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Bank of Canada Rate Announcement Oct 19th, 2016

Bank of Canada Rate Announcement Oct 19th, 2016

With all the recent government activity meant to bring stability to the Canadian housing market (read cool down Vancouver and Toronto), its no surprise that the bank of Canada has decided against making any drastic changes to the overnight rate in their announcement today. Here is the summary of where the government thinks we are at, along with a copy of the monetary policy report for October 2016. 

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1/2 per cent. The Bank Rate is correspondingly 3/4 per cent and the deposit rate is 1/4 per cent.

The global economy is expected to regain momentum in the second half of this year and through 2017 and 2018. After a weak first half, the US economy in particular is strengthening: solid consumption is being underpinned by strong employment growth and robust consumer confidence. However, because of elevated uncertainty, US business investment is on a lower track than expected.

Looking through the choppiness of recent data, the profile for growth in Canada is now lower than projected in July’s Monetary Policy Report (MPR). This is due in large part to slower near-term housing resale activity and a lower trajectory for exports. The federal government’s new measures to promote stability in Canada’s housing market are likely to restrain residential investment while dampening household vulnerabilities. Recent export data are improving but are not strong enough to make up for ground lost during the first half of 2016, despite the effects of the Canadian dollar’s past depreciation. Growth in exports over 2017 and 2018 are projected to be slower than previously forecast, due to lower estimates of global demand, a composition of US growth that appears less favourable to Canadian exports, and ongoing competitiveness challenges for Canadian firms.

After incorporating these weaker elements, Canada’s economy is still expected to grow at a rate above potential starting in the second half of 2016, supported by accommodative monetary and financial conditions and federal fiscal measures. As the economy continues to adjust to the oil price shock, investment in the energy sector appears to be bottoming out. Non-resource activity is growing solidly, particularly in the services sector. Household spending continues to rise, along with employment and incomes outside of energy-intensive regions. The Bank expects Canada’s real GDP to grow by 1.1 per cent in 2016 and about 2 per cent in both 2017 and 2018. This projection implies that the economy returns to full capacity around mid-2018, materially later than the Bank had anticipated in July.

Measures of core inflation remain close to 2 per cent as the effects of past exchange rate depreciation and excess capacity continue to offset each other. Total CPI inflation is tracking slightly below expectations because of temporary weakness in prices for gasoline, food, and telecommunications. The Bank expects total CPI inflation to be close to 2 per cent from early 2017 onwards, when these temporary factors will have dissipated, but downward pressure on inflation will continue while economic slack persists.

Given the downward revision to the growth profile and the later closing of the output gap, the Bank considers the risks around its updated inflation outlook to be roughly balanced, albeit in a context of heightened uncertainty. Meanwhile, the new housing measures should mitigate risks to the financial system over time. At present, the Bank’s Governing Council judges that the overall balance of risks is still in the zone for which the current stance of monetary policy is appropriate, and the target for the overnight rate remains at 1/2 per cent.

Read the official Release Here. 

Here are the remaining announcement dates for 2016.

  • Wednesday 7 December

Here are the announcements dates set our for 2017.

  • Wednesday 18 January*
  • Wednesday 1 March
  • Wednesday 12 April*
  • Wednesday 24 May
  • Wednesday 12 July*
  • Wednesday 6 September
  • Wednesday 25 October*
  • Wednesday 6 December

*Monetary Policy Report published

All rate announcements will be made at 10:00 (ET), and the Monetary Policy Report will continue to be published concurrently with the January, April, July and October rate announcements.

Monetary Policy Report October 2016

Creating Stability in the Canadian Housing Market

Creating Stability in the Canadian Housing Market

This morning, Finance Minister Bill Morneau announced new housing measures, changes meant to alleviate risk in Canada’s current housing market. The measures include:

  • Standardizing lending criteria for high- and low-ratio mortgages, including a mortgage stress test
  • Closing tax loopholes for capital gains exemptions on principal residence sales
  • Consulting with industry stakeholders to ensure risk is properly distributed.

It is good to note that these changes will not have any impact on existing mortgage holders, they will be applied going forward.

