No need to tweak B-20 stress tests for ‘shrewd’ Canadians: Scotia CEO

General Simon Wong 27 Aug

No need to tweak B-20 stress tests for ‘shrewd’ Canadians: Scotia CEO

Scotiabank CEO Brian Porter: Best to stand pat on B-20 stress tests for now

Bank of Nova Scotia’s chief executive officer believes Canadian consumers are in good shape amid high household indebtedness and a shifting real estate landscape.

“Canadian consumers have been pretty shrewd, in terms of the choices they make, whether they go variable in the mortgage market or fixed rate in the mortgage market,” Scotia CEO Brian Porter told BNN Bloomberg in a Tuesday interview.

Porter added that the B-20 mortgage stress tests that took effect in 2018 have succeeded in cooling Canada’s hottest housing markets.

“B-20 and the mortgage market – in terms of the qualifying rate – has had its intended impact,” he said. “So, real estate markets in Canada – Vancouver and Toronto – are in balance and that’s a good thing.”

And while some housing industry insiders have urged the Office of the Superintendent of Financial Institutions to relax, or abandon, the B-20 mortgage stress tests, Porter said it’s best to stand pat for now.

“You have to see these through different economic cycles, too,” Porter said. “The economy in Canada is pretty good, on a relative basis, to everywhere else in the world.”

“So, I wouldn’t be doing any tweaking [to B-20] right now, but the government has the ability to do that over time.”

Scotiabank topped analyst expectations Tuesday with its fiscal third-quarter earnings. While double-digit growth in the bank’s international division fetched headlines, it was Scotia’s core Canadian banking business that led the way as profit at home rose three per cent to $1.16 billion.

“Our business here in Canada is growing very nicely, our business loans are growing nicely, credit cards – because expenditures are up – are growing very well against a somewhat slower environment here in Canada, but our business did very well,” he said.

The Canadian banks’ loan books have come under scrutiny recently, most notably by ‘The Big Short’ portfolio manager Steve Eisman, who has placed short calls on three major Canadian banks.

Porter, however, isn’t worried about credit quality at Scotia.

“We’re very comfortable with our credit trends here in Canada and outside of the country,” he said.

Household Debt Soaring Among Canada’s Young Adults, And It’s Not Mortgages.

General Simon Wong 22 Aug

Household Debt Soaring Among Canada’s Young Adults, And It’s Not Mortgages

Expect to see more regulation of consumer borrowing, Transunion predicts.

Nattakorn Maneerat via Getty Images

High house prices and the mortgage stress test are making it as difficult as it’s ever been to buy a house, but young Canadians are finding other reasons to borrow money these days ― like covering their day-to-day living costs.

The latest “Insights” report from credit rating agency Transunion found the total money owed by Canadians rose 4.3 per cent over the past year, to $1.88 trillion.

Much of that increase came from young people. Among millennials, debt jumped by 12.3 per cent in the past year, to a total of $515.9 billion. That makes millennials’ debt larger than the baby boomers’ for the first time, Transunion noted.

But it’s not mortgages driving that increase anymore. The number of new home loans issued in Canada dropped by 8.9 per cent in the past year, down by one per cent among millennials and by 12 per cent among Gen-Xers. The dollar value of mortgages to Gen-Z borrowers (age 25 and under) dropped by more than 13 per cent, despite a 46-per-cent jump in the number of mortgages.

Young adults are increasingly using debt to cover their cost of living. On top of auto loans and student loans, they are borrowing for things like paying off other debts or going on trips, said Matt Fabian, Director of Research and Industry Analysis at TransUnion Canada.

“When you think about this age group, one of the things they’re looking at is … how do I just manage? They’re not thinking long term … They’ve never seen a high interest environment.”

Young adults are turning increasingly to non-traditional lenders and fintech ― online lenders with no brick-and-mortar locations who often advertise aggressive promotions online.

Some are essentially acting as subprime lenders, doling out money at interest rates of 16 to 20 per cent to borrowers rejected by traditional lenders, Fabian noted.

These are the people who would be most impacted by a hike in interest rates, Fabian noted ― though at the moment rising interest rates seem unlikely.

One of the things they’re looking at is … how do I just manage? They’re not thinking long term … They’ve never seen a high interest environment.Matt Fabian, Transunion

Fabian says he wouldn’t be surprised if the idea behind the mortgage stress test was expanded to other kinds of borrowing ― meaning a test, for instance, on car loans or lines of credit.

He notes that Quebec is taking a step to reduce debt levels by requiring a higher minimum payment on credit card balances. The province has set a minimum of 2 per cent of the balance, rising gradually to 5 per cent.

“We’re going to see some types of controls” as Canadians’ debt levels rise, Fabian predicted.

Canadian Home Affordability Sees Biggest Improvement In A Decade

General Simon Wong 12 Aug

Canadian Home Affordability Sees Biggest Improvement In A Decade

Falling interest rates around the world are helping out homebuyers in Toronto and Vancouver.

It’s a bit premature to say houses in Canada are affordable again ― in fact, it’s way too premature to say that ― but things are moving in the right direction, and fast.

The latest housing affordability monitor from National Bank of Canada shows the cost of owning a home, relative to income, saw its steepest drop in a decade in the second quarter of this year.

The last time affordability improved this much, it was due to a sharp slowdown during the financial crisis of 2008-09. This time around, it’s falling mortgage rates, combined with rising wages.

