The Latest in Mortgage News: CMHC to Review Investment Property Down Payments

It’s no secret that the federal government is eyeing reforms to investment properties in an effort to help reel in runaway house prices.

In a mandate letter sent from the Prime Minister in December, Housing Minister Ahmed Hussen was specifically directed to “review the down payment requirements for investment properties” and develop policies to “curb excessive profits” in that housing segment.

In 2021, over a quarter of all home purchases were made by buyers who already own a home—investors in many cases—according to data from Teranet.

“…our government is looking at every tool at our disposal to tackle these challenges head on,” the Ministry of Housing and Diversity and Inclusion and Canada Mortgage and Housing Corporation (CMHC) told the Financial Post in a statement. “By developing policies to curb excessive profits in investment properties, protecting small independent landlords and Canadian families, and reviewing the down payment requirements for investment properties, we are targeting the issues the market is facing from multiple angles.”

The government has not yet released details on potential changes to investment property down payment rules that are being considered, nor has it provided a timeline for any announcements.

Currently, non-owner-occupied rental properties in Canada with up to four units require a down payment of at least 20% by most lenders.

Mortgage expert Rob McLister told the Financial Post on Wednesday that a five percentage-point-increase to the minimum down payment would likely slow investment purchases “incrementally,” while implementing a 35% minimum down payment would “substantially slow” such purchases.

He added that regulators could also introduce restrictions on the use of borrowed money, such as home equity lines of credit, to fund down payments.

(Updated)

Jason Ellis Appointed CEO of First National

After serving in various roles at First National for nearly 18 years, Jason Ellis has been named the company’s new Chief Executive Officer effective today.

Ellis, who first joined the company in 2004, served as Chief Operating Officer since 2018 and in 2019 added the title of President.

Outgoing CEO Stephen Smith, who served in the role since First National went public in 2006, will continue to provide strategic advice and guidance to management in a newly created role of Executive Chairman.

Smith founded First National in 1988 with Moray Tawse, growing the company to one of Canada’s largest non-bank originators and underwriters of mortgages with $121 billion in mortgages under administration.

“Jason is uniquely qualified to lead First National as my natural successor,” Smith said in a statement. “Passing the baton to Jason is something that I am pleased to do as I know he will take First National to the next level of achievement for the benefit of our employees, customers, partners and shareholders.”

B.C. Saw Record Sales in 2021

More than 124,800 residential units traded hands in British Columbia in 2021, according to final 2021 figures released from the B.C. Real Estate Association (BCREA).

That’s a 33% increase from 2020. Meanwhile, the average MLS residential price in the province was $927,877, a nearly 19% jump from the year before. In three of B.C.’s largest markets, the average price of a home is now over $1 million.

“Last year was a record year for BC homes sales with seven market areas setting new highs,” BCREA Chief Economist Brendon Ogmundson said in a release. “Listings activity could not keep up with demand throughout the year. As a result, we start 2022 with the lowest level of active listings on record.”

Total active listings are currently at a record low of just 12,179 units, down over 41% from 2020.

–Steve Huebl

Can You Qualify for a Mortgage While on Probation at Your Job?

Last year, we noticed an increase in the number of mortgage applicants who are still on probation at their jobs.

In the past, we tended to advise these clients to wait until their probation was completed, because lenders view them as a higher risk of not making their mortgage payments (if released during probation). But in some cases, that may not be necessary.

We recently discussed this topic on a mortgage industry Facebook discussion board and received some feedback from seasoned experts on which circumstances new employees could still apply for a mortgage.

What brokers had to say

Here’s what a sampling of mortgage brokers had to say about the factors that would favour a mortgage application while still on work probation:

“It depends a lot on who the employer is. I have had exceptions for CN employees, cops, standard government jobs.”
– Justin Foulis, Mortgage Advantage in North Vancouver

“I’ve had success across the A-lending universe with police, EMS, fire, nursing, doctors, teachers, etc., primarily due to the work and education required to obtain the job in the first place.”
– Adrian McInerney with Oriana Financial

“If it’s the same industry and they have a two-year history, it’s usually pretty safe. More so in a high-demand industry like nursing, programming or trades…that’s usually OK. Multiple recent job changes, a new industry or no two-year income average is a hard sell.”
– Monica Parkin, Invis in Courtenay, B.C.

