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The Prime rate in Canada is currently 6.70%. Changes in the prime rate can affect your debt payments and thus your GDS and TDS ratios when applying for mortgage loans or even at the time of your mortgage renewal.
In its latest move, the Bank of Canada (BoC) has kept its policy rate fixed at 6.7% and expects inflation to be around 3% by 2023. Canada's housing market is the largest channel for the monetary policy to affect the real economy. The BoC's assets have moderated from their peak, yet they are far above their pre-pandemic level of $120 billion. Prime rates at Canada's financial institutions are 6.7%, the highest level over the past 22 years. The cost of borrowing has increased dramatically over the past year. Some credit cards set their interest rate based on the Prime rate, while others are unsecured and have high interest rates to make up for the additional risk. If the Prime rate goes up, your mortgage payment will go towards interest and less towards your mortgage principal. Some borrowers may also reach their trigger rate. If you plan to get a variable rate mortgage, you should know how the Prime rate affects your potential mortgage rate. Although variable rate mortgages are all based on the Prime rate, lenders can set a modifier that determines how much higher or lower the variable rate is relative to the Prime rate. The Prime rate tends to follow the Bank of Canada target overnight rate because the overnight rate influences a bank's cost of funds. If the overnight rate goes down, the banks can pass on the savings to their customers. If you're thinking of converting your variable rate to a fixed rate, please call today to discuss your options. Please call direct @ 647-773-4849.
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As real estate prices surge, you may feel discouraged about getting into the market if you’re a potential first time buyer or you may feel scared attempting to expand your real estate portfolio because the market seems volatile and the future uncertain.
There is no doubt that real estate in Canada's major cities has increased by almost 300 percent since the 1990s, when the last market crash occurred. In the 90's, a few of my friends bought their homes when distressed mortgage holders left their keys on the front porch because they could no longer afford their mortgages. Their properties now have tons of equity, which they used to buy additional rental properties. Needless to say, they are multi millionaires and their retirements are secure! Owning real estate, however, is not for everyone. Despite the fact that their properties are rented out, some people are not comfortable managing rental properties or being responsible for various mortgages in case of market crashes like the 90s. That’s completely understandable. Just like any other investment, real estate can present risks and so it’s important to balance out those risks and rewards. For your own knowledge, a lot has changed in the banking world since the 90s. There are way more safety mechanisms in place to avoid crashes that happened in the 90s and in 2008, for example. During my career, I considered renting versus owning. Both sides had their arguments. Renting, for example, does not require you to pay property expenses or maintenance costs. The rent will only increase by about 2 percent per year if you stay in the same place, for instance, and there won't be a need to remortgage every five years. But realistically, with renting, you would have to be able to save enough money each year to beat or match the gains you are making in real estate. On average, real estate increases about 3-5% per year (even with corrections along the way). So, if you purchase a house for let’s say, $800,000, you can expect your value to increase by up to $40,000 per year. If you manage to save $10,000 a year in personal savings, you will only earn approximately $500. Of course, you can always put your money into riskier investments, but not everyone feels comfortable doing that, and nothing is as stable as a physical, hard asset like real estate. Additionally, with renting, you cannot force savings and your rent doesn’t gain you any equity. When you have a mortgage, you’re paying down principal and interest which frees up your equity that you can potentially use in the future. To put it in perspective, the property owner who purchased a home for $800,000 will have earned approximately $200,000 in five years, and the person renting and putting money away will have only earned $2,500-$5,000. This is exactly why 75% of Canadians have their wealth in real estate, and why many renters complain they can’t get ahead. Now, I know what you are thinking. The market has decreased in value! Well, you are right and wrong at the same time. During the last three years, the real estate market experienced exponential gains because of record-low interest rates. These low rates brought everyone and their mother out of risk-aversion and propelled them to buy real estate. A million dollar mortgage for five years only cost about $3,400 per month and was outperforming rent! It made sense to buy, and as a result, we had huge demand! Some properties increased by 50 percent! The correction we are seeing now is merely the scaling back of the pandemic gains, but property value in cities like Toronto and Vancouver are still up 14-20 percent, and it’s unlikely that this will change anytime soon. Just consider immigration. Our government has plans to bring in 100 million people by the year 2100. That’s 500,000 immigrants a year. Toronto’s population is going to go from 3.3 Million people to 33 Million people. And during this time, people will need shelter, which will put more demand on the housing sector, pushing up property value. Ontario only builds about 70,000 houses a year, so the math on supply/demand isn’t hard! Not to mention that it is getting harder and harder to qualify for mortgage financing! In addition to being stress tested, the government now wants to crack down on alternative loans and make sure even those who need unconventional financing pass certain tests and meet stricter qualifying criteria. This is simply going to create a larger divide between property owners and renters, but make no mistake, there will be many more renters, and this is why investment companies are purchasing neighborhoods at a time. These companies understand the future landscape of our countries and cities, and they are capitalizing on the prices now. So, the point of this post is to really think about your equity you have now or even getting into the market while you can, and of course, working with a knowledgeable mortgage professional;) I have been in the real estate and mortgage industry for over 20 years! I am very experienced in mortgage loans, and have been rated the best by “threebestrated.com” which actually checks my reviews on the web. It is my job to not just complete a mortgage for you, but also help you understand the process and become your personal mortgage guide. I recognize that sometimes, people need more than just a person behind a desk. They need someone to confide in and trust and look out for their best interests. I will do just that! If you would like to set up a consultation, please feel free to call 647-773-4849 or email me at scolucci@sherwoodmortgagegroup.com. You can also visit my website at www.coluccimortgages.com #overnight #rate cut #payments #variable #term #rate hikes #policy #bond market #home prices #recession
While many homeowners' monthly mortgage payments on adjustable-rate mortgages and lines of credit are increasing by hundreds of dollars per month, some industry analysts think that time is running out on interest rate increases. With rampant inflation and higher rates bleeding through to 2023, it is expected that variable-rate and fixed-rate mortgages will continue to remain unattractive in the short term. BCREA believes that five-year fixed rates have already peaked at the current 5.5 percent average, and that rates are expected to start falling early in 2023, ending at 5.05 percent at the tail-end of 2023. Mortgage rates are expected to increase through 2023, but they are equally likely to start falling if the Bank of Canada (BoC) hits their inflation targets earlier. CIBC analysts project that the Bank of Canada will keep rates at the higher levels through 2023, slowing demand and allowing inflation to hit its 2 per cent target. Looking forward at the end of 2023 and through 2024, analysts are penciling in an early rate cut from the Bank of Canada, which could bring national benchmark prices back below the 3.00% mark before 2024. If the bond markets predictions are right, though, our central bank would be signalling a rate cut before year-end 2023. The Bank of Canada is expected to start cutting its policy rate in response to significant economic slowdowns or a recession, beginning in the second half of 2023. The BoC has also said that it will hold off on cutting its overnight rate until Canada's economy has recovered and inflation has reached about 2%. Long-term rates could reach lower levels by late 2023 in both Canada and the United States, because markets are starting to price in modest central bank policy rate cuts for 2024, and forecasting inflation will stabilize and decrease. Currently, the Canadian 5-year bond yield is priced to expect another 0.75 percent hike by the Bank of Canadas interest rates in early 2023. That means that some homeowners, who are seeing a big jump in mortgage payments, may have to either refinance their homes or list them for sale. It can take 1-2 years for inflation to tame, according to BoC, so holding onto a short-term fixed-rate mortgage might be a good bet, but you might then end up having to re-lock in as rates will not be at their lowest. Cited Sources
Last Wednesday, the Bank of Canada raised its overnight lending rate to 3.75%, up half a percentage point. Which means, Prime Rate is now 5.95%.
