Pandemic Has Increased Homebuying Intentions Among Young Canadians

There may be uncertainty on the horizon for the country’s real estate market, but young Canadians are undeterred and remain optimistic about the prospect of buying a home.

Nearly one in five young Canadians aged 18-34 say the pandemic has accelerated their plans to purchase a home or investment property, according to a recent Scotiabank survey.

Part of the reason can be attributed to the strain of recent lockdowns on those confined to smaller living spaces and wanting to upgrade to a larger or more functional living space.

“The pandemic has caused many Canadians to turn their living rooms into classrooms, their dining rooms into offices, and their basements into home gyms,” said John Webster, Head of Real Estate Secured Lending and Scotia Mortgage Authority at Scotiabank in a release. “This is motivating many to consider investing more in their current homes or re-evaluating their living spaces altogether.”

But, historically low interest rates seem to be the key driver behind this homebuying optimism. Despite soaring home prices, falling interest rates have helped keep homes within reach for many buyers.

Based on the average mortgage size of $289,000, according to Equifax Canada, today’s homebuyers could save more than $13,000 due to the recent plunge in interest rates compared to if they had purchased back in January.

That’s based on a nationally available uninsured 5-year fixed mortgage rate of 1.84% today vs. 2.84% at the start of this year. That works out to $142 in monthly mortgage savings, or $13,532 over the five-year term.

Even if today’s mortgage amount was increased to $299,000, those buying now would still come out ahead by $2,689 over the 5-year term with today’s lower rates.

Younger Canadians More Likely to Expect a Drop in Home Prices

Not only are prospective buyers counting on historically low interest rates, many believe home prices are set to fall as well.

One-third of those who say the pandemic has accelerated their homebuying plans say they are waiting for prices to drop before making a purchase.

The survey found the younger the demographic, the more likely they are to expect a forthcoming drop in house prices:

• 25% of overall respondents expect a drop in home prices, vs.
• 36% of those 18-34
• 24% of those 35-54
• 17% of those 55 and older

Additional Findings

The Scotiabank survey also found the following tidbits:

• 1 in 5 Canadians (20%) have had their finances negatively impacted by the pandemic and have had to put their homebuying plans on hold.
• 77% of renters say they have no plans to purchase a home in the next two years, despite low interest rates.
  • A recent Mortgage Professionals Canada survey made a similar finding, that 23% of renters expect to buy a home in the next two years.
• 12% of homeowners are planning to use the equity in the home to finance a renovation
  • 20% plan to use a personal line of credit
  • 22% to use funds from their investments
  • 3% plan to borrow from family or friends

–Steve Huebl

Latest in Mortgage News: CMHC to Get New Name, Maybe “Housing Canada”

What’s in a name? Well, in the case of the Canada Housing and Mortgage Corporation, “mortgage” likely won’t be for much longer.

The housing agency announced last week that it will be undergoing a rebranding in the coming months to better reflect its mandate. CEO Evan Siddall says the current name overemphasizes homeownership financing and doesn’t highlight the agency’s work related to housing affordability.

The name “Housing Canada” has already been floated, but federal legislation would be needed for an official name change. However, in an interview with The Canadian Press, Siddall said the agency could simply use a trade name.

He added that now is the time to look at such a name change that would better align the organization’s present and future.

“People always talk about the current moment as being an inflection point,” he said. “There’s a moment now that policy-makers are reflecting on and we’ll see what happens in the coming weeks and months, but this is for sure a moment like that.”

Home Affordability Improved in Q2

Canada’s large urban centres became more affordable in the second quarter of 2020, according to National Bank’s Housing Affordability Monitor.

That follows deteriorating affordability in the two previous quarters. The improvement is attributed to higher incomes and, more importantly, lower interest rates.

“[Interest rates] declined 19 basis points in the quarter, reflecting the easing from the central bank,” reads the report. “Combined, income and mortgage rates were more than enough to offset the increase in home prices”

NBC notes that the quarterly data doesn’t capture the full extent of the decline of 5-year fixed rates seen throughout the pandemic.