“Same industry, good tenure previously, and overall good file, I have never had an issue.”
– Ryan Sims with TMG The Mortgage Group in London, ON

“I always want to know that it makes sense. Same industry? Check. Better income? Check. Closer commute? Check. Not habitually changing jobs? Check. I always call an underwriter first to see that they will get behind this. But if it’s a prudent move, I have had lenders make the exception.”
– J.D. Smythe, Dominion Lending Centres Central in Mississauga, ON

“It depends on the file. Someone with weaker credit, next to no assets who have bounced around a bit…..probably not. It depends on the layers of risk.”
– Julie Malo, Paragon Mortgage Inc. in Timmins, ON

Can high-ratio purchasers qualify for a mortgage if they are on probation?

If your lender can get behind it and make the case for the applicants, there is a decent chance the insurer will go along. For example, Sagen’s website clearly states, “Applicants are to be qualified based on the lender’s probation policy.”

Mortgage maven Ron Butler from Butler Mortgage notes that the process can be fairly straightforward. “You make the case to the lender to waive probation, and in the case of a high-ratio mortgage, the lender sends it to the insurer, the insurer approves, and bingo, done,” he said. “Conventional probation is purely a lender decision, typically a risk sign-off and done. It doesn’t matter which lender, it’s the same process everywhere.”

Can a borrower change jobs prior to the funding date?

Once an applicant is approved for a mortgage, we normally advise they stay put till the mortgage is funded. No sudden moves or changes to your personal or financial circumstances, is an oft-heard broker mantra.

But some homebuyers want or need to change jobs in the middle of the purchase process. They do not want to pass up a golden career opportunity.

Even in this case, getting their mortgage approved may still be possible. It always comes down to the same things.

“I have had a 99% success rate with this situation,” noted Andrew Galea, VP of Digital Sales at MortgagePal. “As long as you can relate the previous occupation with the new job, you should be fine.”

He adds that it all comes down to risk management and the propensity for the client to be successful in the new job so they can still be employed after probation. “Where the trouble lies is when it’s a totally new industry or profession and the odds of failure increase,” he added.

The takeaway

Myself, I see this happening most often with Information Technology professionals and engineers. Their skill sets are very much in demand. Once they have had a few years of successful employment under their belt, it seems they can move around with impunity.

That said, it’s best to just depend on having the base salary accepted, because including an additional two-year average of commission and bonus income from a previous job is going to be much more challenging.

If a probationary period is in your picture, you need peace of mind and certainty. This is one of several factors affecting whether or not your mortgage will be approved. Ask your mortgage broker or banker to get the lender’s sign-off before you firm up your purchase plans.

–Ross Taylor

2022 Housing and Interest Rate Forecasts

For the second straight year—and in the face of an ongoing pandemic—the Canadian real estate market has continued to defy gravity.

Projected figures for 2021 suggest home sales will end the year 21% higher than 2020 (to a total of 668,000 transactions), while home prices will end the year up 21.2% to an annual average of $687,500, according to the Canadian Real Estate Association.

Tight supply has been a recurring theme, with CREA noting the months of inventory measure has fallen below two months worth of supply just four times in history: in February and March of 2021, and again in October and November.

“While price growth is not expected to be as extreme in 2022, many of the conditions that supported it right up until the end of 2021 will still be there on New Year’s Day,” CREA noted in its housing forecast.

While home price growth is expected to moderate in 2022, low supply is still expected to keep upward pressure on prices for much of the year, according to various forecasts that we’ve summarized below.

We’ve also recapped the latest interest rate forecasts for 2022 from the bond market and from analysts at the Big 6 banks. While the exact timing and pace of any Bank of Canada moves is still up in the air, it’s clear that rate hikes are on the horizon.

Real Estate Market

CREA

• 2022 home sales forecast: -8.6% (following a projected 21% increase in 2021)
• 2022 home price forecast: +7.6% (following a projected 21.2% increase in 2021)
• Commentary: “Along with an unprecedented supply crunch, there are quite a few other factors that will play important roles in Canadian housing markets in 2022. Ongoing strong demand from an unobservable but no doubt large number of households waiting for new listings to show up will be one tailwind,” CREA said. “There will also be headwinds, chief among them higher interest rates. While the Bank of Canada has set the stage for a tightening cycle of still indeterminate size to begin as early as April of next year, mortgage rates have already started to move higher, first this past spring, and again in the last few months.”
• Link

Royal LePage

• 2021 house price forecast: +10.5%
• Commentary: “Following more than a year of record price appreciation across the country, Canadian home values are expected to rise strongly again in 2022, however at a slower pace compared to 2021. Pent-up demand from buyers who were unable to transact in 2021, coupled with the growing need for shelter from new household formation and newcomers to Canada, will continue to put upward price pressure on a market suffering from a chronic supply shortage.”
• Link

