BoC Increasingly Likely to Deliver a Surprise Rate Cut This Week

Growing fallout from the coronavirus—including tanking stock markets and falling oil prices—means the Bank of Canada is increasingly likely to cut interest rates this week.

Just days ago, the market consensus was that the Bank of Canada would wait until its April meeting before lowering rates by 25 bps, in order to give the Governing Council more time to assess the situation.

But panic selling on the world’s stock markets, as well as a 25%+ drop in the price in WTI crude oil since the start of the year, means markets are nearly fully expecting the Bank of Canada to move its rate cut to its upcoming meeting this Wednesday.

Not only that, but markets are suddenly pricing in three quarter-point rate cuts by the end of the year.

Economists at RBC Economics are among those anticipating a rate cut this week.

“The plunge in global equity markets and sharp drop in commodity prices, in particular oil, are bumping up the risks that the confidence hit in financial markets will be mirrored in household and business sentiment,” said RBC’s Deputy Chief Economist, Dawn Desjardins. “The data doesn’t show this yet but with markets extrapolating what looked like a modest hit to global growth from the coronavirus into a full-fledged economic downturn, the bank is likely to want to lean against any deterioration in confidence.”

She added that the bank’s revised call for a rate cut does not remove the possibility for an additional rate cut in April.

“The Bank of Canada doesn’t want to further stoke this fire [household debt-to-income ratios reaching new highs] via rate cuts that could encourage home-buying behaviour,” added economists at TD Economics, who also expect a rate cut this week. “But the unfortunate truth is that it probably can’t do much to manage this market.”

Stephen Brown, Chief Economist at Capital Economics, added that increased confidence of price growth among homeowners may be welcomed by the BoC in this time of growing fear in equity markets.

“We think the Bank would only cut if it were convinced that the disruption caused by the virus elsewhere in the world has already been enough to seriously jeopardize domestic growth…The sharp downward moves in commodity prices are a bigger immediate risk, but volatile market moves may not be enough to persuade the Bank to cut either,” Brown wrote. “All that said, it clearly would not take much more to change the Bank’s mind. While it has been worried about the effects of looser policy on house prices, it may become more welcoming of a further boost to housing wealth if equity values continue to plummet.”

Derek Holt, head of capital markets at Scotiabank, urged the Bank to cut rates right away given the latest developments.

“The Bank of Canada needs to cut. Now. Enough dithering,” he wrote on Friday. “The greater risk to financial stability is not giving the economy a shot in the arm.”

Three Rate Cuts Suddenly Priced in for 2020

As quickly as coronavirus-induced fears have engulfed equity markets, so too have expectations changed for additional monetary policy easing this year.

Overnight Index Swap (OIS) markets as tracked by Bloomberg are now fully pricing in three 25-bps rate cuts by year’s end.

That would bring Canada’s overnight interest rate down to 1.00%, a level it hasn’t seen since December of 2017.

What This Means for Fixed and Variable Mortgage Rates?

Canadian 5-year bond yields have experienced a stunning collapse in recent weeks, falling from 1.66% as of January 1 of this year to a two-and-a-half-year low of 1.07% as of Friday.

Since bond yields lead fixed mortgage rates, we can expect mortgage lenders to continue lowering rates in the weeks ahead. As we reported last month, fixed rates have already been on the move lower, with the lowest nationally available insured 5-year fixed rate falling to 2.33%. Since then, they’ve already crept down to 2.32%, according to rate-tracking website RateSpy.com. That’s down from 3.19% a year ago.

Falling bond yields are good news for fixed-rate holders, who should expect rates to continue to trend lower in the weeks ahead if fears over coronavirus persist and economic data continues to soften.

As of Monday morning, HSBC announced new rate specials, including a high-ratio 3-year fixed rate of 1.99%.

But for the first time in a while, variable-rate mortgage holders may finally see some rate relief as well if the Bank of Canada follows through with its expected rate cuts.

Average variable rates currently stand at 2.82%, as tracked by RateSpy, compared to 2.59% for fixed-rate mortgages.

But rates may not fall completely in lock-step with BoC rate cuts, say some. Variable-rate mortgages are based instead on prime rate, which is set by the country’s big banks.

With the big banks’ revenue under pressure in this time of flat to inverted yield curves, rate expert Rob McLister of RateSpy.com says not to expect them to lower prime rate to the same extent that the BoC lowers the overnight rate.

“Given this, and rising loan loss provisions and higher risk premiums, I would not bet on banks passing along a full BoC cut to borrowers. That said, hopefully I’m wrong and we’re all pleasantly surprised,” he told CMT.

But that’s not a reason for borrowers to avoid variable rates, he adds.

Have Questions About the New Stress Test Rate? Here Are Some Answers…

The Department of Finance created shockwaves this week with its announcement that it will be revamping how insured mortgages are stress tested.