“Canadians have told us they are concerned about growing household debt and rapidly rising house prices in some of our biggest cities, particularly in markets like Toronto and Vancouver. These concerns have grown over many years, and there are no quick fixes. The federal government plays an important role in ensuring that housing markets are stable and function efficiently. My colleagues and I are committed to continuing to work with provinces and municipalities to address the concerns of middle class families, and to ensure Canada’s housing markets and financial system remain strong, stable and resilient well into the future.”

–Bill Morneau, Minister of Finance

During his press conference, the Finance Minister said repeatedly that he believes the housing market is stable, and that these are simply preventative measures. Over the next week there will be more information available about the specifics of what this announcement means, and that will be shared here, however in the mean time, here is the announcement from the government found on the Department of Finance website.

Backgrounder: Ensuring a Stable Housing Market for All Canadians

Protecting the long-term financial security of Canadians is a cornerstone of the Government of Canada’s efforts to help the middle class and those working hard to join it. Recognizing that for many families, their homes are their most important asset, the Government is taking preventative measures today to ensure a healthy, competitive and stable housing market for all Canadians.

Today’s actions recognize the effect that years of low interest rates and shifting attitudes towards debt and indebtedness have had on the housing market. While the overall Canadian housing market is sound, house prices have risen significantly in some markets, notably Toronto and Vancouver, and some borrowers are taking on high levels of debt. In these circumstances, it is important to ensure that these debt levels are sustainable, that lenders are acting prudently, and that financial stability risks do not arise in the event of increases in interest rates or a housing market downturn.

The Minister of Finance has been actively engaged on the housing file. One of the Government’s first steps since being elected nearly a year ago was to address pockets of risk in the housing market by raising the minimum down payment for homes priced above $500,000. Since then, Department of Finance Canada officials have been further studying the housing market, and have led a working group with municipalities and provinces, as well as federal agencies such as the Office of the Superintendent of Financial Institutions and Canada Mortgage and Housing Corporation.

This in-depth analysis, informed by the productive dialogue with our partners, has informed today’s announcement of three complementary measures designed to reinforce the Canadian housing finance system, to help protect the long-term financial security of borrowers, and to improve tax fairness for Canadian homeowners. Analysis and cooperation are ongoing as the Government continues to carefully monitor the situation.

1. Bringing Consistency to Insured Mortgage Rules

“Mortgage rate stress test” for all insured borrowers:

To help ensure new homeowners can afford their mortgages even when interest rates begin to rise, mortgage insurance rules require in some cases that lenders “stress test” a borrower’s ability to make their mortgage payments at a higher interest rate. Currently, this requirement only applies to a subset of insured mortgages with variable interest rates or fixed interest rates with terms less than five years. Effective October 17, 2016, this requirement will apply to all insured mortgages, including fixed-rate mortgages with terms of five years and more. Homeowners with an existing insured mortgage or those renewing existing insured mortgages are not affected by this measure.

Safer lending:

There are currently different rules in place depending on what proportion of the value of the property is covered by a loan. For example, mortgage insurance criteria for a loan that represents 80 per cent of the value of the property or less (low loan-to-value ratio mortgages) are not as stringent as for high loan-to-value ratio mortgages (loans that represent more than 80 per cent of the value of the property). This could lead to increased risk for the taxpayers who ultimately back insured mortgages. To help ensure that taxpayer support for mortgage funding is targeted towards safer lending, effective November 30, 2016, mortgages insured by lenders through portfolio insurance and other low loan-to-value ratio mortgage insurance must meet the same loan eligibility criteria as high loan-to-value insured mortgages.

2. Improving Tax Fairness and Closing Loopholes

The Government is committed to tax fairness, and to ensuring that the exemption from capital gains tax on the sale of a principal residence is available only in appropriate cases. Proposed changes to the tax rules would ensure that the principal residence capital gains exemption is not abused, including by non-residents buying and selling a property in the same year. An additional measure would improve compliance and administration of the tax system with respect to dispositions of real estate, including the sale of a principal residence.

3. Managing Risk and Protecting Taxpayers

The Government continuously monitors the housing market and is committed to implementing policy measures that maintain a healthy, competitive and stable housing market. As a part of this effort, the Government is looking at whether the distribution of risk in Canada’s housing finance system is balanced, and appropriately reflects all parties’ abilities to share in the management of housing risks.