“Looking ahead, the preliminary data for rates shows additional improvements in the third quarter of the year (cumulatively they are down over 70 bps),” the report notes. “While we expect this to help affordability, home prices should remain resilient based on the latest resale market data showing record sales volumes.”

Homeowner Sentiment Improving, MPC Survey Shows

As economic and housing market indicators have improved over the past couple of months, so too has homeowner sentiment.

The second in a series of four surveys conducted by Mortgage Professionals Canada has found improvements in homeowner confidence in August compared to July.

For one, the survey noted an increase in the percentage of non-owners who expect to purchase a home in the coming year, from 7% as of year-end 2019 to 16% in August. Similarly, there was a substantial drop in non-owners who said they would never purchase a home, from 32% at the end of 2019 to 19% in August.

Optimism in the economy in the coming 12 months and the percentage of those who agree Canadian real estate is a good long-term investment both increased since July, the report found.

“We’re encouraged by the new survey data, which indicated that confidence in the housing sector improved during July and August,” said Paul Taylor, President and CEO of MPC. “As many Canadians become more comfortable with our new business operating environments, optimism about future economic activity appears to be buoying housing market activity and expectations for future purchases.”

The latest survey also found an increase in homeowners who believe now is a good time to buy a home or condominium (with an average rating of 6.18 in August, up from 6.05 in July and 5.82 at year-end 2019). A score of 8-10 signifies strong agreement and a score of 1-3 signifies strong pessimism.

Consumers are also more likely to expect a rise in home prices since July (with an average score of 6.46 vs. 5.94 in July).

–Steve Huebl

Big Banks Still Dominate Mortgage Market Share, Says CMHC

Big banks originate nearly 7 out of 10 (67%) of new Canadian mortgages, although their market share has fallen slightly from last year, according to CMHC.

Of total mortgages outstanding, the big banks hold 72% of those loans, down from 75% in 2018, according to the latest Residential Mortgage Industry Report released by the Canada Mortgage and Housing Corporation (CMHC).

Their average loan in 2019 was $220,650, with interest rates ranging from 3.10% to 5.20% and a delinquency rate of 0.24%.

Mortgage Finance Companies (MFCs) dominate the insured mortgage space after the larger lenders, holding 20% of the market, followed by 12% for credit unions.

Of total mortgages outstanding, MFCs have 9% of the market share, with average mortgage loans of $247,828 and a delinquency rate equal to that of the big banks at 0.24%.

Credit unions hold 14% of outstanding mortgages, with smaller loan amounts averaging $156,817 and a lower delinquency rate at 0.17%.

Private lenders and mortgage investment corporations (MICs) hold just 1% market share and reported average interest rates of between 7% and 15% with an average delinquency rate of 1.73%.

$1 Billion in Monthly Mortgage Deferrals

CMHC also reported that Canadians have deferred a total of $1 billion per month since the height of the pandemic.

“This significantly reduces the influx of payments toward outstanding mortgage debt and is expected to contribute to increasing the total mortgage debt in the second and third quarters of 2020,” CMHC noted.

The calculation was made based on an average monthly payment of $1,333.

“…we also expect fewer mortgage borrowers will be making additional mortgage payments this year in order to accelerate their mortgage repayments (through lump-sum payments or accelerated repayments),” CMHC added.

About 20% of borrowers said they plan on making prepayments to their mortgage this year, based on data from the Financial Industry Research Monitor (FIRM). Last year, two thirds of mortgage borrowers said they planned to make extra payments towards their mortgage in 2020.

Additional Data from CMHC

• About 760,000 borrowers from Canada’s chartered banks have deferred their mortgage payments.
• 63% of all mortgages offered by the big banks were for uninsured loans.
• “Renewals with the same lender increased by 11% relative to the previous year and accounted for more than half of all extended loans,” CMHC noted.
• Up to 20% of borrowers said they “might be looking at switching lending institutions depending on whether their lender approved mortgage relief measures and how they dealt with accommodations during the crisis,” according to FIRM data.