Think about how to manage your unsecured debts and mortgage debts if you need to pause and take a look at your finances. A specialist may be able to help you either consolidate existing debt or even consider selling your property if things become unmanageable if finances are tight. Again, a large percentage of Canadian homeowners are mortgage free, and according to big bank data, many had loans that were around 50% loan to value during the pandemic, which means those borrowers should still have a wealth of equity in their properties. Those who purchased during the last three years with minimal downpayments like 20% or who took out high-risk loans requiring high-ratio mortgage insurance may be in the worst position.These people may be in a negative-equity situation that makes it almost impossible to sell since they owe more on mortgage debt than the property is worth. The recent rate hikes will likely increase homeowners' monthly payments by 18 percent, according to Ratesdotca. If your mortgage is up for renewal, you may want to shop it around. There are still some lenders offering mortgages in the high 4’s although that’s unlikely to last much longer. Are we likely to see a 3 stage pivot by the Central Bank in Canada? Well, according to experts that seems to be very likely. It is predicted with only a 50 basis point hike on Wednesday by the Bank of Canada, which was 25 points less than what the market expected, the Bank of Canada may be winding down its front-loading of rate hikes. According to experts like Deputy Chief Economist of CIBC, Benjamin Tal and even prominent traders like Greg Mannarino of traderschoice.net, the fed wil be easing rate hikes in the coming months, only to leave them alone for the next year, which will, of course, allow markets to shoot back up. According to Rob McLister, of MortgageLogicNews, the Bank of Canada may or may not have made a mistake easing their rate hikes to only 50 basis points when market was expecting 75 points. Most people don’t believe inflation is coming down, although the Bank is telling us it is coming down, except core inflation, which is still rising despite unprecedented rate hikes. According to a recent survey, 53% of Canadians don't even know the Bank of Canada has an inflation target, much less a 2% target. Quantitative Tightening is also not well accepted by everyone, and when you factor in the tight labour market, this could create a nightmare for central banks. Due to the fact that people will ask for wage increases to keep up with inflation, inflation will not be lowered. Market expectations have historically been higher than what the Bank has increased rates. Based on forward pricing in the bond market, overnight rates are only going to 4.25%, and core inflation is 5.3%, which may be enough for the central banks to stop raising rates for now. Nevertheless, anything can happen, as McLister pointed out. More wars, Chinese trade disputes, oil, the loonie, etc. and it may be too early for the Bank of Canada to get softer on inflation. Even though we are headed towards a recession, inflation can still become entrenched. There is a possibility that inflation has not peaked. Inflation may have peaked in June, but core inflation is more important. For mortgage interest rates to decrease, we need core inflation back to 3%. Prime could surge like it did in 1981 and if that happened again prime could go to 6.75%. We should all prepare for the worst on rates. I agree with Rob that if rates do not increase further in 2023, consumer psychology will change and prices may bounce in the spring. If sales surge, then we are near a short-term bottom. It's anyone's guess what will happen with unemployment expected to spike, however, the housing fundamentals are still there. Lots of immigration, mortgage stress-test which is now making borrowers qualify at 7.25% for a variabel rate mortgage and so on. Economic and financial well-being is the objective of Canada's monetary policy. Canadians are best protected by a low and stable environment. A five-year extension of the flexible inflation targeting strategy was announced by the Canadian Government and the Bank of Canada on December 31, 2021. The current inflation target is 2%, being the midpoint between 1 and 3 percent. It is within the control range of 1-3 percent that the central bank can actively seek to maintain maximum sustainable employment levels. Inflation expectations will be anchored at 2% using this flexibility. Monetary policy changes take time to materialize and work their way through the economy, which is why monetary policy is considered “forward-looking.” Throughout the world, inflation has continued to rise this year, reaching highs not seen for decades. In response, many central banks have raised their policy rates. In many countries, underlying inflation has yet to ease despite a decline in commodity prices and easing inflationary pressures due to supply challenges. Businesses and consumers worldwide are feeling the effects of tightening monetary and financial conditions and Russia's invasion of Ukraine. Global economic growth is expected to slow sharply. There has been a significant decline in household spending and investment in the United States. Canadian exports are driven by these factors. Energy shortages and elevated uncertainty are expected to cause economic contraction in the euro area during the second half of 2022. As China's economy recovers from the most recent round of lockdowns due to the COVID-19 pandemic, the property market correction continues to stifle growth. Global financial conditions have been affected by the rapid rise in US policy interest rates and the surge in the US dollar. There are rising debt servicing costs for many emerging-market economies (EMEs), with some developing economies having difficulty servicing their debt. Many countries experience inflationary pressures due to the appreciation of the US dollar. In 2023, the Bank of Canada projects global growth to decline from roughly 314% in 2022 to 112%. If the COVID-19 pandemic and the 2008–09 global financial crisis are excluded, this would be the slowest rate of global growth since 1982. Despite tighter monetary policy and tighter financial conditions, growth is expected to pick up to around 212% in 2024. At the global level, inflation is expected to decline to levels that are close to the targets set by central banks in 2024. As monetary policy tightens, commodity prices will fall, supply challenges will ease, and demand will slow, which will lead to lower inflation. Here are the Bank of Canada’s changes to the projections that made in July: There are potential output growth changes. The negative effects of supply chain disruptions on productivity and of labour market mismatch that previously assumed to be temporary are now assumed to be permanent. Financial conditions are tighter, and wealth is lower than expected. Household spending has consequently been revised down. As a result of lower commodity prices and weaker foreign demand projections, exports have been revised downward. These effects are partially offset by the depreciation of the Canadian dollar. It is expected that business investment will decline this year due to tighter-than-expected financial conditions, weaker foreign demand, and the recent depreciation of the Canadian dollar, which has raised the price of imported machinery and equipment in Canadian dollars. Inflation in the consumer price index (CPI) is expected to be lower than previously predicted in 2022 and 2023. According to revised forecasts, CPI inflation will be just under 7% in 2022 and about 4% in 2023. Inflation is expected to remain relatively unchanged in 2024. Several factors contributed to the downward revisions, including lower gasoline prices and weaker demand. Inflation in 2023 is also expected to be reduced by lower-than-expected shipping costs and easing global cost pressures. These cost pressures are partially offset by the weaker Canadian dollar. Global economic challenges and risks are becoming more complex. There is still widespread and high inflation in most countries. Some central banks have begun shrinking their balance sheets as well as raising interest rates rapidly. A tightening in financial conditions has increased financial stress in 2022. Rising geopolitical tensions and Russia's invasion of Ukraine remain major uncertainties. The projection incorporates some of the risks identified in previous issues of the Report. Base-case scenarios include weaker global growth, lower commodity prices, tighter global financial conditions, and sharper declines in Canadian housing activity in the near term. There are two main risks to the inflation outlook, according to the Bank. It is possible that inflation could stay higher for a longer period of time than predicted in the base case. Inflation expectations failing to adjust downward as expected is one way this could occur. This would result in a wage-price spiral according to the July Report. Stickier inflation can also be caused by other factors. A global economic slowdown could be even more severe and inflation could fall further than expected. Since inflation is persistently high, the Bank is more concerned about the upside risk than the downside risk. Upside risk: High inflation that persists Inflation could persist at a higher rate than expected. Global or domestic channels could pose this risk. There are some global factors responsible for recent high inflation that could last longer or have a greater impact on consumer prices than expected. Price spikes in oil, natural gas and agricultural products could result from an intensification of supply disruptions caused by Russia's invasion of Ukraine. Increased geopolitical tensions may prolong supply chain disruptions, creating higher prices for internationally traded goods. It is also possible that domestic factors will keep inflation high. The pandemic has increased short-term inflation expectations. The inflation rate will remain higher for longer if these expectations persist longer than expected. Additionally, households may tap into their higher levels of savings more than anticipated. Inflation would be pushed higher by increased household spending. Global financial vulnerabilities could amplify the impact of tighter monetary policy in many countries, leading to a severe global slowdown. There is a high level of debt in many countries, including sovereign debt, nonfinancial corporate debt, and household debt. There is also a vulnerability associated with significant external borrowing in US dollars for several EMEs. Lower levels of liquidity have made some funding markets more fragile. It is possible for higher-risk borrowers to face funding strains and a prolonged period of deleveraging as a result of an abrupt repricing of risk. Consequently, commodity prices are likely to fall and a global