RE/MAX

• 2022 house price forecast: +9.2%
• Commentary: “RE/MAX is anticipating steady price growth across the Canadian real estate market in 2022, with inter-provincial migration continuing to be a key driver of housing activity in many regions, based on surveys of RE/MAX brokers and agents…The ongoing housing supply shortage is likely to continue, putting upward pressure on prices.”
• Link

RBC

• 2022 home sales forecast: -19.8%
• 2022 house price forecast: +3.3%
• Commentary: “Our view remains that deteriorating affordability (arising from soaring prices or higher interest rates, or both) and easing pandemic restrictions will gradually cool demand in 2022. We expect extremely tight demand-supply conditions will keep prices under intense upward pressure in the near term though we see such pressure easing significantly by the second half of 2022 as markets achieve a better balance.”
• Link (data)
• Link (commentary)

TD

• 2022 house price forecast: +7%
• Commentary: “Higher interest rates are likely on the way and our rate forecasts imply that they will exert a moderate drag on housing demand. However, a supportive macro backdrop, alongside stress tests that offer ample room for rates to rise before buyers are crowded out, should keep activity holding above pre-pandemic levels next year…Affordability has become much tougher due to the rapid escalation of prices during the pandemic. That said, Canada has in its past managed to weather a situation where the cost-of-living situation was even worse without seeing a severe retrenchment in activity. And, both new and resale markets remain drum-tight, suggesting another strong year for price growth is in the cards for 2022.”
• Link (data)
• Link (commentary)

CIBC

• 2022 home sales forecast: -15%
• Commentary: “Overall, we expect sales to fall by 15% in 2022, relative to the elevated level seen in 2021—an environment that is consistent with a notable deceleration in home price inflation next year,” wrote economist Benjamin Tal. “This environment is also likely to impact the relative value of condos vs. single-detached units…Logic suggests that higher rates will channel more activity into the more affordable condo market, resulting in relative price outperformance in that market.”
• Link

Fitch Ratings

• 2022 house price forecast: +5-7%
• Commentary: “The slower growth will be driven by an expected rise in interest rates, inflationary pressures and declining affordability, which will dampen demand…Additional factors that could hinder price growth are new macro-prudential measures (additional stress tests or new taxes on non-owner-occupied homes). These measures would further limit the number of borrowers who qualify for a mortgage or make it less economical to own a non-owner-occupied property, which in turn would limit the number of buyers in the market (both new entrants and people looking to buy a bigger home).
• Link

Interest Rate Forecasts

Below are the latest rate forecasts from the Big 6 banks. Averaging the forecasts, the Big 6 banks expect the overnight rate to rise about 1% by the end of 2022, meaning four quarter-point rate hikes by the Bank of Canada.

Looking ahead to the end of 2023, analysts from the big banks are calling for an additional three rate hikes, bringing the overnight rate to 1.75%.

Meanwhile, the bond market is maintaining its forecast for more aggressive rate tightening by the Bank of Canada.

As of Tuesday, it is still fully priced in for five quarter-point rate hikes by the end of 2022, which would bring the overnight target rate to 1.50%.

–Steve Huebl

2021 – Year in Review

As we turn the page on yet another tumultuous year headlined by Covid and its emerging variants, we wanted to take a look back at some of the top mortgage-related stories of 2021 and how mortgage rates fared.

Consumers grappled with rising prices in all aspects of the economy, including, of course, in Canadian real estate. As of November, the average price hit a record-high of $720,854, up over 20% from a year earlier. Rising prices led to record growth in mortgage credit over the year as homebuyers were forced to take out ever-growing mortgages.

And while fixed mortgage rates rose in 2021, they still remain low historically. That’s even more true for variable mortgage rates, which became the mortgage product of choice for a growing percentage of borrowers this year. But all eyes are looking ahead to 2022, with speculation abounding as to when and by how much the Bank of Canada will raise lending rates.

Here’s an overview of some of the year’s top stories, rate movements and mortgage-related stock performance.

Top Mortgage Stories of 2021

• Home prices soared in 2021 as demand outstripped supply (Story)
• Fixed mortgage rates climbed over the course of the year (Story)
• The Bank of Canada acknowledges high inflation could last longer than expected (Story)
• Mortgage credit reached new heights (Story)
• Borrowers faced a more stringent mortgage stress test (Story)
• Sagen overtook CMHC as Canada’s largest mortgage insurer (Story)

This Year’s Top Deals & Lender Moves

• MCAP Acquired Paradigm Quest and Merix (Story)
• Non-Bank Lender CMLS Launches a HELOC (Story)
• Mortgage Brokers Get TD’s HELOC (Story)
• Newly Launched Fundible Allows Canadians to Buy Before Selling (Story)
• Meet Bloom, Canada’s Newest Reverse Mortgage Provider (Story)
• The Broker Channel Gets Another Prime Lender: Strive Capital (Story)

Rate Movements

The foundation for Canadian interest rates is the overnight rate, which finished the year where it began. Meanwhile, the most important benchmark for fixed-rate pricing—the 5-year government bond—ended the year up nearly 90 basis points, which resulted in higher fixed rates for many mortgage borrowers.

