TD Economics ECONOMIC SNAPSHOT

Canada’s economy shook off last year’s growth slump in Q1 2013, as real GDP grew at a healthy 2.5% annualized pace driven by a stronger trade performance.. However, the remainder of 2013 looks more uneven, as a sub-par external backdrop and subdued domestic demand should hold growth in Canada’s economy to a modest 1.7% pace this year.

• Next year, one ofthe biggest positivesforCanada is a strengthening U.S. economy.As fiscal drag in the U.S. abates laterthis year, better U.S. demand forCanada’s exportsshould help underpin a healthier 2.4% growth rate in 2014.

• The national jobless rate is likely to hold above 7% in 2013, before heading modestly lower in 2014.

• A cooling resale housing market should curb the pace of household debt growth per year, keeping to the debt-to income ratio stable, but constraining consumer spending growth over the medium term.

- Amid rising inventories of newly completed homes, residential construction is expected to be a softspot.
- Mortgage rule changes often prove to be temporary; after falling sharply in 2012,home sales have since stabilized, as low interest rates support demand. Most of the unwinding of a likely moderate over-valuation should occur in 2014-15, as interest rates start to grind higher.

The Week in Economic and Real Estate News

Last week got off to a good start with the release of May sales data from the Canadian Real Estate Association. May was a good month for re-sales in most Canadian markets. Economists at Canadian banks were generally encouraged by the market's performance in May. Bank of Montreal suggested that The Ceiling Can't Hold Us and TD Bank suggested that the impact of changes to mortgage insurance rules tend to be temporary and this time has not been different.

Then the US Federal Reserve Chairman sent financial markets reeling by announcing the potential beginning of the end of the economic stimulus program known as Quantitative Easing. Stock markets were down sharply and the benchmark 5 year government bond yield climbed over 1.80% on Friday. 

Are Canadians real estate obsessed? Results of a survey done for the online real estate service provider Zoocasa seem to say so. The obsession is most severe in the Toronto area but has strength across the country. 

Our Feature Article looks further at the CREA data and the recent movement in fixed term mortgage rates. 

Joel Sida from MCAP newsletter

The Week in Economic and Real Estate News

CMHC published data for May housing starts early last week. The six month rolling average is trending at the same level as in April but there was a surge in multiple starts, particularly in the Toronto area where there are now 242 condominium projects underway. 

  

The Bank of Canada released it semi-annual Financial System Review last week. The Bank sees levels of household indebtedness and imbalances in parts of the housing market (the Toronto condominium market in particular) as the most significant domestic risks to the Canadian economy. Despite slowing consumer debt accumulation and reduced home re-sales and new home construction, the Bank still considers that these risks remain "elevated".

Statistics Canada released April data for new home prices last week which showed that Calgary is leading the country in new home price growth. 

The National Bank/Teranet House Price Index for May was also published last week. It shows that Canadian home prices were up 1.1% in May from April. Prices were 2% from May, 2012 - the smallest annual increase since November, 2009.  

extracted from MCAP, Joel Sida

The Week in Economic and Real Estate News

The Week in Economic and Real Estate News

We learned on Friday that the Canadian economy added a whopping 95,000 new jobs in May. The consensus estimate among economists was for about 15,000. The unemployment rate in Canada dropped from 7.2% to 7.1%. In the US, number were more muted with only 175,000 new jobs as the unemployment rate ticked up to 7.6%.

   

Canada's largest real estate boards reported their May sales data last week and they reflect significant regional differences. Vancouver enjoyed its first yearly gain in 19 months, Calgary saw sales and prices both up strongly, Toronto posted slower sales amid continued price increases and Montreal was also slower with prices also moving up.

Scotiabank published its quarterly Global Real Estate Trends which looks in particular at the Toronto housing market which the bank expects to experience continued lower sales volumes and slower new construction activity into mid-decade. 

Our Feature Article takes a closer look at the numbers form the big four real estate boards and the Scotiabank report on the Toronto real estate market.

