Why Are Mortgage Rates Rising?

General Simon Wong 31 Mar

Why Are Mortgage Rates Rising?

Over the past month, the Bank of Canada has lowered its overnight rate by a whopping 1.5 percentage points to a mere 0.25%. Many people expected mortgage rates to fall equivalently. The banks have reduced prime rates by the full 150 basis points (bps). But, since the second Bank of Canada rate cut on March 13, banks and other lenders have hiked mortgage rates for fixed- and variable-rate loans. That’s not what happens typically when the Bank cuts its overnight rate. But these are extraordinary times.

The Covid-19 pandemic has disrupted everything, shutting down the entire global economy and damaging business and consumer confidence. No one knows when it will end. This degree of uncertainty and the risk to our health is profoundly unnerving.

Most businesses have ground to a halt, so unemployment has surged. Hourly workers and many of the self-employed have found themselves with no income for an indeterminate period. All but essential workers are staying at home, including vast numbers of students and pre-school children. Nothing like this has happened in the past century. The societal and emotional toll is enormous, and governments at all levels are introducing income support programs for individuals and businesses, but so far, no cheques are in the mail.

In consequence, the economy hasn’t just slowed; it has frozen in place and is rapidly contracting. Travel has stopped. Trade and transport have stopped. Manufacturing and commerce have stopped. And this is happening all over the world.

What’s more, the Saudis and Russians took advantage of the disruption to escalate oil production and drive down prices in a thinly veiled attempt to drive marginal producers in the US and Canada out of business. This has compounded the negative impact on our economy and dramatically intensified the plunge in our stock market.

Many Canadians are now forced to live off their savings or go into debt until employment insurance and other government assistance kicks in, and even when it does, it will not cover 100% of the income loss. The majority of the population has very little savings, so people are resort to drawing on their home equity lines of credit (HELOCs), other credit lines or adding to credit card debt. Businesses are doing the same.

The good news is that people and businesses that already have loans tied to the prime rate are enjoying a significant reduction in their monthly payments. All of the major banks have reduced their prime rates from 3.95% to 2.45%. So people or businesses with floating-rate loans, be they mortgages or HELOCs or commercial lines of credit, have seen their monthly borrowing costs fall by 1.5 percentage points. That helps to reduce the burden of dipping into this source of funds to replace income.

So Why Are Mortgage Rates For New Loans Rising?

These disruptive forces of Covid-19 have markedly reduced the earnings of banks and other lenders and dramatically increased their risk. That is why the stock prices of banks and other publically-traded lenders have fallen very sharply, causing their dividend yields to rise to levels well above government bond yields. As an example, Royal Bank’s stock price has fallen 22% year-to-date (ytd), increasing its annual dividend yield to 5.31%. For CIBC, it has been even worse. Its stock price has fallen 30%, driving its dividend yield to 7.66%. To put this into perspective, the 10-year Government of Canada bond yield is only 0.64%. The gap is a reflection of the investor perception of the risk confronting Canadian banks.

Thus, the cost of funds for banks and other lenders has risen sharply despite the cut in the Bank of Canada’s overnight rate. The cheapest source of funding is short-term deposits–especially savings and chequing accounts. Still, unemployed consumers and shut-down businesses are withdrawing these deposits to pay the rent and put food on the table.

Longer-term deposits called GICs, which stands for Guaranteed Investment Certificates, are a more expensive source of funds. Still, owing to their hefty penalties for early withdrawal, they become a more reliable funding source at a time like this. As noted by Rob Carrick, consumer finance reporter for the Globe and Mail, “GIC rates should be in the toilet right now because that’s what rates broadly do in times of economic stress. But GIC rates follow a similar path to mortgage rates, which have risen lately as lenders price rising default risk into borrowing costs.”

To attract funds, some of the smaller banks have increased their savings and GIC rates. For example, EQ Bank is paying 2.45% on its High-Interest Savings Account and 2.55% on its 5-year GIC. Other small banks are also hiking GIC rates, raising their cost of funds. Rob McLister noted that “The likes of Home Capital, Equitable Bank and Canadian Western Bank have lifted their 1-year GIC rates over 65 bps in the last few weeks, according to data from noted housing analyst Ben Rabidoux.”

The banks are having to set aside funds to cover rising loan loss reserves, which exacerbates their earnings decline. An unusually large component of Canadian bank loan losses is coming from the oil sector. Still, default risk is rising sharply for almost every business, small and large–think airlines, shipping companies, manufacturers, auto dealers, department stores, etc.

Lenders have also been swamped by thousands of applications to defer mortgage payments.

Hence, confronted with rising costs and falling revenues, the banks are tightening their belts. They slashed their prime rates but eliminated the discounts to prime for new variable-rate mortgage loans. Some lenders will no doubt start charging prime plus a premium for such mortgage loans. Banks have also raised fixed-rate mortgage rates as these myriad pressures reducing bank earnings are causing investors to insist banks pay more for the funds they need to remain liquid.