slowdown will be more severe. Foreign demand could be weaker, terms of trade could fall, and spillovers could affect the Canadian economy. The resulting tighter financial conditions and higher unemployment could undermine homebuyer sentiment and lead to a larger-than-expected drop in house prices. This in turn could reduce household wealth, access to credit and consumer confidence. The base case assumes that the spike in goods prices since the beginning of the pandemic will persist. In the event of a slowdown, however, these prices could decline in global growth proves to be more severe than anticipated. A sharper slowdown, especially in the US, may result in retailers offering deep discounts if they have too much inventory. Ontario is still tackling its housing crisis. Since October 25, 2022, the Non-Speculation Tax rate has increased from 20% to 25%. As home ownership becomes more and more out of reach, foreign real estate is eating into Canadians' buying power. It is intended to discourage foreign speculation in Ontario by making it harder to buy property. As a result of these steps, both near-term solutions and long-term commitments will be made to provide more affordable housing options to Ontario families based on recommendations from the Housing Affordability Task Force and the first-ever Provincial-Municipal Housing Summit. By limiting relief eligibility to newcomers who commit to stay in the province long-term, the provincial government is also eliminating loopholes. In August, there were a little more than 5,600 home sales, down 34.2 percent year-over-year, according to the Toronto Regional Real Estate Board (TRREB). Whether higher interest rates or falling prices, prospective homebuyers are weighing current conditions. There has been a noticeable slowdown in price growth. A year ago, the average sales price of all homes combined was $1,079,500, up just 0.9 percent. TRREB also pointed out an important point: "The average selling price also rose slightly month-over-month, while the HPI Composite dipped compared to July.". A higher share of more expensive home types sold in August was indicated by a monthly increase in the average price versus a dip in the HPI Composite." Detached
There has been a mixed supply. In August, there were 10,537 new residential listings, down 0.7% from July. However, active listings increased by more than 62 percent to 13,305. Toronto's real estate market has also seen robust new home construction activity, according to CMHC data. To 4,535 units, housing starts grew 12.55 percent in August. The number of units under construction as of August has increased nearly 4.5 percent from October of last year. CMHC predicts deep housing correction, negative equity, alberta calling, bank of england bailout10/4/2022 What are the signs this country has a housing problem, especially in Ontario and Vancouver? There has never been a time when housing has been so unaffordable as today.
Buying a home in this country has never been more difficult, according to economist Robert Hogue in a recent report from RBC. After a hot two-year run, home prices across the country have softened in recent months, but Hogue highlights how rising interest rates have pushed home ownership costs to record levels. Since March, the Bank of Canada has steadily increased its interest rates, which added hundreds of dollars to mortgage payments. Besides this, Hogue asserts the property value increase during the pandemic has made it harder than ever to become a homeowner in Canada. Hogue notes that RBC's national aggregate affordability measure - which represents loss of affordability - reached 60% in the second quarter, surpassing the previous worst-ever point (57%) in 1990. In Vancouver, the figure reached 90.2% and in Toronto; it reached 83%. Hogue acknowledges that buyers in Ontario and British Columbia (BC) remain extremely challenged, but that conditions are still “manageable” in the Prairies and most of Atlantic Canada and Quebec. Even in the priciest provinces, there is some good news for buyers. We've seen home price declines since early spring that will eventually provide relief to buyers, according to Hogue. "Some of the spectacular price gains made during the pandemic are being rolled back by the sharp housing market correction that began this spring. RBC expects benchmark prices to fall 14% nationwide by next spring — more so in Ontario and BC. As a result, ownership costs should be lower next year. Nevertheless, rate hikes might prevent potential homebuyers from entering the market, since they continue to rise in an effort to "fight inflation." Almost half of Canadians are also putting off buying a home. Brokers and real estate agents have predicted that prices will drop another 2.2% over the fall, according to Re/Max's Fall Housing Market Outlook Report. Furthermore, since the Bank of Canada raised interest rates in March, the cost of borrowing has steadily increased, making homeownership unaffordable for many. Even during the boom, home ownership was touted as a better option than renting because larger mortgages still meant lower monthly payments. In many cases, mortgage payments are more expensive than rent due to rising interest rates, and property prices are steadily declining, making homeownership increasingly unattractive. Overnight lending rates have increased 300 basis points since March, and today the Prime Rate is 5.45%, meaning most mortgages are also being "Stress Tested" at approximately 7% or so. In August, the Canadian Real Estate Association reported that total home prices fell 3.9%, which meant an average adjustment of $180,000. Homebuyers presently waiting on the sidelines, even those who want to sell and buy, are likely to do so in 2023 if market conditions improve, according to Re/Max. There is no universal application of this to Canada as a whole. When the market begins to correct itself, Ontario and Vancouver, for example, will see the most losses since these provinces saw the most gains during the pandemic. Toronto, for example, has seen a 6.3% price decline and sales are down 35%. Oakville, Ontario, on the other hand, is predicted to increase by 2% over fall. In Muskoka, prices are also expected to rise by 5%. According to RE/MAX brokers in regions such as Vancouver, BC, Victoria, BC, Kelowna, BC, and Edmonton, AB, rising interest rates impacted local market activity. Consumer confidence weakened, there were fewer multiple offers from buyers, and conditions between buyers and sellers shifted toward more balance, according to the report, which forecasts price declines between 0 and 6.5%, and -3% in Metro Vancouver as unit sales declined by 15%. In Calgary and Edmonton, demand continues to be strong, although prices are expected to rise by 3% and 1.5%, respectively. Cowtown sales are expected to increase by 25% this fall, according to RE/MAX. Rising interest rates in Canada's maritime provinces, combined with the possibility of an impending recession, have dissuaded would-be home buyers. In Charlottetown, PEI, sales dropped by almost half on a month-over-month basis because of rising rates, according to RE/MAX. As a result of its relative affordability, Atlantic Canada continues to be a popular destination for out-of-province buyers, including Halifax, NS (+1.5%), Moncton, NB (+6%) and St. John's, NL (+7%). Charlottetown, PEI, is the outlier, where the average residential sale prices are expected to drop by 2% in the fall. Nearly all of Canada's Big-6 banks have increased their short-term fixed mortgage rates over the past week. Rate increases have largely been limited to 1-, 2-, and 3-year fixed mortgage products, including special offers and posted rates. The increases ranged from 10 to 55 basis points at TD, Scotiabank, RBC, BMO and National Bank of Canada. However, big banks haven't been the only ones raising rates. MortgageLogic.news reports that uninsured 1- and 2-year fixed rates have increased by 27 basis points and 22 basis points, respectively, since the beginning of the month. During the same period, average uninsured 5-year fixed rates increased by 5 basis points. How does yield curve inversion occur? In the bond market, yield curve inversion occurs when short-term interest rates rise above longer-term rates. Typically, this indicates growing pessimism about near-term economic prospects, since more money is moving into longer-term bonds. So, what is the reason for this? Investor sentiment has been volatile in the near-term. Because of the declining GDP, rising unemployment, and net job loss in August, economic data have been trending downward. Yield curve inversion is controversial; however, the time the curve has been inverted and its sheer magnitude shows a recession is looming. The Office of the Superintendent of Financial Institutions recently changed the Insurer Capital Adequacy Test. OSFI is Canada’s federal banking regulator and recently, it changed the Insurer Capital Adequacy Test for insured variable rate mortgages. Canadian mortgage default insurers must calculate their capital reserve requirements for residential variable rate mortgages based on an amortization of no more than 40 years. As interest rates have been rising, especially adjustable rates on variable rate mortgages, longer amortization periods are being implemented beyond the current maximum of 30 years. The amortization period may extend beyond 40 years until the payment is reset to match the original amortization period. Home Ownership is on the decline, according to Statistics Canada According to Census data released last week, Canada's homeownership rate is declining. Household ownership (both outright and with a mortgage) fell from 69% in 2011 to 66.5% in 2021. As of 2021, approximately 10 million households owned their own homes. In contrast, renter households grew 21.5% between 2011 and 2021, more than twice as fast as owner households. Canadian immigration is growing at an unprecedented pace, with its fastest growth since 1957. As of July 1, the population of Canada stood at 38.9 million. In other words, 284, 982 people have been added since April 1. In terms of highest quality growth, it's the highest since 1949, when Newfoundland was a Confederation. The provinces of Ontario, Manitoba, and Saskatchewan suffered the highest losses in interprovincial migration, while New Brunswick gained the most. In order to improve transparency, the Bank of Canada will now publish its summary of deliberations from its policy meetings. The IMF, which stands for International Monetary Fund, provided high marks in its report, it noted that the Bank of Canada does not publish the minutes (which is a summary) of monetary policy deliberations, which is a practice considered the “gold standard” among inflation targeting central banks. The IMF also agrees that the Bank of Canada should improve communication regarding ex-post