The moderation of Canada’s housing market means reduced revenue for the Canada Mortgage and Housing Corporation.

Its quarterly financial report for the first three months of 2019 reflects the reduced size of the insured mortgage market as home sales continue to lag the highs of recent year following several policy changes introduced in 2018.

In the period ended March 31, 2019, CMHC generated revenues of $1.48 billion and net income of $394 million.

Mortgage insurance in force held fairly steady at $442 billion, compared to $448 billion at the end of the previous quarter.

The quality of the loans backed by CMHC remained strong with the typical CMHC-insured borrower having a credit score of 755, equity of 7.6%, and a purchase price of $284,164. The overall arrears rate was 0.30%.

The corporation provided mortgage insurance for more than 39,000 homes across the country, supporting over 17,000 homebuyers and 22,000 rental units; and provided $39 billion in guarantees through its mortgage funding activities.

CMHC declared $505 million of dividends in the quarter, paid to the Canadian government, its only shareholder. This was more than offset by $575 million of comprehensive income, resulting in a slight increase in total equity of Canada.

National Housing Strategy

CMHC’s role in the National Housing Strategy saw investment of $777 million on behalf of the Government of Canada to create and support much-needed housing units for low- and middle-income Canadians.

And bilateral agreements were signed with Prince Edward Island, Alberta and Yukon under the new Housing Partnership Framework to support the delivery of key NHS initiatives.

“In the first three months of 2019, we supported Canadians across the country access housing they can afford and that meets their needs, while responsibly managing our resources and contributing to the stability of the financial system,” said Lisa Williams, Chief Financial Officer

In the run up to this week’s rate setting by the Bank of Canada, talk of a coming rate cut is creeping into the forecast.

A recent Reuters poll of 40 economists put the chances of a cut, within the next 12 months, at 40%.  However, the same poll but the chances of a cut, within this year, at about 20%.

Many of the economists cite global trade uncertainties – which are stalling economic growth in Canada and other countries – as the key trigger for a possible 25 basis-point reduction.  Most of the concern centres on the current China – U.S. tensions and the potential for a recession in the States rather than domestic, Canadian, factors.

Realistically, it is unlikely there will be any interest rate movement – down or up – in Canada before 2020.  The BoC is calling for moderate GDP growth through the second half of this year.  As well, the politics surrounding the October federal election will keep the bank on the sidelines.

In a separate Reuters poll, property market gurus predict home prices will remain in the doldrums for the rest of 2019.  They are forecasting a little breeze next year that will push prices up by about 1.7%, which will barely meet the rate of inflation.  The Canadian Real Estate Association is forecasting a 1.6% decline in sales for this year, with a 2.0% increase in 2020.

The market-watchers polled by Reuters point to debt-burdened consumers as the key reason for the slowdown.

The Canadian credit market has grown but it appears that consumers are generally managing their debt well.

The mortgage market continues to record a slower pace of growth although performance remain generally good.

TransUnion’s Industry Insights Report for the first quarter of 2019 shows that the number of consumers with access to credit grew 1.3% year-over-year to 28.9 million while the total balance of these credit products grew 4.2% to $1.85 trillion.

Non-revolving credit products including auto loans and installment loans led the growth in consumer credit with a 3.1% rise in the number of consumers holding at least one of these products.

“The Canadian consumer credit market expanded against a backdrop of moderating economic growth, signs of increasing inflationary pressures and higher interest rates. It’s a big positive that this credit growth hasn’t come at the expense of serious delinquencies, which remained broadly flat,” said Matt Fabian, director of financial services research and consulting for TransUnion Canada. “The shift in focus towards non-revolving credit products is an interesting development and may be indicative of wider changes in consumer spending behavior and confidence.”

Mortgage market continues to slow
Mortgage origination figures are for Q4 2018 and show a 1.3% decline year-over-year as the impact of the stress test and rising interest rates remained.

The data shows how lending and housing market conditions vary across regions with BC recording a 19.3% decline in originations year-over-year due to additional provincial market-cooling measures.

