CMHC’s Siddall Won’t Seek Another Term

One of Canada’s most vocal advocates for stricter mortgage rules has announced he will be stepping down at the end of this year.

Evan Siddall, who served as President and CEO of the Canada Mortgage and Housing Corporation (CMHC) since 2014, won’t be seeking another term once his ends, according to spokeswoman Audrey-Anne Coulombe.

“A selection process for a new President and CEO will start in the coming months,” Coulombe told Bloomberg. “This will be an open and transparent process that will be managed by the Government of Canada.”

Siddall oversaw a number of policy initiatives during his tenure that have been both cheered and jeered, the most high-profile being the introduction of new stress tests in 2016 and 2018.

The stress test for insured mortgages—those with less than 20% down payment—was introduced in October 2016 and significantly reduced the number of insured borrowers with high debt ratios. The more controversial stress test for uninsured mortgages (those with a down payment of 20% or more) came into effect in January 2018. This also reduced the number of highly leveraged borrowers at federally regulated lenders, forcing many to seek financing from non federally regulated institutions, like credit unions and private lenders.

The Department of Finance and the Office of the Superintendent of Financial Institutions (OSFI) ultimately implemented the rule changes, but Siddall was a strong and vocal proponent and advocated for such changes.

During his time at CMHC, the agency went from insuring 43% of outstanding residential mortgages in 2014, to just 29% in 2018, according to its annual report.

Other policy changes during his tenure included:

• An increase in default-insurance fees
• Changes that resulted in higher securitization costs
• The removal of a number of mortgage types from being eligible for insurance coverage (e.g., refinances, amortizations over 25 years, single-unit rental properties).

The changes were polarizing, with many in the mortgage industry either very supportive or completely opposed. Despite the criticism, Siddall stood by them, arguing they were necessary to protect the stability of the country’s housing market and to rein in house price growth.

“If you want a crash in a real estate market, feeding debt is exactly the way to make it happen, I’m telling you. I’m trying to preserve healthy markets, which you should want,” he said at the national mortgage conference in November.

“I don’t want you to think we’re opposed to homeownership. That’s just not the case. It’s like blood pressure, you can have too much of a good thing, we’re just trying to get that balance right.”

But Siddall hasn’t always been so diplomatic. He was regularly called out for his unabashed criticism of industry players, including accusing Mortgage Professionals Canada CEO Paul Taylor of “bold” self-interested rhetoric and “reckless myopia” when the association called for tweaks to the stress test.

He levelled similar criticism at those against tighter mortgage-lending rules in 2017 during testimony at the House of Commons Finance Committee, calling them “self-interested.” That drew a rebuke from Conservative MP Ron Liepert, who called Siddall “arrogant.”

Siddall as Bank of Canada Governor?

Just as Siddall is in the home stretch of his term at CMHC, so to is current Bank of Canada Governor Stephen Poloz, who will be ending his seven-year term in June.

Siddall’s name has been floated as a potential, yet unlikely, candidate given his extensive experience in financial markets as a former Goldman Sachs investment banker, as well as a stint at the Bank of Canada starting in 2010. Siddall joined the Bank at the request of former BoC Governor Mark Carney, where he spearheaded the Bank’s efforts in establishing financial infrastructure to guard against systemic risks. His involvement with the Bank following the financial crisis may also help explain his bias towards credit tightening.

“Deflating asset-price bubbles and curbing the propensity of Canadian households to borrow has become almost as important as setting interest rates at the Bank of Canada,” reads a recent Financial Post column, which noted Siddall has emerged as “the leading defender of tighter mortgage rules.”

Love him or hate him, Siddall is always clear on where he stands, and stands by what he believes. But the public nature of his role at CMHC exposed him to intense public scrutiny, regardless of the policies being implemented. It awaits to be seen who will jump at the opportunity to fill his shoes.

–Steve Huebl

BANK OF CANADA HOLDS OVERNIGHT RATE AS EXPECTED, BUT APPEARS TO BE LESS CONFIDENT IN THE STRENGTH OF THE ECONOMIC OUTLOOK.

