Market Commentary

With the Bank of Canada’s latest rate cut now well established attention is turning to what happens next.

Along with this month’s rate cut the Bank of Canada lowered its economic growth forecasts. It does not expect to see the economy return to full capacity until early 2017, indicating it is unlikely there will be a rate increase before then.

The United States will influence what happens next. The U.S. Fed has indicated it hopes to raise interest rates in the fall. An increase there, is a de facto reduction here, making it unnecessary for a further BoC cut in September, as some have suggested.

Canada’s big banks did trim their variable rates but, as with the January cut, not by the full 25 bps made by the central bank. Of course we are still in prime real estate season and the banks may be leaving themselves some room for further discounts once things slow down again.

Fixed rates will likely move once the effects of the reduced overnight rate make their way to bond yields

Brokers call for standardized penalties

It may be an exercise in futility, but brokers are once again calling for consistency in the way banks calculate mortgage penalties.
 
“We need regulation for penalties – every lender calculates them in a different way,” Paul Sidhu, president of Safe Mortgages told MortgageBrokerNews.ca. “I had one client that was hit with a $28,000 penalty at (one big bank) and we called the ombudsman and they couldn’t explain how it was calculated. TD wouldn’t explain it either.”
 
Sidhu went so far as to file a FSCO complaint against the ombudsman and eventually, the bank reassessed the penalty and dropped it to a much lower figure.
 
Penalty calculations are a perennial concern for mortgage brokers, whose clients are often hit with hefty bills. And there isn’t enough consistency across the board, most say.
 
“There are so many different ways lenders calculate penalties – certain lenders will use the posted rate and not the discounted rate that was offered to the client,” Narish Maharaj of Dominion Lending Centres Mortgage Mentors recently told MortgageBrokerNews.ca. “Others will subtract the client rate from the T BILL rate and subtract the client’s rate to determine the penalty.”
 
But is reform in the future?
 
One broker isn’t so optimistic.
 
“I think it’s wishful thinking because there isn’t enough public outcry,” Kent Farnsworth of Mortgage Alliance Simply Mortgages told MortgageBrokerNews.ca. “Interest rate differential penalties are the most frustrating – I think (a penalty of) three months’ interest is sufficient, but not all lenders calculate it that way.”
 
Still, the growing outcry – and action like Sidhu’s against the ombudsman – may make a slight difference

Borrowing is tougher for self-employed

Homebuyers looking for a mortgage are finding conditions are getting tougher if they are self-employed, at a time when there is an increasing number of self-employed Canadians. Solid credit scores are multiple years in business are still not making it easy for business owners to buy their own home. Chad Oyhenart, a Vancouver-based mortgage broker at Dominion Lending Centres told The Financial Post that conditions are tougher as the result of rule changes over the past 7 years: “They just want to make sure that they’re not putting Canadians into situations that they can’t get out of, so that we don’t end up being the U.S.” Jeff Mark of Spin Mortgage also sounded a supportive note for tighter regulations commenting that they were too loose in the past. He says that the self-employed may have to take larger incomes from their businesses, meaning more tax to pay, in order to qualify for mortgages. 

Sorry Mr Oliver, we don’t believe you

Analysts predict lower rates for 2 years

Reacting the Bank of Canada’s cut in interest rates many economists are predicting they will have to stay low for some time. While talk of cheaper mortgages may be in focus for homeowners and buyers the wider economic picture painted by the BoC is one of sluggish growth for Canada this year. Two quarters of negative growth (0.6 per cent in Q1 and 0.5 per cent in Q2) means a technical recession and the bank cut its expectation for this year to just above 1 per cent with next year and 2.5 per cent in 2016 and 2017. That contrasts with growth in the global economy of 3 per cent for this year and 3.5 per cent in the following two years. Additionally Fed chair Janet Yellen said Wednesday that the US economy is on target for a rise in interest rates.

The cut in interest rates has already hit the loonie, although that should help exports which are a key part of the plan to boost the economy. Some analysts are skeptical as to whether Canada can achieve even the downgraded GDP forecasts and are calling for interest rates to stay low, and perhaps go lower, during the next two years. 

Home sales set new record

Home sales set a record for the month of June, standing 11 per cent above June 2014 and 14 per cent above the 10-year national average for the month, according to the latest figures from the Canadian Real Estate Association.

But the trend is local, said the organization, pointing to increases in Hamilton-Burlington, the Durham region and the Greater Toronto Area, and decreases in Ottawa and Montreal.

“Low interest rates are helping sales activity set new records in and around the Greater Toronto Area, which is boosting national sales activity,” said Gregory Klump, CREA’s chief economist.

“Those records would be even higher were it not for an ongoing shortage of listings for single-family homes in the area. The combination of strong demand and a shortage of listings are continuing to fuel single-family home price increases.”

Sales were up on a year-over-year basis in around two-thirds of all local markets, led by activity in the Lower Mainland of B.C., Greater Toronto, and Hamilton-Burlington.

The actual national average price for homes sold in June 2015 was $453,560, up 9.6 per cent on a year-over-year basis.

However, this figure continues to be distorted by sales activity in Greater Vancouver and Greater Toronto, which are among Canada’s most active and expensive housing markets.

If these two markets are excluded from calculations, the average is a more modest $346,904 and the year-over-year gain is reduced to 3.1 per cent.
 

Canadians driven to huge mortgage rates  

by Steve Randall | 10 Jul 2015

The Canadian dream of owning a home is driving some to agree to exorbitant mortgage rates from the world of shadow lending. A Reuters report says that while home prices have been increasing, mortgage lenders have become more conservative and regulators have tightened lending restrictions, meaning that some buyers have taken on home loans at high rates. According to mortgage broker Lou Perrotta 20 to 30 per cent of his mortgage book is through private lenders, including his own money, amounting to up to $5 million of his $20 million of annual business. Many investors are seeing private lending as a high yield option often returning 9 per cent or more. Although this part of the mortgage sector is small, around 5 per cent is estimated, it still represents a potential risk as economic conditions, including interest rates, inevitably change.