Joel Sida from MCAP

Interest rates remain on hold as governor Mark Carney leaves the Bank of Canada

Data Release: Interest rates remain on hold as governor Mark Carney leaves the Bank of Canada

• As was widely expected, the Bank of Canada elected to hold the Overnight Rate target at 1.00%.
• The Bank noted that the recent progression of the Canadian economy was broadly in line with its expectations. Much of the communiqué was a reiteration of what has already been previously stated, save for a brief mention of first quarter growth likely being stronger than the Bank had projected in its last Monetary Policy Report and a slightly weaker-than-anticipated pace of headline inflation.
• Overall, economic growth in Canada is forecasted to progress at a moderate pace, residential investment is likely to decline further, and the household debt-to-income ratio is expected to stabilize near current levels. The bank continues to anticipate inflation to remain below the 2% target until the middle of 2015.

Key Implications

• Bank of Canada governor Mark Carney was widely expected to make few waves in his final interest rate announcement before the end of his tenure. This was certainly the case in today’s communiqué, especially given that the economy has largely progressed as the Bank forecasted in its April Monetary Policy Report.
• We do not expect a change in bias when incoming governor Stephen Poloz begins his tenure. Despite publicized concerns that his previous position as head of Export Development Canada may lead to an easing bias in favour of a weaker Canadian dollar, the Bank of Canada has never explicitly targeted the exchange rate and, in fact, is mandated to conduct monetary policy to achieve its 2% inflation target. We expect a continuation of this policy.
• Ultimately, with inflationary pressures remaining muted and the Canadian economy firmly entrenched in a moderate growth environment, TD Economics continues to anticipate the Bank of Canada to remain on hold until the end of 2014.

TD Economics

RBC Housing Trends and Affordability

 RBC published its quarterly Housing Trends and Affordability report last week.

 The report suggests that housing affordability levels were generally unchanged in the first quarter of 2013. All three of the major components of the affordability calculation 

- mortgage rates, 

-home prices and 

-incomes - each remained more or less flat over the most recent quarter. 

Variability across local markets in Canada was also minimal. RBC concludes that, based on its analysis of the relationship between home prices and general housing affordability since the 1970s, current affordability levels are outside the “danger zone”. Their conclusion is therefore that there is no imminent price correction on the horizon. Rising interest rates present the clearest threat to affordability but RBC expects rates to remain at their current levels for at least another year.

Mortgage Rules Help Fuel Rent Hikes

Mortgage Rules Help Fuel Rent Hikes

The Week in Economic and Real Estate News

 

With the summer cottaging season kicking off this past weekend, Royal LePage released results of a survey of Canadians on recreational properties. The low interest rate environment is a key driver of demand and many potential buyers feel an added sense of urgency to buy whiles rates are so favourable. 

The Canadian Real Estate Association released its latest Canadian home sales data last week and reported that sales rose in April. Canadian bank economists agreed for the most part but warned that a return to levels seen in the first half of last year are not likely any time soon. 

Here are links to the analysis of the Canadian April home sales data from economists at Bank of Montreal, TD Bank, Royal Bank and Bank of Nova Scotia.

Our Feature Article takes a closer look at the CREA data, some of the bank economists' analysis and the Royal LePage recreational property survey.

MCAP news

A hint of optimism to start the spring home-buying season

• National home sales activity rose in April by 0.6%, month-over-month. This represents the second straight month of positive gains. However, on a year-over-year and a non-seasonally adjusted basis, sales are still down by 3.1%.
• Home prices increased by 1.3% versus a year ago. The average home price in Canada now rings in at roughly $380,600 on a non-seasonally adjusted basis.
• The aggregate MLS® home price measure tracks changes in prices but is less distorted by the composition of sales. By this measure, prices were up 2.2%, year-over-year. This pace matches what was recorded in March. It also equates to the slowest pace of acceleration in two years. Among the property type classes, price growth remained strongest for one-storey single family homes (+3.1%) and two-storey single family homes (+2.6%), year-over-year.
• The sales-to-new listings ratio came in at 50.4% in April, roughly the same as the last few monthly readings. This reading is indicative of a Canadian housing market firmly entrenched in balanced territory. According to the Canadian Real Estate Association, it would take 6.6 months to deplete the number of unsold homes – a count that has not materially changed over the past nine months.
• Sales improved in more than half of all local markets in the month, led by gains in Greater Toronto, Winnipeg and Calgary. However, listings were down in about half of all markets including Montréal, much of rural Québec, Ottawa, and Vancouver.