evaluations of policy decisions along with improving the timeliness and accessibility of published macroeconomic projections. In the coming months, the Canadian Mortgage and Housing Corporation predicts home prices will fall as much as 15% across the country. The Canadian Mortgage and Housing Corporation (CMHC) released a comprehensive report in May that revealed new housing starts haven't kept up with population growth in some of Canada's largest cities, especially Toronto, making affordability a "noteworthy" problem. According to the housing authority the following month, the planned construction of new units by 2030 will not be enough to address Canada's supply and affordability issues, concluding that an additional 3.5 million units will be required. According to the CMHC report released in June, the housing stock will rise by 2.3 million units by 2030, reaching close to 19 million units. In order to make Canada affordable for all, that number would have to rise to over 22 million, according to the report. For those re-qualifying for a mortgage at the current rate plus two percentage points, the Toronto Regional Real Estate Board has called for a more flexible stress test. So far, OFSI has rejected the idea of removing or making amendments to the mortgage stress test. Rob McLister, founder of Ratespy.com says that CMHC is actually hinting at tightening mortgage policies, which will make financing even more difficult. As I mentioned earlier, CMHC is actually predicting a market correction of 15-18% nationally. According to Evan Siddall, the former CEO of CMHC, the Canadian economy could be very hard hit, especially with so much debt. In order to understand the potential risks ahead, the right policy measures must be taken and young people must be warned that they could face negative equity, which is when you owe more on your mortgage than your property is worth. Buying a home with a mortgage is especially risky less than 20 percent down, since it doesn’t take much correction in the market to tip this class of buyers into the “negative equity” territory. As predicted by not only CMHC, but also big banks like RBC and BMO, buyers with 5-10% down could very well lose that downpayment through the depreciation of real estate by 15-30% in the next coming months. Why is negative equity important? If the recession becomes worse, it won't be possible to sell your house if you lose your job, since if you purchased with a high-ratio insured mortgages you might owe more than your house is worth, which would mean you would have to come up with the difference to sell. When we sell our real estate, we usually have left over profits, so this is definitely not something we're used to. It is difficult for people to move or refinance if they are underwater. CMHC will likely create policies to protect against this in the future. First-time buyers may need a larger down payment or a more rigorous stress test. In the coming weeks and months, I will be watching for and reporting on any policy changes proposed or implemented. Banks are also looking at their risks and whether they need to change their policies to protect against default or homeowners entering negative equity territory. Banks, governments, and central banks are all taking action that is causing a tremendous "rethink" about homeownership. Does real estate still outperform renting in a declining asset environment? One thing is certain: the central bank can control property values through its monetary policies. In the wake of a 10%-20% decline in real estate since March, people are now taking more time to decide whether they should buy now or wait 3-6 months. There will be a 2-year lag effect on the housing market in a recession. There is a possibility that many people may not be able to get jobs back, including those who would like to buy a house or already own one. Unknowns abound. The housing market has just begun to feel more pain, according to Rob McLister. The Bank of England has now pivoted back to money-printing or Quantitative Easing. To protect the macroeconomic situation in the UK, the Financial Institution of England is pivoting to quantitative easing. In order to restore economic stability within the UK, the Financial Institution of England will buy long-term government bonds. The Sterling Pound fell to its lowest stage against the US greenback after the new UK Prime Minister revealed plans to reduce taxes. Tax cuts financed by debt were announced by the UK's new chancellor. Essentially, the UK is in the midst of a full blown financial disaster as inflation continues to soar. Moreover, the fear of a recession (which we are likely already in) has adversely affected the UK's macroeconomic situation. Accordingly, the Bank of England will pivot to Quantitative Easing in order to restore some stability to the economy. Is the US Federal Reserve also poised to pivot? Everyone is asking this question. As of now, the Federal Reserve maintains a hawkish stance on inflation. According to Neel Kashkari of the Minnesota Fed, interest rates may not be excessive enough. Furthermore, Susan Collins of the Boston Fed emphasizes the importance of maintaining hawkish policies. The CEO of Eight World, Michael van de Poppe, reveals that the Fed may have to pivot eventually. As the demand slowdown accelerates, recession fears are growing. Central banks face an acute dilemma they haven’t faced for a long time as the global economy teeters and markets are in turmoil. The recent crash of the British pound and bond markets is the latest example. The choice is between maintaining price stability – tightening monetary policy to avoid inflation spiraling out of control – and financial stability – preventing financial markets from seizing up. According to the Federal Reserve, it plans to keep hiking interest rates until inflation returns closer to the bank’s target of 2 to 3 percent. The result might be the kind of serious, panic-level troubles reminiscent of the global financial crisis and the COVID-19 pandemic. There is no doubt that American markets are under stress at the moment. Over the past year, Bitcoin (BTC) and ether (ETH) are down more than 50%, the Nasdaq 100 has fallen 30%, and the S&P 500 is down 22%. As a place to hide during asset crashes, the bond market – as represented by the "risk-free" 20-year bond – underperformed the S&P, losing 30% in 2022. Since the Fed was founded in the early 20th century with the aim of reducing the threat of bank runs, the Fed has always made it a priority to help financial markets. Although implicit throughout the bank's history, the Fed's price stability mandate wasn't explicitly enshrined in law until 1977. Is the Fed likely to prioritize inflation over market stability this time around? According to Dick Bove, chief financial strategist at Odeon Capital, whenever the United States economy or financial system faces difficulties, the Fed can print money to fix the problem. However, we've learned that we can't continue doing what we've done.""Wall Street isn't going to give up the American economy just to please Wall Street," he said.To stop the shocking rise in rates over the past few weeks, the Bank of England announced on Wednesday its intention to buy as many long-dated gilts as necessary to restore stability to its bond and currency markets.Although U.S. bond yields have not fallen as dramatically as those in the U.K., the 10-year Treasury yield briefly reached 4% on Wednesday, a record high.U.S. markets could get a lot worse if Fed Chair Jerome Powell and his colleagues fail to bring current inflation rates of 8.3% back to near their 2% target. Does the Fed need to pivot like the Bank of England and buy bonds outright again? According to Bove, the U.S. is at a point where the old playbook - the Fed aggressively easing policy to cover up a crisis - won't work anymore. According to him, inflation will take off "like a rocket" if the Fed prints money.In order to achieve long-term stability, the Fed seems willing to put markets through some short-term pain, according to Beth Ann Bovino, chief U.S. economist at S&P Global.During these times, it's hard to know what the Fed is thinking, but my impression is they don't want a global financial crisis.Due to shaky markets and the recent dot plot showing continued rate hikes into 2023, Fed officials keep reiterating they won't pivot to easier policy. According to the fed funds futures market, no rate hikes or rate cuts are priced in for all of 2023.As Bovino put it, "it could be that they're talking the talk." The Fed is trying to establish credibility by giving markets forward guidance about what it plans to do. It's just not possible for them to keep increasing debt, according to Bove. The United States cannot pay back its debt at some point when the debt becomes so enormous that it cannot be repaid. Alberta is calling… Residents of Ontario are fleeing by the tens of thousands because of the astronomical cost of living. Data from Statistics Canada (Stat Can) shows a surge in interprovincial migration in Q2 2022. The talent in Ontario is fleeing to more affordable regions such as Alberta and Nova Scotia. Immigration is having a hard time filling the gap, according to a Big Six bank. As a result of Ontario's failure to compete for young adults, this level of migration has never been seen in the province before. There is a sudden rush to move among Ontario residents. In Q2 2022, over 49,000 people left the province for another province. Outflows were up 77.6% from the previous quarter and 45.9% from last year's same quarter. In a single quarter, Ontario has never seen so many people rush for the door. The trend has reached an emergency level. A total of 125,000 residents left in Ontario, up 54.7% from a year ago. A lack of perceived opportunity is reflected in strong performance and rising outflows. Housing is expensive in one of North America's worst-paying tech hubs, so it made sense. The negative numbers indicate that more people are leaving than arriving in a province. For a temporary fix, immigration can be used, but this is a long-term problem. As with locals, immigrants eventually see a lack of opportunity and move as well. It has never been this problematic for Ontario's net interprovincial flows. There were 21,000 net outflows in Q2 2022, a record since the early 1980s recession. There were over 47,200 outflows for the quarter. In the 12-month period, 47,200 more people left than arrived in other provinces. The situation in Ontario has never been this bad, and it's getting uglier. According to BMO Capital Markets, the seasonally adjusted annualized net migration looks terrible. Canadian home prices have fallen 2.4% in just one month. According to the Teranet––National Bank National Composite House Price Index, sales fell sharply in August from July and the year over year price gains have slowed even further.
