Should the mortgage stress test be changed?

Fergal McAlinden
other

Regulation continues to serve important purpose despite calls for reform, says CEO

Interest rates have continued to tick resolutely upwards in 2022, a trend that’s seen the re-emergence of a debate in the mortgage space on whether changes to the stress test rate are required.
Last week saw the Bank of Canada announce its latest rate increase of the year, hiking its overnight rate to 3.25% in a development that means the qualifying rate for variable mortgages is now even higher.
Homebuyers borrowing from a federally regulated lender are required to prove they can meet the higher of 5.25%, or the qualifying rate plus 2%, with the prime rate now matching the former and five-year fixed mortgage rates hovering slightly higher.
That means most new buyers are now having to qualify at much higher interest rates than earlier in the year, sparking some calls for regulators to revisit their criteria for testing borrowers in a much-changed 2022 market.
Toronto Regional Real Estate Board (TRREB) president Kevin Crigger said the federal government could remove the stress test for switching existing mortgages to a new lender and allow for longer amortization periods on mortgage renewals as home sales continued to dip through August.
Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI) has poured cold water on speculation that it could loosen mortgage qualifying rules, with its head Peter Routledge acknowledging that clamour while also confirming that no change to its underwriting standards was imminent.
“The uncertainty and anxiety caused by a rising interest rate environment have, understandably, caused some Canadians to advocate for a loosening of the underwriting standards in Guideline B-20,” he told a Toronto audience. “Let me reassure those of you who oppose a loosening of underwriting standards that OSFI will not do that.”
Read next: Bank of Canada “not done” on rate hikes: CIBC’s Tal
That’s the right approach, according to a prominent Toronto-based mortgage broker who said the stress test had proven “very beneficial” to the mortgage and housing markets as a whole since its introduction.
Drew Donaldson (pictured top), founder and CEO of Donaldson Capital, told Canadian Mortgage Professional that the measure had helped the market, and homeowners, cope with rapid rises to interest rates this year – and that it remained a necessary measure for the future.
“Going forward, some would say that it’s not needed. I still think it’s fine – keep it in place for now,” he said. “We’ve seen how fast rates have moved in the last six months. Could rates go from 5% to 7%? They could, so why not keep the stress test in place, and just make sure that borrowers can withstand that?”
The only area where an adjustment might be merited, Donaldson said, is in nonconforming loans, which usually feature significantly higher rates than standard or conventional arrangements.
The current stress test rate came into effect last year after OSFI and the federal finance ministry announced that qualifying criteria would be raised in response to a red-hot housing market and rock-bottom borrowing rates.
Read next: Where are interest rates headed for the rest of 2022?
While many of Donaldson Capital’s clients are high-net-worth individuals who typically aren’t impacted by changes to the stress test, Donaldson noted the importance of explaining the reasons for the maximum pre-approved amount to new buyers, even if a detailed rundown of the stress test wasn’t always required.
As for the prospect of reform to the stress test in the coming months, OSFI’s steadfastness on the matter appears to have firmly shut the door on that possibility for the foreseeable future.
Routledge indicated in his speech that the regulator is “constantly evaluating” the stress test, but added that it “must accept the risks of acting early to minimize the costs of acting too late.”
Donaldson said a one- to two-year lull in the real estate market was required to get things back to more normal levels. “This whole 10%, 20%, 30% growth year over year was just unprecedented, and it wasn’t healthy for the market,” he said. “So I would say leave [the stress test] in place.
“The Bank of Canada is deliberately trying to cool demand on real estate [and] a lot of other areas of the GDP market. So why would the regulator then try to spur and get growth back going again? Let’s just let things sit for a year or a year and a half, and then at that point in time, maybe revisit the stress test.”

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Real estate wealth in massive Canada crash

Ephraim Vecina
other

Prices are plunging for homes and stocks

A sharp decline in Canadians’ net worth was registered during the second quarter amid sustained volatility in financial markets and the housing sector, according to Statistics Canada.

Household net worth saw a 6.1% quarterly decrease to settle at $15.2 trillion in Q2, representing a precipitous drop of $990 billion.

While household wealth remained nearly $3 trillion higher than pre-pandemic levels, the Q2 figure was also the largest decrease in at least 22 years, significantly outstripping a 5% decline seen during the global financial crisis in 2008, StatCan said.

Read more: Equifax Canada reports latest consumer debt levels

Concurrently, Canadian households took on an additional $56.3 billion in debt, bringing the nation’s total household debt load to roughly $2.8 trillion. The household debt-to-income ratio correspondingly increased from 179.3% in Q1 to 181.7% in Q2.

Economists cautioned that this might be just the beginning when it comes to added debt, as more Canadians will be forced to borrow more expensive loans due to multiple inflationary pressures.