At a city level, mortgage originations declined by 1.3% in Toronto but grew 8% in Montreal.

Mortgage balances showed a year-over-year decline of 4.2% in Q1 2019 and spanned all risk tiers, with subprime and near prime tiers falling the most at 6.4% and 6.9% respectively.

“This is now the third consecutive quarter we have seen a decline in both mortgage originations and balances. Adjustment to the new stress test regulations has been slow in many areas, and it will be interesting to see if any residual year-on-year declines remain after market demand fully adjusts to these new conditions,” said Fabian.

The data also shows a decline in HELOCs with a year-over-year decline in accounts of more than 10%.

Again, TransUnion says this may be due to tighter lending restrictions, as the overall line of credit market grew; originations were up 15.6% and line of credit accounts had the highest average non-mortgage balances.

Delinquency rates generally steady
TransUnion’s report reveals that delinquency rates across Canadian consumer credit products remained relatively stable year-over-year in Q1 2019.

For credit cards, the most commonly held product amongst Canadian consumers, consumer-level serious delinquency rates dropped only slightly, down 5 basis points (bps) to 3.12%. Similarly, small changes were seen in delinquencies for line of credit accounts (down 2 bps), auto loans (up 2 bps) and mortgages (also up 2 bps).

A more significant change was seen in installment loans, up 14 bps YoY, which is perhaps reflective of the increase in lending to riskier tiers in this category observed in recent quarters.

“The Canadian consumer credit market remains robust with delinquencies rates staying broadly stable despite a growth in overall lending levels. However, the economy is slowing and continues to face some headwinds, which could eventually create some pressure on segments of consumers that could impact credit demand and their ability to service their debt obligations. As we progress through this business cycle, lenders will need to remain vigilant and continue to adjust their underwriting strategies and portfolio management strategies to accommodate changing macro-economic conditions and consumer demand,” concluded Fabian.

The Bank of Canada released its review of the financial system Thursday and warned that it was important to remain vigilant to the risk of household indebtedness.

The bank said that while the mortgage stress test and interest rate hikes have slowed household borrowing and improved credit quality, there are still high levels of indebtedness and a large portion is held by households that are highly indebted.

However, it noted that the share of Canadians falling behind with credit payments is low and steady.

“New measures have curbed borrowing, reduced speculative behaviour in housing markets and made the financial system more resilient. While the fundamentals in the housing sector remain solid overall and the sector should return to growth later this year, we continue to monitor these vulnerabilities closely,” said BoC governor Stephen Poloz.

Another risk to the system

Governor Poloz highlighted rising risk to the financial system from corporate debt, especially among lower-rated companies.

He also said that assessment is needed of the risk from climate change.

The most important risks to Canada’s financial system remain a severe nationwide recession, a large house price correction and a sharp repricing of risk in financial markets.

But the BoC says its recent stress tests found that Canadian banks are in good shape to deal with these scenarios.

“Global uncertainty is rising, and risks to financial stability have edged up in the past year. Still, confidence in the resilience of Canada’s financial system remains high, and we are seeing improvements in some of the key vulnerabilities we’ve been worried about for many years,” said Governor Poloz.

A new program the federal government has announced to subsidize first-time homebuyers isn’t likely to help the market but more likely to harm it.

And not only is it not going to help out the market, but it’s not going to help out new homeowners.

In its recently announced budget, the government is essentially putting the weight of turning around the market on the backs of people just entering the housing market.

Part of the problem with the plan is that we only know what’s happening on the front end. People buying their first home will be eligible for a 5% top up from the from the Canada Mortgage and Housing Corporation (CMHC) to the total cost of a home. That amount increases to 10% for new constructions. To qualify, a household must have a combined income of less than $120,000, and the CMHC will only pick up a maximum of $480,000.

In exchange for this, the housing corporation gets an equity share in your home.

While we know what the government will give new homebuyers, we don’t know what it’s going to cost them down the road. Believe it or not, there’s been no announcement on what interest rates will be offered on the loans, nor what the terms of repayment would be. Complete costing isn’t expected until at least the fall, likely after the federal election.

