record highs. We are in the eleventh year of economic expansion, the longest expansion on record, although it is not the strongest. Unlike the US, Canada has benefitted from a surge in immigration in the past three years, boosting growth.

Canadian housing markets have rebounded considerably from the Jan 1, 2018 imposition of the B-20 mortgage stress tests and fiscal stimulus is likely in the next budget, cutting taxes for the middle class and boosting government spending. Such stimulus will likely forestall further weakening in the economy.

–DR. SHERRY COOPER

The Latest in Mortgage News: 2020 Forecasts

Following a challenging 2018, by most accounts 2019 could be characterized as a “turnaround year” for Canada’s housing market. And 2020 is looking to bring much of the same.

That’s according to predictions for the new year by CMHC, the Canadian Real Estate Association (CREA) and several real estate firms. But while sales are forecast to pick up, housing inventory will continue to lag demand, putting continued pressure on prices, according to CREA.

Here’s a look at the latest housing and interest rate forecasts for 2020:

CREA Says “Lack of Supply” Will be the Story in 2020

Housing activity is expected to improve in 2020, with prices continuing to rise in many parts of the country, according to CREA.

Aside from the Prairies and Newfoundland and Labrador, CREA says the economic fundamentals underpinning housing activity remain strong. Population and employment growth, as well as no expectation of interest rate hikes in 2020, are also continuing to support the resale market.

2020 Forecasts

• Average house price: $531,000 (+6.2%). Small declines are expected in Alberta, Saskatchewan and Newfoundland and Labrador, with “solid” gains expected in Ontario, Quebec and the Maritimes.
• Home sales: 530,000 (+8.9%). CREA says this growth rate is primarily caused by a weak start to 2019 for home sales. Home prices for 2019 are on track to come in at $500,000, a 2.3% increase from 2018.

CREA notes the turnaround in real estate in the latter half of 2019 was driven largely by a fall in new listings—a trend that is expected to continue in 2020.

“These trends have caused many housing markets to tighten, which has sharply lowered the national number of months of inventory,” CREA noted. In November, this measure fell to its lowest level since mid-2007. “This is resulting in increased competition among buyers for listings and providing fertile ground for price gains.”

Housing Recovery in Store for 2020, Says CMHC

Housing activity in Canada is expected to recover in 2020, supported by economic and demographic conditions, according to the Canada Mortgage and Housing Corporation (CMHC).

It also expects overvaluation concerns in Toronto and Vancouver to continue to subside.

“Recent measures of overvaluation for the major markets of Vancouver and Toronto, as well as for those in their vicinity, indicate a general easing of vulnerabilities as prices have been gradually aligning more with fundamentals in recent quarters,” CMHC’s Housing Market Outlook reads. “The current outlook for renewed growth in home prices over the forecast horizon does not imply that overvaluation and/or price acceleration measures will necessarily worsen…”

2020 Forecasts

• Average MLS Price: Between $506,200 and $531,000. This will follow two consecutive years of decline from the peak reached in 2017. “However, positive price growth is expected to resume in 2020 and 2021, driving the average price above its 2017 level by the end of the forecast horizon,” CMHC said.
• MLS Sales: Between 480,600 and 497,700. After remaining at their 2018 levels throughout 2019, sales are expected to rise in both 2020 and 2021, CMHC says, adding this forecast “reflects expectations of household disposable income growth.”
• Housing Starts: Between 194,000 and 204,300

Real Estate Firms Forecast Prices to Rise 3%+ in 2020

Both Royal LePage and RE/MAX foresee a healthy bout of house price appreciation across the country in 2020, with price growth forecasts of 3.2% and 3.7%, respectively.

Increased consumer confidence is expected to drive much of the gains next year, according to RE/MAX.

“As more Canadians have adjusted to the mortgage stress test and older millennials move into their peak earning years, it is anticipated that they will drive the market in 2020, particularly single millennials and young couples,” reads the 2020 Housing Market Outlook Report.

It also expects a “levelling out” of the highs and lows that characterized the 2019 housing market, particularly in Toronto and Vancouver.

Royal LePage echoed that assessment, saying: “The positive outlook for Canadian real estate in 2020 is based on healthy buyer demand. A segment of potential homeowners that once put home purchasing on hold beginning in January 2018, due to the introduction of the mortgage stress test, started returning to the market…driving competition and demand.”