Now that the dust has settled, here’s a more in-depth look at the implications, as well as some industry reaction.

But first, a quick recap of what’s changing come April 6, 2020:

• Current stress test rate for insured mortgages (typically those with less than 20% equity): 5.19%
  • Based on the Big 6 banks’ posted 5-year fixed rates.
• New stress test rate (if it were in effect today): ~4.89%
  • Based on a rate equal to the weekly median 5-year fixed insured mortgage rate plus 2%.

Could the new benchmark rate eventually be higher than the current qualification rate?

According to estimates from Mortgage Professionals Canada’s chief economist Will Dunning, yes.

He plotted his estimate of the typical “special offer” rate advertised by major lenders, and as recently as late-2018, the new qualifying rate would have been nearly 40 basis points higher than the new qualifying rate. Dunning notes, however, that it would be beneficial to have official data provided directly from the Canada Mortgage and Housing Corporation (CMHC) to remove some of the guess work from estimating the official average insured mortgage rate.

“Given the history, it’s highly possible that there will be future times when the new qualifying rate will be higher than the posted rate, but I don’t see that as important: the posted rate should never have been part of the mortgage stress tests,” Dunning told CMT.

How will the rate be calculated, exactly?

That’s still to be determined, at least publicly. The Bank of Canada says it can’t confirm if the new benchmark rate will be based on all insured applications (such as 2- to 4-unit properties, self-employed borrowers, second homes, rental properties, etc.) or just a core group.

How much of the mortgage market will be impacted by the stress test rate change?

As of 2018, insured mortgages accounted for less than a third of new mortgages. Although, the Office of the Superintendent of Financial Institutions (OSFI) announced it is also considering a similar change in its formula for stress testing uninsured mortgages (those with more than 20% equity). OSFI is currently accepting input from stakeholders by email until March 17, 2020.

How much does it help the average buyer?

There’s no question the new formula for stress testing insured mortgages will help many buyers who are currently just on the cusp of being able to pass the stress test.

Consider that the current stress test rate of 5.19% is a full 283 basis points higher than the lowest available insured mortgage rate on the market.

The new formula will narrow that gap by 30 basis points after April 6. This will decrease the income required to buy a $300,000 home by roughly $1,500, assuming a 5% down payment and 25-year amortization.

Alternatively, it will allow those who can easily pass the stress test to purchase about 5% more home. As Ron Butler of Butler Mortgage Inc. told us, “Someone who qualified for a $500K mortgage (previously) will qualify for $525K in April.”

Does the move go far enough to help buyers?

It depends on who you ask. Industry representatives say the changes are welcome, but that there’s still room for improvement to assist young and aspiring homeowners struggling to enter the housing market.

“A stress test at 4.89% is better than one at 5.19%, but this test threshold is still too high, for several reasons,” MPC’s Chief Economist Will Dunning told CMT.

“Most importantly, the tests fail to acknowledge that by the time of a renewal in five years, the borrower’s income will have increased, usually by more than 10%, and they will have more capacity to make payments. The calculations should, but don’t, take this into consideration.”

Dunning adds that after a five-year term of the borrower faithfully making payments, the outstanding principal will have been reduced by 14-15%. “The design of the test doesn’t properly account for this, and therefore it over-estimates how much the payments would increase. And, it increasingly looks unlikely that rates will rise by anywhere near the 2 percentage points that the revised test will assume.”

Paul Taylor, President and CEO, Mortgage Professionals Canada, told BNN Bloomberg that he’s not sure if the change will help qualify a “tremendous” number of additional buyers.

“It certainly will help some folks on the margin,” he said. “But it’s certainly good news for the marketplace from a policy perspective.”

Taylor added the association would like to see the test closer to 75 basis points above a buyer’s contract rate (as opposed to 200 bps) based on calculations that take into account income growth and mortgage principal payment over the term of the mortgage.

Responding to concerns of the change contributing to increased home prices, Taylor said this: “I think the lack of supply is really what is causing the increase in those prices. There are just far more people than there are housing products available for them. This particular change…is not really going to affect the prices in isolation. I think it’s the rest of the dynamics in the market that are going to create the increases that everybody is expecting.”

Industry Reaction to the Stress Test Change

Here’s a selection of other viewpoints from across the industry on the stress test rate change:

Jason Stephen, President of The Canadian Real Estate Association (CREA)

“REALTORS have advocated for changes to the stress test on behalf of potential homeowners who have been sidelined, borrowers who have moved away from the regulated market to less-regulated options, and real estate markets across the country in need of relief. We are pleased the government has taken steps to address some of these issues in Canadian housing markets.”

Evan Siddall, head of the Canada Mortgage and Housing Corporation (CMHC):

“It’s worth noting that by changing the reference rate, authorities are recommitting to the merits of the stress test. The credibility of the measure is strengthened via this technical improvement. Calls to reduce the margin (from 200 to 75 bps) do not have traction at present.”