But the real problem at the heart of this is the measures won’t do anything to help the affordability of homes. It’s not going to decrease the price of housing, and it’s just going to put the burden of propping up the market on the backs of new entrants.

In RBC’s most recent housing affordability report, released in March, the bank said a softer housing market was making houses slightly more affordable, as their national affordability index dropped 0.7 percentage points to 51.9%. (The lower the score, the more affordable homes are.)

“The fourth-quarter relief barely made a dent in Vancouver and Toronto where affordability remains at crisis levels. Owning a home in both of these markets, as well as in Victoria and increasingly Montreal, is a huge stretch for ordinary buyers,” RBC said in a press release.

In Montreal, the bank’s score is 44.5%, and RBC said the situation is not critical just yet.

“Housing affordability is eroding gradually to levels that could potentially pinch buyers—though so far they haven’t shown any sign of balking,” they said.

But with this new CMHC policy, that gradual erosion is likely to turn critical when this new wave of homebuyers crashes into the market.

One of the potential risks with this scenario is called overhang. Essentially, because a new policy has been announced, but hasn’t come into force yet, many Canadians who are likely to qualify are going to decide to put off their purchases. For now, un-bought supply will build up. But as soon as this policy goes into effect, these first-time buyers are going to suck up huge swathes of the housing market, and prices are going to skyrocket.

The new federal program is designed to lower the monthly mortgage payments of new homeowners by what amounts to a few hundred dollars a month. That can make a huge difference in the budget of a young family, but to do this, the government is putting their hands in the pockets of new homeowners for an unspecified amount, while at the same time risking further unaffordability in the housing market.

They could have had the same effect—lowering monthly payments—by re-introducing 30-year amortizations. Instead, they’ve kept the limit for CMHC-insured mortgages set to 25 years.

The shorter amortizations coupled with the continuation of the strict stress-testing rules, covered extensively in recent North East Mortgages blog posts, puts pressure on people on the lower end of the market. The stress test makes sure you can’t just handle the rate you’re signing on for, but makes sure you can handle an additional 2 percentage on top of it.

The rules the government has passed in the last few years have made it more difficult for new buyers and established buyers alike. They’ve also made it hard for people to refinance their more toxic debt, putting them into situations far riskier than the relative rarity of mortgage default.

Adjusting those rules would have a wider effect and give more people the step up they need to enter the housing market.

If the government really wanted to help with the affordability of homes, they have plenty of better options. This narrow measure is going to end up causing more harm than good.

Busy lives and the changing trends in how we get around is driving greater demand for homes close to good transit links.

In a new survey released Tuesday, 28% of ‘modern family’ homeowners in major Canadian metros said that transit-friendliness is one of their top 3 homebuying criteria.

Sotheby’s International Realty Canada and Mustel Group’s Modern Family Home Ownership Trends Report: Neighbourhoods “in Transit” shows that transit links are more important than car-friendliness (17%) with cycle-friendly neighbourhoods trailing on 4%.

“Transportation and housing have always been inextricably linked. Investments into any transportation infrastracture, whether rapid transit, bus lines, roads, or bikelanes, not only have a direct impact on a community’s quality of life, but often, real estate values,” says Brad Henderson, President and CEO, Sotheby’s International Realty Canada.

In Toronto and Vancouver, the importance of transit-friendly neighbourhoods was a priority for around 3 in 10 homebuyers, far outpacing the 13% in Vancouver and 17% in Toronto who rank car-friendliness as a leading location factor.

“The importance that many of today’s young families are placing on neighbourhood public transit access when home buying reflects changing attitudes and values, the strains of cost of living, as well as improvements to transit infrastructure made to date. These priorities also point to what this influential group of buyers will deem prime real estate locations in the future,” added Henderson.

Cutting the commute
As work-life balance becomes increasingly important, living closer to work is a priority for modern families.

More than half (57%) of survey respondents said they had bought a home within 30 minutes commute of their work or school; 15% live within 10 minutes and 42% live 10-29 minutes away.

