by David Larock

The Bank of Canada (BoC) left its policy rate unchanged last week, as widely expected, and that means variable mortgage rates will remain at their current levels for the time being.

The Bank also issued its latest Monetary Policy Report (MPR), which provides us with its quarterly assessment of economic conditions both at home and abroad.

The January MPR, along with the BoC’s accompanying commentary, conceded more uncertainty about the current conditions. This dovish shift led to a drop in Government of Canada (GoC) bond yields, which our fixed-rate mortgages are priced on, and lenders started lowering their five-year fixed mortgage rates shortly thereafter.

Today’s post will provide highlights from the BoC’s latest communications along with my take on how its more cautious outlook will likely impact both our fixed and variable mortgage rates going forward.

First a recap of current conditions.

The bond market and the BoC haven’t seen eye to eye for some time now.

Over the past year, the Bank has offered a relatively optimistic assessment of our economy’s prospects, while the bond market has reflected a decidedly more pessimistic outlook through its pricing of GoC bonds. (The historical record shows that bond markets are much better economic forecasters than central banks.)

These disparate views caused our bond-yield curve to invert, which happens when short-term bond yields rise above longer term yields. (The inverted yield curve is also the reason that our five-year variable mortgage rates have been higher than our five-year fixed mortgage rates for about a year now.)

The BoC’s latest communications didn’t offer a complete mea culpa to the bond market, but the Bank did acknowledge that our economic momentum hasn’t proven to be as robust as it had previously forecast. To wit:

• “The global economy is showing signs of stabilization” but “there remains a high degree of uncertainty and geopolitical tensions have re-emerged.”
• “The Canadian economy has been resilient but [recent] indicators … have been mixed.”
• Our recent economic data “indicate that growth in the near term will be weaker, and the output gap wider, than the Bank projected in October.”
• “Exports fell in late 2019, and business investment appears to have weakened after a strong third quarter.”
• “Job creation has slowed, and indicators of consumer confidence and spending have been unexpectedly soft.”
• The BoC conceded that the weaker-than-expected data could be a signal “that global economic conditions have been affecting Canada’s economy to a greater extent than was predicted.”
• The only sector of the economy the BoC didn’t sound worried about was residential investment, which the Bank called “robust” for most of 2019 and assessed was “moderating to a still-solid pace in the fourth quarter.”

The BoC has a well-established pattern of conceding that current conditions are weaker than expected when the data leave it no choice but then offsetting that acknowledgement with forecasts of improving momentum on the horizon. There are benefits to using this approach. For example, if you’re in charge of managing inflation expectations, optimistic growth projections can help stave off complacency about continuing low interest rates that might otherwise fuel asset bubbles and undermine financial stability.

True to form, the Bank reduced its GDP growth forecast from 1.7% to 1.6% in 2020 but raised it from 1.8% to 2.0% in 2021. Its hope for improving momentum was underpinned by the following factors:

• “Canadian business investment and exports are expected to contribute modestly to growth, supported by stronger global activity and demand.” That assumption is underpinned by the Bank’s belief that businesses are less concerned about the “risks related to trade tensions and global growth.” Given that Phase One of the U.S./China trade deal is proving to be all hat and no cattle and that U.S. President Trump has vowed to turn his trade guns on Europe next, that sentiment could turn on a dime.
• “The BoC is also projecting a pickup in household spending, supported by population and income growth, as well as by the recent federal income tax cut.” We saw record levels of immigration in 2019, which are likely to continue. That will help fuel more spending overall, but income growth started to tail off at the end of 2019, and not everyone is convinced that the federal income-tax cuts the Bank references will have much impact.
• “In its January MPR, the Bank projects the global economy will grow by just over 3 percent in 2020 and 3 ¼ percent in 2021.” The BoC believes that global economic momentum is “bottoming out” after a period of “synchronous slowing.” That bottoming out was facilitated by 49 central banks cutting their policy rates 71 times by a total of 2,500 basis points in 2019. The BoC is hoping that these rate cuts will continue to bolster global economic momentum, but more than a decade of ultra-low rates has reduced the stimulative impact of each incremental rate cut, and that increases the likelihood that the recent uptick in global growth may end up being only a short-term sugar high.