“Looking ahead, financial headwinds are only going to intensify, as job gains slow while interest rates continue to march higher,” said Ksenia Bushmeneva, economist at Toronto-Dominion Bank. “This is going to push debt servicing costs higher over the rest of this year and into the next one.”

 

Copyright © 1996-2022 Key Media, Inc.

Bank of Canada “not done” on rate hikes: CIBC’s Tal

Fergal McAlinden
other

The central bank showed little sign that it’s ready to hit pause on rate jumps, says economist

 The Bank of Canada’s announcement last week on its benchmark policy rate was a clear indication that it intends to continue its rate-hiking path in the coming months, according to a prominent economist.

Benjamin Tal (pictured), deputy chief economist of CIBC World Markets, told Canadian Mortgage Professional that the central bank had used “very hawkish” language in its statement on Wednesday, which saw a 75-basis-point hike bring its trendsetting interest rate to 3.25%.

In that announcement, the Bank said the outlook for inflation meant its governing council believed the policy rate would need to rise further.

“Basically, the Bank of Canada is telling you, ‘We are not done,’” Tal said. “This is the Bank with a very clear mission, to make sure that inflation expectations are under control.

“The fear is that they’re losing the battle here if they’re not seen as very aggressive, so it was a bit more hawkish than the market expected, quite frankly.”

The statement showed that the Bank was “not taking any chances with inflation,” Tal said, despite the annual rate having slowed slightly in July to 7.6%, from 8.1% the previous month.

Read more: Bank of Canada announces another big rate increase

Its Press release accompanying the decision on September 7 indicated that measures of core inflation were ticking upwards across many countries, with inflation, excluding gasoline, having risen in Canada and short-term inflation expectations remaining high.

The risks of elevated inflation becoming entrenched would increase, the Bank added, the longer those conditions continued.

CIBC had said before the Bank’s announcement that a three-quarter-point hike in September could be the central bank’s final rate increase of the year – and Tal said it should weigh its next decision carefully before making further rate moves.

“I think that we are very close to overshooting territory,” he said. “What I mean by that is maybe the Bank of Canada should stop here and assess the impact on the housing market and the rest of the economy before continuing.”

That would be a “tricky” decision, he said, especially with inflation remaining resolutely high despite previous rate hikes. “Show me the central bank that will be willing to stop raising interest rates while inflation is still up there – and there’s so much pressure to move,” he said.

It was possible, he added, that the Bank would hike its benchmark rate by another 50 basis points before starting to cut rates to bring it back to around 3%. Still, the neutral rate – in other words, where the Bank rate will ultimately settle – would still be notably higher than its previous peak, 1.75%, in an economic environment that has shifted dramatically this year.

Read next: Canada housing market – what direction is it headed in?

The central bank is effectively hoping that it can bring inflation back to its target rate of 2% by 2024, Tal said, with little prospect of that occurring next year. Because it has no control over up to 65% of inflation, which is influenced by supply chain trends from outside, the Bank needs to be more aggressive with its rate increases, he added, to control the other 35% to 40%.

The Bank had surprised market watchers in its previous policy rate announcement with a 1% rate increase, a larger hike than many had expected. Still, there was little surprising about its September move, according to Tal – and five-year bond yields, and by extension fixed interest rates, were unlikely to see much movement as a result.

“The market is already pricing in this aggressive move. This is already priced in, so any movement in the five-year rate at this point will be limited,” he said. “So, it’s really more variable rates, as opposed to five-year rates [that will be impacted].”

Wednesday’s decision was the central bank’s fifth rate hike in 2022, with that cycle having brought an end to the rock-bottom policy rate that prevailed throughout the first two years of the COVID-19 pandemic.

The announcement means the rate is now a full three percentage points above that level, which came into play as the Bank slashed rates amid widespread economic uncertainty and public health restrictions in March 2020.

The Bank is scheduled to make its next policy rate announcement on October 26, with its Monetary Policy Report – detailing its full economic and inflation outlook – set to arrive on the same date.

 

Copyright © 1996-2022 Key Media, Inc.

Bank of Canada not done on rate hikes: CIBC’s Tal

Fergal McAlinden
other

BC property transfer revenues exceed expectations despite drop

Peter Mitham
Western Investor

Housing downturn likely to be short-lived despite headwinds

Finance Minister Selina Robinson. Photo via B.C. GOVERNMENT

The province expects to post a surplus of $706 million in the current fiscal year, according to its first-quarter fiscal update released September 12.

Higher taxes as well as revenues from the reviving oil and gas sector supported the rosy outlook.

“While we can’t ignore today’s global inflation and the economic turbulence ahead, the Province performed better than expected because British Columbians have worked hard to keep our economy going,” said provincial finance minister Selina Robinson in delivering the report.