An additional concern is that financial markets have become less and less liquid–sellers cannot find buyers at reasonable prices. The ‘bid-ask’ spreads are widening. That’s why the central bank and CMHC are buying mortgage-backed securities in enormous volumes. That is also why the Bank of Canada has started large-scale weekly buying of government securities and commercial paper. These government entities have become the buyer of last resort, providing liquidity to the mortgage and bond markets.

These markets are crucial to the financial stability of Canada. Large-scale purchases of securities are called “quantitative easing” and have never been used before by the Bank of Canada. It was used extensively by the Fed and other central banks during the 2008-10 financial crisis. When business and consumer confidence is so low that nothing the central bank can do will spur investment and spending, they resort to quantitative easing to keep financial markets functioning. In today’s world, businesses and consumers are locked down, and no one knows when it will end. With so much uncertainty, confidence about the future diminishes. The natural tendency is for people to cancel major expenditures and hunker down.

We are living through an unprecedented period. When the health emergency has passed, we will celebrate a return to a new normal. In the meantime, seemingly odd things will continue to happen in financial markets.

Bank of Canada Moves to Restore “Financial Market Functionality”

General Simon Wong 27 Mar

Bank of Canada Moves to Restore “Financial Market Functionality”

The Bank of Canada today lowered its target for the overnight rate by 50 basis points to ¼ percent. This unscheduled rate decision brings the policy rate to its effective lower bound and is intended to provide support to the Canadian financial system and the economy during the COVID-19 pandemic (see chart below).

Strains in the commercial paper and government securities markets triggered today’s action to engage in quantitative easing. The Governing Council has been meeting every day during the pandemic crisis. Market illiquidity is a significant problem and one the Bank considers foundational. These large-scale purchases of financial assets are intended to improve the functioning of financial markets.

Credit risk spreads have widened sharply in recent days. People are moving to cash. Liquidity has dried up in all financial markets, even government-guaranteed markets such as Canadian Mortgage-Backed securities (CMBs) and GoC bills and bonds. The commercial paper market–used by businesses for short-term financing–has become nonfunctional. The Bank is making large-scale purchases of financial assets in illiquid markets to improve market functioning across the yield curve. They are not attempting to change the shape of the curve for now but might do so in the future.

These large-scale purchases will create the liquidity that the financial system is demanding so that financial intermediation can function. Risk has risen, which creates the need for more significant cash injections.

At the press conference today, Senior Deputy Governor Wilkins refrained from speculating what other measures the Bank might take in the future. When asked, “Where is the bottom?” She responded, “That depends on the resolution of the Covid-19 health issues.”

The Bank will discuss the economic outlook in its Monetary Policy Report at their regularly scheduled meeting on April 15. In response to questions, Governor Poloz said it is challenging to assess what the impact of the shutdown of the economy will be. A negative cycle of pessimism is clearly in place. The Bank’s rate cuts help to reduce monthly payments on floating rate debt. He is hoping to maintain consumer confidence and expectations of a return to normalcy.

The oil price cut alone would have been sufficient reason for the Bank of Canada to lower interest rates. The Covid-19 medical emergency and the shutdown dramatically exacerbates the situation. All that monetary policy can do is to cushion the blow and avoid structural problems to the economy. The overnight rate of 0.25% is consistent with market rates along the yield curve.

High household debt levels have historically been a concern. Monetary policy easing helps to bridge the gap until the health concerns are resolved. The housing market, according to Wilkins, is no longer a concern for excessive borrowing by cash-strapped households.

At this point, the Bank is not contemplating negative interest rates. Monetary policy has little further room to maneuver, given interest rates are already very low. With businesses closed, lower interest rates do not encourage consumers to go out and spend money.

Large-scale debt purchases by the Bank will continue for an extended period to provide liquidity. The Bank can do this in virtually unlimited quantities as needed. The policymakers are also focussing on the period after the crisis. They want the economy to have an excellent foundation for growth when the economy resumes its normal functioning.

Fiscal stimulus is crucial at this time. The newly introduced income support for people who are not covered by the Employment Insurance system is a particularly important safety net for the economy. There are many other elements of the fiscal stimulus, and the government stands ready to do more as needed.

The Canadian dollar has moved down on the Bank’s latest emergency action. The loonie has also been battered by the dramatic decline in oil prices. Canada is getting a double whammy from the pandemic and the oil price war between Saudi Arabia and Russia. The loonie’s decline feeds through to rising prices of imports. However, the pandemic has disrupted trade and imports have fallen.

The Bank of Canada suggested as well that they are meeting twice a week with the leadership of the Big-Six Banks. The cost of funds for the banks has risen sharply. CMHC is buying large volumes of mortgages from the banks, which, along with CMB purchases by the central bank, will shore up liquidity. The banks are well-capitalized and robust. The level of collaboration between the Bank of Canada and the Big Six is very high.