Stock Moves

And finally, here’s a look at the performance of Canada’s big banks and public companies that make the majority of their revenue in the mortgage business.

–Steve Huebl

Minimum Qualifying Rate for Both Mortgage Stress Tests Left at 5.25%

As part of its annual review of the stress test for uninsured mortgages, the Office of the Superintendent of Financial Institutions today confirmed the minimum qualifying rate will remain at 5.25%.

That means borrowers making a down payment of 20% or more will need to prove they can afford payments based on their contract rate plus 2% or 5.25%, whichever is higher. Currently, about 90% of mortgage borrowers are being qualified at the 5.25% minimum qualifying rate (MQR) rate as opposed to their contract rate plus 2%, OSFI said.

The Department of Finance followed suit by leaving the MQR unchanged for insured mortgages, or those putting down less than 20%.

“Maintaining the current minimum qualifying rate will ensure prudent underwriting standards for insured mortgages,” read a joint statement from the Deputy Prime Minister and the Minister of Finance. “We will continue to monitor the housing market and review the minimum qualifying rate in order to adjust it as warranted.

OSFI said it made its decision based on the current environment of increased household indebtedness and low interest rates, adding it is essential that lenders continue to test borrowers to ensure they can afford their mortgages “during more adverse conditions.”

“Sound mortgage underwriting is critical for maintaining the stability of the financial system,” Peter Routledge, Superintendent of OSFI, said in a statement. “This is especially true now when changing conditions such as potentially rising interest rates could make repaying mortgages more difficult in the future.”

On a media conference call following the announcement, Assistant Superintendent Ben Gully said OSFI considers a range of factors when assessing the MQR, including interest rate sensitivity, changes in borrowers’ income, changes in house prices or imbalances and lenders’ funding costs.

He added that the supply and demand imbalance in the housing market is a “long-term prudential risk.”

“A sustained, multi-year imbalance between housing demand and supply intensifies risk to Canada’s housing market and to Canada’s system of housing finance. The imbalance tends to drive price increases to ever-higher levels relative to income. This, in turn, induces more Canadians to resort to more leverage when buying  a home.”

OSFI reviews the MQR each December and said it will make further adjustments “if conditions warrant.”

“We will continue to monitor housing markets across Canada and apply our supervisory focus to both changes in the market and lenders’ practices,” Gully said.

Stress Test Tightened in 2021

OSFI introduced its stricter stress-test for uninsured mortgages in June, which was promptly adopted by the Department of Finance for insured mortgages. The MQR for the stress test was previously 4.79%, nearly 50 basis points lower.

The change was estimated to have reduced purchasing power for new buyers by between 4% and 5%.

Economists from National Bank had estimated that under the new qualifying rate, the maximum amount that could be borrowed would decrease by 4.5%, or from $442,000 to $422,000 for a median-income household, they wrote.

OSFI Sees “Modest” Risk in Housing Credit

Asked why OSFI didn’t raise the floor rate today, Gully said mortgage credit risk has risen “only modestly.”

“While housing-related vulnerabilities remain elevated, residential mortgage credit risk has risen only modestly,” he said. “Our view is other measures taken by OSFI and other federal financial sector agencies have contributed to a margin of safety in the market.”

His comment echoed remarks from OSFI head Peter Routledge last month. Since then, house prices in Canada have continued to rise, reaching a record high $720,850 in November, according to the Canadian Real Estate Association. That’s up over 19% compared to a year ago.

“Despite this exuberance and rising mortgage credit levels, Canadians are dedicating less income to debt service payments such as mortgage payments, automobile loans and credit card payments,” Routledge said at the time.

Overall, residential mortgage credit growth is rising at a pace of about 10% annually, he added.

Gully was asked if anticipated interest rate hikes in 2022 from the Bank of Canada played any role in OSFI’s decision to leave the MQR unchanged, but he pointed to the dynamic structure of the stress test that already accounts for interest rate fluctuations.