BANK OF CANADA RELIES ON QUANTITATIVE EASING

As promised, the Bank held its target overnight rate at the effective lower bound of 25 basis points with the clear notion that negative policy rates are not in the cards. Instead, the central bank will rely on large-scale asset purchases–quantitative easing (QE–of at least $5 billion per week of Government of Canada bonds. QE adds liquidity to the financial system and keeps market yields low. The Bank began aggressive QE with the beginning of the pandemic and will not cease until the economy has recovered, and inflation is sustainably at 2%. This could be years away, as for example, Ontario has paused reopening plans with the virus numbers ticking up. Many public health officials are expecting infections to rise with the opening of schools and the turn to colder weather. The government is preparing for a possible second wave. Policymakers, however, have dialed back language on more aggressive action.

The Bank has stated, “Both the global and Canadian economies are evolving broadly in line with the scenario in the July Monetary Policy Report (MPR), with activity bouncing back as countries lift containment measures. The Bank continues to expect this strong reopening phase to be followed by a protracted and uneven recuperation phase, which will be heavily reliant on policy support. The pace of the recovery remains highly dependent on the path of the COVID-19 pandemic and the evolution of social distancing measures required to contain its spread.”

In Canada, real GDP fell by 11.5% (39% annualized) in the second quarter, resulting in a decline of just over 13% in the first half of the year, mainly in line with the Bank’s July Monetary Policy Report (MPR) central scenario. All components of aggregate demand weakened, as expected. Global financial conditions have remained accommodative. Although prices for some commodities have firmed, oil prices remain weak.

As the economy reopens, the bounce-back in activity in the third quarter looks to be faster than anticipated in July. Economic activity has been supported by government programs to replace incomes and subsidize wages. Core funding markets are functioning well, and this has led to a decline in the use of the Bank’s short-term liquidity programs. Monetary policy is working to support household spending and business investment by making borrowing more affordable.

Housing activity has been particularly robust with substantial existing home sales in July and August. With record-low mortgage rates, buyers are satisfying their demand for more space and for moving further from city-center congestion. This urban exodus is more than anecdotal. You can get more for your money, and with many people working from home, long commutes don’t seem to be as relevant. The chart below shows that the outer suburbs of Toronto have seen the most significant increase in sales since the market picked up in early June.

Also, the construction of new homes surged to the highest level in more than a decade in August following a sharp increase in July. The greatest strength was in Toronto and Vancouver, particularly in multiple units.

Household spending rebounded sharply over the summer, with stronger-than-expected goods consumption and housing activity. There has also been a large but uneven rebound in employment. Exports are recovering in response to strengthening foreign demand, but are still well below pre-pandemic levels. Business confidence and investment remain subdued. While recent data during the reopening phase is encouraging, the Bank continues to expect the recuperation phase to be slow and choppy as the economy copes with ongoing uncertainty and structural challenges.

CPI inflation is close to zero, with downward pressure from energy prices and travel services, and is expected to remain well below target in the near term. Measures of core inflation are between 1.3% and 1.9%, reflecting the large degree of economic slack, with the core measure most influenced by services prices showing the weakest growth.

Bottom Line

The Bank also suggested that “as the economy moves from reopening to recuperation, it will continue to require extraordinary monetary policy support. The Governing Council will hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2% inflation target is sustainably achieved. To reinforce this commitment and keep interest rates low across the yield curve, the Bank is continuing its large-scale asset purchase program at the current pace. This QE program will continue until the recovery is well underway and will be calibrated to provide the monetary policy stimulus needed to support the recovery and achieve the inflation objective.”

The next policy meeting will be held on October 28 when the Bank will release its new forecast in the MPR. A rate hike is unlikely this year or in 2021.