Rob McLister, Founder of RateSpy.com

“Will a looser stress test stoke the market? Absolutely. While it might boost buying power by just 3% or less (depending on what the new benchmark turns out to be, come April 6), the psychological boost will be material. Homebuyers—particularly younger buyers—are already worried about prices running away from them, given the double-digit gains of the last 12 months. News of an easier mortgage stress test won’t help.”

Doug Porter, Chief Economist, BMO Bank

Extending similar qualifying rate changes to uninsured mortgage stress testing could “put further upward pressure on prices, especially in markets that are already leaning to a sellers market.”

Bill Morneau, Minister of Finance (responsible for the latest qualifying rate change)

“We think these are positive moves to ensure that the approach remains effective for Canadians and that it also deals with changing market conditions…I think what’s important for us to ensure is that we continue to protect people’s most important investment. This will ensure that people only take on mortgages that are appropriate for their situation.”

–Steve Huebl

Department of Finance Announces New Qualifying Rate for Insured Stress Test

The federal government announced on Tuesday it will be changing the benchmark qualifying rate used for Canada’s insured mortgage stress test.

The change, which will take effect April 6, 2020, means borrowers with insured mortgages (typically those with less than 20% equity) will need to prove they can afford monthly mortgage payment based on a rate equal to the weekly median 5-year fixed insured mortgage rate plus 2%.

The Department of Finance confirmed that rate would currently equal 4.89%, 30 basis points less than today’s benchmark qualifying rate of 5.19%, which is based on the Big 6 banks’ posted 5-year fixed rates.

Critics say the big banks have been keeping their 5-year fixed posted rates artificially high since they are used in setting prepayment penalties. But with mortgage rates falling since last year, the mortgage stress test has been increasingly out of sync with the actual contract rates consumers are securing.

“This adjustment to the stress test will allow it to be more representative of the mortgage rates offered by lenders and more responsive to market conditions,” the DoF said in its announcement.

The news comes following a review of the mortgage stress test that was ordered by Prime Minister Justin Trudeau in December to explore recommendations from financial institutions to make the stress test more “dynamic.”

Changes to the Uninsured Stress Test Rate Coming Too?

At the same time, the Office of the Superintendent of Financial Institutions (OSFI) delivered its own announcement that it is considering the same benchmark rate for its stress test on uninsured mortgages (those with more than 20% down payment).

“The proposed new benchmark for uninsured mortgages is based on rates from mortgage applications submitted by a wide variety of lenders, which makes it more representative of both the broader market and fluctuations in actual contract rates,” OSFI said in its release.

The move was preceded by hints from OSFI’s Assistant Superintendent, Ben Gully, who said in a recent speech recently that “the posted rate is not playing the role that we intended.” He added that the “difference between the average contract rate and the benchmark has been widening more recently, suggesting that the benchmark is less responsive to market changes than when it was first proposed.”

OSFI said it is currently accepting input from stakeholders by email until March 17, 2020.

Industry Reaction to the Stress Test Change

Mortgage Professionals Canada (MPC) has been calling for the stress test rates to be uncoupled from the Bank of Canada’s posted 5-year fixed rate since the insured stress test was introduced in 2016. The association welcomed the announcement, saying the use of a floating rate will make the stress test more dynamic and responsive to changing markets and bond rates.

“We thank the government for acknowledging this issue and making these changes,” Paul Taylor, President and CEO of MPC, wrote in an email to membership. “We do, however, still consider a two percent (2%) buffer to be an onerous test level given the economic realities globally”.

Taylor said the association will continue to ask for additional support measures for those still struggling to pass the stress test.

“Included in our asks will be the reintroduction of an insurable 30-year amortization for first-time buyers, and increases in the income maximum multipliers under the newly introduced First Time Home Buyers Incentive Plan,” he said.

While industry reaction has so far been favourable, some said there were likely ulterior motives for the sudden change in policy.

“It’s a political move. The government said they would do ‘something’ about high-ratio buyers in the last election, so now they have,” Ron Butler of Butler Mortgage told CMT. “I suppose if the ‘average rate’ drops enough to produce a 4.39% qualifying rate, then we will see some real changes.”

As it stands, Butler estimates the 30-basis point drop in the qualifying rate will increase the purchasing power for insured borrowers by around 5%.

“Someone who qualified for a $500K mortgage yesterday will qualify for $525K in April,” he said.

–Steve Huebl

MORNEAU EASES STRESS TEST ON INSURED MORTGAGES

Minister Morneau Announces New Benchmark Rate for Qualifying For Insured Mortgages

The new qualifying rate will be the mortgage contract rate or a newly created benchmark very close to it plus 200 basis points, in either case. The News Release from the Department of Finance Canada states, “the Government of Canada has introduced measures to help more Canadians achieve their housing needs while also taking measured actions to contain risks in the housing market. A stable and healthy housing market is part of a strong economy, which is vital to building and supporting a strong middle class.”

