Low Rates Helping Borrowers Pay Off Mortgages at Record Pace

Home prices may be astronomical in certain parts of the country, but historically low mortgage rates are allowing borrowers to pay off their mortgages faster than ever.

At today’s average rates, 61% of a new homebuyer’s very first mortgage payment is going towards principal repayment, according to data from Edge Realty Analytics.

In the early 2000s, that percentage was 26.5%. The change is even more drastic when looking back at the 1990s, where just 11.9% of a homebuyer’s first payment went towards paying down the principal, or the 1980s, when that percentage was a minuscule 4.6%.

The result is a much faster build-up of equity over a short period of time, so long as interest rates remain low.

After the first five years of mortgage payments, today’s homebuyers borrowing at today’s prevailing rates will have paid back more than a fifth of their mortgage (16.5%). Here’s a look at how that compares to past decades:

(Courtesy: Edge Realty Analytics)

“Homeownership represents a very aggressive forced saving program,” Mortgage Professionals Canada noted in its annual consumer report.

“As a result (and even before we consider the impact of price growth) housing equity is built very rapidly,” the report noted. “This excellent ‘net affordability’ goes a long way to explaining why homebuying activity has remained strong in Canada and why a large majority of Canadians see homeownership as financially better than renting, despite the rapid run–up in house prices and the higher burden of mortgage (principal plus interest) payments.”

(Source: Mortgage Professionals Canada)

Not only have low interest rates allowed borrowers to repay their mortgages more quickly, but it’s also kept housing moderately “affordable” despite the 38.4% run-up in average home price in the past 12 months.

“If it were not for the extremely low interest rate, most cities in Canada, especially Toronto, Ottawa, Vancouver and Montreal, would be in overvalued territory,” Alberta Central chief economist Charles St-Arnaud wrote in a recent analysis. “It means that the main driver for affordability is the record low level of interest rates.”

But Rates Won’t Stay Low Forever

All good things must come to an end, and that goes for ultra-low mortgage rates.

The Bank of Canada has made it abundantly clear that it expects to start raising interest rates by late next year.

How much rates will increase in the Bank’s next rate-hike cycle is anyone’s guess. But for what it’s worth, markets are pricing in at least eight 25-bps hikes over the next five years, which would bring Canada’s overnight rate to 2.25%, up two percentage points from its current record-low of 0.25%.

But even a more modest rise in rates of as little as 100-150 basis points could “push the valuation metrics into overvalued territory,” St-Arnaud noted, making today’s still somewhat “affordable” housing market patently unaffordable for most.

“Our simulations show that many cities in Canada will struggle with housing affordability as interest rates increase,” he added. “A 150-bps increase in mortgage rates could be enough to generate significant headwinds on some housing markets and house prices.”

–Steve Huebl

Housing Market Moderates in May, but Prices Forecast to Rise 19.3% this Year

Home sales and prices continued to moderate in May, easing from March’s peak. But with ongoing tight supply and high demand, prices are expected to remain elevated through the year.

That’s according to the Canadian Real Estate Association (CREA), which released its updated outlook for average prices to post a 19.3% annualized gain to $677,775. That’s expected to be followed by a much more moderate 0.6% annual price gain in 2022.

“…activity will remain strong through 2021, resulting in a record number of sales this year despite the slowdown that began in April.,” CREA said. “Over time, activity is forecast to continue returning towards more typical levels. As a result, 2022 is expected to see significantly fewer MLS transactions than in 2021 while nonetheless still marking the second-best year on record.”

In May, Canada’s average home price (not seasonally adjusted) was $688,208 in May, up 38.4% year-over-year, but down nearly 4% compared to March. Removing the high-priced markets of the Greater Toronto and Vancouver areas, the average price still stands at $548,208, up 36.8% from last year.

Housing inventory continued to rise slowly, reaching 2.1 months in May, up from the record low of 1.7 months set in March. Compare that to the long-term average of more than five months. Housing inventory is the amount of time it would take to liquidate current inventories at today’s rate of sales.

“More and more, there is anecdotal evidence of offer fatigue and frustration among buyers, and the urgency to lock down a place to ride out COVID would also be expected to fade at this point given where we are with the pandemic,” said Cliff Stevenson, Chair of CREA.

Cross-Country Roundup of Home Prices

As price gains eased in many of the major markets, one region in Ontario’s cottage country bucked the trend. The Lakelands region, comprising Parry Sound, Muskoka, Haliburton and Orillia, posted an average price of $601,300, up 48.7% compared to last year but also up 6% from April. Other regions, including Southern Georgian Bay and Kawartha Lakes, saw their average prices eke out only slight gains of 0.5% and 0.4%, respectively, compared to April.