To this end, the Government will launch a consultation process with market participants this fall on lender risk sharing, a potential policy option that would require mortgage lenders to manage a portion of loan losses on insured mortgages that default. Currently, lenders are able to transfer virtually all of the risk of insured mortgages to mortgage insurers, and indirectly to taxpayers through the government guarantee.

If you have any questions about what any of this means, please contact me anytime at 416.945.9123 or by email at mat@fugeremortgage.ca!

Further Tightening of the Mortgage Belt

Further Tightening of the Mortgage Belt

Before reading this you should be warned that the following content is pretty dry… like eating 8 saltine crackers without drinking water dry. If you need to go and get something to drink before proceeding, no worries, we will wait here. Take your time.

The quick and dirty version, as of November 1st 2016, OSFI is going to require banks to have more money on hand to protect them in case the Canadian economy decides to ride a shark with 200 pounds of dynamite strapped to it’s chest into the mouth of an active volcano. This means two things, banks will probably slowly increase rates to cover their costs and secondly you will probably see mortgage qualification tighten a little further.

Here is all you need to know on the subject, sourced from a few different places online.

OSFI

On September 9th, The Office of the Superintendent of Financial Institutions (OSFI) released for public consultation, revisions to its Capital Adequacy Requirements Guideline (CAR). The following is the official release:

OSFI’s CAR Guideline provides a framework for assessing the capital adequacy of federally regulated deposit-taking institutions and is updated periodically to ensure that capital requirements continue to reflect underlying risks and developments in the financial industry.

The CAR Guideline is based on requirements agreed by the Basel Committee on Banking Supervision. As a member of the Basel Committee, OSFI supports and applies the global risk-based framework to its regulated institutions through a measured and tailored approach that is suited to the Canadian context.

Captured in this set of revisions are OSFI’s expectations on the domestic implementation of two global capital adequacy standards issued by the Basel Committee in recent years. In this draft, OSFI outlines its discretionary approach to the implementation of the Basel III countercyclical buffer regime in Canada as well as provides guidance on the application of Basel’s equity investment in funds rules, which require institutions to hold adequate capital against equity investments in funds.

To reflect the changing risks in the Canadian mortgage market, the draft CAR Guideline has also been updated to include planned revisions to the treatment of insured residential mortgages (see OSFI’s December 2015 letter to industry). Through the capital framework, OSFI is clarifying the conditions under which risk mitigation benefits of mortgage insurance are recognized for regulatory capital purposes. These changes aim to reinforce the need for banks to exercise prudent underwriting and proper due diligence when originating insured mortgages.

Finally, the revisions to the draft guideline provide clarification on how OSFI’s capital framework will apply to federal credit unions.

Quick Facts

  • The implementation date for these changes is set for November 1, 2016 for institutions with an October 31 year end, and January 1, 2017 for institutions with a December 31 year end.
  • OSFI is inviting comments on the proposed updates, which it will consider during the development of the final version of the guideline. The deadline for submitting comments is October 18, 2016.
  • A non-attributed summary of industry comments received along with OSFI’s responses will be posted on OSFI’s website when the final version of the guideline is released.

Associated Links

About OSFI

The Office of the Superintendent of Financial Institutions (OSFI) is an independent agency of the Government of Canada, established in 1987, to protect depositors, policyholders, financial institution creditors and pension plan members, while allowing financial institutions to compete and take reasonable risks.

Canadian Mortgage Trends

As most people don’t care to read straight government correspondence, Canadian Mortgage Trends, a publication of Mortgage Professionals Canada published an article summarizing the Capital Adequacy Requirements.

“Under the proposed revised guideline, the amount of capital required to be held by the institutions is not expected to change significantly,” assured a spokesperson. “These changes aim to ensure that capital requirements continue to reflect underlying risks and developments in the financial industry.”

The article goes on to describe an interesting change called a “countercyclical buffer”… if that doesn’t spin you around on your chair, nothing will! Hot stuff! Anyway…

You can read the full article here >>

Money Sense Magazine

Not one to miss a chance at a sensational headline, Money Sense Magazine published an article called “Expect tougher mortgage rules by November”. The article goes on to outline the following:

  • Hot markets prompt tougher rules for banks
  • Taxpayer will be less exposed
  • How it will impact the Canadian home buyer
  • When will tougher rules take affect?