But one area where British Columbians are working less appears to be in real estate, with the province reporting lower revenues from the property transfer tax.

The province collected $863 million in property transfer taxes in the three months ended June 30, well above the budget forecast of $795 million. A cooling real estate market meant that collections were down 8.8 per cent from a year ago, however.

During the period, data from the B.C. Real Estate Association indicates that the province saw $24.5 billion worth of residential sales. This was down 29.2 per cent from the value that changed hands last year.

By the end of the fiscal year, the province expects to receive $2.5 billion from the property transfer tax. This is down from 25 per cent from last year.

The latest housing market outlook from the BCREA, released Sept. 8, forecasts unit sales to decline 34.4 per cent through the end of the year. It will be mitigated by a 4.5 per cent increase in the average sale price to $969,400.

BCREA chief economist Brendon Ogmundson says the downturn is likely to be short-lived, however.

“While the housing market is currently feeling the weight of higher interest rates, the downturn is unlikely to be long-lived as BC’s strong population growth combined with extremely favourable demographics means there will be no shortage of demand for housing in the province,” he said.

 

© 2022 Western Investor

BC economy still strong, despite inflationary headwinds

Nelson Bennett
Western Investor

Province’s forecasted deficit now expected to be a surplus

 “The province performed better than expected” in the first quarter, says B.C. Finance Minister Selina Robinson.Province of BC

As B.C.’s economy navigates uncertain waters between a pandemic and a possible global economic recession in 2023 — precipitated by an energy crisis, war, inflation and rising interest rates — it appears B.C.’s ship of state is still steady and not taking on any water.

Employment remains strong, revenues from commodities like natural gas are up, and a $5.5 billion deficit that had been forecast for 2022-23 is now expected to be an operating surplus of $706 million, according to an economic uopdate based on the first quarter of the fiscal year that was released today by B.C. Finance Minister Selina Robinson.

“While we can’t ignore today’s global inflation and the economic turbulence ahead, the province performed better than expected because British Columbians have worked hard to keep our economy going,” Robinson said.

While there are fears that inflation is curbing economic growth, and could lead to a recession in the U.S., Europe and China in 2023, B.C.’s economy is proving resilient so far. B.C.’s unemployment rate remains low, at just 4.8%, and employment is up 3.6% this year as of August.

B.C.’s nominal gross domestic product (GDP) is forecast to grow by 11.6% in 2022 and 3.5% in 2023. When inflation is accounted for, real GDP growth is forecast to be 3.2% in 2022 and 1.5% in 2023.

However, B.C. economy does appear to be seeing some some cooling, as a result of inflation.

While retail sales are up 1.5% in the first six months of the year, higher costs for consumer goods has resulted in “moderating” retail spending.

And while housing construction is still “elevated” for a 10-year average, home sales have fallen below average historical levels in recent months, the Ministry of Finance notes.

On the other hand, high commodity prices have been good for B.C.’s resource economy. Natural gas royalties are up $1.7 billion this year.

“Strong commodity prices, such as natural gas and coal have benefitted the value of B.C. goods exports,” the ministry notes. ”Year-to-date to June 2022, B.C. goods exports were up 32.1% and service exports are continuing to recover as tourism resumes.”

Inflation remains high, however, which introduces uncertainty into economic forecasts, since the cure for inflation – rising interest rates – are designed to cool spending and can curb economic growth.

“A lot can change between now and the end of the year, and we need to keep making thoughtful decisions – especially with everything that’s going on around the world,” Robinson said.

“But this indicates that we’re in a strong position to continue investing in the things people need to reduce costs, strengthen services and build a stronger B.C. for everyone.”

 