Bank of Canada Holds Steady Despite Economic Slowdown

In a more dovish statement, the Bank of Canada maintained its target for the overnight rate at 1.75% for the tenth consecutive time. Today’s decision was widely expected as members of the Governing Council have signalled that the Bank still believes that the Canadian economy is resilient, despite the marked slowdown in growth in the fourth quarter of last year that has spilled into the early part of this year. The economy has underperformed the forecast in the October Monetary Policy Report (MPR).

In today’s MPR, the Bank estimates growth of only 0.3% in Q4 of 2019 and 1.3%in the first quarter of 2020. Exports fell late last year, and business investment appears to have weakened after a strong Q3, reflecting a decline in business confidence. Job creation has slowed, and indicators of consumer confidence and spending have been much softer than expected. The one bright light has been residential investment, which was robust through most of 2019, moderating to a still-solid pace in the fourth quarter only because of a dearth of newly listed properties for sale. 

The central bank’s press release stated that “Some of the slowdown in growth in late 2019 was related to temporary factors that include strikes, poor weather, and inventory adjustments. The weaker data could also signal that global economic conditions have been affecting Canada’s economy to a greater extent than was predicted. Moreover, during the past year, Canadians have been saving a larger share of their incomes, which could signal increased consumer caution which could dampen consumer spending but help to alleviate financial vulnerabilities at the same time.”

The January MPR states that over the projection horizon (2020 and 2021), “business investment and exports are anticipated to improve as oil transportation capacity expands, and the impact of trade policy headwinds on global growth diminishes. Household spending is projected to strengthen, driven by solid growth of both the population and household disposable income.” Growth is expected to be 1.6% in 2019 and 2020 and is anticipated to strengthen to 2.0% in 2021.

Inflation has remained at roughly the Bank’s target of 2%, and is expected to continue at that pace.

Also from the MPR: “The level of housing activity remains solid across most of Canada, although recent indicators suggest that residential investment growth has slowed from its previously strong pace. Demand remains robust in Quebec, where the labour market has been strong. In Ontario and British Columbia, population growth is boosting housing demand. In contrast, Alberta’s housing market continues to adjust to challenges in the oil and gas sector. Nationally, house prices have continued to increase and should strengthen slightly in the near term, consistent with the responses to the Bank’s recent Canadian Survey of Consumer Expectations.”

Bottom Line: The Canadian dollar sold off on the release of this statement and I believe there is a downside risk to the Bank of Canada forecast. Today’s release is a more dovish statement than last month, showing less confidence in the outlook. The Governing Council did express concern that the recent weakness in growth could be more persistent than their current forecast, saying that “the Bank will be paying particular attention to developments in consumer spending, the housing market, and business investment.” They also raised estimates of slack in the economy and dropped language about the current rate being appropriate.

According to Bloomberg News, today’s Governing Council comments “are a departure from recent communications in which officials sought to accentuate the positives of an economy that had been running near capacity and was deemed resilient in the face of global uncertainty. While Wednesday’s decision still leaves the Bank of Canada with the highest policy rate among major advanced economies, markets may interpret the statement as an attempt to, at the very least, open the door for a future move.”–DR. SHERRY COOPER

Canadians’ New Year’s Resolution: Pay Down that Debt

It’s that time of year again, when we vow to kick bad habits and set a healthier or more positive course for the new year ahead. Improving our finances usually tops the list, and this year is no exception.

For the 10th straight year, the top financial priority for Canadians in 2020 is to pay off their debts—perhaps not surprising given that the average person dropped about $1,600 on holiday shopping last month.

With this goal in mind, nearly three quarters of Canadians (71%) said they held back from borrowing more money in 2019, according to a recent CIBC poll. On the flip side, about 31% of Canadians saw their debt load increase last year, according to the BDO Canada Affordability Index.

Despite paying down debt being a top priority, it’s also consumers’ biggest challenge. The BDO survey found that while more than 43% of Canadians are slowly paying down household debt, another 30% admit to delaying paying down their credit card balances because they can’t afford it.