You can read the full article here >> 

Let’s Talk

If you are considering buying a property in the next couple of years, or have a mortgage that you would either like to renew or refinance, please contact me anytime at 416.945.9123 or by email at mat@fugeremortgage.ca. I would love to discuss what is going on in the economy and help you determine if now is a good time for you to make a move.

Let’s talk, I’m always available to you!

Use Low Rates to Your Advantage!

Use Low Rates to Your Advantage!

In an article I recently published called “Is Now a Good Time to Buy?” we identified that interest rates are at all time Canadian lows and as it’s never been cheaper to borrow money, now is a good time to buy property. In no way was it being said that “because interest rates are low, you should rush out and buy property”. Obviously there is a balance and you should take the decision to buy a property seriously. The point of the article was that while the media would have us believe that the sky is falling and the housing market is crashing around us, it’s not all doom and gloom, there are some silver linings (like low interest rates).

But the problem with low interest rates is that they can actually perpetuate the housing crash conversation. These low interest rates won’t last forever, inevitably rates will go up. And when they do go up, the question is “are today’s low rates setting people up for failure down the road when rates increase”? Well, let’s have a look and discuss the 5 year fixed rate mortgage.

Firstly, when qualifying for a mortgage using the 5 year fixed rate, you are able to debt service (qualify) using the contract rate (low rate, currently around 2.39%). This is instead of having to use the benchmark rate (currently 4.74%) like you would on a variable rate mortgage or any term less than 5 years. As such, the low rate on the 5 year fixed allows you to qualify for a much higher mortgage amount compared to qualifying at the higher benchmark rate. The argument is that by qualifying using the lower rate, you are taking on more debt than you can actually handle.

Secondly, when your 5 year term is up, even after paying on the mortgage for 5 years, if interest rates go up, there is a chance your mortgage payment will go up as well. The media calls this “payment shock” and it’s a real thing. On a modest mortgage amount, with rates as low as they are today, any increase of rate at renewal could mean hundreds of dollars a month extra on your new payment schedule.

Qualifying for a higher mortgage amount based on a low interest contract rate, combined with a higher rate upon renewal, plus a third variable like a job loss, reduced income because of a maternity leave, or significant health/life issue is what leads speculators to make the claim that low interest rates are contributing to the eventual housing market collapse. It’s a reach, but that’s the argument that’s made.

So, if you find yourself concerned about these things, here is some quick advice on how to avoid payment shock and how to take advantage of today’s low interest rates.

Spend Afford

Just because you qualify for a certain mortgage amount (because of low interest rates or not), doesn’t mean you have to spend that much. If you are worried about a potential market correction, instead of qualifying using the lower mortgage amount, consider setting your personal limit at the benchmark rate instead. That way you are already building in a “stress-test” and are ahead of the game.

Also, just because your minimum payment is based on today’s low interest rate, doesn’t mean you can’t pay more aggressively. Let’s say your payment is set using a 2.39% rate, using your pre-payment privileges, consider increasing your payment to the benchmark rate of 4.74%. This will do two things, it will pay down a lot more of the principal amount in the first 5 years of your mortgage, plus if interest rates do increase upon renewal, you will have already conditioned yourself to be paying a higher payment, and you won’t be shocked by the increase!

If you are thinking about buying a property in the next couple of years, please contact me anytime at 416.945.9123 or by email at mat@fugeremortgage.ca, I would love to help you arrange mortgage financing.

Bank of Canada Rate Announcement Sept 7th, 2016

Bank of Canada Rate Announcement Sept 7th, 2016

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1/2 per cent. The Bank Rate is correspondingly 3/4 per cent and the deposit rate is 1/4 per cent.

Global growth in the first half of 2016 was slower than the Bank had projected in its July Monetary Policy Report (MPR), although the Bank continues to expect it to strengthen gradually in the second half of this year. The US economy was weaker than expected in the second quarter, notably reflecting a contraction in business and residential investment. While a healthy labour market and solid consumption should remain supportive of growth in the rest of the year, the outlook for business investment has become less certain. Meanwhile, global financial conditions have become even more accommodative since July. 