The Stock Market Has Had Three Good Days

As the chart below shows, the Toronto Stock Exchange has retraced some of its losses in the past three days as the US and Canada have announced very aggressive fiscal stimulus. As well, the Bank of Canada has now lowered interest rates three times this month, with a cumulative easing of 1.5 percentage points. The Federal Reserve has also cut by 150 basis points over the same period. In addition to lowering borrowing costs, the central bank has also announced in recent days a slew of new liquidity measures to inject cash into the banking system and money markets and to ensure it can handle any market-wide stresses in the financial system.

The economic pain is just getting started in Canada with the spike in joblessness and the shutdown of all but essential services. Similarly, the US posted its highest level of initial unemployment insurance claims in history–3.83 million, which compares to a previous high of 685,000 during the financial crisis just over a decade ago. These are the earliest indicator of a virus-slammed economy, with much more to come. All of this is without precedent, but rest assured that policy leaders will continue to do whatever it takes to cushion the blow of the pandemic on consumers and businesses and to bridge a return to normalcy.

Extraordinary Coordinated Policy Actions To Ease the Economic Impact of Pandemic In Canada

General Simon Wong 13 Mar

Extraordinary Coordinated Policy Actions To Ease the Economic Impact of Pandemic In Canada

Prime Minister Justin Trudeau said Canada would introduce a “significant” fiscal stimulus package, as part of a coordinated effort with other Group of Seven countries to counter the virus-driven global economic slowdown and calm markets. In an exceptional press conference held at 2 pm today, Finance Minister Morneau sat at the side of the Governor of the Bank of Canada, and the head of the Office of the Superintendent of Financial Institutions (OSFI) to announce measures to soothe financial markets, boost confidence and support the Canadian economy.

Only nine days after the Bank of Canada cut the overnight policy rate by 50 basis points to 1.25%, Governor Poloz announced another 50 bps reduction in the policy rate to a level of 0.75%. Here is the Bank of Canada’s official statemen t:

“The Bank of Canada today lowered its target for the overnight rate by 50 basis points to ¾%. The Bank Rate is correspondingly 1%, and the deposit rate is ½ percent. This unscheduled rate decision is a proactive measure taken in light of the negative shocks to Canada’s economy arising from the COVID-19 pandemic and the recent sharp drop in oil prices.
It is clear that the spread of the Coronavirus is having serious consequences for Canadian families, and for Canada’s economy. In addition, lower prices for oil, even since our last scheduled rate decision on March 4, will weigh heavily on the economy, particularly in energy-intensive regions.
The Bank will provide a full update of its outlook for the Canadian and global economies on April 15. As the situation evolves, Governing Council stands ready to adjust monetary policy further if required to support economic growth and keep inflation on target.”
The Bank has also taken steps to ensure that the Canadian financial system has sufficient liquidity. These additional measures were announced in separate notices on the Bank’s website. The Bank is closely monitoring economic and financial conditions, in coordination with other G7 central banks and fiscal authorities.”

At the press conference, a reporter asked Poloz whether he would take the policy rate down to negative levels. He responded that he “does not like negative interest rates” and that “there is sufficient fiscal firepower in Canada” so that, hopefully, “negative interest rates are not likely to be needed.”

He also commented: “Combined with the other measures announced today, lower interest rates will help to support confidence in businesses and households. For example, borrowing costs will be lowered both for new purchases of homes and through variable-rate mortgages and mortgage renewals.”

Today, the Bank also announced a new Bankers’ Acceptance Purchase Facility. This facility will support a key funding market for small- and medium-sized businesses at a time when they may have increased funding needs, and credit conditions are tightening. The facility will buy 1-month BAs starting the week of March 23. More details are forthcoming. This comes in addition to introducing a 6-month and 12-month bi-weekly repo operation yesterday.

Finance Minister Morneau announced he would deliver a fiscal stimulus package next week that will include an additional $10 billion in new funding to the country’s two business financing agencies — the Business Development Bank of Canada and Export Development Canada. This announcement follows $1 billion of funding for the country’s public health response outlined earlier this week, which came with some modest measures to support disrupted workers.

So significant fiscal stimulus measures are coming next week. There were no details on the size of these measures, but something on the order of 1% of GDP seems like a reasonable estimate. Mr. Morneau also noted that the government is looking at providing direct aid to individuals and families. The floodgates are about to be flung open.

The final bit of stimulus came from OSFI’s lowering capital requirements for the Big Six Canadian banks. Jeremy Rudin, head of Canada’s banking regulator, announced he would reduce the nation’s “domestic stability buffer” by 1.25 percentage points of risk-weighted assets, effective immediately. The buffer will drop to 1%, from its prior level of 2.25%. He said that the government is looking at providing direct aid to individuals and families. This action will free up about $300 bln in funds for the big banks to lend. It will also offer some solace to the stock market, where bank stock prices have plunged in the past two weeks. Concern about the Canadian banks’ balance sheets is always rife when markets are stressed.