Extracted from TD Economics

The Week in Economic and Real Estate News

On Friday, we learned that the Canadian economy gained 12,500 jobs in April - a much better performance than in March. It was not enough to move the unemployment rate, however, which remains at 7.2%.

CMHC reported last week that housing starts in Canada were down again in April as builders continue to adjust to a slowing market. Statistics Canada also reported last week that the New House Price Index gained 0.1% in March.

BMO published a survey on how home buyer's think about the location that they choose. First time buyers are thinking more and more about transit service and commute times. 

CIBC Economist Benjamin Tal weighed in on the future of the Toronto condo market this week. Despite short term appearances to the contrary, this complex market remains in balance but has some big tests coming in the next two years.

Our Feature Article takes a closer look at the Toronto condominium market and some of the other news from the past week. 

MCAP newsletter of the week.

The Market Pulse from Genworth

The Market Pulse from Genworth

The Week in Economic and Real Estate News

Canada's two largest real estate boards reported April results last week. The Vancouver market is showing signs balance and emerging price stability while Toronto posted a strong month, led by the downtown condominium segment.

Bank of Montreal published its Psychology of Home Buying Report last week which contains some interesting insights into some of the motivations and emotions which drive home buyers.

Also last week, PWC published analysis of debt levels of Canadian consumers. The report, called The Tide Turns: Canadians, Debt and Retail Lending, indicates that consumers seem to be having difficulties sticking with debt reduction plans and putting off major purchases. The report also has some sobering advice for Canadian lenders going forward.

Joel Sida form MCAP newsletter.

A $500 Million RBC Group Becomes Brokers

A $500 Million RBC Group Becomes Brokers

A group of five high-performing RBC mortgage specialists have decided that the grass is greener in the broker world. The group formed a company called Denova Group and has joinedMortgage Alliance, a national mortgage brokerage.

Mortgage Alliance President & CEO Michael Beckette pegs the team’s trailing 12-month volume at half a billion dollars.

We spoke with David Goncalves, one of the group’s founding partners, to find out why he left the “golden lion” to be an independent.

Goncalves, a 10-year RBC vet, has been a top-10 RBC mortgage specialist (in total sales) for five years running, says Mortgage Alliance. RBC has somewhere around 1,500 mortgage specialists.

The Why

“It came down to more entrepreneurial activities,” said Goncalves, who wanted to expand his private and commercial lending.

Rates were another key issue. “The rates are similar,” he said. “The difference is that banks are cyclical and they go through stages when they’re competitive and not competitive. In the broker word it’s a lot more consistent.”

“The ability to advertise (good rates) gives brokers a bit of an advantage,” he added. Banks don’t allow mortgage specialists to mass-advertise the lowest rates.

“One of the things that restricted us [at the bank] was that when we’d send up an advertisement, it had to have a marked up rate." That’s no longer necessary as a broker, he says. “Now we can send out mass marketing with best pricing. It’s exciting.”

Rates Aside

“The biggest advantage of brokers is not so much rate, but selection of products,” Goncalves notes. RBC, for example, offers one lump-sum prepayment option (10% lump-sum prepayments makeable once a year). By contrast , brokers can access lenders with up to 30% lump-sum prepayments, makeable anytime.

“As a broker, you might start off with 10 lenders that fit the client’s bucket," he said. "Then you can start narrowing it down to one or two lenders that meet the client’s needs very well.”

Goncalves also cites compensation pressure as a factor in his group's decision. With banks forced to match brokers, specialists often have to give up compensation to “buy down” their rates. That's sometimes hard to swallow because they make less per deal to begin with.

And then there’s the matter of creditor life insurance. Banks often use quotas to pressure mortgage specialists to sell creditor life insurance. Sometimes they’re expected to sell insurance to one out of every three applicants. But many clients don’t need it. Moreover, bank-issued creditor life is typically inferior to regular life insurance, or even broker-offered creditor life (which is portable, unlike most bank policies).

Joel Sida Mortgage Broker extracted from Mortgage trends

The Week in Economic and Real Estate News

The Canadian Real Estate Association published sales data for March last week. Activity remains below levels seen last year but prices are holding well in most markets.

 BMO Capital Markets officially declared Canadian home prices to be "boring" while TD Economics predicted that the slow start to the year and current trending will "mean a lacklustre 2013 for the record books".

