In its latest outlook, The Conference Board of Canada stated that residential starts and non-residential construction in Canada will see notable deviations from each other in 2017, with the former slowing down and the latter exhibiting stronger activity.“Not only is the residential construction industry seeing a downturn in housing starts, spending on home renovations is now showing signs of weakness too. In all, we expect price-adjusted spending growth in the residential construction industry to average less than one per cent per year through 2020,” the Board’s director of industrial trends Michael Burt said. “A slowdown in multi-unit construction, particularly in the apartment and row house segment, is expected to drag down industry output by 0.2 per cent in 2017. Signs of this downturn have already shown up in recent housing starts data, with multi-unit housing starts down 2.3 per cent in 2016. Multi-unit housing starts will take another step back in 2017, and will struggle through 2021,” the Board said in its announcement. However, “despite weaker residential construction activity, pre-tax profits are forecast to grow by 4.7 per cent this year to reach $4.2 billion.” Meanwhile, “non-residential construction output is forecast to expand by 3.7 per cent this year, led by growth in the institutional segment,” as well as “increased investment in warehouses and hotels.” “Providing support to the industry’s commercial segment is the rise of online shopping, which is beginning to see a faster rate of adoption in Canada. This will help support a U.S.-style buildup in warehouses across the country, although Southwestern Ontario will be a key beneficiary,” the Board added. “Industry profitability is expected to improve slightly over the next five years. Pre-tax profits are expected to reach $2.2 billion this year and grow by an average of more than 4 per cent between 2018 and 2021.” Related stories: Mortgage professionals’ organization reluctant about foreign buyers’ tax in GTA Record year for Canadian commercial sales points to a robust 2017 – CBRE
While various quarters have argued that the Canadian real estate sector’s current situation is nothing like the instability that characterized the U.S. housing industry prior to last decade’s crash, a commodities analyst warned that the two markets are more alike—and face more similar risks—than consumers are willing to admit.
In a contribution for Maclean’s, freelance journalist and financial observer Andrew Hepburn expressed bafflement at the chorus of voices (such as Moody’s and other specialists) declaring that the Canadian market will not fall into a U.S.-style recession any time soon.
Hepburn cited figures from the International House Price Database by the Federal Reserve Bank of Dallas, which found that, adjusted for inflation, Canadian home prices as of Q2 2016 are far more inflated compared to prices in the U.S. during the peak of its bubble in 2008.
Another factor that merits consideration is household debt, now at all-time highs in Canada and fuelled by steady sales volumes in the country’s hottest metropolitan markets.
“As with the U.S. bubble, a surge in household indebtedness (principally via mortgages) has provided the fuel to send prices soaring. If we examine U.S. and Canadian household debt-to-GDP ratios, we see that Canada recently exceeded the level reached by American households in the first quarter of 2008,” Hepburn explained.
“Turn on Canadian radio and television these days, or browse the Internet and social media, and you’ll encounter a near-constant barrage of pitches for condos, mortgages (as well as second mortgages) and real estate seminars, promising the secrets of easy real estate riches as taught by self-professed experts,” he added.
Hepburn cautioned that many observers have a misplaced—and dangerous—sense of the Canadian economy’s robustness against global pressures, and that these suppositions should not be taken as gospel truth.
“When the U.S. housing market collapsed, it kneecapped the global economy, and yet Canada emerged largely unscathed, with observers praising the health of Canada’s banks… Now as global growth slows, yet more observers are singing Canada’s praise for its embrace of fiscal stimulus, trade and newcomers, a stark contrast to the presidential candidacy of Donald Trump.”
“Canada better hope all this housing confidence is justified,” the analyst concluded “If there’s one thing the U.S. crash reminded us, it’s that housing bubbles can have very serious and long-lasting consequences—property values crater, mortgages become millstones, consumer spending plummets, and unemployment soars.”
Vancouver carries the greatest probability of a bubble – study
New rules will push first-time buyers out of the market faster
“We’ve been talking about this in the mortgage world for a while now. All these mortgage changes affect the monolines; all these capital requirements require rate increases and there are going to be capital requirement changes on the insurers,” Ron Butler, a broker with Butler Mortgage, told MortgageBrokerNews.ca. “Finally, in the end, there is going to be risk sharing, which requires more capital requirements. At the end of the day, all of the stuff requires higher rates.”
TD Bank was the first lender to act in response last month’s mortgage rules changes.
The bank announced in a note to brokers Tuesday that it was changing its mortgage rates, including increasing its mortgage prime rate to 2.85%.