The mortgage stress test is “designed to reflect a range of different mortgage interest rates,” he noted. “There’s an acknowledgement that rates can change over time and that’s why we’ve built a mechanism that preserves a margin of safety for borrowers to account for a range of outcomes,” with Bank of Canada interest rate increases being one of them, he added.

(Story updated)

–Steve Huebl

The Bank of Canada’s Big Pivot on Inflation

The Bank of Canada is finally coming around to the view that the rising cost of goods and services is perhaps not so transitory after all.

The following is the key line from the Bank’s most recent Monetary Policy Report:

“The recent increase in CPI inflation was anticipated in July, but the main forces pushing up prices—higher energy prices and pandemic-related supply bottlenecks—now appear to be stronger and more persistent than expected.”

It has been clear for months now that this was not a base effects issue (i.e., inflation is only high now because it was so low last year), which was one thing we heard from pundits earlier this year. The September Consumer Price Index (CPI) inflation report provided further confirmation with one of the strongest three-month increases in core CPI (seasonally adjusted) since the early 2000s. Inflation is happening in real-time.

We’re also seeing the breadth of inflationary pressures expanding beyond industries initially affected by supply chain disruptions. The number of CPI sub-components seeing increases of more than 3% is the highest it’s been since the early 1990s.

And things aren’t cooling down, either. The price of raw materials purchased by manufacturers increased 2.5% month-over-month in September and was up a whopping 31.9% year-over-year, while the Industrial Product Price Index, which measures the price of finished manufactured goods, registered a 1% monthly increase and was still up 0.6% even once volatile energy prices were stripped out. It’s now up 15% annually overall, the highest reading since the series began in the early 1980s. Those prices will flow through to consumers in due time.

Signs point to high inflation persisting long-term

There’s no reason to think inflationary pressures are set to abate anytime soon.

For starters, price plans hit a new record in the latest CFIB (Canadian Federation of Independent Business) Small Business Barometer. This series has an excellent track record of predicting core inflation trends six months out. Nearly half of respondents are now expecting to raise prices by more than 5%, which is a record for the series by a wide margin.

Meanwhile, the monetary base continues to expand rapidly with M2, a broad measure of the money supply, now growing 11% year-over-year versus a 6.3% average since 1990. The two-year change is over 30%, the highest it’s been in nearly 40 years.

So, all of this points to more inflationary pressures ahead.

What’s generally needed to sustain inflation over the longer term is a broad increase in wages. While that’s not in the official data yet, it’s likely only a matter of time.

Another factor to look at is the share of businesses reporting labour shortages, which set a new high again in October. And this is at a time when hiring intentions among businesses are the strongest on record:

This suggests that workers finally have bargaining power again, and it’s happening at a time when they are starting to feel the pinch from rising prices. It all points to strong wage growth ahead.

The impact on interest rates

So, what does all this mean for interest rates?

Clearly, the Bank of Canada is taking on a more hawkish tone and is rightfully concerned about rising prices. But, how much room do they actually have to move rates before causing real pain in the broader economy?

Markets are now pricing in five quarter-point rate hikes by this time next year, but let’s think about what that would mean.

If we look at the household debt service ratio and make some conservative assumptions regarding aggregate income growth (1% per quarter) and debt growth (1.5% per quarter) and then model out an 80-basis-points rise in the effective interest rate—which is about the flow-through in one year from a 125-bps hike—we would hit new all-time highs by early 2023.

Now, if income growth really takes off, it will certainly help. And the record pile of excess household savings, currently estimated at a quarter of a trillion dollars, would also act as somewhat of a buffer. But this would still slam the brakes on consumption and housing investment, which, combined, have accounted for nearly 85% of real GDP growth over the past year.

And that’s just the impact on households. Broaden things out to include non-financial businesses and we end up with a combined debt-service ratio of 23% and total debt-to-GDP equivalent to 240% of GDP…66 points above the G20 average.

This level of indebtedness is exactly the sort of limiter that will make it very difficult for the Bank to normalize interest rates.

Instead, they will likely be more inclined to let prices run hotter than they have in previous cycles and allow inflation to eat away at the burden of debt over time. In fact, a Bank of Canada staff analytical note released this summer, appropriately titled Exploring the Potential Benefits of Inflation Overshooting, is about as clear a signal as they could give on this front.

The days of ultra-cheap mortgages may be behind us, but at this point, the fear of rising rates is likely overblown.

This piece was originally published in Mortgage Professionals Canada’s Perspectives magazine (Issue #4, 2021).
Article feature image by David Kawai/Bloomberg via Getty Images

–Ben Rabidoux

Home Prices Rose to a Record High in November

The average price of a home in Canada reached a new all-time high in November as inventory levels remain near record lows.

