What the parties are promising to make housing more affordable

General Simon Wong 30 Sep

What the parties are promising to make housing more affordable

OPINION: With home ownership out of reach for many Canadians, Marc Lee looks at what the parties are promising to do to solve the problem

Across the country, lack of affordable housing is top of mind for many Canadians.

The increase in housing prices has pushed home ownership out of reach for many. And, the combination of households staying longer in rental housing — and little new rental housing being built — has led to low vacancy rates and high rents. The tip of this iceberg is the rampant homelessness on the streets of our major cities, including Vancouver.

Almost two years ago, the federal government released a new National Housing Strategy, however, much of the commitment is for loans not grants spread over 10 years and back-end loaded, meaning most of the money is spent at the end of the 10 years. The Parliamentary Budget Officer notes that when compared to past federal funding levels, this strategy barely moves the needle.

So what are the parties promising?

Subhead: Mortgage stress

At the peak of the real estate frenzy the federal government introduced mortgage stress tests to prevent households from becoming over-leveraged. The stress tests require that a borrower can make payments if interest rates rise by two percentage points.

The Conservative party proposal to eliminate the mortgage stress test means some households could have a heftier mortgage and increased vulnerability. The Conservatives and NDP would allow for longer 30-year mortgage terms, leading to lower monthly payments but increase household debt.

This would not improve housing affordability and could further inflate the market. With record levels of household debt in Canada, it’s hard to see the wisdom of pushing households to assume bigger mortgages.

First-timer buyers

The federal government introduced the First-Time Home Buyer Incentive program in the 2019 budget, which provides an interest-free loan of up to 10 per cent of a new home or up to five per cent of a resale home. The government assumes a share of the mortgage to be repaid upon sale of the home. Program limits are a maximum $500,000 mortgage and household income up to $120,000.

The Liberals would increase the program to better work in expensive markets like Vancouver and Toronto with the maximum mortgage rising to $800,000 and maximum income rising to $150,000.

In contrast, the Greens would eliminate the program entirely.

Curbing speculation

The Liberals have proposed a speculation tax similar to the B.C. NDP government for foreign owners and “satellite families,” whose principal breadwinner works outside Canada and little income is declared in B.C. The Liberals propose a national version with a one per cent tax rate applied to properties owned by non-resident, non-Canadians. It is not clear how this would work since property tax is provincial jurisdiction.

The NDP has also promised a 15 per cent foreign buyers tax.

Building new dedicated affordable housing

Missing from the National Housing Strategy is major investment in new, dedicated affordable housing. Non-market rental housing, in particular, is badly needed for vulnerable populations including people who are homeless, low-income working families, people with disabilities and seniors on fixed incomes.

From the 1950s to the 1980s, the federal government played a major role building affordable housing in partnership with the provinces, municipalities and non-profits. After a generation of neglect, it’s time to build the affordable housing we need.

The Green Party and NDP have committed to supporting new affordable housing at levels of 25,000 units and 50,000 units per year respectively. Both parties also support co-ops and non-market housing and would remove the GST on new affordable housing, which would shift the incentives for developers towards rental housing construction over building condos.

Retrofitting existing housing is also important and can include energy efficiency upgrades to reduce a home’s carbon footprint. The Green Party calls for 15,000 units per year to be retrofitted while the NDP platform includes retrofitting all housing stock by 2050.

August Data Confirm That Housing Has Turned the Corner

General Simon Wong 16 Sep

August Data Confirm That Housing Has Turned the Corner
 

Statistics released today by the Canadian Real Estate Association (CREA) show that national home sales rose for the sixth consecutive month. Transactions are now running almost 17% above the six-year low reached in February 2019, but remain about 10% below highs reached in 2016 and 2017. Toronto, Montreal and Vancouver all saw sales and prices rise. CREA updated its 2019 sales forecast, now predicting a 5% gain this year. Gains were led by a record-setting August in Winnipeg and a further improvement in the Fraser Valley. These confirm signs that the country’s housing market is returning to health.

Actual (not seasonally adjusted) sales activity was up 5% from where it stood in August 2018. The number of homes that traded hands was up from year-ago levels in most of Canada’s largest urban markets, including the Lower Mainland of British Columbia, Calgary, Winnipeg, the Greater Toronto (GTA), Ottawa and Montreal.
 