–DR. SHERRY COOPER

Latest in Mortgage News: OSFI Changes Rules for Mortgage Deferrals

OSFI, Canada’s banking regulator, announced today it will start phasing out special regulatory capital treatment of deferrals given improving economic conditions.

The changes are effective immediately for mortgage payment deferrals granted by the Big 6 banks through to the end of September. Those deferrals will now only receive special capital treatment for up to three months as opposed to six. After September 30, any deferrals will be treated according to OSFI’s normal rules.

At the height of the pandemic and market volatility, the Office of the Superintendent of Financial Institutions announced special treatment for loan and insurance premium payment deferrals to be considered as “performing” as opposed to “non-performing.” A loan is considered non-performing when the borrower is late on making payments, typically by 90 days or more. Non-performing loans require the bank to set aside additional capital, or “provisions,” in the event of losses.

“The gradual phase out of this special capital treatment supports the ongoing stability of Canada’s financial system by ensuring a smooth transition back to pre-existing requirements,” OSFI said in a release.

“Our change today really reflects changes in economic conditions, unwinding of certain government programs and other indicators,” an OSFI official added during a conference call. “We’ll continue to monitor those going forward and, if conditions begin to deteriorate, we’re ready to act as necessary.”

Asked whether banks will be more likely to limit future deferrals to three months vs. six, OSFI officials noted that, “banks are well-capitalized to continue to offer deferrals and other supports to their borrowers even as the capital treatment winds down.”

As of July 30, there was approximately $170 billion worth of outstanding mortgage deferrals in place among the Big 6 banks, with the majority expected to mature between September and October, OSFI noted. The regulator added that the number of new deferrals in recent weeks has been “limited” and “stable at a low level.”

In recent weeks the big banks have reported a sharp decline in the number of mortgage payments still being deferred. For example, BMO and Scotiabank report that 90% of mortgage borrowers who had deferred payments are back to making regular payments. At RBC, normal payments have resumed for about 80% of its mortgage deferrals, with extensions granted to 19%. The remaining 1% are considered delinquent.

U.S. Federal Reserve Adopts New Approach to Inflation

The Federal Reserve announced a significant policy change on last week to “average inflation targeting.”

As a result, the central bank will allow inflation to run above its inflation target of 2% for some time before hiking interest rates.

Fed Chairman Jerome Powell called the change a “robust updating” of central bank policy. What it means is that the Fed will be less inclined to raise interest rates when unemployment falls, as long as inflation doesn’t rise too drastically.

“Many find it counter-intuitive that the Fed would want to push up inflation,” Powell said in prepared remarks. “However, inflation that is persistently too low can pose serious risks to the economy.”

Could the Bank of Canada Follow Fed Policy Changes?

It seems likely, considering the BoC launched a public consultation this week inviting the public to share its ideas on inflation targeting.

Canada’s central bank is gathering feedback through this online survey, which will be available until Oct. 1, 2020.

The review of how the BoC sets its inflation target has been spurred by the COVID-19 pandemic. Societal changes mean people are now spending less on items that have a larger impact on the inflation reading, such as gasoline. They’re now spending more on items that have a smaller impact on the index.

“While we have benefited from having well-anchored inflation expectations in the past, this mooring will be tested by the very rough economic waters caused by the pandemic,” Deputy Governor Lawrence Schembri said in a speech to the Canadian Association for Business Economics.

The Bank of Canada has been targeting inflation at 2% for nearly 30 years after it got out of control in the late 1970s and early eighties.

Home Building Springs Back to Highest Level Since 2017

Home building activity is back into high gear following a drastic slowdown during the height of the pandemic.

Housing starts were up 16% nationally in July compared to June, to a seasonally adjusted 245,604 units—the highest level since November 2017. In Toronto, building activity sprung back even more quickly, jumping 22% on an annualized basis.

“Despite the housing market’s durability thus far, we continue to see a soft spot ahead given the ongoing lack of immigration and upcoming resumption of many deferred mortgages,” wrote Royce Mendes of CIBC Economics.