The data also shows credit card use is growing, with 57% of Canadians carrying a card balance in 2019, up from 53% in 2018. Not to mention the recent rise in delinquency rates.

Long story short, high debt loads continue to be a thorn in the side of the country’s financial system, and one being watched closely by experts.

Bank of Canada Governor Stephen Poloz has been sounding alarm bells for months, and most recently stated recently that household debt “continues to be Canada’s biggest financial system vulnerability,” though did qualify that by adding the Bank is confident it’s “becoming less of a threat over time.”

Canadians Still Value Home Ownership

So what does this mean for Canada’s real estate sector?

Despite high debt loads and reduced affordability, owning a home continues to be a priority for most Canadians.

And while those with children often face added affordability challenges, the BDO Affordability Index found the percentage who are homeowners rose over the past year to 70%, up 7% from 2018.

In many cases, this has been made possible due to sacrifices made over the past two years to achieve that homeownership goal. That includes delaying buying essentials, like food or healthcare products (15%), postponing their planned retirement date (17%), putting off a car purchase (28%) and delaying taking a vacation (51%). Another 13% said they have delayed paying essential utilities, like hydro, phone or gas.

“Putting off a vacation or the purchase of a new vehicle may be necessary sacrifices for avoiding debt,” reads the BDO survey. “But delaying basic needs is a clear sign of financial distress.”

It also found distress among non-homeowners, 70% of whom say they are unlikely to purchase a home in the near future due to their debts, rising costs of living and overpriced housing markets.

“While affordability challenges aren’t solely linked to too much debt, the findings of the BDO Canada Affordability Index show that debt is a major factor,” the report adds.

–Steve Huebl

Canadian Home Prices Continued Their Recovery in December: CREA

Canadian home prices continued their recovery in December, according to the latest data from the Canadian Real Estate Association (CREA).

Benchmark prices are up 3.4% from December 2018 to $643,700 in the 19 markets CREA tracks, while the average home price is up 9.6% year-over-year to $517,000. (The benchmark price is considered a more accurate reflection of the “typical” home price as it excludes the most and least expensive properties and focuses on key markets.)

“The momentum for home price gains picked up as last year came to a close,” said Gregory Klump, CREA’s chief economist. “If the recent past is a prelude, then price trends in British Columbia, the GTA, Ottawa and Montreal look set to lift the national result this year, despite the continuation of a weak pricing environment among housing markets across the Prairie region.”

That split between Ontario and the Prairies has been the case for over a year. Ontario properties have moved from strength to strength, with overflow from Toronto spilling into small urban centres in the province, while prices for properties in the Prairies have consistently dropped for over five years, since oil went bust.

Sales were down slightly from November but jumped 22.7% year-over-year due to a relatively quiet month for sales last year. While transactions have rebounded from the six-year low reached in February 2019, they’re still 7% below the peak recorded in 2016 and 2017. Sales are strong in the Lower Mainland of British Columbia, Calgary and Montreal, but sluggish in Toronto and Ottawa.

CREA continues to blame the mortgage stress test introduced in 2018 for preventing a full market recovery in terms of sales, but tighter mortgage rules are in place to protect the economy as a whole, and to ensure that only those who can comfortably afford a home can do so.

In theory, taking prospective buyers out of the market because of the stress test would result in lower prices—and, indeed, home prices for expensive detached houses did grow at a much slower rate over the last couple of years. But prices have now picked right back up, likely because supply is simply so low. So, while demand has shrunk slightly, supply has taken a nosedive.

Active listings are at a 12-year low and there are just 4.2 months of inventory left—the lowest level since the summer of 2007 and far below the long-term average of 4.3 months. That means that if sales continue at their current pace, all available homes will be gone in 4.2 months. Unless sellers start listing their homes on the market en masse, prospective buyers are likely to see increased competition, higher prices, pressure to remove conditions from their offers and are unlikely to get their first or second choice of property.

The national sales-to-new-listings ratio, a metric that measures competitiveness in the markets, rose to 66.9% in December. That’s the highest ratio since the spring of 2004 and far above the long-term average of 53.7%. Sellers have the upper hand when the ratio is this high.

