Hey Guys!
It seems like every hour there is a MAJOR development in the economy. And I mean major.
On Friday, March 13th the Finance Minister of Canada, Governor of the Bank of Canada and the Superintendent of Financial Institutions announced a co-ordinated effort to help our economy.
We have not seen a response by policy makers like this since the Great Recession. The powers that be in Canada are throwing everything at their disposal (and the kitchen sink) to assist our economy.
Let’s take a look at what’s been happening and relate it back to Canada’s Mortgage market.
Rate Cuts by the Bank of Canada:
- In the last two weeks the Bank of Canada has cut interest rates by a full percentage point.
- Retail banks in Canada have passed along the first 0.50% interest rate cut to Canadians by lowering the Prime lending rate. There should be an announcement today (Monday) as to passing on any additional rate cuts.
- Variable rate Mortgages, Home Equity Lines of Credit (HELOC) and personal lines or credit are associated with the Prime lending rate.
- For every $100K of borrowed money, a reduction of 0.25% equals about $12 less in Mortgage payment per month. With gasoline prices also down, people have a more disposable income which is a simple form of stimulus.
- The oil shock alone is reason enough for a very strong response by our Central Bankers. You’ll recall in 2015 their response was to swiftly slash interest rates when the price of oil plummeted. At that time, the big banks did not pass the full rate reduction on to Canadians. I think the full rate cut will be passed along this time around.
- Currently the prime rate is 2.45% which could be reduced to 1.95% (if the latest 0.50% is passed along).
Adding Additional Liquidity To Credit Markets:
- Canadian banks are well capitalized and in strong financial positions. None of our major banks will be going anywhere. However, our financial governors are seeing some credit tightness coming. Here’s how they are adding liquidity to the market:
- Business Credit Availability Program. This is a credit facility, extended by the Government of Canada, through the Business Development Bank of Canada (BDC) and Export Development Canada (EDC). They have made $10 BILLION dollars available for private sector lenders to coordinate financing and credit insurance solutions for Canadian businesses.
- Office of the Superintendent of Financial Institutions (OSFI …not writing that out again, LOL) is lowering the Domestic Stability Buffer requirement by 1.25% of risk weighted assets.
In plain language, OSFI has been regulating Banks to build a war chest of reserves. This was a big thing in January 2018 with the new B-20 lending guidelines came out. At that time, this increased interest rates in Canada, along with implementing a stress-test for all home buyers, regardless of their down payment.
Now OSFI has reduced the amount of capital the Banks are required to keep on reserve. They want that money lent out in the market to keep the economy propped up. I think of this as a rainy day reserve of capital. Well, it’s pouring.
- New Bankers Acceptance Purchase Facility. A banker’s acceptance is a short term promissory note issued by a borrower. When accepted by a bank, it creates an unconditional payment obligation to the holder which may be traded as a money market instrument.
Banker’s acceptance have become a large source of funding for large corporations due to credit downgrades and market consolidation. This is the largest source of non-Goverment issued securities that account for about 25% total domestic money.
Essentially, the Bank of Canada has added money to this market so there continues to be money supplied to corporations.
- Government of Canada Bond Buyback. This is another angle for the Government to add liquidity to the market. The Government is essentially purchasing bonds to inject money into the system to keep things flowing. They have stated they are watching the markets closely and are willing continue to provide the necessary liquidity to support the functioning of the Canadian financial system.
- Standing Term Liquidity Facility. This is interesting. The Bank of Canada is willing to take a Banks Mortgage loan portfolio as collateral to provide them short term cash, amongst other collateral.
That’s A LOT of stimulus, all at once. Again, the oil shock we are experiencing, which seems to get lost in our ongoing health crisis, is enough alone to warrant a big response from our Central Bankers.
Thus far, this has been monetary stimulus. Let’s talk about the coming fiscal stimulus …
Fiscal Stimulus:
Finance Minister of Canada, Bill Morneau, has stated that the Government of Canada is releasing a MAJOR fiscal stimulus program this week via the 2020 Federal budget.
Earlier last week, Justin Trudeau, from his home, also stated that a major Government initiative will be announced soon.
I think the plan will be to get cash into Canadian’s hands as soon as possible. Stimulating the economy with money to build bridges and road ways is great, but people will need cash to continue to pay their debt and bills.
FOR YEARS, governing bodies in Canada have spoken to the debt-to-income ratio of Canadians. The narrative has been to pay down household debt, increase household savings, and not to over leverage the household balance sheet.
With 70% of Canada’s economy based on consumer spending, and that facing a big challenge with our health crisis because of social distancing, I think the Government will be planning to get cash into Canadians hands.
When the new budget is released, I’ll let you know what has been announced related to the Real Estate market.
Dynamic Mortgage Qualifying – Cancelled:
Early in the New Year, Justin Trudeau announced an investigation into making the Mortgage Qualifying Rate more dynamic.
Earlier this month, an announcement was made to this qualifying test which was due to be activated April 6th, 2020.
That’s been halted!
For the time being, the Mortgage Qualifying Rate and Mortgage stress test are to remain unchanged. With everything that is happening in the market, this additional change to policy is unwanted.
Interest Rates Are Increasing (yes, increasing):
Despite all of the monetary and pending fiscal stimulus noted above, credit markets are very nervous.
It is possible lenders are fearful of future additional default rates looming on consumer debt (credit cards, auto loans etc). It is possible Mortgage default rates also increase.
This kind of credit tightening warrants lenders to price in risk through higher rates. This might seem counterintuitive because the Bank of Canada has slashed the central rate and the bond market has cratered since the New Year. That said, I’m seeing rates increase.
I think now is a time to request an interest rate hold if you are thinking of purchasing a home. If you have a Mortgage renewal looming, connect with me about the interest rate you’re being offered.
To those of you wishing to switch/transfer your Mortgage to a lower interest rate, I think the window will be closing to make that happen.
Conclusion:
To say the least, I find this to be a very interesting time we are living in.
I expect Calgary’s Real Estate market to be effected by these economic happenings. How could it not be?
I expect the return of the “wait and see” mentality that was pervasive in 2015 and 2016. This in and of itself, pulls back on home purchase demand. With a seasonal increase of home supply, the market numbers will soon be very slanted to down pressure on pricing.
I think you’ll agree with me, Alberta has been in relatively tough economic times for the past 5 years now. And because of this, I think people who “needed” to sell their homes have been flushed out of the market already. If this is true, this should stave off any panic selling due to financial hardship this time around.
Like it or not, I think our Government’s decision to stress test borrowers will help with our housing market resilience. These borrowers needed higher incomes to qualify for their home.
I can also personally speak to the rigors of Mortgage qualifying …lenders requesting liquid asset fall back, scrutinizing credit, consideration of income strength and viewing customer credit scores from many different angles.
I can’t say housing markets in other parts of Canada will be as resilient as Alberta’s. I don’t think they (Vancouver & Toronto) have felt the severity of tough economic times in recent history. We are battle hardened.
I hope this content has been helpful for you …if so, let me know and respectfully share it with others who might find it valuable.
Cheers,
Chad Moore
P.S
How are you planning to socially distance (isolate) yourself? Are you skipping the gym, restaurants, not going into the office? How far are you taking this?
P.P.S
I’ve recently had a head cold and experienced “cold/sick shaming”.
Honestly, I was embarrassed to be sick. I did my best to limit the spread of my germs and increased my vigilance on personal hygiene (self quarantine, washing my hands frequently, and elbow bumping clients/colleagues etc).
However, I did experience sick shaming. If the spread of this virus reaches even half of its potential, a lot of people will fall ill. I plan on being compassionate and humble.