The average selling price in November was $720,854, up 19.6% year-over-year on an unadjusted basis, according to the Canadian Real Estate Association’s latest monthly report. The MLS Home Price Index, which takes out some of the volatility from the monthly figures, was up 2.7% on a monthly basis and a record 25.3% from a year ago.

Removing the high-priced markets of the Greater Toronto and Vancouver areas, the average price stands at $562,850, up 17% year-over-year.

There were 54,222 home sales in November up 32.1% from a year earlier, but down 1.6% on a monthly basis.

“Even at what is traditionally the slow time of year for housing, conditions and price trends are at the same record levels we saw this spring,” noted CREA chair Cliff Stevenson. “Things may calm down a bit through the balance of December and January, but next year’s spring market will no doubt be an interesting one.”

Near record-low housing inventory continues to be a major factor keeping prices higher. In November, there were just 1.9 months of inventory available, unchanged from October and well below the long-term average of five months. One positive, however, was the fact new listings were up 3.3% from October, which helped ease the sales-to-new listings ratio slightly to 77% from 79.1%.

Cross-Country Roundup of Home Prices

In just the past month, existing homeowners in some markets have seen the value of their homes rise by tens of thousands of dollars. Compared to October, average prices are up nearly $23,000 in Barrie and District, $29,613 in B.C., and over $44,000 in the Greater Toronto Area.

Here’s a look at some more regional and local housing market results for November:

• Ontario: $922,580 (+23.9%)
• Quebec: $471,195 (+14.1)
• B.C.: $992,844 (+21.9%)
• Alberta: $429,543 (+6.4%)
• Barrie & District: $809,400 (+36.8%)
• Halifax-Dartmouth: $488,382 (+24%)
• Victoria: $884,700 (+22.4%)
• Greater Montreal Area: $512,400 (+20.8%)
• Greater Toronto Area: $1,172,900 (+28.3%)
• Ottawa: $651,200 (+16.6%)
• Greater Vancouver Area: $1,211,200 (+16%)
• Winnipeg: $323,100 (+12.8%)
• St. John’s: $289,400 (+7.2%)
• Calgary: $446,300 (+9.3%)
• Edmonton: $337,100 (+4%)

2022 Outlook for Home Prices

Record low housing supply, which is at least partly to blame for rising prices, will continue to pose an affordability challenge for new buyers in 2022, CREA noted.

“The fact is that the supply issues we faced going into 2020, which became much worse heading into 2021, are even tighter as we move into 2022,” wrote Shaun Cathcart, CREA’s senior economist.

“Interest rate hikes will make it even harder for new entrants to break into the market next year, even though activity may remain robust as existing owners continue to move around in response to all of the changes to our lives since COVID showed up on the scene,” he added. “As such, the issue of inequality in the housing space will remain top of mind.”

Some analysts continue to believe part of the renewed market “vigour” will be temporary, caused as buyers rush to make their purchase ahead of looming rate hikes.

“We believe many buyers are rushing in before higher rates take purchasing budget room away from them,” wrote RBC economist Josh Nye, adding that this trend could have a little longer to run, potentially into the first few months of the new year.

“We still think, though, that rapidly deteriorating affordability and easing pandemic restrictions will gradually cool demand and moderate price growth over the course of the coming year,” he added.

TD Bank economist Rishi Sondhi agrees, saying home sales will likely drop in the first half  of 2022 as the “pull-forward effect” unwinds and higher rising interest rates start to weigh on activity.

“However, a solid macro backdrop, favourable demographic trends, elevated household savings rates, and improving population growth should keep sales above their pre-pandemic levels,” he wrote. “This view is not without risks however, as investors have comprised a rising share of the market, thus potentially making sales more sensitive to rising interest rates.”

–Steve Huebl

Bank of Canada Leaves Expectations For 2022 Rate Hikes Intact

–Dr. Sherry Cooper

Housing Demand Surges as Buyers Take Advantage of Low Rates While They Last

Canada’s largest markets saw a surge in homebuying demand in November, driven in part by buyers trying to secure mortgages before next year’s expected interest rate hikes.

That’s keeping upward pressure on home prices, according to the latest monthly reports from some of the key regional real estate boards.

Anticipated Bank of Canada rate hikes in 2022 are creating a “sense of urgency” for buyers, says Ann-Marie Lurie, chief economist for the Calgary Real Estate Board. In Calgary, sales are up over 46% from a year ago, but new listings haven’t been able to keep up.

It’s a similar story on the West Coast, according to the Real Estate Board of Greater Vancouver (REBGV).

