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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
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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 |
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January 2023
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