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

• Ontario: $866,307 (+37.6%)
• Quebec: $449,698 (+28.6%)
• B.C.: $916,741 (+26.2%)
• Alberta: $442,808 (+19.2%)
• Barrie & District: $718,800 (+37.8%)
• Ottawa: $653,600 (+34.4%)
• Halifax-Dartmouth: $466,633 (+29%)
• Greater Montreal Area: $496,600 (+28.6%)
• Winnipeg: $319,900 (+15.2)
• Victoria: $810,400 (+14.2%)
• Greater Vancouver Area: $1,172,800 (+14%)
• Calgary: $441,600 (+11.3%)
• Edmonton: $343,300 (+8.5%)
• St. John’s: $274,700 (+5.6%)

Peak Prices Could Still be Ahead

May marked the second-straight monthly decline in home resales, largely because buyers are having difficulty finding the property they want within their budget.

But prices are still moving upwards, just more slowly compared to earlier in the year, as we noted above. And there still looks like room to grow, at least until the end of the year, according to some observers.

“While there may have been fewer buyers participating in them, bidding wars were still the norm in most markets,” wrote RBC economist Robert Hogue. “Strong competition between buyers is keeping intense upward pressure on property values at this stage. We’ll need to see a much more significant market rebalancing before prices can stabilize. We expect this to occur late this year at the earliest.”

May’s data also showed that condos are coming back into favour, given their increasing share in price growth.

“Though overshadowed by the super-heated detached market, condos are quietly making a comeback,” wrote TD Bank economist Rishi Sondhi, pointing out that condo price gains in the last three months are the strongest since 2017. “Should condo sales consume a rising share of the market moving forward (as we expect), downward pressure on average home prices from these lower-priced units would be applied.”

–Steve Huebl

The Slowdown In Canadian Housing Continued in May

-Dr. Sherry Cooper

Bank of Canada Holds Rates, Says High Inflation Will be Temporary

The Bank of Canada’s Wednesday rate announcement was “steady as she goes,” as it maintained its Quantitative Easing program and reiterated that rates should stay where they are until the second half of next year.

The overnight lending rate remains at 0.25%, where it’s been since last March. But that’s expected to change about a year from now, according to the BoC’s guidance.

“We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2% inflation target is sustainably achieved…this happens sometime in the second half of 2022,” its statement read.

The other hot topic was inflation, which the Bank expects will remain elevated over the short term.

“While CPI inflation will likely remain near 3% through the summer, it is expected to ease later in the year, as base-year effects diminish and excess capacity continues to exert downward pressure,” the BoC said.

The Reaction

There was no shortage of analysis into the Bank’s statement and what it may foretell. Here’s some of it…

“There was nothing all that surprising in today’s statement. With the economy performing broadly in line with the Bank’s April projections, we didn’t see scope for any hawkish adjustments to policy…As for the policy rate, it’s unlikely July will bring a change in forward guidance, but we continue to flag the BoC’s less flexible policy mandate and upside risks to output gap closure as drivers for a rate hike earlier in its forward guidance ‘window’ (i.e., in Q3 rather than Q4).” 

— National Bank economists

“After turning sharply more optimistic in April, the Bank of Canada hasn’t backed off at all despite two months of lockdowns for large segments of the country. The willingness of policymakers to shrug off what could be a big miss on their first-half growth forecast clearly points to a hawkish bias. We had been expecting the next [QE] taper to come in October…but today’s Statement suggests the Bank wants to act sooner rather than later.”

— Benjamin Reitzes, BMO Economics

“On inflation, they flagged the rise of CPI inflation ‘to around the top of the 1–3 percent inflation-control range,’ which is an understatement. It’s already materially above the upper band and when StatsCan adjusts for pandemic-era spending weights in July the June CPI report is likely to climb closer toward 4% y/y and perhaps overshoot.”

— Derek Holt, Scotiabank

“We remain skeptical…that the Bank will raise interest rates in 2022 as its current forecasts imply, given the likelihood that inflation will drop back below 2% next year…[Even though we] expect inflation to surpass the upper limit of the Bank of Canada’s 1% to 3% range for most of the rest of the year…we continue to think that it will drop back to less than 2% in 2022.”

— Stephen Brown, Capital Economics

“July’s meeting could be a bit more interesting. At this stage, we don’t see any need for dramatic forecast revisions, and the BoC’s guidance that rates might have to start increasing in the second half of next year remains appropriate. It looks like the main question will be around further tapering of the BoC’s asset purchases…If incoming data aligns with the BoC’s forecasts, we could see it reduce weekly bond buying again in July, to $2 billion per week from $3 billion currently.”