And according to Butler, the other banks might follow suit.
“Starting in January, banks are going to be required to assign more capital to mortgages. All these banks are going to be pushed in some sort of direction to raise rates because of these capital requirements on the hot marketplaces,” he said. “But this is their first step – [TD was] just putting this out there and praying that the other banks will go.”
Raising rates is a natural reaction to the recent changes, Butler argues, and the lenders shouldn’t be blamed for passing the expense onto customers.
After all, no successful business will just eat the cost and settle for less profit.
“This is the result of the government’s moves. The government is increasing capital requirements in different layers and different levels of the mortgage business. And by doing so, they require banks to raise rates,” Butler said. “Every business passes government regulation change onto the consumer. TD is doing this because they feel they have to; there is a logical reason behind it based on capital requirements and other banks may change or may not.
“My position is this was not a TD thing. It’s not like TD is going to grab more profit off this.”
The board says 2,233 properties were sold in October of this year, down from the 3,646 home sales recorded in the same month last year.
Board president Dan Morrison says changing market conditions combined with a series of government interventions in the real estate market contributed to the decline.
Both the B.C. and federal governments have brought in a number of measures to address soaring housing costs, particularly in Vancouver.
In August, the provincial government implemented a 15 per cent tax for foreign nationals buying property in Vancouver in a bid to stabilize the city’s housing prices, which have been among the highest in North America.
Last month, the composite benchmark price for all residential properties in Metro Vancouver was $919,300 _ a 24.8 per cent increase compared to October 2015, but a 0.8 per drop from September of this year.
The Canadian Press
London-based think tank Legatum Institute ranks New Zealand, Norway, Finland and Switzerland above Canada with Australia just behind and the US in 17th place.
However, health and education are two areas where Canada is slipping, and overall prosperity has been half that of the UK and New Zealand. The report highlights that Canada has fared better than the US.
The report also warns that despite its prosperity Canada is not immune to economic growth failings seen in Latin America, noting that Canada “faces a similar challenge in keeping its prosperity rising, with oil producing provinces likely to be hit in their creation of prosperity by falling oil prices in a way that oil-consuming provinces will not be.”
More market update:
Sotheby’s signs deal with Chinese real estate portal
Confidence in real estate prices slides
Toronto home prices up more than 20 per cent
Toronto condo king Brad Lamb delays Alberta projects amid oil slump: ‘The situation is worse than 2008’
Lamb Development Corp. is delaying construction of two condominium projects in Alberta as the slump in the price of oil guts jobs and housing demand
The report released Friday notes Toronto house prices are up 10.3 per cent from a year ago while Vancouver prices are up 16.3 per cent in the same period. Meanwhile the Brookfield House Price index for the entire country is up just under 5 per cent while Statistics Canada’s New House Price Index is growing at just under 2 per cent.
“Housing gains have been markedly slower in the other Canadian metro areas, particularly in the Prairie provinces, and growth has moderated further in recent months,” writes Alexander Lowy, an associate economist at Moody’s Analytics which is a division of Moody’s Corp.
The economist says two factors may bring the housing market’s “white-hot streak to a screeching halt” and predicts a softening of household demand over the coming years.
Moody’s Analytics says the bifurcation in the market could work against the overall Canadian housing market at some point.
“This split will make it difficult to manage the market in the event of adverse shocks, and a continued slowdown in smaller metro areas could eventually drag down the overall market,” says the report.
Lowy also predicts rising interest rates will take a bite out of the Canadian housing market. “Mortgage rates will almost certainly rise by the end of the year as the U.S. Federal Reserve continues its rate hikes, driving up longer-term government bond yields in the U.S. and Canada through 2016,” he writes, adding the expectations of higher rates may giving the market “artificial strength” as buyers and sellers rush to secure deals with attractive financing.
Eventually, all the activity that has been pushed forward could result in a quicker drop in demand than anticipated, if rates begin to climb in a dramatic way.
The economist thinks Canada’s central bank is eventually going to have no way to go but up, when it comes to its key overnight lending rate.
“The Bank of Canada’s low interest rate policies may help prop up house prices this year, but even Canadian policy rate tightening is inevitable. This could price many new borrowers out of the market and increase the risks for those faced with rolling over existing mortgage debt or attempting to draw equity out of their homes. The result will likely be a softening of household demand over the coming years,” said Lowy.