In another move, the government announced that it is suspending consultation on the proposed change to the uninsured mortgage stress test. The insured stress test revision will start on April 6 as planned. OSFI wants to wait until markets return to more normal activity before making a final decision on the insured qualifying rate. Hopefully, banks will cut their posted mortgage rates in response to the combined 100 bp decline in the overnight rate and the plunge in 5-year bond government yields (see chart below). As of yesterday, March 12, the BoC Daily Digest held the conventional mortgage rate (5-year, aka the posted rate) steady at 5.19%.

We will now watch what the Canadian banks do in response to these actions. Will they cut their prime rates another full 50 basis points? And will they pass that on to borrowers of variable-rate mortgage money? Monday will be an interesting day.

Bottom Line: This is an excellent start to getting ahead of what will likely be a very challenging period for the Canadian economy. However, we need to see more of the details. Look for additional fiscal stimulus to be announced in the coming days and weeks (from the federal government as well as the provinces), and expect the Bank of Canada to ease policy rates another 50 bps to a level of 0.25% for the overnight benchmark rate by April. And, if conditions deteriorate more than anticipated, there’s room for the BoC, government and OSFI to do more.

This is in direct contrast to the inept and disjointed policy response south of the border. Hopefully, the financial markets will take note that Canada is far better equipped both financially as well as from a public health perspective than our recent stock market performance has suggested.

Coronavirus Anxiety and The Canadian Housing Market

General Simon Wong 29 Feb

Virus Anxiety Hits Canada

As though things weren’t volatile enough, a new wave of virus terror is wreaking havoc on global financial markets. The novel conronavirus, COVID-19, continues to spread causing panic in worldwide stock and bond markets for the seventh day. Share prices have plummetted in Asia, Europe, the U.S. and Canada. The sell-off is fueled mostly by concern that measures to contain the virus will hamper corporate profits and economic growth, and fears that the outbreak could get worse.

Interest rates are falling sharply, hitting record lows reflecting a movement of cash out of stocks and commodities like oil, into the safer havens of government bonds and gold. In Canada, the 5-year bond yield has fallen to 1.16% this morning, down more than 50 basis points (bps) year-to-date and down 65 bps year-over-year (see chart below). Mortgage rates are closely linked to the 5-year government bond yield, so further downward pressure on mortgage rates is likely. Oil prices have fallen sharply, hitting the Prairie provinces hard. Crude oil WTI prices have fallen to just over US$45.00 a barrel compared to $62.50 earlier this year.

The Canadian dollar has also taken a beating, down to 0.7468 cents US, compared to a high of 0.7712 early this year.

The Canadian economy was already battered as today’s release of fourth-quarter GDP data shows. Statistics Canada reported that the economy came to a near halt in Q4 as exports dropped by the most since 2017 and business investment declined. Household spending was a bright spot–a reflection of a strong labour market and rising wages.

Monthly data for December, also released this morning, came in stronger than expected, showing the economy had some momentum going into 2020 before the coronavirus reared its ugly head.

The weak 0.3% growth in Q4 was expected as a series of temporary factors including a week-long rail strike, manufacturing plant disruptions and pipeline shutdowns slowed growth. Even though December posted an uptick, the first quarter will no doubt be hampered by the rail blockade and now virus-related supply and travel disruptions as well as reduced tourism.

Bottom Line: Panic selling in the stock market is never a good idea. The TSX opened down more 550 points this morning following yesterday’s outage. Trading on Thursday was suspended around 2 PM for technical reasons.

None of this is good for psychology or the economy.

The Bank of Canada meets next Wednesday, and clearly, their press release will address these issues. It’s unlikely the Bank will cut rates in response on March 4, but if the economic disruption continues, rate cuts could be coming by mid-year.

The new stress test will be in place on April 6. If rates were at today’s level, the qualifying rate for mortgage borrowers would be more than 40-to-50 basis points lower than today’s level of 5.19%. This will add fuel to an already hot housing market.

Morneau Eases Stress Test On Insured Mortgages

General Simon Wong 18 Feb

Minister Morneau Announces New Benchmark Rate for Qualifying For Insured Mortgages

The new qualifying rate will be the mortgage contract rate or a newly created benchmark very close to it plus 200 basis points, in either case. The News Release from the Department of Finance Canada states, “the Government of Canada has introduced measures to help more Canadians achieve their housing needs while also taking measured actions to contain risks in the housing market. A stable and healthy housing market is part of a strong economy, which is vital to building and supporting a strong middle class.”

These changes will come into effect on April 6, 2020. The new benchmark rate will be the weekly median 5-year fixed insured mortgage rate from mortgage insurance applications, plus 2%.

This follows a recent review by federal financial agencies, which concluded that the minimum qualifying rate should be more dynamic to reflect the evolution of market conditions better. Overall, the review concluded that the mortgage stress test is working to ensure that home buyers are able to afford their homes even if interest rates rise, incomes change, or families are faced with unforeseen expenses.

This adjustment to the stress test will allow it to be more representative of the mortgage rates offered by lenders and more responsive to market conditions.