— Josh Nye, RBC Economics

–Steve Huebl

The Latest in Mortgage News: Have Home Prices Peaked?

The seemingly endless run-up in home prices seems to have reached a peak, at least for now.

May home sales data from some of the country’s real estate boards showed sales and prices still growing in some regions, but down for their second consecutive month in others following the peak in March.

The following is a summary of activity in May for select cities. Keep in mind that year-over-year changes are now skewed due to the dip in activity during the height of the lockdown restrictions last spring.

Toronto (Toronto Regional Real Estate Board)

• Home sales: 11,951 (+15% above the 10-year average)
• Average sale price: $1,108,453 (+30% year-over-year)

Vancouver (Greater Vancouver Real Estate Board)

• Home sales: 4,268 (-13%)
• Average price (single-detached home): $1,800,600 (+22.8%)
• Average price (condo): $737,100 (+1.2%)

Montreal (The Quebec Professional Association of Real Estate Brokers)

• Home sales: 5,398 (-13.5% year-over-year)
• Average price (single-family home): $496,000 (+34%)
• Average price (condo): $365,000 (+30%)

“The return to lower, more sustainable levels of activity continued last month across major Canadian markets,” wrote Robert Hogue of RBC Economics. “Despite showing eye-catching increases from a year ago—entirely reflecting depressed comparison points in May 2020—our read of early reports from local real estate boards is home resales fell broadly from April to May.”

New App Gives Brokers Access to Realtor Leads

For brokers looking to expand their marketing efforts, a new app has arrived on the scene that may fit the bill.

Reslii is a Canadian first that helps mortgage agents partner with Realtors, opening up a new stream of leads.

The app is geared towards Realtors to help them create professional-looking listing sheets and landing pages, while also providing a client relationship dashboard that facilitates marketing campaigns.

While the service is free for Realtors, mortgage brokers pay a subscription fee to partner with select real estate agents, who then put the broker’s information and branding on their client-facing materials.

“We saw an opportunity to enhance the existing technology to bring mortgage brokers and Realtors together to create a more cohesive experience for their mutual clients,” said Jason Lang of Outline Financial, who has partnered with Jason Henneberry of Tango Financial to promote Reslii in Canada. “When a Realtor commits to using Reslii, they are also committing to promoting their top mortgage broker early in the sales cycle when they begin working with new homebuyers.”

Lang and Henneberry say there’s a growing trend among technology platforms to integrate mortgage brokers and Realtors, but note nothing has hit the Canadian market until now.

“What’s unique about Reslii is that it enhances the existing business processes of the Realtor,” said Henneberry, adding that it’s a user-friendly platform. “The fact that it’s easy for a broker to demo the tool and start using it is why we believe Reslii will be a real game-changer for how mortgage brokers and Realtors partner going forward.”

The official launch isn’t until July, but Lang and Henneberry say they have already had more than 100 Realtor partners sign up after beta testing the app.

Interested brokers can view a demo here.

Mortgage Arrears Remain at Historic Lows

With the mortgage payment deferral program now in the rear-view mirror, the percentage of mortgage arrears has remained at historical norms.

Only 0.22% of mortgages from the chartered banks are currently in arrears, according to the latest (March 2021) data from the Canadian Bankers Association.

The national arrears rate hasn’t been lower than that since June 1990, and is well below the peak of 0.65% seen in January 1997.

The rate is lowest in Ontario (0.09%) and highest in Saskatchewan at 0.76%.

–Steve Huebl

–Dr. Sherry Cooper

More Seniors to Rely on Home Equity as Part of Retirement Planning

Almost 8 in 10 Canadians over the age of 55 believe they can’t rely on registered savings and pension plans alone to support a comfortable retirement.

Roughly half say that home equity is a vital part of retirement planning, yet many don’t want to downsize from their current home, according to an Ipsos survey commissioned by HomeEquity Bank.

For those unwilling to sell their home to access that liquidity, that leaves reverse mortgages and potentially home equity lines of credit as the most likely sources of equity take-out during retirement.

That’s why HomeEquity Bank, one of two providers of reverse mortgages in Canada, has launched a new national campaign to raise awareness that older Canadians don’t necessarily want to sell and downsize their home, despite 76% of them saying their demographic feels pressure to do so.

“Downsizing isn’t as attractive as it used to be,” said HomeEquity Bank President and CEO Steven Ranson. “Given the amount of risk associated with moving and finding another suitable home, more than a quarter of older homeowners are considering accessing the equity in their homes instead of selling to help fund their retirements.”