The BoC’s most important forecast concerns inflation. Its primary mandate is to keep inflation “low, stable and predictable”, and BoC Governor Poloz has made it clear that the Bank will adhere to this mandate even if doing so creates negative side-effects in sub-sectors of our economy. Here is its latest assessment:

• “ … the output gap has widened in recent months.” The output gap measures the gap between our economy’s actual output and its maximum potential output. It is a significant inflation gauge because prices rise when the output gap closes, and the BoC will typically raise rates in anticipation of this occurring. A widening output gap portends reduced inflation ahead.
• “The Bank expects inflation will stay around the 2 percent target over the projection horizon, with some fluctuations in 2020 from volatility in energy prices.” A bit of a disconnect here because as per the point above, the widening output gap should ease inflationary pressures unless the Bank expects the gap to close (which it did not forecast).
• “Meanwhile, labour markets in most regions have little slack and wages continue to firm.” Last year we added more new immigrants than new jobs, and the federal government is hoping to increase our immigration numbers in 2020, above last year’s record level. That will help add labour capacity, and while average wages are still rising, their growth rate has showed early signs of slowing (down from 4.5% in November to 3.6% in December).

In its closing statement, the BoC said that it “will be watching closely to see if the recent slowdown in growth is more persistent than forecast”, conceding that the data haven’t yet made clear whether we are in a blip or at a turning point. The Bank will be keeping its eye on “developments in consumer spending, the housing market, and business investment.” With that in mind, I’ll be doing the same.

So, what does all of this mean for Canadian mortgage rates?

For borrowers in the market for a fixed-rate mortgage, these rates should continue to drop somewhat over the near term. The BoC’s more cautious stance and its acknowledgement of the widening output gap correlate with both lower growth and reduced inflationary pressures ahead.

For current variable-rate borrowers or for those considering a variable rate in future, a rate cut still appears a way off, because the Bank wants to see more evidence of slowing momentum before moving off the sidelines. That said, I continue to believe that the BoC will cut its policy rate, which variable mortgage rates are priced on, later this year (as I outlined in detail in my mortgage-rate forecast for 2020).The Bottom Line: The BoC did not cut its policy rate last week, but its more cautious tone pushed GoC bond yields lower, and several lenders responded by dropping their five-year fixed rates. If the five-year GoC bond yield remains at its current level, which marks a three-month low, expect other lenders to follow suit.

Meanwhile, the BoC’s dovish shift should at least increase the odds that a rate cut may finally be on the horizon, which will be welcome news to variable-rate borrowers who haven’t seen a cut in more than four years.

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U-Haul has named Chatham its No. 10 growth city in Canada after arrivals of one-way trucks to the city rose in 2019.

By: Tom Morrison

U-Haul has named Chatham its No. 10 growth city in Canada after arrivals of one-way trucks to the city rose in 2019.

There was a two per cent increase in arrivals last year, while departures were down 13 per cent from 2018 numbers.

The company determines its growth cities based on the net gain of one-way trucks entering a city versus leaving the city during the calendar year. Other communities in the region to rank included St. Thomas at third, Stratford at seventh, Sarnia at 15th and Strathroy at 23rd.

The top cities were North Vancouver, followed by Trenton, Ont.

Chatham previously ranked 13th in 2016 and 11th in 2017. It did not rank in 2018.

Victoria Bodnar, co-ordinator for resident attraction and retention for the Municipality of Chatham-Kent, said the U-Haul rankings are useful for seeing trends in population growth but are not as certain as census numbers.

“It is a good indicator for us in between those census years to see if our community is growing and what kind of trajectory we’re headed in, even without the definite numbers of what our population stats actually look like,” she said.

According to a news release from U-Haul, arrivals accounted for 54.4 per cent of all one-way traffic through Chatham in 2019.

Since this is Chatham’s highest ranking in recent years, Bodnar said she hopes it means attraction efforts are paying off after facing declines in population over several censuses.

“At the very least, it shows that our community is increasingly being seen as an attractive place for people to come and live and work,” she said.