Those in Calgary (69%) are most likely to live within half an hour of their work or school while this is true for around 6 in 10 in Vancouver, Montreal, and Toronto.

Young urban families living in Toronto and Vancouver are the most likely to have purchased a home with a commute time of over an hour, at rates of 12% and 13% respectively.

Staying safe

Safety remains the top priority for homebuyers across all regions and overall 48% said safety was a top 3 location factor.

This rises to 45% of modern families in Vancouver, 50% in Calgary, 51% in Toronto and 46% in Montreal.

“Metropolitan areas across Canada have been grappling with balancing the needs of growing populations, and various priorities in transportation, ” says Josh O’Neill, General Manager of Mustel Group. “This report sheds light on the specific needs and priorities of young urban families when it comes to the neighbourhoods in which they live and buy real estate, with findings that highlight the importance of the issue of transportation for this cohort.”

The full report can be found at mustelgroup.com

The Fraser Valley continues to be a slower-than-usual housing market but there are some positives.

Sales in April were down 19% year-over-year to 1,383, although that was an increase of 13.3% from March according to MLS data from the Fraser Valley Real Estate Board.

While it was the second-slowest April in 10 years, consumers’ demand for housing is strong despite weakened purchase power compared to before the mortgage stress test.

Darin Germyn, President of the Board, says that certain housing types are performing better than others.

“Detached homes under one million dollars and attached homes – ranging from $400,000 to $700,000 – continue to attract buyers in the Fraser Valley. Townhome sales in Abbotsford increased by almost 60% compared to March and were on par with last year’s April sales,” he said.

Active listings increased 38.9% year-over-year and 12.3% month-over-month to 7,870 by the end of April and there were 3,391 new listings during the month, an 18.1% increase compared to March but down 1.1% compared to April of last year.

“A slower, stable market has had a positive impact on affordability in our region. Prices of typical residential homes in the Fraser Valley have decreased between 5 and 6 per cent in the last year. In the last three months, benchmark prices have either plateaued or have experienced a small recovery,” added Germyn.

Fraser Valley home prices

HPI® Benchmark Price Activity:

• Single Family Detached: At $964,600, the Benchmark price for a single family detached home in the Fraser Valley increased 0.2% compared to March 2019 and decreased 4.8% compared to April 2018.
• Townhomes: At $521,800 the Benchmark price for a townhome in the Fraser Valley in the Fraser Valley increased 0.9% compared to March 2019 and decreased 5.1% compared to April 2018.
• Apartments: At $420,700, the Benchmark price for apartments/condos in the Fraser Valley increased 0.6% compared to March 2019 and decreased 6% compared to April 2018.

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The latest reading of Canada’s economy brings both good and bad news for the housing market.

While growth slowed in February – to just 0.1% following a 0.3% rise in January – the weakness will almost certainly rule out any interest rate increases this year.

Statistics Canada’s GDP figures released Tuesday show a near-even split between gains and losses among the 20 main industrial sectors. Among the declining sectors were mining, quarrying, and oil & gas extraction; and the manufacturing sector.

“After roaring out of the gate at the start of the year, growth in the Canadian economy slipped in February. With economic growth remaining subdued, so too will price pressures and this will keep the Bank of Canada on the sidelines into next year,” commented Conference Board of Canada’s Principal Economist Alicia Macdonald.

He added that the data was in line with the Conference Board’s most recent forecast that expects economic growth to remain soft in the first quarter.

The winners and losers
Finance and insurance declined 0.6%, offsetting increases in the previous two months.

Construction was up 0.2%, marking a second gain following seven consecutive decreases. This was driven by increases in residential and industrial building activities.

Real estate, rental and leasing declined 0.2%, the first decrease since February 2018.

This was impacted by activity at offices of real estate agents and brokers which was down 6.6%, the fourth decline in five months due to lower housing resale activity in Ontario, Quebec, and British Columbia.

Retail sales were also up in February, posting their largest gain since last May although the increase was not enough to offset the sectors large decline in January, suggesting that growth in consumer purchases of goods will remain soft in the first quarter.