While Canada’s economy shrank in the second quarter, the Bank still projects a substantial rebound in the second half of this year. Second-quarter GDP was pulled down by the Alberta wildfires in May and by a drop in exports that was larger and more broad-based than expected. Exports disappointed even after accounting for weaker business and residential investment in the United States, adjustments in the resource sector, and cutbacks in auto production. The economy is expected to rebound in the third quarter as oil production recovers, rebuilding commences in Alberta, and consumer spending gets an additional lift from Canada Child Benefit payments. As federal infrastructure spending starts to have more impact, growth in the fourth quarter is projected to remain above potential. While the strength in exports during July was encouraging, the ground lost over previous months raises the possibility that the profile for economic activity will be somewhat lower than anticipated in July.  

Inflation is roughly in line with the Bank’s expectations. Total CPI inflation is below the 2 per cent target, mainly because of the temporary effects of lower consumer energy prices. Measures of core inflation remain around 2 per cent, reflecting offsetting effects of excess capacity and past exchange rate depreciation.

On balance, risks to the profile for inflation have tilted somewhat to the downside since July. At the same time, while there are preliminary signs of a possible moderation in the Vancouver housing market, financial vulnerabilities associated with household imbalances remain elevated and continue to rise. The Bank’s Governing Council judges that the overall balance of risks remains within the zone for which the current stance of monetary policy is appropriate, and the target for the overnight rate remains at 1/2 per cent.

Read the official Release Here. 

Here are the remaining announcement dates for 2016.

  • Wednesday 7 September 
  • Wednesday 19 October*
  • Wednesday 7 December

Here are the announcements dates set our for 2017.

  • Wednesday 18 January*
  • Wednesday 1 March
  • Wednesday 12 April*
  • Wednesday 24 May
  • Wednesday 12 July*
  • Wednesday 6 September
  • Wednesday 25 October*
  • Wednesday 6 December

*Monetary Policy Report published

All rate announcements will be made at 10:00 (ET), and the Monetary Policy Report will continue to be published concurrently with the January, April, July and October rate announcements.

Is Now a Good Time to Buy?

Is Now a Good Time to Buy?

If you’re getting tired of all the media headlines claiming impending housing market and economic doom and gloom, you’re not alone. It seems every time you browse the news another US economist is predicting terrible things for Canada. Articles like this one, claiming an ‘extreme bubble’ is just around the corner… note, not just a bubble… but an extreme bubble. 

The truth is, mortgage rates have never been lower and while low interest rates are somewhat blamed for increased house prices, low interest rates are good for borrowers who are looking to get into the market. So despite what the media would have us believe, now (historically speaking) is actually a pretty good time to buy a property.

Understanding that you can’t control the future, and of course past performance doesn’t indicate future direction, if you isolate the actual cost of borrowing money, you might be surprised at how cheap money is right now. Obviously buying a property is a personal decision, the time has to be right for you, and your finances have to be in order, but if the sensational media headlines are causing you to second guess yourself or the market, let’s have a look at the cost of borrowing today compared to previous years.

Fixed Interest Rates

Fixed interest rates are at an all time low. Seriously, it has never been cheaper to borrow fixed money in Canada. Here is a handy chart that provides a visual to that effect, showcasing the historical posted 5 year mortgage rates from 1973 to today.

5 yr posted Graph

Reference: Bank of Canada Interest Rates

Here are a couple points to note:

  • In July of 1981, fixed rates were at 21.75%.
  • 21.75% is a higher rate of interest than a lot of credit cards. Yikes!
  • In July of 2016, rates were at 4.74%.
  • 4.74% is a posted rate, a lot of broker channel lenders have discounted rates in the low 2% range.

Prime Rate

So, fixed rates are a little too permanent for you? No problems, the prime rate (the rate that sets the baseline for a variable rate mortgage) can be found hovering below half of the Canadian historical average. So here is another handy chart that provides a visual going back to 1935 up until today.

Prime Rate Graph

Reference: Bank of Canada Interest Rates

A couple points to note:

  • The 80s were not only bad for music and fashion, but a bad time to borrow money as well.
  • Although prime is 2.7%, lenders offer a variable component discount as well tied to the prime.
  • Discounts in today’s lending landscape are around half a percentage point.
  • The 40s, 50s, and 60s, were pretty steady, who knows, we might just be in for some more of that!