These changes will come into effect on April 6, 2020. The new benchmark rate will be the weekly median 5-year fixed insured mortgage rate from mortgage insurance applications, plus 2%.

This follows a recent review by federal financial agencies, which concluded that the minimum qualifying rate should be more dynamic to reflect the evolution of market conditions better. Overall, the review concluded that the mortgage stress test is working to ensure that home buyers are able to afford their homes even if interest rates rise, incomes change, or families are faced with unforeseen expenses.

This adjustment to the stress test will allow it to be more representative of the mortgage rates offered by lenders and more responsive to market conditions.

The Office of the Superintendent of Financial Institutions (OSFI) also announced today that it is considering the same new benchmark rate to determine the minimum qualifying rate for uninsured mortgages.

The existing qualification rule, which was introduced in 2016 for insured mortgages and in 2018 for uninsured mortgages, wasn’t responsive enough to the recent drop in lending interest rates — effectively making the stress test too tight. The earlier rule established the big-six bank posted rate plus 2 percentage points as the qualifying rate. Banks have increasingly held back from adjusting their posted rates when 5-year market yields moved downward. With rates falling sharply in recent weeks, especially since the coronavirus scare, the gap between posted and contract mortgage rates has widened even more than what was already evident in the past two years.

This move, effective April 6, should reduce the qualifying rate by about 30 basis points if contract rates remain at roughly today’s levels. According to a Department of Finance official, “As of February 18, 2020, based on the weekly median 5-year fixed insured mortgage rate from insured mortgage applications received by the Canada Mortgage and Housing Corporation, the new benchmark rate would be roughly 4.89%.”  That’s 30 basis points less than today’s benchmark rate of 5.19%.

The Bank of Canada will calculate this new benchmark weekly, based on actual rates from mortgage insurance applications, as underwritten by Canada’s three default insurers.

OSFI confirmed today that it, too, is considering the new benchmark rate for its minimum stress test rate on uninsured mortgages (mortgages with at least 20% equity).

“The proposed new benchmark for uninsured mortgages is based on rates from mortgage applications submitted by a wide variety of lenders, which makes it more representative of both the broader market and fluctuations in actual contract rates,” OSFI said in its release.

“In addition to introducing a more accurate floor, OSFI’s proposal maintains cohesion between the benchmarks used to qualify both uninsured and insured mortgages.” (Thank goodness, as the last thing the mortgage market needs is more complexity.)

The new rules will certainly add to what was already likely to be a buoyant spring housing market. While it might boost buying power by just 3% (depending on what the new benchmark turns out to be on April 6), the psychological boost will be positive. Homebuyers—particularly first-time buyers—are already worried about affordability, given the double-digit gains of the last 12 months.

–DR. SHERRY COOPER

JANUARY HOME SALES SLOW MOSTLY OWING TO A DEARTH OF NEW LISTINGS

Home Sales Slip A Bit In January As Supply Tightens Pushing Up Prices

Statistics released today by the Canadian Real Estate Association (CREA) show that national existing-home sales dipped between December and January owing to a dearth of new listings, especially in the GTA. As the CREA chart below shows, the pace of monthly home resales nevertheless remained strong.

Home sales recorded over Canadian MLS® Systems declined by 2.9% in January 2020, although they remain among the stronger monthly readings of the last few years.

Transactions were down in a little over half of all local markets in January, with the national result most impacted by a slowdown of more than 18% in the Lower Mainland of British Columbia. According to CREA, “While there were few notable gains in January, it should be noted that many of the weaker results have come alongside a shortage of new supply in markets where inventories are already very tight.”

Actual (not seasonally adjusted) sales activity was still up 11.5% compared to January 2019, marking the best sales figures for the month in 12 years. Transactions surpassed year-ago levels in about two-thirds of all local markets, including most of the largest urban markets. Some of the larger markets where sales were down, such as Ottawa and Windsor-Essex, are currently among some of the tightest supplied markets in Canada.

“Home price growth continues to pick up in housing markets where listings are in short supply, particularly in Southern, Central and Eastern Ontario,” said Jason Stephen, president of CREA. “Meanwhile, ample supply across the Prairies and in Newfoundland and Labrador is resulting in ongoing competition among sellers.”

In many tight housing markets, potential sellers appear to be waiting until the spring to list their properties when the weather is better and more buyers are actively looking

New Listings

The number of newly listed homes was little changed in January, edging up a slight 0.2% on the heels of a series of declines which have left new listings at a near-decade low. January’s small month-over-month (m-o-m) change came as the result of declines in a number of larger markets, including Calgary, Edmonton and Montreal, which were offset by gains in the York and Durham Regions of the Greater Toronto Area (GTA) where new supply bounced back at the start of 2020 following a sharp slowdown towards the end of last year.