© 2022 Western Investor

Staycation state of mind at the Douglas

Andrew McCredie
The Province

West Coast vibes are in the nature of this downtown hotel with hip lounge, classic steakhouse
September is one of the best months here on the southwest coast of B.C., with warm days, cool nights and fewer tourists in the downtown core. In other words, the perfect excuse to maintain that staycation state of mind.
The next month also features a packed schedule of sports and concerts at the city’s two arena venues — B.C. Place and Rogers Arena — which makes the Douglas Hotel an ideal choice to take in a game or a show and to explore Yaletown and Olympic Village. All are in easy walking distance from the 188-room boutique-style hotel, with a name, décor, and striking lobby desk that pay homage to the Douglas fir, that iconic tree that played an integral role in Vancouver’s economic growth and continues to be a natural touchstone for the city and its citizens.
The Douglas is part of the expansive Parq complex, which includes sister hotel JW Marriott, a full-service spa, the Parq casino and no less than 10 dining and drinking establishments, ranging from a high-end steak house to a vibrant sports bar to an eatery inspired by a Singapore night market. The centrepiece of the Parq is, well a park, though one located six floors above ground level and featuring 30,000 square feet of secluded and peaceful sanctuary above and hidden from the madding crowd. While the Marriott remained open throughout the pandemic — serving as a hub for visiting health-care workers — the Douglas closed for the better part of a year, so the hotel and staff are making up for lost time.
To check into the Douglas, you take an elevator to that sixth floor, where you’re greeted by a unique piece of functional art. The lobby check-in and concierge desk is a nearly eight-metre-long replica Douglas fir encased in glass, and when I checked in, there wasn’t a guest at the desk who didn’t bend down to have a closer look — myself included. Beside the lobby is the Douglas’ lounge, called the D/6 and exemplifying the hotel’s ode to the West Coast Mother Nature. The décor is natural wood hues with large comfortable seats, a full-sized pool table, a curated hardcover book selection and a steam fireplace that casts a cabin-like glow in the lounge. Outdoor seating also has open flame features that warm the cool night and provide that distinctive West Coast vibe. And like that lobby desk, D/6 has something that every guest just has to have a closer look at. Push one side of the floor-to-ceiling bookcase and it swings open to reveal a private room for more intimate gatherings. The rooftop lounge is also a great place to enjoy a pre-dinner cocktail before strolling outside through the park over to the Victor, the Parq’s first-class steak house. Just as D/6 nails the look, feel and vibe of an old-school West Coast lounge with a dash of hipness, the Victor checks all the classic steak house boxes. There are high-backed chairs, oak dining tables and leather banquets. The staff is knowledgeable, attentive and professional. The menu is loaded with carnivore delights, including a selection of Wagyu cuts, cowboy rib-eyes, porterhouse and the prerequisite Tomahawk to share. There’s also a wide seafood selection — from Nova Scotia lobster to sushi to whole branzino. And the Victor boasts one of the country’s largest in-house Enomatic wine systems, with the tasteful and elegant dispensers located throughout the dining room.
I was told that about 60 per cent of the Victor’s clientele is local, so despite its well-hidden location, high above the city streets and accessible only through the park, it’s certainly not the city’s best-kept steak house secret.
After a fantastic dinner, I headed down to the casino to check out the action then back to D/6 for a nightcap before retiring to my room, which glowed with the ever-changing light show of B.C. Place’s roof, which was so close out my window, I felt I could touch it.
There are a number of package deals available.
The romantic package, called Love is Love, includes in-room dining for two and a $100 credit at the Victor, while the Park and Dine package includes parking and a $50 credit at D/6, the Victor or Honey Salt. For a complete list of Parq offers, visit parqvancouver.com/offers

© 2022 The Province

Canadian banks raise prime rates after Bank of Canada hike

Denise Paglinawan
other

Canada’s six big banks have all raised their prime rates after the Bank of Canada hiked its key rate to 3.25 per cent Wednesday. Photo by REUTERS/Mark Blinch/File Photo

Major Canadian banks have increased their prime lending rates by 75 basis points to 5.45 per cent in response to the Bank of Canada’s move Wednesday to raise its key policy rate to 3.25 per cent.

Toronto-Dominion Bank, Royal Bank of Canada, Canadian Imperial Bank of Commerce, Scotiabank, Bank of Montreal and National Bank of Canada all had their prime lending rate at 4.70 per cent prior to the announcement.

The new prime rates come into effect Thursday. The hike in prime lending rate at Canadian banks indicate a higher starting point for lenders’ loan calculations.

Stephen Brown, senior Canada economist at Capital Economics, said major lenders matching the Bank’s policy rate by increases in their prime rates will mean an immediate jump in borrowing costs for many Canadians.

He said the hike in interest payments is worth about 0.5 per cent of household income at a national level, but the costs are heavily skewed toward those with variable rate mortgages, as the increase will take a much larger share of their income.

“This is likely to feed through to a reduction in household spending on goods and services and raises the downside risks to the economic outlook,” Brown said.

The banks’ announcements come after the central bank hiked interest rates 75 basis points on Wednesday, the fifth consecutive increase since it started tightening in March.

The central bank said more hikes are on the way to tame inflation that continues to be too widespread in the economy.

 

© 2022 Financial Post

Canadian banks raise prime rates after Bank of Canada hike

Denise Paglinawan
other

Winnipeg 1,600-square-foot office building sells for $500,000

Western Investor Staff
Western Investor

The free-standing property sold to the occupier for medical use

Shindico Realty Ltd., Winnipeg, for Western Investor

 

Property type: Office building

Location: 340 Stafford Street, Winnipeg, Manitoba

Size of property: 1,600 square feet

Number of units: 1

Sale price: $500,000

Sold to: Occupier

Brokerage: Shindico Realty Ltd, Winnipeg

Broker: Jared Kushner

 

 

© 2022 Western Investor