Let’s Talk

So regardless if you prefer the fixed or variable, as you can see, it’s never been cheaper to borrow money. Period. Please don’t let the media scare you into thinking the market is about to implode, their job is to sell advertising not bring a balanced perspective to your newsfeed. Affordability is a personal thing and shouldn’t be dictated by a market you can’t control.

If you would like to figure out what you can afford, and go over your financial situation to prepare for getting a mortgage, I’d love to help. Please contact me anytime at 416.945.9123 or by email at mat@fugeremortgage.ca, I would love to work with you.

 

Negative-Yield Bonds – Pay to Save?

Negative-Yield Bonds – Pay to Save?

  • By mathieufugere@gmail.com
  • July 26, 2016
  • Blog,Economy

There is a good chance that if you skimmed the news headlines this last week, you passed right on over a piece called CIBC sells negative-yield bonds for 1st time. No one blames you, because let’s face it, stories about the Canadian bond market don’t really scream excitement. However, despite the dry subject matter, the idea of paying money in order to “save your money” is an interesting one.

Yep, you read that right, pay money to lose money. Negative-yield bonds are bonds you purchase expecting to lose money. CIBC just raised almost $1.8 billion in six-year debts that will lose 0.009%. So why in the world would anyone do this? Well, according to the CBC News article referenced above “Investors have an appetite for such debt because the forecast for other assets is even worse. With stock returns looking dodgy due to fears about the global economy, lending money to a bank can seem appealing even if it’s guaranteed to lose a few pennies per dollar over time.”

Negative Mortgage Rates

Given the fact that mortgage rates are at an all time low, if you ever actually found yourself wondering about things like bond rates, and mortgage rates, you might question what would happen if they kept going down. Can you have negative mortgage rates? Will the bank pay you money to buy a house? Actually these questions were addressed by Bank of Canada Governor Stephen Poloz back in December of 2015.

Here are a couple articles that talk about negative mortgage rates.

Quick summary of the articles… Instead of taking a loss, the average person would probably keep their cash under their mattress… but if banks were being punished for saving, and losing value on what they keep on deposit with the central bank, they would essentially be encouraged to stop hoarding their cash… the uptick in borrowing and lending caused by negative interest rates could provide a much-needed boost to Canada’s economy.

Now, instead of putting your money into an investment that is guaranteed to lose money, it might be a good idea to look at investing in property. If you have some money to invest, the minimum downpayment required in Canada for a rental property is 20%. Rental properties are good in that they provide cash flow and appreciation. Obviously there are advantages and disadvantages to building a small rental portfolio, and the simple fear of losing money in your savings account isn’t going to push you into the market, but if it’s something you have already been thinking about, why don’t you pick up the phone and give me a call, I’d love to sit down with you and talk about some of the options you have available to you.

Please contact me anytime at 416.945.9123 or by email at mat@fugeremortgage.ca!

Bank of Canada Rate Announcement July 13th, 2016

Bank of Canada Rate Announcement July 13th, 2016

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1/2 per cent. The Bank Rate is correspondingly 3/4 per cent and the deposit rate is 1/4 per cent.

Inflation in Canada is on track to return to 2 per cent in 2017 as the complex adjustment underway in Canada’s economy proceeds. The fundamentals remain in place for a pickup in growth over the projection horizon, albeit in a climate of heightened uncertainty.

In this context, the forecast for the global economy has been marked down slightly from the Bank’s April Monetary Policy Report (MPR). Global GDP growth is projected to be 2.9 per cent in 2016, 3.3 per cent in 2017, and 3.5 per cent in 2018. In particular, after a weak start to 2016 the US economy is showing signs of a rebound, with a healthy labour market and solid consumption growth. In the wake of Brexit, global markets have materially re-priced a number of asset classes. Financial conditions, already accommodative, have become even more so.

In Canada, the quarterly pattern of growth has been uneven. Real GDP grew by 2.4 per cent in the first quarter but is estimated to have contracted by 1 per cent in the second quarter, pulled down by volatile trade flows, uneven consumer spending, and the Alberta wildfires. A pick-up to 3 1/2 per cent is expected in the third quarter as oil production resumes and rebuilding begins in Fort McMurray. Consumer spending will also get a boost from the Canada Child Benefit.