A survey from the National Institute on Aging reported similar findings, with nine out of 10 Canadians saying they want to stay in their homes as long as possible in their golden years.

The Retirement Income Gap

Looking at the average base income Canadian seniors can expect in retirement, it’s easy to see why a growing number are open to tapping into their home equity as a supplement.

Seniors derive income in retirement through three primary sources. Those are:

• Canadian Pension Plan (CPP): The average amount for a 65-year-old as of January 2021 was $736.58.
• Old Age Security (OAS): The average amount reported by the Government of Canada was $618.45.
• Retirement Savings Withdrawals (RRSP): A BMO study found that the average RRSP balance for Baby Boomers (those 57 to 75 years old) was $178,664.

All told, the above works out to roughly $2,100 per month in retirement income.

Reverse Mortgages Continue to See Strong Growth

Rapidly rising home values have been a boon to seniors who are considering a reverse mortgage, which in turn has helped fuel reverse mortgage growth.

In 2020, Canadian seniors added $408 million in new reverse mortgage debt, bringing the total reverse mortgage debt outstanding to $4.42 billion, according to data from the Office of the Superintendent of Financial Institutions.

That’s up 12.5% from the year before and a whopping 367% jump from $898.5 million in 2011.

Equitable Bank, the other reverse mortgage provider in Canada, reported volume growth in Q1 2021 of +44% from the previous quarter and +241% year-over-year.

“Demand for the Bank’s reverse mortgage products accelerated due to low interest rates, record property values and a strong preference for aging in place and is expected to further increase as the Canadian market is under-served compared to international benchmarks…,” the company said in its earnings release.

-Dr. Sherry Cooper

Insured and Uninsured Mortgage Stress Test Changes Confirmed for June 1

Starting June 1, both insured and uninsured mortgage borrowers will be subject to a stricter stress test when qualifying for their mortgage.

The Office of the Superintendent of Financial Institutions (OSFI) confirmed on Thursday that it will move ahead with its stress test changes first announced last month, which will apply to uninsured mortgages (typically those with more than a 20% down payment).

Soon after, the Department of Finance confirmed it will follow OSFI’s lead, and apply the same higher qualifying rate to insured mortgages, or those with less than 20% down.

In both cases, borrowers will need to prove they can afford payments based on the higher of the contract rate plus 2%, or a new floor rate of 5.25%, up from the current 4.79%.

“The recent and rapid rise in housing prices is squeezing middle class Canadians across the entire country and raises concerns about the stability of the overall market,” Finance Minister Chrystia Freeland said in a statement. “The federal government will align with OSFI by establishing a new minimum qualifying rate for insured mortgages…It is vitally important that homeownership remain within reach for Canadians.”

Both OSFI and the DoF said they will review the floor rate annually, likely each December at a minimum.

The Impact on Borrowers

Applying the higher stress test to insured borrowers will impact roughly 1 in 5 mortgage borrowers, according to data from the Bank of Canada. It will also take direct aim at first-time borrowers who are more likely to be putting less than 20% down on a mortgage.

The higher minimum stress test is expected to cut maximum buying power by between 4% and 4.5%. For a median-income household, that would reduce the maximum purchase price from $442,000 to $422,000, according to previous estimates from National Bank.

It’s estimated that this change will reduce purchasing power for uninsured borrowers by between 4% and 4.5%. By comparison, the B-20 stress test implemented in January 2019 requiring homebuyers to qualify at the higher of either the 5-year posted rate or the contractual rate plus 200 basis points reduced purchasing power by 22%.

“Today’s news is both bad news and good news for (first-time buyers),” wrote Rob McLister, mortgage editor at RATESDOTCA. “Obviously, it cuts buying power, but that also means fewer people will be able to bid as much for homes, reducing some price pressure.”

Mortgage Professionals Canada issued a statement to members on Thursday, noting it was disappointed that the minister decided to move so quickly in applying the stricter stress test to insured mortgages.

“Given the traditional audience for insured mortgages, namely young aspiring middle-class families, single individuals, and the recently separated, all owner occupiers of the properties they purchase, MPC would have preferred the insured qualification rate had not been increased in the interest of this community,” the association said. “Given the rapid rise in prices, making qualification more stringent now will disqualify many of the Canadians the government has promised to support.”

Bank of Canada Concerned About Home Prices, Household Debt

The new stress test changes fell on the same day that the Bank of Canada voiced concern about unsustainable house prices and growing household debt.