It added that a decline in high price appreciation in the condominium segment in recent years “reflects a shift in millennial demand towards houses and is expected to reinvigorate sales activity in the suburbs.”

Where Are Interest Rates Going in 2020?

After spending all of 2019 on the sidelines and leaving rates untouched, the Bank of Canada is expected to deliver a long-awaited 25-bps rate cut in 2020.

The BoC’s target overnight rate remained at 1.75% throughout 2019, thanks largely to a strong domestic economy in the face of global headwinds. Meanwhile, more than 40 central banks around the world have cut interest rates in recent months.

Overnight Index Swap markets are currently pricing in a roughly 30% chance of a rate cut by July, according to Westpac.

–Steve Huebl

Latest in Mortgage News: Mortgage Delinquencies on the Rise

The debt burden carried by Canadian consumers continued to rise this year, causing more people to fall behind on their debt payments…including their mortgages.

The 90-day-plus delinquency rate for mortgages rose to 0.18% in the third quarter. That’s a 6.7% increase compared to a year earlier, according to data from Equifax.

Non-mortgage debt delinquencies were up 9.7% in Q3 to 1.15%. That’s the highest third-quarter reading since 2012.

“While the uptrend in delinquencies has been relatively modest, it has been masked by a significant increase in consumer bankruptcies,” said Bill Johnston, Vice President of Data and Analytics at Equifax Canada. “Consumer proposals, where a licensed insolvency trustee negotiates debt repayments, remain on a strong rising trend and that is coming at the expense of traditional delinquencies.”

The Equifax data shows the average consumer now carries about $72,500 in debt, up 2.1% compared to a year earlier. Non-mortgage debt rose just 1.5% to $23,800, which marks a “significant slowing from recent trends,” Equifax noted.

In total, Canadians now owe $1.966 trillion in consumer credit, a rise of 4.1% from the same time last year.

HomeEquity Bank Sells Reverse Mortgage Portfolio

HomeEquity Bank announced Wednesday it has sold $75 million worth of reverse mortgage loans to a third party. This is the first time a reverse mortgage portfolio has been sold as a financial product in Canada.

“This transformative deal paves the way for creating a new market for originating and selling reverse mortgages in Canada, similar to opportunities available to U.S. and U.K. investors,” HomeEquity Bank EVP and Chief Financial Officer Atul Chandra said in a release. “It creates a new source of liquidity to support our continuing growth, in addition to further enhancing the profitability of our business.”

The Globe and Mail reported that the buyer was Saskatoon-based Concentra Bank, a provider of wholesale banking and trust company services to credit unions.

HomeEquity Bank is the leading provider of reverse mortgages in Canada with its CHIP Reverse Mortgage product. It currently has $3.3 billion in reverse mortgages on its balance sheets, and expects to add another $900 million in the coming year. According to comments made in the Globe article, HomeEquity Bank CEO Steven Ranson said they would like to sell upwards of 10 to 20% of that portfolio.

B.C. Speculation Tax Will Rise to 2%

British Columbia’s Speculation and Vacancy Tax on land owned by foreigners will jump to 2% on December 31, 2019, up from its current 0.5% rate.

The B.C. government announced it will introduce several new exemptions, while others will be phased out.

It was reported earlier this summer that the tax had raised $115 million that was reinvested to create more affordable housing. Figures show 12,029 B.C. property owners have been affected by the tax. Of those, 4,585 are foreign owners, around 1,500 are Canadians living outside of B.C. and 2,410 are B.C. residents.

Home Prices Post 9.2% Increase

Canadian home prices rose 9.2% year-over-year in November, according to the latest Teranet-National Bank Composite House Price Index.

The increase is similar to the 8.4% increase reported days ago by the Canadian Real Estate Association.

This marks the fourth straight quarter of home price appreciation by the Teranet-National Bank House Price Index, which tracks sales of single-family homes.

“The composite index has been strengthening for seven months after weakness in the previous eight, a path reflected in a cumulative gain of only 1.4% over the 12 months ending in November. That, however, amounts to a fourth consecutive acceleration,” the report noted.

Leading the gains were Windsor, Ont. (+9.37%), London, Ont. (+9.37%) and Brantford, Ont. (+8.20%). Leading the declines in home prices were Vancouver (-5.19%), Edmonton (-2.67%) and Abbotsford (-1.72%).

-Steve Huebl