With sales down and new listings up slightly in January, the national sales-to-new listings ratio fell back to 65.1% compared to 67.2% posted in December 2019. Even so, the long-term average for this measure of housing market balance is 53.8%. It has been significantly above that long-term average for the last four months. Barring an unforeseen change in recent trends between the balance of supply and demand for homes, price gains appear poised to accelerate in 2020.

Indeed, concern is growing that Canada’s largest housing market may be about to experience a new round of froth, similar to 2016. “It’s looking more and more like early-2016 all over again for the Toronto housing market. This is not a good sign,” wrote RBC Economics senior economist Robert Hogue. “Those were the days when things started to heat up uncomfortably, propelling property values sky-high in the ensuing year.”

Based on a comparison of the sales-to-new listings ratio with the long-term average, close to two-thirds of all local markets were in balanced market territory in January 2020. Apart from a few areas of Alberta and Saskatchewan, the remainder were all favouring sellers. As the chart below shows, the GTA housing market is in sellers’ market territory. 

There were 4.2 months of inventory on a national basis at the end of January 2020 – the same as in November and December and the lowest level since the summer of 2007. This measure of market balance is now a full month below its long-term average of 5.2 months.
National measures of market balance continue to mask significant and increasing regional variations. The number of months of inventory has swollen far beyond long-term averages in the Prairie provinces and Newfoundland & Labrador, giving homebuyers ample choice in these regions. By contrast, the measure is running well below long-term averages in Ontario, Quebec and the Maritime provinces, resulting in increased competition among buyers for listings and providing fertile ground for price gains. The measure is still in balanced market territory in British Columbia overall but is tightening in the Vancouver area as the chart below indicates.

Home Prices

The Aggregate Composite MLS® Home Price Index (MLS® HPI) rose 0.8% in January 2020 compared to December, marking its eighth consecutive monthly gain. It is now up 5.5% from last year’s lowest point in May and has set new records in each of the past six months (see the CREA chart below). The MLS® HPI in January was up from the previous month in 14 of the 18 markets tracked by the index. (see CREA table below).

Home price trends have generally been stabilizing in most Prairie markets in recent months following lengthy declines. Meanwhile, prices are clearly on the rise again in British Columbia and in Ontario’s Greater Golden Horseshoe (GGH). Further east, price growth in Ottawa, Montreal and Moncton continues as it has for some time now, with Montreal and particularly Ottawa having strengthened noticeably in recent months.

Comparing home prices to year-ago levels yields considerable variations across the country, although for the most part trends are still regionally split along east/west lines, with rising gains from Ontario east, and a mixed bag of smaller gains and declines in B.C. and the Prairies.

Home prices in Greater Vancouver (-1.2%) remain slightly below year-ago levels, but declines are still shrinking. Meanwhile, January saw prices back in positive y-o-y territory in the Fraser Valley (+0.3%). Elsewhere in British Columbia, home prices logged y-o-y increases in the Okanagan Valley (+3.5%), Victoria (+3.4%) and elsewhere on Vancouver Island (+4%).

Calgary, Edmonton and Saskatoon continued to post small y-o-y price declines, while the y-o-y gap has now widened to -6.9% in Regina.

In Ontario, home price growth has re-accelerated across most of the GGH, with a number of markets getting close to double digits. Meanwhile, price gains in recent years have continued uninterrupted in Ottawa (+13.7%), Montreal (+9.8%) and Moncton (+6.4%).

All benchmark home categories tracked by the index accelerated further into positive territory on a y-o-y basis, with similar sized gains among the different property types. Condo apartment unit prices posted the biggest y-o-y increase (+5%) followed closely by two-storey single-family homes (+4.8%), one-storey single-family homes (+4.4%) and townhouse/row units (+4.2%). Earlier this cycle, condo prices markedly outpaced the single-family sector, but in the past year, detached homes have more than caught up.

Also, note in the table below that the benchmark home price in Toronto-area Oakville-Milton at $1.05 million is now above the benchmark price in Greater Vancouver of $1,026. The GTA has a much larger and more diverse housing market with a benchmark price of $.841 million.

Consumer Unsecured Debt is a Bigger Problem Than Mortgage Debt

Bottom Line: Housing markets in Canada are strengthening as interest rates continue to fall, job growth is robust, wage gains are sizable and foreign immigration boosts demand. While the stress test qualifying rate remains stuck at 5.19%, market forces emanating from the coronavirus epidemic are pushing down market rates, and TD Bank has cut its posted rate to 4.99%. If downward pressure continues, which is likely given the news out of China, other big banks may follow the TD lead, reducing the qualifying rate. Regardless, contract mortgage rates are once again under downward pressure.

The Bank of Canada is unlikely to cut its overnight benchmark rate when it meets again March 4. It will point to the resilience of the Canadian economy and the debt exposure of Canadian households. To be sure, much has been made of the eye-catching fact that consumer insolvencies rose by 9.5% in 2019, the most substantial annual increase since the 2008-09 recession. But it should be emphasized that this reflected excessive credit card and auto loans, not mortgage debt. 