“It is important to understand that the recent rapid increases in home prices are not normal,” Bank of Canada Governor Tiff Macklem said following the release of the Bank’s annual Financial System Review, which found the share of highly indebted households taking out mortgages is now up to 22%.

“Some people may be thinking that the kind of price increases we have seen recently will continue. That would be a mistake,” Macklem added. “Interest rates are very low. That means there is more potential for them to go up…Borrowers and lenders both have roles in ensuring that households can still afford to service their debt at higher rates.”

The Bank also unveiled a “House Price Exuberance Indicator” meant to measure nine major markets across Canada for expectations that local home prices will continue to rise. The indicator currently finds that the Toronto region, Montreal and Hamilton are in exuberant territory, with Ottawa not far off.

–Steve Huebl

Latest in Mortgage News: House Prices to Moderate This Year, Says CMHC

Home prices are expected to finally level off from the “unsustainable” increases that have been seen over the past year, says the Canada Mortgage and Housing Corporation (CMHC).

“Low mortgage rates, high savings rates and persistent, uneven impacts of the pandemic and low immigration are forecast to continue to support sales of more expensive housing types while limiting rental demand,” the agency said in its latest Housing Market Outlook report. “Existing home sales and price growth will moderate from unsustainable 2020 pace of increase but will remain elevated.”

Home sales topped 550,000 in 2020, but could rise to 602,300 in 2021 before falling back to 547,100 in 2022 and 561,100 in 2023, CMHC noted. It also expects national prices to average $649,400 in 2021, which would mark a 14% rise from last year. CMHC sees prices continuing to march higher over the coming years, with a forecast average of $704,900 by the end of 2023.

“Economic conditions are expected to return to pre-pandemic levels by the end of 2023, if broad immunity to COVID-19 takes hold by the end of 2021,” said Bob Dugan, CMHC’s chief economist. “This includes the pace of home sales and prices, which we expect to see moderate from 2020 highs over the same period. However, significant risks remain with respect to the path, timing and sustainability of the recovery.”

Big-City Home Prices Fall Back Slightly from March Highs

After soaring to record highs in March, preliminary data from April shows average home sales and prices pulling back on a monthly basis.

There were 13,663 home sales in the Greater Toronto Area in April, a 362% increase from last year’s pandemic-induced drop-off in activity, but a 13% drop compared to March. Similarly, the average price in April was $1,090,992, according to the Toronto Regional Real Estate Board (TRREB), a 33% year-over-year increase, but down slightly from last month.

“It makes sense that we had a pullback in market activity compared to March,” said TRREB President Lisa Patel. “We’ve experienced a torrid pace of home sales since the summer of 2020, while seeing little in the way of population growth. We may be starting to exhaust the pool of potential buyers within the existing GTA population.”

It was a similar story in Greater Vancouver, which saw 4,908 home sales in April, up 342% year-over-year, but down 14% from March. Meanwhile, the MLS Home Price Index composite benchmark price for all property types was $1,152,600, a 12% year-over-year gain and modest 2.6% increase from March.

Montreal’s real estate market saw a similar trend, with its 6,237 home sales representing a 231% annual increase, but a 1.7% decline from March. The median single-family home price came in at $500,000 (up 39% YoY and 4% MoM), while the median condo price was $357,750 (up 23% YoY and 3% MoM).

“The low inventory of single-family homes for sale and the dramatic increase in prices in April continue to drive the demand for condominiums, which are more affordable and have lower maintenance and renovation costs,” said Charles Brant, director of market analysis for  The Quebec Professional Association of Real Estate Brokers.

NDP Promises New Foreign Buyers’ Tax

An NDP government would implement a 20% levy on home purchases made by non-residents.

That was one of the pledges made by NDP leader Jagmeet Singh recently, along with a promise to make a “massive” investment in housing supply to ease the price pressures being seen across the country.

“Let’s massively invest in housing as a way to create jobs locally in communities and as a way to ensure people have a place to call home,” Singh said, promising a $14-billion investment in housing construction to build over 500,000 new units over four years.

He also promised a nationwide 20% tax on home purchases by foreign buyers, similar to the 20% Foreign Buyers Tax currently in place in B.C., and Ontario’s 15% Non-Resident Speculation Tax (NRST).

“We know that people are treating Canada like a stock market when it comes to housing and just plopping their money into the housing market, hoping it will continue to grow,” Singh said.

In comparison, the Liberal government recently announced a 1% foreign owner’s tax on vacant properties in its spring budget, a measure TD economics said is “unlikely to significantly dent current activity.”

–Steve Huebl