As interest rates continue to rise, keep in mind the following: Although property prices are higher than they were last year, and this statistic is being used to persuade home buyers to buy now, the reality is that some areas have seen gains of up to 50 percent in the last two years. Therefore, even as prices come down, they will still appear higher than last year, and this by no means signals we’ve hit the bottom. This reality is something potential investors and home buyers should keep in mind when contemplating their next property purchase. In the Composite House Price Index, Toronto is down 8.3%, Hamilton is down 10.5%, Halifax is down 8.7%, but Calgary and Alberta are up. The Toronto housing market acclimatized to sharply higher interest rates by dropping home prices for a fifth consecutive month, the longest slide since 2017. The Toronto Regional Real Estate Board reported on September 2 that the benchmark price of a home in Canada's largest city dropped 2.8% from July to August. It is likely that interest rates will keep rising in response to inflation and the effort to reduce inflation and bring the CPI down to at least 2%. In the US, the main message has not changed. Despite Jackson Hole, Powell's main message hasn't changed: the Fed is committed to bringing inflation down to 2%. The Federal Reserve began hiking rates in March and is expected to do so until the funds rate reaches a "terminal rate" of 4.6% in 2023. Rate cuts are unlikely until 2024, according to the dot plot of individual members' expectations. Since Canada usually follows the USA’s lead, we can expect the same policies here. In July, the preferred personal consumption expenditures price index showed inflation at 6.3%, while the summary of economic projections shows inflation falling back to 2% by 2025. The FOMC's statement tweaked language to describe spending and production as having "softened" while still observing that inflation remains elevated and that "ongoing increases in the target rate will be appropriate." The markets and economists are now signaling that 75 basis points are the new 25. Here in Canada, the central bank used to raise rates by 15 to 25 points or less (if at all), at each meeting, but now it is expected to follow the US Fed and raise rates by at least 75 basis points at each meeting for the foreseeable future. After this front-loaded strategy to tame inflation, there could be three rate cuts in 2024 and four more in 2025, according to the Fed's dot plot, which means there will only be higher interest rates, even in Canada, for the next year or two. As mentioned, the market is still heavily overpriced compared to pre-pandemic and pre-stimulus levels, and this could change quickly as consumer sentiment changes and mortgage interest rates continue rising. More consumers are beginning to use their credit cards and lines of credit to manage rising interest rates and the cost of living since core inflation is still at a 40-year high and has actually risen despite overall inflation dropping to 7.6% last month. This means that when hit with higher interest rates there may be a breaking point where homeowners need to sell and liquidate or face delinquency and power of sale. More inventory means less competition and add in the mix of hesitant buyers, a huge market correction is inevitable. CIBC's deputy Chief economist Benjamin Tal warns that rising interest rates could cause a situation where mortgage borrowers could see the pain of rising mortgage and debt levels for years to come. In a report released Aug. 22, Tal and CIBC's Karyne Charbonneau analyzed the impact of rising interest rates on Canadian household debt. 30 percent of Canadians are debt-free, so a higher borrowing rate won't affect their payments in any way, according to the authors. Most people with debt don't have a mortgage, meaning their household debt comes from credit cards or loans to finance a new car. Tal argues that credit cards already have very high interest rates, so rate hikes by the Bank of Canada are unlikely to have much of an impact, and installment loans typically have steady interest rates over the term of the loan. Mortgage holders - and homeowners who take out home equity lines of credit (HELOCs) - will bear the brunt of rate hikes. Mortgage holders with adjustable rates are certainly feeling the impact of higher rates, as their monthly mortgage payments increase as soon as the Bank of Canada raises its policy rate. The same applies to HELOC interest rates. Nevertheless, 70 percent of Canadians with variable-rate mortgages are on fixed payment schedules, which means they do not pay more each month as their rates rise. As a result, the amortization, or the overall length of their mortgage term, lengthens. This is what I discussed in my last video. As a result of higher interest rates, mortgage amortizations are increasing. For example, borrowers can refinance or transfer their mortgage to a new financial institution and extend their amortization period during renewal. In order to afford double mortgage payments, someone with a 5-year amortization may need to extend the amortization again. Additionally, those in fixed payment variable mortgages will also see their amortization lengthen since more of their payments will get allocated to interest instead of principal. Some lenders are urging the Federal Government to create policies that help mortgage affordability in this time of rising interest rates. A CEO at radius financial warns that $1.7 trillion of equity in real estate may disappear if the government does not extend mortgage amortizations to at least 40 years. Radius Financial founder Alex Haditaghi recently wrote an opinion piece based on his two decades of experience in the mortgage industry. Unless the Canadian Government responds immediately with urgent policy changes, he warns that the Canadian real estate market will experience a significant correction of up to 30%, putting at risk $1.7 trillion in equity. Approximately 43 percent of Canadian mortgage holders surveyed by Pollara Study after the Bank of Canada's last rate hike in July said they weren't sure how to make ends meet. Despite Rob McLister's (ratehub founder) assertion that the federal mortgage stress test introduced in 2018 means Canadians should be prepared to handle higher borrowing costs, mortgage rates could still rise higher if the central bank hikes rates beyond September to control inflation because of a global supply shock or other economic disruption. Anyone who wants to save money right now should manage their budget and revisit their budget because according to Oxford Economics, Canadians are not in for a "soft" landing as Chrystia Freeland and others have proposed. Based on Oxford Economics' predictions, Canadian real estate will fall by another 30 percent and return to the benchmark price, wiping out the 50 percent gains made over the last two years. It is a recession that follows a rate adjustment, when inflation is being tamed. A soft landing occurs when rates rise but the economy only slows - no recession occurs. A moderate recession is expected to start in Q4 2022, according to Oxford Econ's Tony Stillo. Rate hikes, high inflation, and weak global demand are attributed to the forecast. In the next six months, they project a moderate recession. From Q4 2022 to Q2 2023, the firm's models predict a contraction of 1.8% peak-to-trough. This size of recession would be considered moderate, so essentially, we're past the point of a soft landing. A flexible response is impossible for Canadian households because of their high levels of debt. With supersized debt loads, small increases in interest will have a big impact on income. In Q2 2023, 8.2% of disposable income will be used to carry mortgage payments, up from 6.5% this year. Since 2009, it has consumed the largest share of income compared to the 2018-2019 debt cycle. According to Stillo, because of Canada's historically high household debt and housing prices, interest rates are more sensitive to the economy. As interest rates rise, debt service costs will rise and the housing correction will deepen. Reduced real incomes due to persistently high inflation will further squeeze households and lead to cuts to discretionary spending and deleveraging." You may have noticed that despite the somewhat steep corrections we have already seen since March, prices still remain elevated. To provide an example, an online listing for a house priced at $1,399,000 in Toronto advertises a mortgage payment of approximately $7,000 a month, not including property taxes. I think we can agree this is definitely NOT sustainable or even realistic when the average salary in Toronto is $93,000 gross, which is $1500 a week or about $6,500 a month, which is why people are just not buying. It’s safe to say we are in the stage now where sellers still want March’s prices and buyers don’t want to pay them. In addition, the purchasers have likely received pre-approvals with rate guarantees back in June that will be expiring at the end of September and mid October. Recently, BMO told investors mortgage preapprovals prop up markets. Canada's real estate market just experienced a shock, and one is on its way. Many home sales today don't reflect current mortgage rates, since many secured their rates months ago. The erosion of buying power will deliver another shock in the coming months, according to the