The Office of the Superintendent of Financial Institutions (OSFI) also announced today that it is considering the same new benchmark rate to determine the minimum qualifying rate for uninsured mortgages.

The existing qualification rule, which was introduced in 2016 for insured mortgages and in 2018 for uninsured mortgages, wasn’t responsive enough to the recent drop in lending interest rates — effectively making the stress test too tight. The earlier rule established the big-six bank posted rate plus 2 percentage points as the qualifying rate. Banks have increasingly held back from adjusting their posted rates when 5-year market yields moved downward. With rates falling sharply in recent weeks, especially since the coronavirus scare, the gap between posted and contract mortgage rates has widened even more than what was already evident in the past two years.

This move, effective April 6, should reduce the qualifying rate by about 30 basis points if contract rates remain at roughly today’s levels. According to a Department of Finance official, “As of February 18, 2020, based on the weekly median 5-year fixed insured mortgage rate from insured mortgage applications received by the Canada Mortgage and Housing Corporation, the new benchmark rate would be roughly 4.89%.” That’s 30 basis points less than today’s benchmark rate of 5.19%.

The Bank of Canada will calculate this new benchmark weekly, based on actual rates from mortgage insurance applications, as underwritten by Canada’s three default insurers.

OSFI confirmed today that it, too, is considering the new benchmark rate for its minimum stress test rate on uninsured mortgages (mortgages with at least 20% equity).

“The proposed new benchmark for uninsured mortgages is based on rates from mortgage applications submitted by a wide variety of lenders, which makes it more representative of both the broader market and fluctuations in actual contract rates,” OSFI said in its release .

“In addition to introducing a more accurate floor, OSFI’s proposal maintains cohesion between the benchmarks used to qualify both uninsured and insured mortgages.” (Thank goodness, as the last thing the mortgage market needs is more complexity.)

The new rules will certainly add to what was already likely to be a buoyant spring housing market. While it might boost buying power by just 3% (depending on what the new benchmark turns out to be on April 6), the psychological boost will be positive. Homebuyers—particularly first-time buyers—are already worried about affordability, given the double-digit gains of the last 12 months.

Interest Rates Plunge on Coronavirus News; BoC Buys 10-year CMBs; FTHBI Plan Flops

General Simon Wong 4 Feb

Canadian 5-year Yield Fell To Lowest Level Since October

Global investors are selling stocks and piling into the safety of bonds in response to fears that the Wuhan coronavirus could disrupt global economic activity. Gold prices, another haven, have also risen. The Government of Canada 5-year bond yield traded this morning at roughly 1.35%, well below its nearly 1.70% level one month ago. The 5-year yield leads fixed mortgage rates, so if this trend persists, we might see widely available fixed-5-year rates in the 2.50% range once again in February.

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Bank of Canada Now Buying 10-year CMBs

The Bank of Canada announced yesterday that effective immediately, the Bank will expand the Canada Mortgage-Backed securities (CMBs, which are government-guaranteed) it can purchase in the primary market to include 10-year fixed-rate bond issues. In 2018, The Bank expanded the assets it acquires to 5-year fixed and floating CMBs. The Bank held $517 million of these 5-year CMBs as of November 30, 2019.

This move by the BoC should improve liquidity, reducing yields on 10-year CMBs, possibly lowering 10-year fixed rates for mortgage borrowers. Governor Poloz supports efforts to extend the duration of mortgages.
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First-Time Homebuyers Incentive Plan Flops
Only about 3,000 applicants were approved for the Liberals’ First-Time Home Buyer Incentive (FTHBI) in 2019. That’s just $55 million in funding, a less-than-stellar start given its $1.25-billion three-year target. (This information is according to attendees at the TD Securities’ Financial Services Conference where CMHC made comments.)

Bank of Canada holds interest rate, but cuts growth forecasts as economy’s engine loses momentum

General Simon Wong 22 Jan

Bank of Canada holds interest rate, but cuts growth forecasts as economy’s engine loses momentum

Kevin Carmichael: The significantly weaker short-term forecast could prompt an interest rate cut if current conditions persist

Stephen Poloz, governor of the Bank of Canada, and Carolyn Wilkins, senior deputy governor at the Bank of Canada, listen during a press conference in Ottawa, Ontario, Canada, on Wednesday, Jan. 22, 2020.David Kawai/Bloombe

Just as the global outlook brightens, Canadian households have gone wobbly, forcing the Bank of Canada to reassess its outlook, though not enough to change its benchmark interest rate.

Consumer spending slowed during the second half of 2019 and the trade wars haven’t calmed enough to offset the loss of Canada’s primary economic engine. The result is a significantly weaker short-term forecast that could prompt the central bank to cut interest rates if current conditions persist.

“There is some downside risk to the outlook for inflation,” Stephen Poloz, the bank’s governor, said at a press conference in Ottawa on Jan. 22. “I’m not saying the door is not open to an interest-rate cut. Obviously, it is. It is open. But it hinges on how the data evolve from here.”