The BC Minister of Finance has announced several changes to the Property Transfer Tax program, effective Wednesday, which include:
- a property transfer tax exemption for Canadian citizens and permanent residents who purchase newly-built homes, condos and townhouses under $750,000. Purchasers must live in the property for at least one year. This is a potential savings in closing costs of up to $13,000;
- a one percent increase in property transfer tax to three percent for homes which are sold over the $2 million mark;
- the first time home buyers exemption will remain in place for homes under $475,000;
- buyers will need to start disclosing their country of residence in all property transactions;
- the beneficial ownership of properties held by corporations will also be tracked.
B.C.’s financial services regulator is proposing that mortgage brokers in the province disclose their commissions, a move the agency says is necessary to protect consumers but that brokers across the country argue will undermine confidence in their industry.
The province’s Financial Institutions Commission issued an open letter on its website last month detailing a plan that would require mortgage brokers to tell clients how much money they stand to make on a deal.
Mortgage brokers are provincially regulated, meaning the proposal would only apply to those in B.C. But the industry is closely watching the issue given the likelihood that other provincial regulators will follow suit.
The Financial Services Commission of Ontario said in an e-mailed statement that it was aware of the discussion in B.C. and “takes an interest in developments of the mortgage-broker industry across Canada, especially when those developments involve consumer protection.”
Unlike independent financial advisers or real estate agents, mortgage brokers don’t typically charge their clients fees, instead collecting a commission from banks and mortgage lenders. While brokers aren’t usually tied to a specific financial institution, in practice many work with only a handful of lenders who reward their loyalty with bonuses based on the volume of business they generate.
Under the current rules, brokers must disclose to clients that they are being paid by a lender, but aren’t required to reveal exactly how much they make on a deal.
The regulator says it’s concerned that brokers might be tempted to steer clients toward lenders who pay the highest commissions and bonuses, rather than into the most suitable mortgage or the one with the lowest interest rate.
“Our concern is firstly that there is a lack of transparency in the way that brokers are compensated and that consumers don’t have any information about the potentially powerful influences on a broker’s advice to them,” the commission’s deputy superintendent Chris Carter said.
Brokers argue that disclosing commissions would only confuse their customers, making them think they’re being charged extra or paying higher mortgage rates than they would at a bank. They fear that being forced to show how much they get paid will drive consumers toward the major banks, where mortgage salespeople also often work on commission, but aren’t required to disclose their compensation to customers.
“It could end up hurting the brokerage industry because of the perception that you’re paying more when you’re dealing with a broker,” Kelowna mortgage broker Laurie Baird said. “It puts us at an unfair disadvantage against the reps from the banks.”
Commissions are fairly standard across the industry, ranging from roughly 80 to 110 basis points on a typical mortgage (there are 100 basis points in a percentage point.) That equates to $4,000 to $5,500 on a $500,000 mortgage.
But brokers say disclosing an accurate dollar figure for every client will be difficult as many don’t know exactly what their commissions will be at the time, since they might end up qualifying for a volume bonus later in the year once they’ve done enough deals with a lender.
“It’s really complicated because how are you going to be able to disclose the exact amount if six months from now maybe your volume went up and you’re going to get a little bit of a bonus?” asked Donna Telep, a mortgage adviser in Maple Ridge, B.C., east of Vancouver. “As long as the individual client isn’t paying the fee, then I don’t see the purpose.”
At least two trade groups representing brokers have sent written concerns to the Financial Institutions Commission. Brokers are also being encouraged to write their MLAs over the issue.
The issue hits at the core of a larger battle facing the fiercely competitive mortgage broker industry, in which some mortgage brokers sacrifice a portion of their commissions in order to offer the lowest possible interest rates, a practice known as “buying down” the rate.
Such brokers typically make up for the lower commissions through doing a higher volume of deals, sometimes into the hundreds of millions of dollars.
They have drawn the ire of many traditional brokers who argue that revealing their commissions will push clients toward discount brokers offering the lowest fees and rates, but whose mortgages may also come with costly restrictions, such as prepayment penalties for those who need to break a mortgage early.
“They are the Wal-Mart of the mortgage industry,” said Walid Hammami, a mortgage broker in Montreal. “They are racing to the bottom.”
Many brokers are mainly afraid of consumers finding out how much they get paid, says Ron Butler, who operates a large online discount brokerage and is one of the few who supports the idea of disclosing commissions to clients.
“It’s really simple. I operate on one-third the income of the average mortgage broker, so I don’t mind it being showed to people,” he said. “I think it will have next to no effect [on the industry], which gives you some good insight into the level of terror that many mortgage brokers feel about revealing their income to their clients.”