bank. When a borrower applies for a mortgage, they obtain something called a pre-approval. These allow the borrower to secure a rate while they shop for a home. Typically this gives buyers 90 to 120 days of interest rate protection. It’s a lot more practical for buyers to not have their purchasing power fluctuate day to day. Mortgage comparison site Ratehub data shows the average 5-year fixed was 3.59% back in June. That means these borrowers with a pre-approval have until October to buy at their secured rate. A borrower in this situation has a nearly 1 point discount and limited time to use it. BMO contends that this creates a kind of buying threshold, where sales are still motivated at lower rates. The price of homes is falling, but without pre-approvals, they could be falling even faster. Buyers with pre-approvals question whether their interest costs will rise more than prices. You may value speed over value when you have a mortgage that expires. According to Robert Kavcic, senior economist at the bank, there is a unique situation in which many potential buyers have pre approvals in hand from before the BoC tightened, as well as expecting 10%-to-20% discounts on home prices. There is still a huge interest rate shock to be dealt with in the bigger picture. According to Kavcic, the one-year increase in carrying costs of a typical home purchase in Ontario was only equaled in the late 1980s (when prices were already lower). For industry professionals, it’s obvious, but for the average person, it’s the sharpest tightening in decades, which means a recession is imminent since discretionary spending will significantly decrease as borrowers allocate more of their income to their mortgage and rent payments. Sarah A. Colucci, Senior Mortgage Agent Sherwood Mortgage Group, Broker 12176 Direct: (647) 773-4849 Email: scolucci@sherwoodmortgagegroup.com Canadians have seen rent, food, and gas prices rise in the past year, and now rising mortgage payments await them. During the housing market frenzy of 2021 and 2022, many borrowers took out variable-rate mortgages with payments that could increase with the next Bank of Canada rate hike.
Variable-rate mortgages usually have fixed payments (interest and principal get allocated according to the rate differences but monthly payment stays consistent), but rising interest rates will likely force many borrowers to have to increase their payment. Approximately 15% of Canadian mortgages fall into this category, which is about 750,000 mortgages nationwide. Under Canadian lending rules, a "trigger rate" occurs when interest payments consume all the borrower's monthly mortgage payments. Typically, the lender will contact the borrower and offer them the option of increasing their monthly payment or making a lump sum payment. Rabidoux et al. warn that borrowers might end up locking themselves into unnecessarily high rates if they switch to a fixed-rate mortgage. Between March 2021 and February 2022, Canadians took out $260B in variable-rate mortgages at an average interest rate of 1.58%. As soon as the Bank of Canada (BoC) raises its key lending rate by one percentage point, or 100 basis points in the language of the financial industry, the “average” of these mortgages will hit their trigger rates, said Rabidoux. BoC has already raised its rate four times this year, taking it from 0.25% to 2.5% at the fastest pace in three decades. Despite this, few variable-rate loans have reached their trigger rates, and monthly payments have remained steady. It is expected that the BoC will raise its policy interest rate by 75 basis points on Sept. 7, but many think it will hike by 100 basis points. As prices rise, shoppers are already cutting back due to rising mortgage payments, which may lead to a recession in early 2023. The Royal Bank of Canada says about 80,000 mortgages will hit their trigger rate with the next few rate hikes. It expects the average payment increase to be $200 per month. All of these borrowers passed the mortgage stress test, which last year would have required them to qualify for a loan at 5.25%. When interest rates are rising rapidly, a higher-than-normal share of mortgage borrowers are exposed to fluctuating interest payments from month to month. As a result, some of these borrowers might panic and switch to a fixed-rate mortgage out of fear that rates will rise further. Rabidoux described this as a "self-induced payment shock to prevent a potential future payment shock." At today's interest rates, locking in a fixed rate is a gamble. Interest rates are expected to fall from current levels in the long run, with at most a few more rate hikes from the Bank of Canada. Aside from the impact on homeowners, many real estate watchers are concerned about the impact these "triggered" mortgages will have on a softening housing market. Owners, especially investor-owners, may be forced to put their properties on the market as a result of higher monthly payments, contributing to the housing shortage. This could result in forced sales in the housing market and further downward pressure on property prices. As of 2019, private lenders account for a relatively small portion of Canada's mortgages, around 1%. There is, however, a high concentration of private lenders in Ontario and British Columbia, with about 85% of private loans originated in those two provinces. So they stand to see more impact from distressed sales than other places. In July, wages grew 5.2% year on year, according to Statistics Canada. Although that doesn't beat July's inflation of 7.6%, it helps with mortgage payments. Inflation's high rate is exactly why borrowers shouldn't expect last year's rock-bottom interest rates to return anytime soon. Rising interest rates will affect mortgage borrowers most at renewal time, according to Bank of Montreal's third-quarter earnings call. Over the next 12 months, $14 billion of uninsured assets will renew. The Bank of Montreal insures 25% of their instalment RESL (Real Estate-Secured Lending) book; the renewals are spread out over time, with only 10% of their uninsured instalment RESL products up for renewal in the next 12 months, according to BMO's Chief Risk Officer Pat Cronin. The average credit bureau score of Bank of Montreal's borrowers are 793, and the average loan to value is 48%. Less than 2% of its Canadian RESL book is to borrowers with a combination of a credit bureau score less than 680 and an LTV greater than 70%.” According to the bank, variable-rate mortgage borrowers with fixed payments are most affected by rising rates through an extension of their amortization period until renewal. According to the bank's presentation to shareholders, the product reverts to the original amortization schedule at renewal, which may require additional payments. From 79% a year ago, 60% of the bank's mortgage portfolio has an effective remaining amortization of fewer than 25 years. In the past year, the Bank of Montreal's residential mortgage portfolio grew to $135.5 billion. In the quarter, the Bank set aside $136 Million as part of growing credit loss provisions. It was only $50 Million last quarter. CIBC predicts the Bank of Canada's next jumbo rate hike on September 7th will be its last for a while at another 75 basis points. Researchers Benjamin Tal and Karyne Charbonneau predict the Bank of Canada will hike another 75 bps next week, then leave the overnight target at 3.25% "for the duration of 2023." In 2022 and 2023, they see the 5-year bond yield averaging 2.45% and 2.3%, resulting in close to $19 billion in additional debt payments. They wrote that out of $2.7 trillion in household debt, $650 billion (24%) face an increase in interest payments. The real show is about to begin. High borrowing costs are now being tested on a generation of Canadians. Although interest rates are still relatively low by historical standards, "the entire pool of household debt was taken out in a low-interest rate environment." "With an inflation rate not seen in decades, there is a legitimate reason to be concerned about consumer stability," they say. Households are more sensitive to higher rates than in the past because mortgage debt accumulated rapidly before and during the pandemic. In terms of interest payments, 100 bps of rate tightening today is equivalent to 150 bps of hike in 2004. Nevertheless, they argue that $300 billion in excess savings over the course of the pandemic will provide a cushion against higher interest rates. According to CIBC, the central bank will not hike rates in 2023, but it will begin easing rates in 2024. Inflation and rising rates combined will notably slow consumption, but Canadian households are equipped to keep consumption growing at a rate that will prevent the Bank of Canada from easing policy until 2023. Home prices will "recalibrate" by 20-25%, says TD. According to a newly released report, prices "could" fall 20% to 25% peak-to-trough from 2022 to 2023. National home prices would only partially retrace the 46% run-up over the pandemic, writes report author Rishi Sondhi. The forecast is more accurately described as a market re-calibration, rather than a severe decline.” In British Columbia and Ontario, where price gains were strongest, steeper declines are expected, while Alberta, Quebec and the Atlantic region are expected to undergo more "middle-of-the-road retrenchments." Manitoba and Saskatchewan prices are expected