It took 45.1 per cent of an average household’s income to afford the mortgage on a median-priced home in the 11 major cities covered by the report, down from 48.7 per cent in the space of just three months. Still, it’s well above the 30-per-cent mark that is generally considered affordable.

In Toronto, that dropped to 58.1 per cent, from 63.2 per cent. In Vancouver, it remained at a very high 76.6 per cent, but that’s down from 83.2 per cent just three months earlier.

“The most significant factor to this development was the decline in mortgage rates,” National Bank economists Matthieu Arseneau and Kyle Dahms wrote.

That, combined with flat or falling house prices in many markets and accelerating wage growth, created the perfect circumstances for improved affordability, Arseneau and Dahms wrote.

But they note that while mortgage payments are easier to handle, buyers still need to clear the mortgage stress test, and the rate used in that has dropped by only 0.15 percentage points.

“Most potential buyers excluded by (the mortgage stress test) still are,” they wrote.

But those circumstances may not last. Canada’s priciest housing markets ― Toronto and Vancouver ― are showing signs of acceleration, with home sales jumping by 24 per cent in both cities in July, compared to a year earlier.

Many experts say the market has adjusted to policies meant to cool excessive house price growth and borrowing, such as foreign buyers’ taxes and the mortgage stress test. Additionally, borrowing costs are falling all over the world, which could push Canadian mortgage rates to new lows.

That, in turn, has some worried the housing market could return to rapid price growth again.

Bank of Montreal chief economist Doug Porter is urging policymakers to “be ready to wield some tough measures” to prevent a possible return to the heated house price growth seen in 2016-2017.

“Domestic policymakers may need to consider other ways to control speculation — especially from abroad — in a world where interest rates stay below inflation, or even below zero,” he wrote in a client note last week.

First-Time Home Buyer Incentive Update – Starting September 2, 2019

General Simon Wong 9 Aug

About the First-Time Home Buyer Incentive

There are a few qualifiers to apply for this incentive:

  • you need to have the minimum down payment to be eligible
  • your maximum qualifying income is no more than $120,000
  • your total borrowing is limited to 4 times the qualifying income

If you meet these criteria, you can then apply for a 5% or 10% shared equity mortgage with the Government of Canada. A shared equity mortgage is where the government shares in the upside and downside of the property value.

How does it work? 

The Incentive enables first-time homebuyers to reduce their monthly mortgage payment without increasing their down payment. The Incentive is not interest bearing and does not require ongoing repayments.

Through the First-Time Home Buyer Incentive, the Government of Canada will offer:

  • 5% for a first-time buyer’s purchase of a re-sale home
  • 5% or 10% for a first-time buyer’s purchase of a new construction

How do I know how much I have to pay back? 

You can repay the Incentive at any time in full without a pre-payment penalty. You have to repay the Incentive after 25 years or if the property is sold, whichever happens first. The repayment of the Incentive is based on the property’s fair market value.

  • You receive a 5% incentive of the home’s purchase price of $200,000, or $10,000. If your home value increases to $300,000 your payback would be 5% of the current value or $15,000.
  • You receive a 10% incentive of the home’s purchase price of $200,000, or $20,000 and your home value decreases to $150,000, your repayment value will be 10% of the current value or $15,000.

NOTE: If your property value goes down, you are still responsible for repaying the shared equity mortgage based on the current home value at time of repayment.

How do I apply?

Complete and sign the application documents (coming soon) and take them to your lender or mortgage broker, who will submit them on your behalf.

NOTE: Once processed and accepted, you MUST call 1.833.974.0963 to activate the FTHBI payment and provide the name of the lawyer/notary you have chosen to close your deal. You must provide your lawyer/notary information as soon as you have chosen one and no less than 2 weeks prior to your closing.

How much funding is available? 

The total amount of funding will be $1.25 billion over 3 years.

NOTE: The program is expected to be ready to receive Incentive applications starting September 2, 2019. If approved for the Incentive, the purchase transaction must close on or after November 1, 2019.

For More Information:

Please feel free to contact me for more information on eligible properties, maximum purchase price calculators, mortgage details, associated costs, and application process.

Let’s Take a Look at Two Examples
Anita wants to buy a new home for $400,000 and has saved the minimum required down payment of $20,000 (5% of the purchase price).

Under the First-Time Home Buyer Incentive, Anita can apply to receive $40,000 in a shared equity mortgage (10% of the cost of a new home) through the program.

This lowers the amount Anita needs to borrow and reduces the monthly expenses.

As a result, Anita’s mortgage is $228 less a month or $2,736 a year.

Ten years later, Anita sells the home for $420,000. The Incentive will need to be repaid as a percentage of the home’s current value.

This would result in Anita repaying 10%, or $42,000 at the time of selling the house.
John has an annual qualifying income of $83,125.

To be eligible for Canada’s First-Time Home Buyer Incentive, John can purchase condominium unit up to $350,000. John has the required minimum down payment of 5% of the purchase price, $17,500 from savings.

John can receive $35,000 in a shared equity mortgage – 10% of a newly constructed home.

This would reduce John’s mortgage payments by $200 a month or $2,401 a year.

Years later, John has decided to sell the condominium unit, but it is now worth $320,000. When the condominium unit is sold at the price of $320,000, John will have to repay the incentive as a percentage of the home’s current value. This would result in John repaying 10%, or $32,000 at the time of selling the house.