The municipality has been focused on improving which markets it targets, said Bodnar.

“The biggest change within the last five years would be connecting more to selling what increasing jobs are available in the community and really showcasing that people can build entrepreneur opportunities … which has been a long-term project with us,” she said.

Bodnar said attraction efforts have also focused on a message that Chatham-Kent is welcoming to newcomers, immigrants and people of all ages.

One method the municipality has been using is putting advertisements for Chatham-Kent in movie theatres along the Windsor to Greater Toronto Area corridor in cities which have higher housing costs or less access to an “outdoorsy” quality of life, she said.

“Those are the places we’re targeting for sure and places that we’re seeing where people are naturally moving from anyways,” said Bodnar.

One limitation of the U-Haul ranking is how it only lists Chatham, when other parts of Chatham-Kent have U-Haul locations, she said.

“They’re city-specific, not community (specific) the way we would define ourselves,” Bodnar said. “It’s hard for us to say how our stats might change if we included U-Haul stops such as in Wallaceburg and other communities.”

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By: Sanjiv Das

In my three decades in the financial markets, I’ve come to expect the unexpected. With the new year upon us, I’m sharing five predictions for the U.S. housing market that counter conventional wisdom. These ideas may not necessarily come to pass, but I’ll explain how they could materialize. Thinking about these outcomes aren’t just theoretical but can help prepare us if they, in fact, happen.

1. Mortgage refinancing will last longer than expected:Already some 11.7 million Americans are eligible or “in the money,” as they have taken advantage of decreased rates. More U.S. homeowners refinanced their properties in 2019 than at any time since 2016; volumes in 2019 were $678 billion, up from $458 billion in 2018. Remarkably, some 82% of loans originated between six- and 25 months ago can benefit from a refinance today — and 2016 was the last time that this percentage of loans were in the money. If rates drop another 25 basis points, or 0.25%, this will bring even more homeowners into the money. As rates remain low, refinancing should continue unabated.

2. Housing affordability improves: Interest rates are one of the primary drivers of home sales. We’re in a low interest environment and Core Housing Lenders (CHLs) are coming off banner years with record revenues and volumes. As a result, mortgage lenders have increased their underwriting capacity. Therefore, as rates go up, firms may continue to absorb these increases, effectively subsidizing the cost for consumers. In other words, homebuyers may see affordability remain constant or improve throughout 2020.

3. Home purchases will increase: Home sales have been increasing, up 2.5% in July 2019, beating expectations in August, and up 7.4 percent in November 2019, versus a year ago.  What’s more, building permits have recently exceeded expectations. And consumer sentiment towards buying a home have also become more positive. A survey of loan officers showed that demand for home purchases was at the highest levels in the third quarter of 2019 since the same period in 2017. If rates remain low as expected, the home purchase market will likely experience a boom, as millions of Americans, especially millennials, will want to take advantage of the attractive economics.

4. Non-qualified mortgage market will evolve more quickly: A non-qualified mortgage (QM) is quite simply a mortgage that doesn’t meet the standards of the Qualified Mortgage Rule, which was adopted in 2014. Non-QM mortgages are often designed for self-employed borrowers, real estate investors, and near-prime borrowers. There is much discussion in policy circles about reforming the Government-Sponsored Enterprises (GSEs) of Freddie Mac, Fannie Mae, and Ginnie Mae. There appears to be a widespread understanding that these GSEs will eventually reduce their footprint in the market. Therefore, there may be more interest and activity in the non-QM mortgage market throughout 2020.

5. Gig economy workers will drive a new wave of homebuying: Remarkably, some 36 percent of workers are part of the “gig economy” and work multiple jobs Uber drivers and freelancers on Upwork. Unfortunately, the standard mortgage application process doesn’t make it easy for these workers, which requires W2 forms that these individuals may not have. The Self-Employed Mortgage Access Act would enable lenders to accept alternative forms of income and job verifications. The enactment of this law would be a boon to millions of Americans who want to take part in the American Dream of owning a home. But those of us in the housing industry aren’t waiting for Congress, as my firm and others are introducing responsible ways to verify gig economy workers.