to hold. Recession forecasts: mild but unavoidable. Bay Street economist David Rosenberg says rising interest rates will lead to a recession in Canada. RBC first forecasted a recession in early July. Desjardins wrote in a recent report that real GDP will slow and "ultimately contract" in the first half of 2023. The Bank expects to start cutting interest rates in the second half of 2023, so this economic downturn should be short-lived. In early 2023, Canada may experience a mild recession. Fed Chair Jerome Powell cautioned against premature rate cuts based on his view south of the border. In a recent speech in Jackson Hole, Wyoming, he said restoring price stability would require some time. Policy should not be loosened prematurely, according to history." Powell said the Federal Reserve must "keep at it until the job is done" to avoid a situation like the "multiple failed attempts to lower inflation in the 1970s." In order to stem high inflation and bring it down to the low and stable levels that were normal until the spring of last year, he said, a lengthy period of very restrictive monetary policy was ultimately necessary. therefore he must act with resolve now to avoid the 1970s outcomes. It is rare for the Bank of Canada to deviate from Federal Reserve monetary policy, which supports higher rates. More than half of Canadians are worried about being able to afford their mortgage payments as interest rates rise. However, many aren't budgeting. In a recent online survey from IG Wealth Management, a financial advising firm, only 39 percent of Canadians include mortgages in their monthly budgets. In a survey of 1,590 adults between July 28 and Aug. 8, 67 percent reported finding budgets helpful to manage their monthly cash flow. One third of Canadians have mortgages, which account for 42 percent of their monthly expenses. Since mortgages are a "fixed cost," they are not likely to change each month, Prentiss Dantzler, assistant professor of sociology at the University of Toronto. Canadians' costs of living have skyrocketed amid high inflation rates and another rate spike expected in September. 60 percent of Canadians worry about cutting costs to reduce their expenses, while 43 percent are unsure they will be able to pay their bills each month. 45% believe they will retire mortgage-free. One in four Canadians admitted to taking on debt to cover their expenses, listing bills and living expenses as their top reasons. A new survey conducted by Leger for Bloomberg and RATESDOTCA found that 81% of Canadians are concerned about inflation trends, while 10% are unable to handle further price increases. 89% of homeowners earning less than $60,000 a year say inflation trends pose a significant threat to their finances. Those earning $60,000 - $100,000 annually (79%) and those earning more than $100,000 annually (77%) also expressed fears. As a result of the surging cost of living, the Bank of Canada increased interest rates rapidly this year, including a full point in July, according to BNN Bloomberg. Mortgage renewals and variable-rate loans have been affected by that." About 54% of Canadian homeowners said they could sustain themselves at current inflation levels for seven months or longer, while 13% said they could sustain themselves for one to six months. In addition, 23% questioned whether they could last under the current conditions. A 7.6% annual spike in inflation was reported in July by Statistics Canada. Has inflation peaked? Perhaps, but in reality, nobody can predict things like price hysterias, a Putin meltdown, China and Taiwan conflicts or another pandemic, for example. For example, Taiwan's defences will be bolstered with more than $1 billion in new weapons and military logistics after House Speaker Nancy Pelosi visited Taipei. A State Department spokesman said the U.S. also approved $665 million in logistics support contracts for Taiwan's surveillance radars. During the Biden administration, this package is expected to be the largest military sale to Taiwan. Uncertainty leads people to expect the worst when the future is unclear. The rise in yields is partly due to investors selling bonds. The BoC's (latest) Q4-2024 'return-to-target' CPI forecast suggests that inflation may persist for at least another two years. By contrast, the bond market is still predicting a rate cut by the end of next year. Perhaps, but in reality, nobody can predict things like price hysterias, a Putin meltdown, China and Taiwan conflicts or another pandemic, for example. For example, Taiwan's defences will be bolstered with more than $1 billion in new weapons and military logistics after House Speaker Nancy Pelosi visited Taipei. A State Department spokesman said the U.S. also approved $665 million in logistics support contracts for Taiwan's surveillance radars. During the Biden administration, this package is expected to be the largest military sale to Taiwan. Uncertainty leads people to expect the worst when the future is unclear. The rise in yields is partly due to investors selling bonds. The BoC's (latest) Q4-2024 'return-to-target' CPI forecast suggests that inflation may persist for at least another two years. By contrast, the bond market is still predicting a rate cut by the end of next year. Canadian banks start preparing for insolvency as interest rates rise.
In their third-quarter earnings reports on Thursday, TD Bank and CIBC provided updates on their variable rate mortgage balances. As a result of the Bank of Canada raising its benchmark rate by 225 basis points since March, variable rate borrowers have seen their interest payments rise. According to RBC's announcement on Wednesday, 80,000 of its variable rate mortgage clients will reach their trigger point by the end of the year. During this period, borrowers' monthly payments only cover the interest and no longer pay down any principal. Mortgage lenders are concerned with borrowers' ability to handle significantly higher mortgage rates at renewal time, aside from the effect of rising rates on variable-rate mortgage holders. Over the next 12 months, CIBC expects to renew 26 billion mortgages, $19 billion in fixed-rate mortgages and $7 billion in variable rate mortgages. CIBC's chief risk officer Sean Bieber says most of its variable rate mortgages have fixed payments. Therefore, they are being affected by rising interest rates through an extension of amortization, rather than an immediate change in payment. Mortgage renewals are reverted to the original amortization schedule, which may require additional payments. At some big banks, the percentage of amortization over 35+ years has increased to 20% or more because of rising interest rates. CIBC, for instance, has seen its amortizations rise to 35+ years for 22% of borrowers, a 12% increase from the last quarter. The way TD Bank works is a tad different. The Canadian personal banking group head at TD Bank, Michael Rhodes, says that if a customer reaches the point where they are no longer amortizing their principal, TD Bank will reach out to them and provide options. With TD Bank, a customer can increase their payment, do nothing, decide to make a lump sum payment, etc. The provision for credit losses at TD increased by $324 million in the quarter to 351 million, compared with a recovery of $37 million in Q3 2021. A year ago, CIBC released $99 million in provisions for credit losses, compared to $243 million this quarter. As mentioned, CIBC's mortgage portfolio now has an amortization of over 35 years. As interest rates rise, more of the fixed monthly payment goes towards interest rather than principle, which just mathematically extends the amortization period. As long as that capitalization continues, it will reach the designated amount, which is 105% of the original principal amount, and immediate payment will be required. However, the 22% of the portfolio that has amortization beyond this point is actually the mathematical outcome of more monthly payments directed towards interest rather than principal. Royal Bank of Canada's net income fell to 3.58 billion as provisions for credit losses in an alien capital market segment hit the bank hard. For similar reasons, the National Bank of Canada's net income fell 2% to $826 million year-over-year. A provision for credit losses is an estimate of potential losses a company may experience due to credit risk. A company's financial statements treat credit losses as an expense. It is for this reason that big banks are experiencing a decline in profits. It is expected that they will suffer losses from delinquent and bad debts or other credit that is likely to default or become unrecoverable. A surge in pandemic demand had boosted home prices across the province. As economists had predicted, instead of home prices falling due to economic uncertainty, demand surged, especially in suburban and rural areas. In the second year of the COVID-19 pandemic, global economic disruptions pushed up the price of nearly everything: groceries, gas, bikes, and cars. According to the Bank of Canada, it acted to slow inflation after it grew by 8% - the highest level in 40 years. With low-interest rates, homeownership has become within reach for more people. This is especially true in markets like Vancouver and Toronto, where house prices have skyrocketed due to demand from young professionals who want a good life but can't afford it yet because of the higher