New Listings
The number of newly listed homes rose 1.1% in August. With sales and new supply up by similar magnitudes, the national sales-to-new listings ratio was 60.1%—little changed from July’s reading of 60.0%. The measure has risen above its long-term average (of 53.6%) in recent months, which indicates a tighter balance between supply and demand and a growing potential for price gains.Based on a comparison of the sales-to-new listings ratio with the long-term average, about three-quarters of all local markets were in balanced market territory in August 2019. Of the remainder, the ratio was above the long-term average in all markets save for some in the Prairie region.

There were 4.6 months of inventory on a national basis at the end of August 2019 – the lowest level since December 2017. This measure of market balance has been increasingly retreating below its long-term average (of 5.3 months).

There is considerable regional variation in the tightness of housing markets. The number of months of inventory has swollen far beyond long-term averages in Prairie provinces and Newfoundland & Labrador, giving homebuyers an 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 fertile ground for price gains. Meanwhile, the measure is well centred in balanced-market territory in the Lower Mainland of British Columbia, making it likely that prices there will stabilize.

Home Prices
Canadian home prices saw its biggest one-month gain in two years. The Aggregate Composite MLS® Home Price Index (MLS® HPI) rose 0.8% m-o-m in August 2019.

Seasonally adjusted MLS® HPI readings in August were up from the previous month in 14 of the 18 markets tracked by the index, marking the biggest dispersion of monthly price gains since last March.

In recent months, home prices have generally been stabilizing in British Columbia and the Prairies, a measure which had been falling until recently. Meanwhile, price growth has begun to rebound among markets in the Greater Golden Horseshoe (GGH) region amid ongoing price gains in housing markets east of it.

A comparison of home prices to year-ago levels yields considerable variations across the country, with declines in western Canada and price gains in eastern Canada.

The actual (not seasonally adjusted) Aggregate Composite MLS® (HPI) was up 0.9% year-over-year (y/y) in August 2019. This marks the second consecutive month in which prices climbed above year-ago levels and the most substantial y/y increase since the end of last year.

Home prices in Greater Vancouver (GVA) and the Fraser Valley remain furthest below year-ago levels, (-8.3% and -5.5%, respectively). Vancouver Island and the Okanagan Valley logged y/y increases of 3.7% and 1.5% respectively.

Prairie markets posted modest price declines, while y-o-y price growth has re-accelerated ahead of overall consumer price inflation across most of the GGH. Meanwhile, price growth has continued uninterrupted for the last few years in Ottawa, Montreal and Moncton.

All benchmark home categories tracked by the index returned to positive y/y territory in August. Two-storey single-family home prices were up most, rising 1.2% y/y. This category of homes had .been hardest hit during the slump. One-storey single-family home prices rose 0.7% y/y, while townhouse/row and condo apartment units edged up 0.3% and 0.5%, respectively.

Stress Test
Canada’s introduction of stricter mortgage-lending rules last year inhibited some potential home buyers. Until recently, declining interest rates and lower home prices may have allowed some of those buyers to return to the market, according to the CREA report.

“The recent marginal decline in the benchmark five-year interest rate used to assess homebuyers’ mortgage eligibility–from 5.34% to 5.19%–together with lower home prices in some markets, means that some previously sidelined homebuyers have returned,” said Gregory Klump, CREA’s chief economist. “Even so, the mortgage stress-test will continue to limit homebuyers’ access to mortgage financing, with the degree to which it further weighs on home sales activity continuing to vary by region.”

CREA also updated its forecasts. National home sales are now projected to recover to 482,000 units in 2019, representing a 5% increase from the five-year low recorded in 2018. The upward revision of 19,000 transactions brings the overall level back to the 10-year average, but remains well below the annual record set in 2016, when almost 540,000 homes traded hands, CREA said.

Bottom Line: This report is in line with other recent indicators that suggest housing has recovered from a slump earlier, helped by falling mortgage rates. The run of robust housing data gives the Bank of Canada another reason — along with robust job gains, higher wage rates and stronger than expected output growth in Q2 — to hold interest rates steady, even as more than 30 central banks around the world have cut interest rates further.