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Traders weren’t ready for a pivot from the Bank of Canada. The only thing they really got right about the latest policy announcement was that the benchmark rate would remain unchanged at 1.75 per cent. Otherwise, most assumed Poloz and his deputies would signal that they were content to muddle along. Ahead of the announcement, prices on securities linked to short-term interest rates put the odds of an interest-rate cut in 2020 at essentially nil.

That remains the most likely scenario. The jobless rate is about as low as it’s ever been, wages are rising and the housing market in most places is strong. No one is talking about a recession.

But the Bank of Canada could no longer ignore persistent signs of trouble. Business investment “appears to have weakened after a strong third quarter,” hiring “has slowed,” and consumer confidence and spending indicators “have been unexpectedly soft,” policy-makers said in their new policy statement.

They slashed their forecast for fourth-quarter growth to an annual rate of 0.3 per cent — stall speed. They foresee a recovery, predicting an expansion of 1.6 per cent in 2020 as business investment and exports gradually improve. That’s nothing to get excited about. The Bank of Canada also revised its estimate of the economy’s non-inflationary speed limit to two per cent.

The new outlook is one of underperformance, with room for stimulus. Traders now put the odds of an interest-rate increase this year at 50 per cent, according to RBC Capital Markets. The dollar dropped a cent against its U.S. counterpart, settling at around 76 cents U.S.

“Today’s dovish statement could turn out to be a game changer at some point,” said Sébastien Lavoie, chief economist at Laurentian Bank Securities.

Household spending on goods and services increased 0.4 per cent in the third quarter, an improvement from very little growth in the spring, but a poor result by historical standards, according to Statistics Canada’s most recent report on quarterly gross domestic product. (The average quarterly change dating back to 1961 is a 0.8 per cent increase.) The path of interest rates will depend on whether the rate of spending gets back to normal.

“Data for Canada indicate that growth in the near term will be weaker,” officials said in their policy statement. The slump could “signal that global economic conditions have been affecting Canada’s economy to a greater extent than was predicted,” they added. “Moreover, during the past year Canadians have been saving a larger share of their incomes, which could signal increased consumer caution.”

The possibility that debt will eventually weigh on consumption has been part of Poloz’s story from the beginning of his tenure almost seven years ago. Households took advantage of ultra-low interest rates and piled up debt after the financial crisis, just as central bankers hoped they would. But consumers were never expected to carry the economy for a decade. Eventually, the burden of all that debt would force them to tap out. Exports and business investment would have to take over.

The shift never really happened. Exports lagged the recovery from the Great Recession because there were too few companies left standing to take full advantage of resurgent global demand. The collapse of oil prices in 2014 and 2015 forced the Bank of Canada to keep interest rates low, and then the trade wars interrupted Poloz’s attempt to return rates back to a more normal setting. Strong hiring, outside of Alberta, and high levels of immigration kept consumption going, but there was always a risk that this dynamic would lose its force.

Nothing in the Bank of Canada’s latest round of communications suggests the economy is in serious trouble. Rather, the message is simply that there isn’t as much momentum as previously thought. Policy-makers last year said they would be watching for evidence that the trade wars were spreading beyond corporate decision making. Now, they said, they could be seeing some. Poloz told reporters that the analysis that led to the revised outlook brought a “crystallization of some of the domestic downside risks.”

If the headlines around trade continue to improve, consumer confidence could get better and spending along with it. Exports and business investment should slowly strengthen, which could forestall the need for stimulus. The Bank of Canada emphasized that it remains concerned about re-igniting a borrowing binge, while acknowledging that a higher savings rate would offset some of those concerns.

Ultimately, the central bank cares most about inflation, and weaker growth could bring deflationary pressure. “In determining the future path of the bank’s policy interest rate, Governing Council will be watching closely to see if the recent slowdown in growth is more persistent that forecast,” the statement said.

General Simon Wong 20 Jan

What $2,000 A Month For Rent Will Get You Across Metro Vancouver (PHOTOS)

What is your money worth around Vancouver? 💸

If you want to live downtown, you might feel like all your money is going towards a tiny shoebox. Meanwhile, if you are willing to sacrifice the location, you can get more bang for your buck. To help you out, we’ve made a list of what a $2,000 Metro Vancouver apartment looks like across the city.

As a local, it will come as no surprise that Vancouver is one of the most expensive places in Canada to live.

According to Rentals.ca rental report, the average one-bedroom in Vancouver in 2019 comes in just a few dollars below $2000. But, this number is forecasted to inflate to a jaw-dropping $2,585 per month by the end of 2020.

Thankfully, there are some areas in the city where you can find much cheaper rentals. As $2,000 can go much further in the suburbs than it can in the downtown core.

You might be surprised to see how much you can get for the same price as a downtown bachelor pad.

If you crave space for all your stuff, for the same price, you can get a newly renovated three-bedroom without adding too much time to your daily commute.