While the fundamental elements of the Bank’s projection are similar to those presented in April, the forecast has been revised down in light of a weaker outlook for business investment and a lower profile for exports, reflecting a downward adjustment to US investment spending. Real GDP is expected to grow by 1.3 per cent in 2016, 2.2 per cent in 2017, and 2.1 per cent in 2018. The Bank projects above-potential growth from the second half of 2016, lifted by rising US demand and supported by accommodative monetary and financial conditions. Federal infrastructure spending and other fiscal measures announced in the March budget will also contribute to growth.  Despite recent volatility, the Bank expects the underlying trend of export growth to continue, leading to a pick-up in business investment. Higher global oil prices are helping to stabilize Canada’s energy sector and household spending is expected to increase moderately.

The Bank forecasts that the output gap will close somewhat later than estimated in April, towards the end of 2017. Underlying this judgement is the downward revision to business investment, which lowers the profile for both real GDP and, to a lesser extent, potential output.  

While inflation has recently been a little higher than anticipated, largely due to higher consumer energy prices, it is still in the lower half of the Bank’s inflation-control range. Most measures of core inflation remain close to 2 per cent but would be lower without the impact of past exchange rate depreciation. The temporary effects of exchange-rate pass-through and past declines in consumer energy prices are expected to dissipate in late 2016, and the Bank projects that inflation will average close to 2 per cent throughout 2017 as the output gap narrows.

Overall, the risks to the profile for inflation are roughly balanced, although the implications of the Brexit vote are highly uncertain and difficult to forecast. At the same time, financial vulnerabilities are elevated and rising, particularly in the greater Vancouver and Toronto areas. The Bank’s Governing Council judges that the overall balance of risks remains within the zone for which the current stance of monetary policy is appropriate, and the target for the overnight rate remains at 1/2 per cent.

Read the official Release Here. 

Here are the remaining announcement dates for 2016:

  • Wednesday 7 September
  • Wednesday 19 October*
  • Wednesday 7 December

*Monetary Policy Report published

All rate announcements will be made at 10:00 (ET), and the Monetary Policy Report will continue to be published concurrently with the April, July, and October rate announcements.

Monetary Policy Report

July 2016 Canadian Monetary Policy Report 

More Oversight for Mortgages in Canada?

More Oversight for Mortgages in Canada?

Although no firm changes have been announced regarding mortgage regulations, it looks like this might be the beginning of something. The following is correspondence shared by Mortgage Professionals Canada by email to the mortgage industry, it has been shared here for your benefit. 

The Office of the Superintendent of Financial Institutions (OSFI) issued a letter this morning to all federally regulated financial institutions (FRFI). The letter expresses concern about the rising levels of household debt in Canada and serves to remind FRFIs of their obligations under Guidelines B-20 and B-21 to assess and underwrite mortgage loans and mortgage insurance in a prudent manner. 

The letter states: 

Given the current economic environment in Canada, with record levels of household indebtedness and growing risks and vulnerabilities in some housing markets, OSFI’s supervisory scrutiny in the area of mortgage underwriting will continue. Moving forward, OSFI will place an even greater emphasis on confirming that financial institutions conduct prudent mortgage underwriting, and that their internal controls and risk management practices are sound and take into account market developments.

You can read the full letter here.

Highlights

OSFI has identified the following five specific areas that it expects lenders to consider diligently during their underwriting process:

Income Verification
Due diligence processes for lenders must be in place.  Inadequate income verification can adversely affect the assessment of credit risk, anti-money laundering and counter terrorist financing (AML/CTF) compliance, capital requirements and mortgage insurability. More stringent due diligence for incomes outside of Canada should be applied, and there should not be any reliance on collateral values as a replacement for income validation.

Non-Conforming Loans
OSFI warns that the 65% loan-to-value threshold should not be considered a demarcation point below which, sound underwriting practices and borrower due diligence do not apply; a borrower’s character and capacity to service the loan should always take precedence over the value of collateral when underwriting mortgage loans or insurance.

Debt Service Ratios
Incomes should be conservatively calculated and appropriately questioned. In particular, rental incomes from the underlying property should be critically examined. OSFI also suggests that relying on current posted five-year interest rates to test a borrower’s ability to service its obligations does not represent an adequate stress test in a rising interest rate environment.