“The imbalance between supply and demand, coupled with some buyers wanting to use rate holds on lower rate fixed-term mortgages, is keeping upward pressure on home prices in this traditionally quieter time of year for the market,” said Keith Stewart, an economist with REBGV.

Housing inventory continued to dry up in November as new listings fell in most major markets on both a monthly and annual basis. In Ottawa, for example, new listings are down by 27% from October.

Here’s a look at November readings from some of the country’s regional real estate boards:

Greater Toronto Area

Sales: 9,017

• +3.3% Year-over-year (YoY)
• -8% Month-over-month (MoM)

Average Price: $1,163,323

• +21.7% (YoY)
• +0.7% (MoM)

New Listings: 10,036

• -13.2% (YoY)
• -14.5% (MoM)

“A key difference this year compared to last year, is how the condo segment continues to tighten and experience an acceleration in price growth, particularly in suburban areas. This speaks to the broadening of economic recovery, with first-time buyers moving back into the market in a big way this year. The condo and townhouse segments, with lower price points on average, will remain popular as population growth picks up over the next two years,” said TRREB Chief Market Analyst Jason Mercer.

Source: Toronto Regional Real Estate Board (TRREB)

Greater Vancouver Area

Sales: 3,428

• +11.9% YoY
• -1.8% MoM

Sales are 33.6% above the 10-year average for November.

MLS Home Price Index for all property types: $1,211,200

• +16% YoY
• +1% MoM

New Listings: 3,964

• -2.6% YoY
• -2.1% MoM

“We expect home sale totals to end the year at or near an all-time record in our region. We’ve had elevated home sale activity throughout 2021 despite persistently low levels of homes available for sale,” said REBGV economist Keith Stewart. “With a new year around the corner, it’s critical that this supply crunch remains the focus for addressing the housing affordability challenges in our region.”

Source: Real Estate Board of Greater Vancouver (REBGV)

Montreal Census Metropolitan Area

Sales: 4,402

• -17% YoY
• +1.9% MoM

Median Price (single-family detached): $525,000

• +21% YoY
• +1.9% MoM

Average Price (condo): $374,000

• +18% YoY
• -1.3% MoM

New Listings: 5,056

• -14% YoY
• -8.3% MoM

“In the context of a low supply of properties on the market and persistent high demand, pressure on prices for residential real estate in the Montreal region remains strong. The good news is that in November, new listings showed signs of exceeding pre-pandemic levels when compared to November 2019 or even 2018,” said Charles Brant, QPAREB’s director of market analysis. “The announcement of an earlier-than-expected rise in interest rates no doubt motivated potential sellers to advance their project in order to benefit from the sustained activity and the opportunity to sell at the best price.”

Source: Quebec Professional Association of Real Estate Brokers (QPAREB)

Calgary

Sales: 2,110

• +46.8% YoY
• -3.4% MoM

Benchmark Price (all housing types): $461,000

• +8.9% YoY
• +0.2% MoM

New Listings: 1,989

• +15.2% YoY
• -20% MoM

“Lending rates are expected to increase next year, which has created a sense of urgency among purchasers who want to get into the housing market before rates rise,” said CREB Chief Economist Ann-Marie Lurie. “At the same time, supply levels have struggled to keep pace, causing tight conditions and additional price gains.”

Source: Calgary Real Estate Board (CREB)

Ottawa

Sales: 1,459

• -9% YoY
• -13% MoM

Average Price (single-family detached): $716,992

• +19% YoY
• +0.08% MoM

New Listings: 1,430

• -13% YoY
• -27% MoM

“Despite significant increases in average prices over November 2020, month-to-month price accelerations have tapered off slightly, with average prices for residential units on par with October’s and condo average prices increasing by 7%. This is a far better situation than the monthly price escalations we had seen in the first quarter of 2021,” said Ottawa Real Estate Board President Debra Wright. “However, there is no question that supply constraints will continue to place upward pressure on prices until that is remedied.”

Source: Ottawa Real Estate Board (OREB)

–Steve Huebl

The Sea Change in Canadian Mortgage Insurance

Few realize how dramatically Canada’s mortgage insurance market has changed. As any mortgage broker with a decade-plus of experience can tell you, borrowers are feeling this change in all too many ways.

Consider the numbers. As of the first quarter of 2021, “only 35% of outstanding residential mortgages extended by chartered banks were insured,” says CMHC. In 2012, this share was over 60%.

And insured mortgage balances just keep shrinking (down 5.3% year-over-year, according to OSFI data) while uninsured mortgage balances surge (+19%).

Source: CMHC

What’s causing this growing gap?