Sanjiv Das is the CEO of Caliber Home Loans. Previously, he was the CEO of CitiMortgage. 

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by Kimberly Greene

Housing affordability is a significant conversation that is taking place across the country, especially in high-density, urban cities. Even as the risk profile for Toronto and Vancouver housing markets have come down to “moderate” levels, the fact remains that the demand hasn’t gone away, and that means that prices are remaining out of reach for many people.

British Columbia in particular, is seeing more people choose to live outside of the Vancouver core or being compelled to live in surrounding regions to find appropriate housing. Their demands, however, haven’t changed: they want to live in convenient locations that are close to shopping centres and transit, even as they move beyond the downtown area. This means that developers are having to think outside the box of the single-family suburban norm.

Many of these areas lack a lot of options when it comes to housing, and people are increasingly demanding more variety in developments in order to meet their needs.

Hari Homes is a developer in British Columbia that is catering to this shift in demand. Their recent revitalization project, Chalet, is meant to increase density in Delta, B.C., in order to keep young families in the area. With Chalet, they didn’t want to build towers, but instead wanted to create something that would compel various swaths of the community to take advantage of the units.

The development plan includes units that range from 491 square feet up to 1,300 square feet and sidewalks that connect the community to local schools and amenities. They are particularly paying attention to affordable units for first-time buyers who are struggling to find other options in the area, given that a single-family home in Delta are older and still at least $900,000, said Aloke Chowdhury, managing director of Hari Homes. This puts them out of reach for a lot of middle-income buyers, such as people who are newly married or who have small families.

“The thing you have to understand is that the land prices are going up day by day,” Chowdry said. Hari Homes bought the land for Chalet five years ago and began work in 2017, but if the land had come available today, Chowdry expects it would be three times more expensive. From a developer’s perspective, he continued, “if they don’t make the small units, they would not be able to provide affordability to the people.”

According to a report published last year by GWL Realty Advisors (GWLRA), neighbouring suburbs of Toronto and Vancouver have seen substantial growth and demand overflow because neither city has added sufficient housing to account for recent population growth.

GWLRA is specifically building new rental housing in both cities, with over 4,000 units in the development pipeline in Toronto.

“Young families migrating to outlying areas is driving rapid population growth in these markets—along with retail demand as this is a prime spending demographic. GWLRA continues to seek grocery-anchored shopping centres in these fast-expanding nodes and recently purchased Sumas Mountain Village in Abbotsford as part of this strategy,” writes Wendy Waters, vice president of research services and strategy at GWLRA.

“We are running out of land, people have to understand that,” Chowdry said. “I have gotten some resistance in this neighbourhood that this neighbourhood will be ruined, or that traffic will be creating more chaos with the hi-rises coming. We cannot control the traffic, because the population growth is there.”

New immigrants are supporting population and housing growth in Canada, and big cities are obvious choices for those new to Canada.

Developers and municipalities are increasingly having to come together to figure out plans for new projects that may have previously not been considered, particularly in high-demand cities. Chowdry says that all of the local cities in the lower mainland—Vancouver, Richmond, Burnaby, New Westminster—are intensely focused on planning ways to create more affordable housing options available.

That includes rentals as well; Chowdry says that developers are being encouraged to come up with more rental housing solutions than they would’ve considered in the past.

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our credit report acts as your financial references when you apply for new credit. Whether you’re trying to build credit for the first time or want to re-build your credit standing, the only way to build a strong credit history is to use credit wisely. Following are 10 tried and true tips to Live Credit Smart:

1. Assess your overall financial situation.

Before you do anything else, it is important to examine your entire financial situation, including your monthly budget and your short and long-term financial goals. Make a list of all of your debts, payment due dates, minimum payment amounts, interest rates and the timeframe in which you would like to pay down your debt. Don’t forget to consider the other financial goals you may wish to accomplish.

2. Select a payment strategy that works for you.

Consider paying down the credit cards with the highest interest rates first. If that seems too daunting, try paying down your smallest balance first so you can see your progress toward eliminating your bills right away. Pay more than the minimum payments, if you can, but most importantly – always pay on time. If you need additional help managing your debt, you might consider reaching out to an accredited credit counselor such as a member of The National Foundation for Credit Counseling (http://www.nfcc.org/).