Consumer insolvencies are comprised of household bankruptcies and proposals (see chart below). Bankruptcies are falling and have been since the economic recovery began in 2009. Last year’s increase reflected a rise in the number of “proposals”—offers to pay creditors a percentage of what is owed and extend the repayment schedule, a remedy available to individuals with up to $250,000 in unsecured debt.

Mortgage debt, on the other hand, has been rock solid. The latest data from the Canadian Bankers Association shows just 0.23% of mortgages were more than 90 days in arrears as of August 2019, matching the lowest rate since 1990. That is not to say mortgage debt isn’t a source of stress for some households—mortgages account for 45% of the average household’s debt servicing costs. But those having trouble making debt payments are likely prioritizing their mortgages over credit cards and auto loans. There has also been an increase in insolvencies among individuals without mortgage debt.

The Bank of Canada and the regulators would do better to focus on the curtailment of excessive unsecured household borrowing than to fixate on mortgage stress testing alone.

–DR. SHERRY COOPER

TD Bank Cuts Its 5-Year Posted Rate

After six long months of no changes to the big banks’ posted rates, TD Bank broke the ice on Tuesday by lowering its 5-year posted rate to 4.99% from 5.34%.

While the big banks adjust their “special” rates regularly (as RBC did last week), changes to their higher posted rates are more rare. And the move is important because it means other banks are likely to follow, and if enough do, it will lead to a drop in the 5-year benchmark qualifying rate…i.e. the stress test rate.

That would be welcome news to the countless mortgage shoppers out there who are struggling to qualify at the current benchmark rate of 5.19%.

“Based on current market conditions, lower funding costs have led to a growing variance in customer rates versus posted rates,” a TD spokesperson told BNN Bloomberg. “This rate decrease aligns TD’s 5-year fixed posted rate more closely with current customer rates.”

And that’s all true. Bond yields—which lead fixed mortgage rates—have plummeted roughly 30 basis points since the start of the year. And the big banks keeping their posted rates artificially higher (in TD’s case, it hasn’t cut its 5-year posted rate since March 2019), has started to draw attention from key industry players.

The OSFI Effect

TD’s rate drop suspiciously comes just days after a speech from Ben Gully, Assistant Superintendent at the Office of the Superintendent of Financial Institutions (OSFI), which regulates federal financial institutions.

In his speech, Gully admitted the use of the benchmark qualifying rate as the floor of Guideline B-20 stress testing for uninsured mortgages is “not playing the role that we intended.”

“For many years, our data showed the difference between the benchmark rate and the average contract rate was about 2%,” Gully said. “However, the difference between the average contract rate and the benchmark has been widening more recently, suggesting that the benchmark is less responsive to market changes than when it was first proposed.”

Some in the industry suspect that speech was the stick that broke the camel’s back and finally pushed the banks (or at least one of them) to adjust their qualifying rate.

Ron Butler of Butler Mortgage said TD’s move “absolutely” was a result of Gully’s comments, and he expects others to follow within the next week.

“We will see a 4.89% qualifying rate in the spring, if not sooner,” he told CMT.

Impact on the Stress Test

Even if the qualifying rate were to drop that much, a 30-bps reduction would still only have a “minimal effect” for buyers  struggling to qualify, he said. Anecdotally, Butler estimates about 300 to 400 mortgage applicants he deals with each year have trouble qualifying under the stress test.

A recent survey from Zillow and Ipsos found that half of Canadians (51%) say they are concerned that stricter rules will prevent them from qualifying for a mortgage, up five points since 2018.

If the qualifying rate were to drop to just 4.99%, that would require roughly 1.8% less income in order to qualify for the average Canadian home, according to Rob McLister of RateSpy.com. It would also increase buying power by nearly 2%.

“These effects may seem small at the margin, but they’re magnified when you’re talking about thousands of buyers across Canada,” he wrote. “A lower stress test rate would also help refinancers qualify for bigger loans. Someone with an average home making $100,000 a year would qualify for a $9,000 bigger mortgage (+/-) if the stress test rate dropped to 4.99% from 5.19%.”

The ball is now in the court of the other Big 5 banks to determine what happens to the qualifying rate. You can be sure many prospective homebuyers will be watching closely.

–Steve Huebl

TD LOWERS QUALIFYING MORTGAGE RATE 35 BPS TO 4.99%

TD LOWERS POSTED MORTGAGE RATE TO 4.99%

Market interest rates have fallen sharply since the coronavirus-led investor flight to the safety of government bonds. The 5-year government bond yield–a harbinger of conventional mortgage rates–now stands at 1.34%, down sharply from the 1.60+% range it was trading in before the virus became global news (see chart below).