 The Bank of Canada is about to change Governors but it did not change its key overnight rate last week and any increase now looks to have been put off until at least the second half of 2014. The Bank, in its press release and Monetary Policy Report, is forecasting a strengthening Canadian economy in the second half of 2013 and continued strength through 2014 and 2015.

Canadian housing market begins to thaw out in March

• National sales activity rose in March by 2.4%, month-over-month. When compared to March 2012, sales were down by 15.3%.
• Prices increased by 2.5% versus a year ago. The average home price in Canada now rings in at roughly $378,500 on a non-seasonally adjusted basis.
• The aggregate MLS® home price index also tracks change in prices, but the index is less distorted by the composition of sales.  By this measure, prices were up 2.2%, year-over-year – the slowest pace of acceleration in two years. 
• The sales-to-listings ratio came in at 49.9% in March, roughly the same as February’s reading. The ratio is just one measure used to infer overall housing conditions and with this month’s reading, the Canadian housing market is in balanced territory. It would take 6.5 months to deplete the number of unsold homes.  This count has not materially changed since mid-2010.
• Toronto and Vancouver are exerting a downward influence on the national price statistic. These two markets saw the largest price gains in 2010 and 2011, and their markets are now unwinding and returning to more fundamentals. By contrast, Calgary and Edmonton did not see these same price gains and as a result, have fewer excesses to evaporate.

HIGHLIGHTS OF THE WEEK

United States

• With little news on the data front throughout the first half of the week, markets focused much of their attention on the release of the March FOMC minutes and President Obama’s 2014 budget proposal.

 • The Fed minutes revealed a growing consensus among participants that a tapering of the $85 billion/month in asset purchases should happen sometime this year. However, what still remains largely unclear is at what point this year the tapering should begin and to what extent it will occur.

 • On the fiscal front, the key elements of the Obama administrations 2014 budget proposal include $580B of additional revenues, $610B in spending cuts, and $620B in entitlement reform over the course of the next ten years.

  Canada

 • Canadian housing starts edged up to 184,000 units in March from an upwardly revised 183,000 units in February. Despite the slight uptick in overall starts, this week’s reading puts new housing construction at almost 30% below the level recorded in April 2012.

 • The ongoing moderation in new home construction has been widely expected given the strong pace of building that took place last year.

 • The Bank of Canada’s Business Outlook reaffirmed the theme of only modest growth this year, but optimism can be taken from the outlook portion of the survey which pointed to a pick up in sales – albeit at a moderate pace – based on improving U.S. demand which is consistent with out forecast.

 • Looking ahead to next week, the Bank of Canada will release its Monetary Policy Report on Wednesday, April 17. The Bank is expected to hold its overnight rate unchanged at 1.00%. Data from TD

Smith Manoeuvre

The Smith Manoeuvre is a technique that converts regular debt into tax-deductible debt. In the process, it affords the opportunity to pay off one's mortgage significantly faster.

The Smith Manoeuvre works basically as follows: 

1. First find a readvanceable mortgage 
2. Then sell your non-registered assets (like stocks held outside of an RRSP) 
3. Use the proceeds as a down payment on your mortgage 
4. Make your mortgage payments like normal 
5. As you pay off principal, re-borrow that principal into a line of credit (LOC) 
6. Invest this re-borrowed money at a higher rate of return than the interest you pay on the line of credit 
7. Deduct your investment loan (LOC) interest and use the tax savings (refund) to pre-pay your mortgage
8.  Repeat steps 3-7 until your mortgage is fully paid off. 

Fraser Smith, for whom the Smith Manoeuvre is named, stated that the strategy can cut your mortgage payoff time in 1/2, while helping you invest more, sooner. The Smith Manoeuvre is indeed a powerful strategy, but it's not for everyone. There are both investment risks and serious tax risks. Your returns could be insufficient, CRA could invalidate your application of the strategy, or you could wind up in a negative amortization scenario if your house value falls. Therefore, always consult a licensed financial and tax advisor before considering it. Find an advisor that will work closely with your mortgage planner, offers free consultations, and charges no out-of-pocket ongoing fees.