The Federal Open Market Committee meets again on Wednesday, and it is widely expected that they will cut rates by 25 basis points as the White House is calling for “emergency easing moves.” The Trump administration has just in the past few days succumbed to political pressure to reduce trade tensions. Trade uncertainty is the only thing right now that would derail the Canadian recovery.

As a result of this recent easing in trade tensions and last week’s cut in overnight rates further into negative territory by the European Central Bank, the flight to US Treasury bond safety diminished, raising the US and Canadian government bond yields by roughly 25 basis points from extremely low levels. Canadian 5-year bond yields at 1.48% are at their highest level in two months. In consequence, the spread between the best 5-year fixed mortgage rates and 5-year government bonds is at a very tight 77 basis points, which is likely not sustainable. A more normal spread between the two is 120-ish (or more) for the best rates and 150-plus-ish (for regular rates). Some lenders are already hiking mortgage rates.

The situation has been compounded with even more considerable uncertainty with the weekend bombing of the Saudi Aramco oil fields, taking an estimated half of all Saudi oil out of production. Stay tuned.

Bank of Canada holds rate for now, but says trade war taking a toll

General Simon Wong 4 Sep

Bank of Canada holds rate for now, but says trade war taking a toll

Kevin Carmichael: Elevated household debt still a concern, but focus squarely on global trade tensions

The Bank of Canada is almost ready to join the other major central banks in cutting interest rates.

But not yet. The consensus agreed by Governor Stephen Poloz and his deputies this week was to leave the benchmark rate unchanged at 1.75 per until at least the end of October, when the central bank’s leaders next assemble to update policy.

The decision implies that policy makers think there is enough stimulus in the system to counter the effects of the trade wars for a little while longer. Exports of non-energy goods and services were lacklustre this spring, and business investment in machinery and equipment plunged in the second quarter. But with inflation at target, the central bank opted not to hold the line.

“Canada’s economy is operating close to potential,” the Bank of Canada said in its new policy statement, published Sept. 4. “However, escalating trade conflicts and related uncertainty are taking a toll on the global and Canadian economies. In this context, the current degree of monetary stimulus remains appropriate.”

The central bank estimates that Canada’s potential, or non-inflationary, rate of growth is about 1.8 per cent. The economy accelerated to an annualized pace of almost four per cent in the second quarter, making up ground lost over the winter when the economy nearly stalled.

Hiring is strong, wages are advancing at a fast pace, and the housing market has pushed through a rough patch. The benchmark lending rate is lower than inflation, an indicator that the economy is unconstrained by the cost of money, and the Canadian dollar is about three per cent lower than it was a year ago and about nine per cent lower than two years ago. Rate cuts by the Federal Reserve have pushed bond yields lower not only in the U.S., but around the world, including Canada.

That existing stimulus separates Canada from some of the countries where central banks have been cutting interest rates. Lower borrowing costs would spur new lending at a time when household and corporate debt already is at elevated levels. Most of Canada’s trade is with the United States, where domestic spending is strong, providing an additional buffer against the global slowdown.

“We do not see the need for the BoC to rush into rate-cut mode,” Sébastien Lavoie and Dominque Lapointe of Laurentian Bank told their clients last week in a note. “Trade tensions could ease. Germany, China, and the U.S. could announce fiscal stimulus measures. Additionally, Canada is already importing lower financing rates because of the global race to the bottom in bond yields.”

Most analysts and traders assumed the Bank of Canada would leave interest rates unchanged this week, while setting itself up to cut at meetings in October or December at the latest. The assumption is that the negative effects of the trade wars will eventually consume Canada the way they have countries such as Australia, Germany, and South Korea.

The Bank of Canada indicated that it’s constrained in taking out insurance against a global downturn by elevated levels of private debt. Policy makers noted that resurgent demand for home loans, “could add to already-high household debt levels, although mortgage underwriting rules should help to contain the buildup of vulnerabilities.”

Still, they were clear that the trade wars will determine the path of interest rates for the foreseeable future.

“As the bank works to update its projection in light of incoming data, Governing Council will pay particular attention to global developments and their impact on the outlook for Canadian growth and inflation,” the statement said.