costs associated with living there. However, experts warned these so-called " traps" would only last until another economic downturn came around again - this time much less forgiving than before. Housing markets in Metro Vancouver and Toronto have been feeling the effects of an interest rate hike after Canada's central bank has been increasing rates steadily since March of this year. Steve Sarisky, a realtor from Vancity stated that people who recently bought homes with variable mortgages may see their monthly payments go up by as much as $1500 because they're now paying more than 4% and even 6% in the cases of those who have alternative or private loans. What are the results? There has been a dramatic cooling in the real estate market. Prices are falling and listings have dried up. In addition, most economists agree that prices will continue to fall as long as inflation remains high since the Bank of Canada intends to increase interest rates to a correlation and bring inflation down to a target of two to three percent. Simply put all homebuyers are vulnerable to rising interest rates but there are three groups most likely affected by higher mortgage payments and they are people who get their loans from private lenders, condo buyers pre-selling assignments with no property value guarantee and homeowners currently facing the trigger option their variable rate mortgage. Basically, a trigger rate is when your lender approaches you or mails you a notice that your monthly mortgage payment is now only allocated towards interest-only payments. The Bank reminds you that the interest rate has dramatically increased since the loan was originally taken out. As a result, the bank will ask for more money each month, which could result in a large amount of insolvency and default risk for many people. These policies that include funnelling billions of cheap money into the economy and then taking it out rapidly via rapid rises to the overnight lending rate at unprecedented intervals, actually work to make the rich super rich and inadvertently push many people below the poverty line when the trigger on inflation is finally pulled. The latest data from the Canadian real estate Association showed prices hit $629,971 in July, down 5% from $662,924 last July. And on a seasonally adjusted basis, it amounted to $650,760, a 3% drop from June. When pandemic lockdowns began in March 2020, the average national price was $543,920. While the Canadian real estate association expects the average home price to rise by 10.8% annually to $786,252 by 2023, most economists expect an even greater price drop. DesJardins Economists predicted that between February's high of $817,253 and the end of 2023, the average national Humphries would fall by 15%. Since we are almost there, they adjusted their prediction to predict a drop between 20 and 25 percent. Many sellers are having difficulty accepting the fact that their homes won't fetch as much money as they would in February or March earlier this year. Who benefits from higher interest rates? Despite growing economic unease, two of Canada's largest banks reaped the benefits of higher interest rates by increasing loan margins in the third quarter of their fiscal year. Inflation and rising provisions for loss led to Toronto Dominion Bank's lower third-quarter profit compared with a year ago. Due to the same headwinds, Canadian Imperial Bank of Commerce also saw earnings dip in the quarter. It is expected that margins will continue to increase in the coming quarters but at a slower pace. In addition, they acknowledged that as inflation runs high, borrowing costs rise, and economic uncertainty remains high, demand for new loans - especially residential mortgages - may decline. Banks expect loan defaults to begin creeping higher from unusually low levels. As CIBC's chief financial officer stated in an interview, if all the forecasts are accurate about what will happen in the economy, including rising rates and a slowing credit demand, you will see an offsetting effect. Although margins are expanding and credit demand is cooling, CIBC is confident that net interest income will continue to grow. In general, most banks, like TD Bank Group for example, reported a profit decline because they are preparing for a possible recession ahead, despite loans continuing to grow and consumer savings rates remaining high. One of the dominant trends so far this earnings season has been the return to climbing provisions for credit losses, which are counted against income. Bank of Montreal has the last report to come out next week. Having unwound parts of their provisions built up in the early days of the pandemic, banks rode a wave of profit beats last year, and are now experiencing the reverse as they build reserves due to rising central bank interest rates. On September 7, the Bank of Canada will raise interest rates again. The Big Six banks are likely to increase the prime rate by half-a-point this time. As HELOC charges increase with each CB hike, we'll get closer to an imminent trigger rate when monthly payments on tens of thousands of variable mortgages soar by $200 each month. So expect no declines in mortgage loans during these times because things are simply still tightening up! Even as prices decline, housing affordability has not declined. About 80% of buyers in Canada rely on mortgage financing, so this is still a barrier for them to get into the market. But there are still many potential homeowners who can get in the market easily and for a bargain! Is it time to sell or should you wait for the market to increase in value again? Two of history's most significant property flops occurred in the Canadian and American housing markets. In these countries, prices dropped on average by 32%. In 1989, 1991 here, and 2005 - 2008 in the US, it took 24 to 36 months until each market bottomed out, then ten years or more before prices could reach their former peak levels. Sarah A. Colucci, Senior Mortgage Agent Sherwood Mortgage Group, Broker 12176 Direct: 647-773-4849 Email: scolucci@sherwoodmortgagegroup.com  This Wednesday, the Bank of Canada is expected to raise its policy rate by 75 basis points.
It would be the largest rate hike since 1998 for the BoC. This would result in the Bank's target overnight rate being 2.25%, and a prime rate of 4.45% (on which variable-rate mortgages and lines of credit are priced). 2008 was the last time Canadians saw a prime rate above 4%. Inflation remains stubbornly high at 7.7%, so the Bank of Canada will have to act aggressively to break consumer expectations of high inflation at its upcoming meetings. "Unless the BoC breaks inflation psychology this month and in September-and/or oil prices plunge-CPI's return to 2% could take more than two years," wrote mortgage expert Rob McLister. Past inflation spikes prove that. Several comments and outlooks have been released recently regarding the BoC's upcoming meeting: On rate-hike expectations:
On inflation:
On the latest employment data:
On the September rate decision:
Royal Bank of Canada has expressed concerns about increasing the overnight lending rate and Canada entering a recession. In fact, RBC suggests that if the BoC raises the overnight lending rate by another 75 basis points in September, this move will plunge Canada into an indefinite recession. Source: Bank of Canada preview: 75-bps rate hike in the cards this week - Mortgage Rates & Mortgage Broker News in CanadaBank of Canada preview: 75-bps rate hike in the cards this week - Mortgage Rates & Mortgage Broker News in Canada (2022). Available at: https://www.canadianmortgagetrends.com/2022/07/bank-of-canada-preview-75bps-hike-in-the-cards-this-week/ (Accessed: 12 July 2022).  The economy is forecast to take a turn for the worse in the next few years, with a recession expected to hit Canada in 2022 or early 2023.
While this may seem like bad news for homeowners, there are actually some things you can do to protect yourself from the potential effects of an economic downturn. One of the most effective ways to recession-proof your mortgage is by making sure you have a large enough buffer built up in your savings account. This will help you make your mortgage payments even if you experience a drop in income or lose your job altogether. It's also critical to have a solid plan for how you'll manage your debt if the economy takes a turn for the worse. If you're carrying a lot of debt, now is the time to pay it down or look to debt consolidation to help you gain more cash flow, which will be necessary during a recession. And finally, make sure you have a thorough understanding of your mortgage terms and conditions. This will help you know what to expect if interest rates start to rise or your property value declines. You shouldn't just sign off on your mortgage renewal as the renewal rates will probably be higher than your current rate. It is wise to explore your options before committing to another term. By following these tips, you can help protect yourself from the potential impacts of an economic downturn and keep your finances on track. We would be happy to review your mortgage and help you customize a recession-proof solution. Please feel free to call or write. Call 647-773-4849 or email colucci.s@mortgagecentre.com |
By: Sarah ColucciSenior Mortgage Agent, Lic. M14000929 Archives
April 2023
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