 Implementing the Smith Manoeuvre takes more than just refinancing your mortgage and picking some mutual funds. Moreover, there is no off-the-shelf financial or income tax software that efficiently manages the process. The best advice is to get proper advice...from the start.
 Taken form Canadian mortgage trends.

New Buyers Raise Their Antecesors

When some people think of first-time home buyers, they picture young people shoehorning themselves into a property with the minimum possible down payment.

That’s not the norm, according to two new surveys from BMO and Genworth.

The BMO study finds that typical first-timers expect to spend $300,000 on a new home. That’s 19% below the current average home price of $368,895 (source: CREA).

More interestingly, prospective newbie buyers plan to put down an average of $48,000 (16%). That’s higher than what previous data has shown.

 In 2012, CAAMP found that only 11% of renters have a $30,000+ down payment.
The average renter’s down payment was $21,000.

•  Do first-time buyers living at home accumulate a bigger down payment than renters? 
• Do they get more support from mom and dad? (BMO says 27% of first timers expect down payment help from their family.)

 41% of all home buyers put down less than 10%, according to 2010-2012 data from Will Dunning.

• That number includes all home buyers. 

One presumes the number would be higher if only first timers were polled. It appears young buyers are somehow saving bigger down payments all of a sudden. According to a Genworth/CACCS survey, 56% of recent first-time buyers put down more than 20% on their homes. Last year, just 36% claimed to do the same.

 What’s more, the proportion of borrowers saving more than five years for a down payment rose by over 50%, says Genworth. But that may be due largely to higher prices and tighter approval guidelines.

 BMO finds that 59% of first timers held off buying their first home due to elevated housing prices. Moreover, 19% of first-time purchases have been deferred due to stricter qualification rules (including last July’s amortization reduction to 25 years on high-ratio mortgages).

 Other findings from BMO:

•  The typical age of a first-timer buyer is 29. 
• Rookie buyers expect to be mortgage-free in 20 years (at age 49 on average), which is eight years less than what this recent CIBC poll suggests. Age 49 seems somewhat optimistic given debt trends and conflicting surveys. 
• First-time buyers are twice as likely to take a fixed rate than a variable rate (46% vs. 20% who choose variable rates). 
• Young buyers are risk averse. 39% of those who expect flat to declining rates still prefer fixed rates over variable rates. Only 23% of those who forecast flat/declining rates favour variables. First time buyers in Alberta expect to pay the most for a new home: $406,000. B.C. is next at $384,000. The Ontario average is $326,000 

 taken from http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2013/04/new-buyers-raise-their-ante.html

Sales activity with a new sense of stability

Sales activity from the two largest real estate boards was reported last week and they reflected signs of a new underlying sense of stability in these markets. In Vancouver, sales remain lower than historical averages but listings and sales have moved toward a better balance. Toronto continues to see modest price increases despite lower sales volumes. The Calgary market's very tight inventory levels pushed prices higher by 9% in March. RBC published research last week which clearly shows that the growth in household debt levels - non-mortgage debt in particular - is moderating considerably. And, CIBC released results from a survey of Canadian homeowners about additional consumer debt and when they think that they will be mortgage free. Royal LePage published its House Price Survey for the first quarter of 2013 and it suggests that the housing market experienced "slightly positive price trends" over the period. Joel Sida taken from Mcap newsletter

RBC and Ipsos Reid left mortgage brokers completely out of the survey.

That’s right. RBC and Ipsos Reid left mortgage brokers completely out of the survey. RBC has its own survey about who people consult for a mortgage and they forget to mention this? That’s despite the fact that 61% of Canadians polled by CAAMP consulted mortgage brokers when getting a new mortgage. It may not surprise people that a bank doesn’t want to promote brokers—it’s competition. But from a research credibility standpoint, we were surprised. RBC bills itself as “the country's number one source of financial advice on homeownership.” Shouldn’t that title require some degree of research professionalism and objectivity? Why would a company with RBC’s good reputation omit (intentionally or not) data that provides a fair representation of the marketplace? This makes us wonder what else they left out. If an organization is going to purport to make newsworthy contributions to the national housing dialog, it better realize that people are watching its every word. One-sided survey results are nothing more than marketing masquerading as news. This example taints RBC’s mortgage-related surveys going forward, for no good reason. Joel Sida. Taken from from Rob McLister, CMT

http://www.royallepage.ca/en/media/130320-canadas-gen-y-still-plan-to-own-homes.aspx?toolstips=1052&relatedcontent=1074

http://www.royallepage.ca/en/media/130320-canadas-gen-y-still-plan-to-own-homes.aspx?toolstips=1052&relatedcontent=1074