It’s been a “long-standing trend,” CMHC says, fuelled by:

1. Regulatory changes
   • Making refinances and properties over $1 million uninsurable was a huge game-changer, as was introducing new stress tests.
2. Soaring home prices
   • Supply/demand imbalances drove home prices to the sky, pushing more homes over the $1 million insurability limit.
3. Changes to portfolio insurance
   • The portfolio insurance ‘Purpose Test’ in July 2016 played a big role, as did November 2016 regulations requiring low-ratio insured mortgages to meet the same criteria as high-ratio mortgages. Couple that with increases in insurance premium rates and this all “contributed significantly to the downward trend in portfolio insurance,” CMHC says.

Uninsured mortgage volumes have ballooned as a result, a trend that remains in full force today.

Meanwhile, both high-ratio insured (-6.7%) and conventional insured (-14.7%) dropped in the first half of 2021, versus the same period in 2020.

That might make you wonder how the risk profile is changing in Canada’s mortgage market. Well, CMHC has data on that. Using historical data on mortgage originations from OSFI’s E2 Mortgage Loans Report, it finds that:

• On average, the loan amounts are higher for uninsured mortgages than for insured mortgages
  • That’s largely because uninsured mortgages have a “larger and increasing share of high-value residential mortgages of over $1 million,” CMHC notes. “The most noteworthy increase in newly originated mortgages was in the issuance of uninsured mortgages for purchases of property, which more than doubled the amount originated in the same quarter in 2020.”
  • As of the second quarter of 2021, about 75% of insured mortgages were under $500,000, versus 57% for uninsured mortgages.
• Uninsured LTVs are climbing
  • “Soaring property prices pushed the loan-to-value ratio distribution upwards for newly originated uninsured mortgages,” CMHC found.
  • But this did not affect insured mortgages in the same way.” In fact, in 2020-21, chartered banks issued insured mortgages with higher equity stakes than in previous years.
  • Among newly originated insured mortgages, 51.8% had an LTV from 90% up to and including 95%. This share is down from 55.4% in 2016, implying “higher equity stakes in newly originated insured mortgages,” CMHC says.
• Uninsured mortgages are increasingly being originated with higher total debt service (TDS) ratios
  • A 44% TDS ratio is typically the maximum that most lenders will entertain for a prime mortgage borrower. Yet, among mortgages originated in the first half of 2021, almost one in four (23%) uninsured mortgages had a TDS ratio over 45%, compared to just 5% of insured mortgages.
  • Meanwhile, the share of new uninsured mortgages with a TDS ratio of 40% or less has been “on a downtrend since the second half of 2020,” and CMHC says it decreased further in 2021.

What does it mean?

On the face of it, there’s unquestionably more risk in pockets of today’s uninsured mortgage market. Equity is an increasingly important safety net on higher-risk loans, and hence, some uninsured lenders will no doubt be put to the test as home equity shrinks in the next housing downturn.

Nobody can predict when that will happen, of course, but if inflation exacerbates our nation’s debt crisis, new supply finally offsets household formation and/or we end up with 150-200+ basis points of rate tightening, it’s not going to help.

Looking ahead, the insured/uninsured mix could change further, thanks to:

• A higher insurability limit
  • The Liberals promised to increase the limit from $1 million to $1.25 million
• A stricter stress test
  • OSFI and the Department of Finance review the minimum qualifying rate (currently 5.25%) next month. If they make the federal stress test tougher, more borrowers will shift to the uninsured market where—depending on the lender and mortgage type—it does not apply.
• First Time Home Buyer’s Incentive enhancements
  • The Liberals floated FTHBI loans, which could drive more insured business.
• Lower default-insurance premiums
  • Another Liberal idea that would incrementally fuel insurance demand (just what we need!).
• New funding methods
  • New uninsured funding mechanisms, like residential mortgage-backed securities (RMBS) and private default insurance, could someday lower uninsured funding costs, reducing the insured-mortgage cost advantage.
• Other regulatory changes
  • Things like higher capital requirements could shift the insured/uninsured balance “overnight.”

This shift from insured to uninsured mortgages argues for lower taxpayer risk, and that’s disputably been the case in terms of direct risk, notwithstanding all the lost government revenue from insurance operations.

But the sea change in Canada’s mortgage insurance regime begs countless questions. Are the policy benefits worth all the systemic costs? How big are the new latent risks that now lurk in our modern uninsured market? Have we simply shifted government-backed risks and increased costs on consumers, such that taxpayers are indirectly worse off? It’ll likely take a major housing downturn to reveal the answers.

–Robert McLister