3. Stop spending frivolously.

While it may sound simple, an important step is to curtail unnecessary spending. Put yourself on a financial diet and try not to spend money on non-essential items until you catch up on any extra debt you incurred during the holidays. Using coupons and comparison shopping for essential items and cutting extra expenses, can really make a big a difference in your monthly budget. In fact, simple lifestyle changes can help you save thousands of dollars over the course of year.

Here are a few ideas of how you can start saving:

Cut back on your daily expenses by carpooling to work, making coffee at home, bringing your lunch to work, switching to reusable water bottles and doing your own nails instead of going to the salon. Together those changes could total more than $5000 in savings per year.

Review your monthly reoccurring expenditures like cable and mobile phone bills to make sure you have the plan that is giving you the most bang for your buck. Determine whether you really need unlimited text messages or if you’re really watching all the channels you’re paying for and modify your plans accordingly.

Take advantage of free leisure activities – Instead of spending money on a movie ticket or going out to dinner, invite your friends for an afternoon hike, take the kids to the park or visit a free museum or art exhibit. Try organizing a pot luck dinner in your neighborhood or take a free class at a local community center. Consider taking advantage of free concerts or outdoor movies in the summer.

Getting involved with a local charity and spending some of your free time volunteering is a great low cost activity with countless rewards.

The money you can save by cutting back on items like these can go toward paying down your debt or saving for next year.

4. Use tax returns and holiday bonuses wisely.

Holiday bonuses and tax returns are two larger lump sums of money that can be used to make a dent in debt, if used wisely. Make sure you are taking full advantage of extra income by putting it toward credit card debt or using it to save for next year’s holiday expenses. Don’t look at these things as free money to spend – rather, use them to pay down debt and boost your credit score to help meet your goals.

5. Start proactively saving for next year’s holiday shopping.

It’s never too early to start saving for next year. Make a holiday shopping budget and set aside money specifically dedicated to it. If you put away $50 each month, before you know it, you’ll have $500 to put toward holiday gifts and travel. The more you can pay in cash, the less you’ll have to worry about paying back this time next year.

6. Know what you want to buy and the best time to buy it.

Write down all of the people you need to buy for and start listing ideas for potential gifts. Have an idea of what you want to buy well in advance of the holidays and keep an eye out for those gifts over the course of the year. Carefully review your favorite stores’ weekly ads or use a service such as pricegrabber.com, which allows you to compare prices on thousands of items including electronics, furniture, books, movies, and even groceries to help you get the best prices.

Take the time to research the best times to buy big ticket items. For instance, bicycles and sports gear often go on sale in January and February while big home appliances can usually be found at discounted rates during September and October. Knowing what you want to buy will give you plenty of time to take advantage of sales and avoid marked up prices as the holidays near.

7. Start shopping early.

By shopping early, you will absorb the cost of holiday gifts throughout the year rather than all at once. Your bills will be easier to pay off and you will keep your credit card balances low, yet they will remain active throughout the year – all of which are good ways to strengthen your credit score.

8. Don’t buy big ticket items without a plan to pay them off.

Even if that big screen TV you’ve always wanted is finally on sale, don’t take it home without knowing whether or not it fits into your budget or without having a plan to pay it off. Determine how you can make adjustments and sacrifices in other parts of your budget to help pay for it. Make sure you know how long it will take to pay it off and what funds you will use to pay for any large expenses.

9. Evaluate your credit cards portfolio.

Make sure you’re being wise about what credit cards you’re using and why. Consider eliminating credit cards with annual fees and incorporating more rewards cards into your wallet. Take advantage of the points you can accumulate with a rewards card and put them towards some of your holiday purchases.

10. Check your credit score so you have a benchmark for improvement.

Check your credit report and purchase a credit score so you understand the baseline of where you stand and how your credit may have been impacted by your holiday spending. During times of high activity on your credit accounts, it is also especially important to make sure that your credit report is accurate. Then, after you have had time to achieve your goals and pay down your debt, get another score to see how where you fall in the range of risk has changed once you have paid down your debt.

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