Appraisals and LTV Calculation
OSFI suggests that rapid house price increases create more uncertainty about the reliability of property appraisals. Institutions should use appraisal values and approaches that provide for a conservative LTV calculation, and not assume that housing prices will remain stable or continue to rise.

Risk Appetite and Portfolio Management
OSFI’s supervisory work indicates that the risk profile of newer mortgage loans is generally on the rise. OSFI reminds mortgage lenders and mortgage insurers to revisit their Residential Mortgage Underwriting Policy and Residential Mortgage Insurance Underwriting Plan regularly to ensure a stringent alignment between their stated risk appetite and their actual mortgage/mortgage insurance underwriting and risk management practices.

OSFI’s letter further states that they are working on various capital policy initiatives to strengthen the measurement of capital held by the major banks and mortgage insurers to ensure their ability to weather losses from residential mortgage defaults. New measures are targeted for implementation in November 2016 and January 2017 respectively.  Risk Sensitive Floors, Capital Requirements for Mortgage Insurers, and BCBS Revisions to the Standardized Approach for Credit Risk are each included in these reviews. 

We are pleased that OSFI is committed to consultations with our industry prior to the implementation of these new rules. Mortgage Professionals Canada will be involved in these discussions and we will keep you informed of any developments.

 

This article was originally published by Mortgage Professionals Canada and was included in an email correspondence. 

 

Is There a “Housing Bubble” in Canada?

Is There a “Housing Bubble” in Canada?

  • By mathieufugere@gmail.com
  • June 28, 2016
  • Blog

Since at least 2008, there have been repeated bursts of commentary that there is a housing bubble in Canada. Those comments have generally assumed that rapid growth in house prices (or a rising ratio of house prices versus incomes or of house prices versus rents) is sufficient evidence of a bubble. To the contrary, these supposedly strong indicators are not definitive proof. They may actually represent healthy outcomes within existing conditions.

Proof of a bubble requires two findings:

  1. There are expectations of price growth that are self-fulfilling – that the expectations of growth lead to increased (and excessive) activity in the market, which drives the price growth
  2. Prices diverge significantly from what should be expected based on economic fundamentals

On the first condition, the author’s statistical research into Canadian housing markets suggests that growth of house prices has very little influence on market activity and, therefore, there is no evidence of a “speculative mindset”. There is evidence of a moderate effect in British Columbia, but even in BC the effect is nowhere near as strong as occurred in the US during its bubble period.

On the second condition, the critical economic fundamental is that very low interest rates have created “affordability space” in which house prices could rise. The amounts of actual increase in local markets have varied, depending on local conditions. The key finding here is that, in the 11 major market areas that are included in the Teranet/National Bank House Price Index, none have fully consumed the affordability space that has resulted from low interest rates. As such, we can conclude that the rapid rises of housing prices are consistent with economic fundamentals.

Another way to interpret the data (which is hopefully clearly evident in the charts shown in this section) is that housing affordability is currently very favourable almost everywhere in Canada. This is resulting in strong housing activity and supporting the broader economy. This support is increasingly valuable, given that investment in energy projects is no longer a driver of growth.

This report concludes that housing bubbles do not exist in Canada.

These findings explain why the countless predictions of doom have not been proven correct. That said, the economic fundamentals can change. In particular, a non-trivial and sustained rise in mortgage interest rates (or a sharp economic downturn) could put current prices offside and lead to price reductions.

There is risk in the policy arena. Changes in mortgage lender or insurer policies that reduce access to mortgages would result in a significant change in fundamental conditions, leading to an unnecessary drop in housing demand and housing prices, causing consequent economic damage.

Assessment of risks in the housing and mortgage markets should give considerable attention to the outlooks for interest rates and the employment situation. Someone who holds strong expectations about adverse changes for the fundamentals could see very substantial risks. On the other hand, someone who does not expect adverse changes for the fundamentals should see limited risks in the housing and mortgage markets.

 

This article was taken from the report Looking for balance in the Canadian Housing and Mortgage Markets published by Mortgage Professionals Canada in June of 2016, written by Chief economist Will Dunning.