This is what you can get for less than $2000 a month right now in the different neighbourhoods:

Downtown Bachelor Apartment

Price: $1,800

Address: 1022 Nelson St., Vancouver, BC

Description: If you are willing to live without a bedroom, you can enjoy this sleek bachelor apartment right downtown.

Rentals.ca

View Here

Multi-Unit Home

Price: $1,600

Address: 11110 156A St., Surrey, BC

Description: This two-bedroom unit is inside a house. The neutrally decorated rental could be yours for just $1600, which also includes your utilities (heating, electricity, water), plus wifi.

Rentals.ca

View Here

2-Bedroom Unit

Price: $1,850

Address: 4520 Union St., Burnaby, BC

Description: For under $2000, this 2-bedroom 850 square feet suite could be yours. It comes with in-unit laundry, and a new refrigerator and electric range cooktop.

Rentals.ca

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3-Bedroom Apartment

Price: $1,895

Address: 10951 Mortfield Rd., Richmond, BC

Description: Are you tired of living in a tiny bachelor pad? If so, this three-bedroom rental will give you all the space you crave. While living here, you can also enjoy the outdoor pool, sauna, and exercise room.

Rentals.ca

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Modern 2-Bedroom

Price: $1,795

Address: 13555 96 Ave., Surrey, BC

Description: This two-bedroom apartment has gorgeous finishing like a kitchen with a quartz countertop that you will love. The unit also comes with keyless entry, in-suite laundry, a dishwasher, along with access to the rooftop terrace.

Rentals.ca

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Spacious 2-Bedroom Home

Price: $1,700

Address: 21571 Stonehouse Ave., Maple Ridge, BC

Description: This newly built 850 square feet 2-bedroom rental is inside a house. It has a private entrance, modern kitchen, in-suite laundry, and parking.

Rentals.ca

View Here

Brand New 1-Bedroom Condo

Price: $1,800

Address: 515 Foster Ave., Coquitlam, BC

Description: You can move into this dreamy one-bedroom apartment that comes with a den perfect for a home office. It comes with a dishwasher, gas cooktop, and a stacked laundry unit. Plus, you’ll be able to enjoy the gym, steam room, sauna, library, screening room, pool, and sports court in the building.

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Hong Kong social entrepreneur pitches rental affordability solution for Vancouver

General Simon Wong 16 Jan

Hong Kong social entrepreneur pitches rental affordability solution for Vancouver

A man walks past a public housing estate in Hong Kong, where the housing market is the least affordable in the world. (The Associated Press)

What can the most expensive real estate market in the world teach Vancouver about rental affordability?

Social entrepreneur Ricky Yu has an idea. In Hong Kong, he’s formed a network of landlords willing to rent out their apartments at a below-market rate to low-income single mothers who are vetted by his company.

And now, the 51-year old is considering expanding to B.C.’s Lower Mainland, and has already reached out to some individual property owners in B.C.

“I’m interested in introducing this program to other big cities especially Vancouver, because there’s a high proportion of Chinese that makes me feel easier.”

It’s a tempting success story, but one that might not sit well with B.C. laws which don’t allow the fixed-tenure leases his housing program, called Light Be, relies on. The program also requires tenants to undergo a series of personal development programs that train them to become economically self-sufficient — something a Vancouver politician criticizes for being too exclusive.

Social enterprise Light Be

Yu is a multinational company executive turned CEO of Hong Kong social enterprise Light Be, a for-profit company that aims to achieve social outcomes and reinvests its profits in its operation.

His 10-year-old company’s social housing initiative, called Light Home Scheme, has been called “highly commendable” by the Hong Kong government in addressing the shortage of low-rent housing there. A Hong Kong NGO launched a similar program two years ago.

Prospective Light Home tenants, who must be single mothers with children, are referred by Hong Kong government social workers. Light Be’s staff then vet applicants via interviews or home visits. Yu also reviews each application. Tenants commit to personal development programs as part of the tenancy terms.

The benefit for tenants is rent that’s 60 to 80 per cent below market rate, depending on each mother’s finances.

Light Be makes its money by taking a variable percentage of the rent paid to landlords, and is sponsored by two charitable foundations affiliated with prominent real estate developers in Hong Kong.

Yu says he doesn’t need to reach out to landlords of the otherwise-vacant apartments — they call him.

“Actually they could call us every month non-stop.”

Landlords do not receive any tax breaks in Hong Kong for joining the Light Be network.

Ricky Yu, second from left, chats with tenants in their Light Home apartment. (Light Be)

Yu said some Canadians living in B.C. are already part of the network of landlords who lease their vacant Hong Kong apartments with Light Be. Many are “concerned about the social problems and try to do something and contribute to the low income citizens,” said Yu.

Also, “they need an agent to make good use of their apartments,” he said.

The latest Hong Kong government data shows a 4.3 per cent vacancy rate in private housing compared to a one per cent vacancy rate in Lower Mainland apartments.