Despite Challenges, Canada's Generation Y Still Plan to Own Homes, According to Royal LePage National Survey

Despite Challenges, Canada's Generation Y Still Plan to Own Homes, According to Royal LePage National Survey

Flaherty Talks Another Bank into Higher Rates

Flaherty Talks Another Bank into Higher Rates On Friday, Manulife Bank posted its lowest rate ever on a 5-year fixed mortgage, 2.89%. It lasted for four days. When our big brothers at the Department of Finance (DoF) caught wind of it, they dialed up Manulife and swayed the bank into raising its rate back to 3.09%. “We don’t want a race to the bottom on mortgage rates by our financial institutions…,” said Finance Minister Jim Flaherty, as quoted by Bloomberg. “I had one of my staff call (Manulife) and indicate my displeasure.” Manulife responded today by saying: "After consulting with the Department of Finance, Manulife Bank has withdrawn the (2.89%) promotional campaign and reverted to our previous posted rate." So now we have Manulife, the 10th largest bank by assets, being told by bureaucrats how to price its mortgages. Two weeks ago, BMO got the same call. Where does this end? The DoF seems set on breaking the knees of home prices, one way or another. With it so intent on regulating real estate transactions, will the next round of headlines read: "Ottawa Legislates Price Ceilings on the Sale of New Homes?" (Yes, this is an exaggeration...I think.) Joel Sida from Rob McLister, CMT

Search for the best rate stressful, poll reveals

Some 65 per cent of respondents age 18 – 34 indicated haggling for a rate was among the most stressful part of the mortgage process while over half (56 per cent) agreed researching and comparing offers made the process more difficult. Most (59 per cent) found that renegotiating for a rate was stressful, while deciding on the right term and payment schedule (55 per cent) and getting customer service help from the lender (35 per cent) were close behind. More damning of the process itself, 67 per cent of Canadians surveyed who currently have a mortgage feel the process was either too complicated (31 per cent), confusing (20 per cent) or hard to figure out (16 per cent). “There is a battle for clients out there, and a real lack of knowledge among people looking for a mortgage,” Friesen told MortgageBrokerNews.ca. “That is what we need to do as brokers: move them beyond the ‘low rate gratification’ and spend an hour just to get to know them, and find out what their needs are.” Joel Sida http://www.mortgagebrokernews.ca/news/newsletter/173531/

Bank of Canada Decision on rates

BoC Decision: Lower for Even Longer Canadian macro-economists are mostly in agreement that the overnight rate should go nowhere in the next 9-12+ months. And the Bank of Canada gave no indication today that such projections are off the mark. The Bank left Canada’s core lending rate unchanged at 1% for the 29th straight month, with no change in sight. Part of the Bank’s reasoning is reflected in these comments from its statement: “Total CPI inflation has been somewhat more subdued than projected in the January MPR as a result of weaker core inflation and lower mortgage interest costs...” “The Bank expects…the debt-to-income ratio [to stabilize] near current levels.” “…Residential investment is expected to decline further from historically high levels.” “With continued slack in the Canadian economy, the muted outlook for inflation, and the more constructive evolution of imbalances in the household sector, the considerable monetary policy stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required, consistent with achieving the 2 per cent inflation target.” For an excellent deciphering of the Bank’s press release, click here. Today’s announcement shed little new light on the timing of the next prime rate change. Of course the BoC is still suggesting that the next rate move is up, but others, like David Madani of Capital Economics, aren’t so sure. On Sunday, Madani said the "inevitable" rate hikes that so many predict could actually be pre-empted by policy loosening. He noted: “Given the recent spat of weak economic data, below target range inflation and the presumably widening output gap, the market's ruling out of interest rate cuts makes little sense.” For now, as long as the 5-year bond yield stays under or within the psychological 1.50% to 1.60% range, there’s little danger of any notable rise in rates. After this morning's rate announcement, bond yields remained flat at 1.32%. The next BoC rate meeting is April 17. taken from mortgage trends. Joelsida.com