This morning, one of the Big-Six banks finally reacted. TD cut its posted 5-year fixed rate to 4.99%. TD’s posted rate had previously been at 5.34%, making this a 36 basis point cut. Other banks had lowered their qualifying rate to 5.19% last July, leading the Bank of Canada to cut its 5-year conventional mortgage rate to 5.19%. This is the qualifying rate under the B-20 rule introduced on January 1, 2018.

Even the regulators have been questioning the efficacy and fairness of using the big-bank posted rate as a qualifying rate for mortgage stress testing.

On January 24, the Assistant Superintendent of OSFI’s Regulation Sector, Ben Gully, gave a speech at the C.D. Howe Institute suggesting that the B-20 qualifying mortgage rate historically would be no more than 200 basis points above contract rates. He said that OSFI chose the “best available rate at the time.”

He went on to say that for many years, the difference between the benchmark rate and the average contract rate was 200 bps. However, this gap “has been widening more recently, suggesting that the benchmark is less responsive to market changes than when it was first proposed. We are reviewing this aspect of our qualifying rate, as the posted rate is not playing the role that we intended. As always, we will share our results with our federal partners. This will help to inform the advice OSFI might provide to the Minister, as requested in the mandate letter to him.”

By keeping posted rates too high, the Big-Six banks have inflated the qualifying rate, making it more difficult than necessary to pass the stress test to get a mortgage.

While TD’s rate cut is welcome news, its posted rate is still too high by historical standards. Given today’s average contract rates, the posted rate should be at least 20 bps lower still.

Banks have a strong incentive to inflate their posted mortgage rate. For one thing, they are the basis for the calculation of big-bank mortgage penalties. Also, they are the minimum qualifying rate.

The posted rate does not appropriately reflect the state of the mortgage market as few borrowers would pay this rate. Interestingly, banks often move this rate in lock-step, or close to it, reflecting their dominant oligopolistic position in the marketplace.

If a couple of the other big banks follow TD’s lead, the Bank of Canada benchmark rate will be below 5% for the first time since January 2018 when the new B-20 rules were adopted. Lowering the stress test rate by 20 bps from 5.19% to 4.99% would require roughly 1.8% less income to qualify for a mortgage on the average Canadian home price (assuming a 20% downpayment), increasing buying power by 2%. This doesn’t sound like much, but it can have a meaningful psychological impact on already improving housing markets. The latest CREA data shows that the national average home price surged 9.6% year-over-year in December. A lower stress test rate would make a busy spring housing market even more active.

–DR. SHERRY COOPER

CMHC’s First-Time Home Buyer Incentive Off to a Slow Start

Four months after its official launch, CMHC’s First-Time Home Buyer Incentive had funded just 4% of its three-year goal, according to new data provided by the agency.

From the time the down payment assistance program launched on Sept. 2 to Dec. 9, CMHC received just 3,252 applications from across Canada, 2,730 of which were approved. That translated into total funding of $51.3 million—well off pace of the agency’s three-year target of $1.25 billion.

Under the program, the government will provide first-time buyers with an interest-free down payment loan of up to 5% for resale purchases, and 10% if the property is a new build. The CMHC then participates in any rise or fall in value of the home, and the loan must be repaid either when the house is sold or within 25 years.

Interest in the program was highest in Quebec, where 1,300 applications were received. Comparatively, just 436 Ontarians applied, according to statistics that were tabled in Parliament last week.

Here’s a look at the breakdown of applications from some of the major housing markets across Canada:

• Greater Toronto Area: 148
• Vancouver: 45
• Edmonton: 447
• Calgary: 260
• Winnipeg: 144
• Montreal 654
• Halifax: 64
• New Brunswick: 60
• PEI: 12

CMHC head Evan Siddall defended the results via Twitter on Friday:

“In addition to CMHC’s challenges in estimating demand for the FTHBI, uneven lender support is a complicating factor,” he tweeted on Friday. “It may also be evidence that there is less unsatisfied FTHBI demand due to the stress test than people claim. People can always buy less expensive homes.

One of the biggest restrictions of the program is that it’s currently limited to purchases of up to $565,000. In markets like Toronto and Vancouver, buyers can be hard-pressed to find available properties under that threshold. According to recent data from the Toronto Real Estate Board, the average sale price in December was $837,788.

Many buyers have also expressed unease at the thought of giving up equity in their home, particularly with prices rising rapidly in many markets across the country.

While Prime Minister Justin Trudeau promised tweaks to the FTHBI during last year’s federal election, no additional updates have since been provided. The proposed changes would increase the maximum purchase price eligible under the program to $789,000 for buyers in Toronto, Vancouver and Victoria.

It remains to be seen whether the FTHBI’s slow start is a harbinger of future demand over the coming years, or whether first-time buyers will grow more receptive to sharing a chunk of their home equity with the government.