B.C. landlord welcomes Light Be

It’s an idea that B.C. property investors have discussed before, said William Blake, a co-owner of more than 1,000 residential units across B.C.

“We have quite a few people who were originally from Hong Kong … and we have talked about Light Be and other programs like that,” he said.

Blake said there are lots of landlords in B.C. who would be willing to lower their rents “to help those who fall through the cracks,” but he feels landlords get inadequate protection from the government if tenants refuse to pay or damage the homes.

The property investor said he hopes Light Be comes to Canada because of the vetting and protection it provides to landlords.

Light Be requires tenants to move out after three years. Yu said his social enterprise has never accepted “alumni” to reapply.

“Before they move out, they should’ve significantly changed their lifestyles, and live in a financially … more sustainable manner,” he said.

Vancouver Coun. Jean Swanson said the Light Be social housing program is ‘exclusive’ and not the right solution. (Ben Nelms/CBC)

Fixed tenure is an issue

But those same terms that might feel like protection to landlords look “exclusive” to Vancouver Coun. Jean Swanson.

Moving after three years isn’t good for a family, and people with mental health issues will have a hard time getting into a program similar to Light Be, she said.

“Housing should be a basic human right,” said the longtime advocate for affordable housing.

The idea gets an even firmer ‘no’ from the B.C. government.

“Landlords could not include a maximum length for tenure as fixed-term leases are no longer allowed in B.C.,” said the B.C. Ministry of

Richmond Coun. Carol Day, who applauds Light Be, said the ministry should look at the Hong Kong initiative’s fixed tenure “through a different lens.”

“This is not an ordinary landlord-renter situation … it is a charitable arrangement,” said Day. She said fixed-term leases should also apply to modular housing.

Andy Yan, urban planning professor of Simon Fraser University, said Light Homes are a form of transitional housing that may work for populations in B.C. who try to “develop a level of stability in their lives,” such as youth who are just out of the government care system, newcomers or certain ethnocultural communities, but this housing program does not address the problem of housing security for senior tenants with declining incomes.

Thom Armstrong, executive director of Co-operative Housing Federation of B.C., said a program similar to Light Be is a realistic response to insufficient government investment on housing. (Maggie MacPherson/CBC)

‘Difficult to scale’

Thom Armstrong, executive director of the Co-operative Housing Federation of B.C., said Light Be’s private approach is a “realistic response” to insufficient government investment on housing, but the initiative is unlikely to reach a large enough scale to have an impact.

Across Hong Kong, there are 120 Light Homes compared to over 780,000 public rental housing units.

Yu is optimistic: “We expect ourselves [to] continue to grow about 100 per cent every three years.”

But he acknowledges there are limitations, saying Light Be “is not trying to address all housing, poverty and inequality issues.” He says Light Be will conduct a feasibility study on how to adjust Light Home Scheme in compliance with B.C. laws.

Yan said a pilot study would be needed to measure the social and economic outcomes of the program.

Weak New Listings Slow Canadian Home Sales as Prices Continue to Rise

General Simon Wong 15 Jan

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

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

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

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

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

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

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

New Listings
The number of newly listed homes slid a further 1.8% in December following a 2.7% decline the month before, leaving supply close to its lowest level in a decade.Slightly higher sales and a drop in new listings further tightened the national sales-to-new listings ratio to 66.3%, which is well above the long-term average of 53.7%. If current trends continue, the balance between supply and demand makes further home price gains likely.

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

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

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

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

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

There remain significant and increasing disparities in housing market activity across regions of Canada. The number of months of inventory has swollen far beyond long-term averages in Prairie provinces and Newfoundland & Labrador, giving homebuyers ample choice in these regions. By contrast, the measure is running well below long-term averages in Ontario, Quebec and Maritime provinces, resulting in increased competition among buyers for listings and providing fertile ground for price gains. The measure is still within balanced market territory in British Columbia but is becoming increasingly tilted in favour of sellers.

Home Prices
The Aggregate Composite MLS® Home Price Index (MLS® HPI) rose 0.8%, marking its seventh consecutive monthly gain. It is now up nationally 4.7% from last year’s lowest point posted in May. The MLS® HPI in December was up from the previous month in 14 of the 18 markets tracked by the index. ( see table below).Home price trends have generally been stabilizing in the Prairies in recent months following lengthy declines but are clearly on the rise again in British Columbia and Ontario’s Greater Golden Horseshoe (GGH). Further east, price growth in Ottawa and Montreal has been ongoing for some time and strengthened toward the end of 2019.

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

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

Home prices in Greater Vancouver (-3.1%) and the Fraser Valley (-2%) remain below year-ago levels, but declines are shrinking. Elsewhere in British Columbia, home prices logged y-o-y increases in the Okanagan Valley (+4.2%), Victoria (+2.3%) and elsewhere on Vancouver Island (+4.2%). Calgary, Edmonton and Saskatoon posted y-o-y price declines of around -1% to -2%, while the gap has widened to -4.6% in Regina.

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

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

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

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

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