Of course, each market is different. Vancouver is still balanced between buyers and sellers, but Ontario, Quebec and the Maritime provinces are tilted towards sellers. In contrast, the Prairies are solidly buyer markets, as they have ample choice of properties to choose from.

What this all means is, unless we can get more supply on the market, home prices will almost certainly rise in 2020.

Check out the infographic below for more information on this month’s real estate situation:

–Danielle Kubes

WEAK NEW LISTINGS SLOW CANADIAN HOME SALES AS PRICES CONTINUE TO RISE.

Sellers Housing Market  Now in the Greater Toronto Area (GTA)

Statistics released today by the Canadian Real Estate Association (CREA) show that national existing-home sales dipped between November and December owing to a dearth of new listings, especially in the GTA.

National home sales edged down 0.9% in the final month of 2019, ending a streak of monthly gains that began last March. Activity is now about 18% above the six-year low reached in February 2019 but ends the year about 7% below the peak recorded in 2016 and 2017 (see chart below).

There was an almost even split between the number of local markets where activity rose and those where it declined, with higher sales in the Lower Mainland of British Columbia, Calgary and Montreal offsetting declines in the Greater Toronto Area (GTA) and Ottawa.

Actual (not seasonally adjusted) activity was up 22.7% compared to the quiet month of December in 2018. Transactions surpassed year-ago levels across most of Canada, including all of the largest urban markets.

The December decline in home sales is not a sign of weakness but is instead the result of diminishing supply. Excess demand continues to push up prices in most regions of Canada. Demand has been boosted by low interest rates, strong population growth and strong labour markets that have triggered significant gains in household incomes. Mitigating this, in part, is the mortgage stress-test, which continues to sideline some potential buyers.

According to Gregory Klump, CREA’s Chief Economist, “The momentum for home price gains picked up as last year came to a close. If the recent past is prelude, then price trends in British Columbia, the GTA, Ottawa and Montreal look set to lift the national result this year, despite the continuation of a weak pricing environment among housing markets across the Prairie region.”

New Listings

The number of newly listed homes slid a further 1.8% in December following a 2.7% decline the month before, leaving supply close to its lowest level in a decade.

Slightly higher sales and a drop in new listings further tightened the national sales-to-new listings ratio to 66.3%, which is well above the long-term average of 53.7%. If current trends continue, the balance between supply and demand makes further home price gains likely.

December’s drop was driven mainly by fewer new listings in the GTA and Ottawa–the same markets most responsible for the decline in sales. Listings available for purchase are now running at a 12-year low. The number of housing markets with a shortage of listings is on the rise; should current trends persist, fewer available listings will likely increasingly weigh on sales activity.

With new listings having declined by more than sales, the national sales-to-new listings ratio further tightened to 66.9% in December 2019 – the highest reading since the spring of 2004. The long-term average for this measure of housing market balance is 53.7%. Price gains appear poised to accelerate in 2020.

Considering the degree and duration to which market balance readings are above or below their long-term averages is the best way of gauging whether local housing market conditions favour buyers or sellers. Market balance measures that are within one standard deviation of their long-term average are generally consistent with balanced market conditions.

Based on a comparison of the sales-to-new listings ratio with the long-term average, just over half of all local markets were in balanced market territory in December 2019. That list still includes Greater Vancouver (GVA) but no longer consists of the GTA, where market balance favours sellers in purchase negotiations (see chart below). By contrast, an oversupply of homes relative to demand across much of Alberta and Saskatchewan means sales negotiations remain tilted in favour of buyers. Meanwhile, an ongoing shortage of homes available for purchase across most of Ontario, Quebec and the Maritime provinces means sellers there hold the upper hand in sales negotiations.

The number of months of inventory is another important measure of the balance between sales and the supply of listings. It represents how long it would take to liquidate current inventories at the current rate of sales activity. There were 4.2 months of inventory on a national basis at the end of December 2019 – the lowest level recorded since the summer of 2007. This measure of market balance has been falling further below its long-term average of 5.3 months. While still within balanced market territory, its current reading suggests that sales negotiations are becoming increasingly tilted in favour of sellers.