–Steve Huebl

INTEREST RATES PLUNGE ON CORONAVIRUS NEWS; BOC BUYS 10-YEAR CMBS; FTHBI PLAN FLOPS

Canadian 5-year Yield Fell To Lowest Level Since October

Global investors are selling stocks and piling into the safety of bonds in response to fears that the Wuhan coronavirus could disrupt global economic activity. Gold prices, another haven, have also risen. The Government of Canada 5-year bond yield traded this morning at roughly 1.35%, well below its nearly 1.70% level one month ago. The 5-year yield leads fixed mortgage rates, so if this trend persists, we might see widely available fixed-5-year rates in the 2.50% range once again in February.

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Bank of Canada Now Buying 10-year CMBs
The Bank of Canada announced yesterday that effective immediately, the Bank will expand the Canada Mortgage-Backed securities (CMBs, which are government-guaranteed) it can purchase in the primary market to include 10-year fixed-rate bond issues. In 2018, The Bank expanded the assets it acquires to 5-year fixed and floating CMBs. The Bank held $517 million of these 5-year CMBs as of November 30, 2019.

This move by the BoC should improve liquidity, reducing yields on 10-year CMBs, possibly lowering 10-year fixed rates for mortgage borrowers. Governor Poloz supports efforts to extend the duration of mortgages.

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First-Time Homebuyers Incentive Plan Flops

Only about 3,000 applicants were approved for the Liberals’ First-Time Home Buyer Incentive (FTHBI) in 2019. That’s just $55 million in funding, a less-than-stellar start given its $1.25-billion three-year target. (This information is according to attendees at the TD Securities’ Financial Services Conference where CMHC made comments.)

–DR. SHERRY COOPER

Latest in Mortgage News: Fixed Mortgage Rates Could Fall Over Coronavirus Fears

As fear grows over the deadly Wuhan coronavirus that has killed more than 100 people, it is now becoming the world’s⁠—and Canada’s⁠—latest economic headwind.

That fear spread to financial markets on Monday, with the TSX falling 142 points and New York’s Dow Jones ending the day down more than 450 points. Canada’s 5-year bond yield fell sharply to a three-month low, signalling that mortgage rates are likely headed lower as well.

“…the new coronavirus is going to put fixed mortgage rates on sale,” RateSpy.com founder Rob McLister wrote in the Globe and Mail. He pointed to the economic impacts contagions can have, such as the 2003 SARS epidemic, which dragged Canada’s GDP down by a tenth of a percentage.

“The present contagion creates yet another risk for Canada’s economy,” he wrote, adding it follows a sombre Bank of Canada rate announcement last week in which the Bank indicated it will be “watching closely to see if the recent slowdown in growth is more persistent than forecast.”

“The impact of the Wuhan coronavirus on mortgage rates could potentially last until reports of new cases slow significantly,” McLister added.

Any further fall in fixed mortgage rates would follow a downward trend over the course of 2019. They fell to near two-year lows in the fall, lower than most variable rates.

The best widely available, full-featured 5-year fixed mortgage is currently 2.79%, which McLister said could “easily fall closer to 2.50% next month” if bonds continue to move lower.

Mortgage Shoppers Prefer Human Advice…Unless the Price is Right

Mortgage brokers who have been fearing the era of digital mortgages can breathe a sigh of relief. It seems most homebuyers prefer personalized advice…from a human.

That’s according to a recent survey from Rates.ca on mortgage shopping behaviour. But that doesn’t mean brokers can afford to be complacent.

A majority of mortgage shoppers also said they would be willing to trade in that personalized advice for a digital-only mortgage if it meant they could get a lower rate. Almost half of mortgage shoppers said those savings would have to be at least 0.05 to 0.20 percentage points to get them to use an online-only lender. One in five (18%) said they wouldn’t need a rate-saving incentive to use an online-only mortgage lender.

On the other hand, a full third (34%) of mortgage shoppers rely solely on offline sources when researching mortgages.

Here’s the current breakdown of where shoppers are getting their mortgage information:

• 45% – in-person advice from a bank, lender or broker
• 42% – bank/lender websites
• 27% – friends and family
• 20% – rate comparison websites

There was another takeaway for lenders: fewer than a quarter of rate shoppers consider brand names when shopping for a mortgage. Instead, their top considerations are getting the lowest interest rate (47%), keeping the total cost of borrowing as low as possible (19%) and clear communication of the conditions and features of their mortgage (14%).

HELOC Borrowing Falls for First Time in Four Years

The amount of borrowing via Home Equity Lines of Credit (HELOCs) from chartered banks fell by 0.4% in November, marking the first monthly contraction since October 2015, according to Scotia Economics. That caused the annual growth rate of HELOC borrowing to continue its downward trend, now in its eleventh consecutive month.

Scotia notes that ever since HELOC borrowing growth started to slow during the market turbulence of 2018, it “has not recovered despite the stabilization of several major urban real-estate markets.”

–Steve Huebl