There remain significant and increasing disparities in housing market activity across regions of Canada. The number of months of inventory has swollen far beyond long-term averages in 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 Maritime provinces, resulting in increased competition among buyers for listings and providing fertile ground for price gains. The measure is still within balanced market territory in British Columbia but is becoming increasingly tilted in favour of sellers.

Home Prices

The Aggregate Composite MLS® Home Price Index (MLS® HPI) rose 0.8%, marking its seventh consecutive monthly gain. It is now up nationally 4.7% from last year’s lowest point posted in May. The MLS® HPI in December was up from the previous month in 14 of the 18 markets tracked by the index. ( see table below).

Home price trends have generally been stabilizing in the Prairies in recent months following lengthy declines but are clearly on the rise again in British Columbia and Ontario’s Greater Golden Horseshoe (GGH). Further east, price growth in Ottawa and Montreal has been ongoing for some time and strengthened toward the end of 2019.

Comparing home prices to year-ago levels yields considerable variations across the country, although for the most part has been regionally split along east/west lines, with declines in the Lower Mainland and major Prairie markets and gains in central and eastern Canada.

The actual (not seasonally adjusted) Aggregate Composite MLS® (HPI) rose 3.4% y-o-y in December 2019, the biggest year-over-year gain since March 2018.

Home prices in Greater Vancouver (-3.1%) and the Fraser Valley (-2%) remain below year-ago levels, but declines are shrinking. Elsewhere in British Columbia, home prices logged y-o-y increases in the Okanagan Valley (+4.2%), Victoria (+2.3%) and elsewhere on Vancouver Island (+4.2%).

Calgary, Edmonton and Saskatoon posted y-o-y price declines of around -1% to -2%, while the gap has widened to -4.6% in Regina.

In Ontario, home price growth has re-accelerated well above consumer price inflation across most of the GGH. Meanwhile, price gains in recent years have continued uninterrupted in Ottawa, Montreal and Moncton.

All benchmark home categories tracked by the index accelerated further into positive territory on a y-o-y basis. One-storey single-family home prices posted the most significant increase (3.6%) followed closely by apartment units (3.4%) and two-storey single-family homes (3.3%). Townhouse/row unit prices climbed a slightly more modest 2.7% compared to December 2018.

The actual (not seasonally adjusted) national average price for homes sold in December 2019 was around $517,000, up 9.6% from the same month the previous year.

The national average price is heavily skewed by sales in the GVA and GTA, two of Canada’s most active and expensive housing markets. Excluding these two markets from calculations cuts more than $117,000 from the national average price, trimming it to around $400,000 and reducing the y-o-y gain to 6.7%.

–DR. SHERRY COOPER

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

Morneau Ordered to “Review” Stress Test. What Can We Expect?

The directive from Prime Minister Justin Trudeau to Finance Minister Bill Morneau on Friday was short and sweet: “Review and consider recommendations from financial agencies related to making the borrower stress test more dynamic.”

What will actually come from this review and the resulting tweaks (if any) to the mortgage stress test is unclear.

BACKGROUNDER: There are two mortgage stress tests, one on insured mortgages (less than 20% down payment) and another on uninsured mortgages. The latter, implemented on January 1, 2018, and overseen by the banking regulator OSFI—and arguably the more contentious of the two tests—requires buyers to be qualified at the greater of their contract rate plus 200 bps or the Bank of Canada’s benchmark rate, which is currently 5.19%. In an interview with BNN Bloomberg, Morneau noted that his mandate includes the insured part of the market, so it’s likely any changes that come from this review would focus on the insured mortgage stress test. However, the Office of the Superintendent of Financial Institutions (OSFI) could always follow the government’s lead and adopt its own changes for the uninsured stress test.

Up until now, the Liberal government and the head of the Canada Mortgage and Housing Corporation (CMHC)—responsible for implementing the stress tests—have been opposed to any tweaks.

“Given the context of a minority government, we should not be shocked [the Liberals] are giving it some consideration,” Robert Hogue, senior economist at Royal Bank of Canada, wrote in a research note.

And given its minority government situation, any tweaks will require the support of other parties in Parliament. During the election, the Conservatives had promised to “fix” the stress test to help first-time buyers, so it’s plausible any tweaks proposed by the Liberals will be palatable to the Conservatives.

Mortgage Industry Reacts Favourably

Friday’s announcement elicited positive responses from mortgage brokers on social media, hopeful the review will result in changes that will lessen the burden faced by first-time homebuyers unable to pass the current stress test.

Canada’s national mortgage association, Mortgage Professionals Canada (MPC), also welcomed the news, noting this marks the first time the Trudeau government has pledged to review the stress test, which was introduced under its watch.

“This news stands out for our mortgage brokering community because MPC has strongly advocated for a review and adjustments to the mechanism since their initial introduction, which occurred without consultation,” J.P. Boutros, Director of Government Relations for the association, told CMT. “MPC is not against stress testing, but feels it needs re-calibration. We also know that stress tests on mortgage switches and renewals especially bothered voters of all political stripes as being anti-consumer and anti-competitive.”

Boutros added he’s encouraged by the news, since mandate letters from the Prime Minster are traditionally deemed a priority for the government. “We appreciate the government’s perspective that stress tests have done what they were intended to do, and that there is now an appreciation that a review is needed.”

Potential Stress Test Tweaks

So, what could changes to the stress test look like? There are two key aspects of the stress test that are ripe for tweaking, according to industry observers.

One would be a change in how the minimum qualifying rate is calculated.

“The biggest problem with the stress test is that it relies on a number that can be manipulated, the benchmark 5-year posted rate,” wrote mortgage columnist Rob McLister in a story on Friday.

Since the rate is based on a mode of the Big Six banks’ posted 5-year fixed rates, he argues bureaucrats “can manipulate it by persuading banks (behind the scenes or with public moral suasion) to keep their rates propped up.”

Instead, McLister argues the rate should be based on a rate that adjusts to market conditions.

“One way the government could do that is by basing the MQR (mortgage qualifying rate) on an objective number, like Canada’s 5-year bond yield plus 300 bps, for example. Were that the case this past summer, the MQR would have been in the 4.30% range instead of over 5%, where it’s been stuck for almost two years.”

A second component that has been criticized is the application of the stress test on mortgage switches. That is, borrowers who want to switch to a different lender at renewal time, typically in pursuit of a more competitive rate compared to their existing lender.

The current rules allow borrowers who renew with their current lender to bypass the stress test, which has resulted in higher numbers of borrowers unable to change lenders.

“This policy traps a subset of renewing borrowers into staying with their current lender…” wrote Dave Larock of Integrated Mortgage Planners. “It is disappointing that this regressive policy has not already been rectified because its intrinsic unfairness was highlighted when the stress test was first introduced.”

Government Likely to “Tread Carefully”

Any change to the stress test is sure to be measured and cautious, so as not to further fan the flames of rising home prices.

Which is why observers say increasing available housing inventory needs to be part and parcel of any solution to addressing affordability.

“On the surface, ideas like relaxing the mortgage stress test, extending the maximum amortization period for insured mortgages, or increasing the amount of RRSP take-out for a first home down payment might bring short-term relief to buyers,” Hogue wrote in his research note. “What millennials in Vancouver and Toronto really need is more inventory of homes they can afford, and a better mix of housing options – be it to own or rent.”

He added, “A more nimble and responsive supply side of the market would go a long way to address the needs of buyers on a more permanent basis,” and that addressing the supply issue will require cooperation from all levels of government.

In addition to his directive to review the mortgage stress test, Minister Morneau has been tasked with limiting housing speculation by “developing a framework and introducing a 1% annual vacancy and speculation tax on applicable residential properties owned by non-resident non-Canadians,” according to his mandate letter. “This would involve working with provinces, territories, municipalities and law enforcement to track housing ownership and speculation,” it added.

–Steve Huebl