A Year In Review and Looking Ahead To 2017
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As we enter into 2017, we take a look back at major headlines in 2016 and projections for what might lay ahead for Canadians in the next 12 months.
New Mortgage Rules
Last October, Canada's Federal Finance Minister made an announcement that would affect those trying to qualify for a mortgage as of November 30, 2016. In the past, borrower's could qualify for a mortgage based on discounted rates. Up until the announcement, a homebuyer could be approved if their debt-ratios showed they could make mortgage payments based on the Bank of Canada’s qualifying rate. The mortgage qualifying rate (MQR) was based on the posted five-year fixed rate and in 2015, it hovered around 4.65%.
With the announcement, anyone applying for a five-year fixed didn’t have to use the 4.65% rate, but rather the much lower contract rate. To add some perspective, in 2015, this contract rate bounced between 1.99% and 2.99%. The contract rate is essentially equivalent to a discounted rate, which in Fall 2016 was about 200 basis points below the stress-test mortgage qualifying rate.
The new rules also restrict insurance for these types of mortgages based on new criteria, including that the amortization period must be 25 years or less, the purchase price is less than $1 million, the buyer has a minimum credit score of 600 and the property will be owner-occupied.
The new rules, simply stated, will stress-test whether or not a buyer could withstand a 1% to 2% increase in mortgage rates. Historically, any changes to mortgage regulations focused on minimum down payments. However, the Federal Finance Minister stated that the reason for the change to mortgage qualification rules was to “Bring consistency to mortgage insurance rules by standardizing eligibility criteria for high- and low-ratio insured mortgages, including a mortgage rate stress test.”
It's been estimated that the new Federal regulations could potentially impact 7% to10% of Canadian home buyers. Nearly one third of Canadian homebuyers who had been approved for "high-ratio mortgages" a short time before last October, wouldn't actually qualify under the new rules. A high ratio mortgage is when a borrower has less than 20% in equity, with a particular vulnerability if the total value of a loan is at least 450% of annual income.
CREA (The Canadian Real Estate Association), released some interesting stats last month (December 2016). Some highlights from their report include:
- National home sales fell 5.3% from October to November.
- Actual activity remained 1.6% above levels in November 2015.
- The number of newly listed homes edged down 0.4% from October to November.
- The MLS® Home Price Index (HPI) in November was up 14.4% year over year.
- The national average sale price climbed 7.3% year over year in November.
- In Calgary, home prices were down 4% year over year.
The national average price continued to be pulled upward by sales activity in Greater Vancouver and Greater Toronto, which remained two of Canada’s tightest, most active and expensive housing markets.
The Central Bank also noted that means house prices are now "just under six times average household income, their highest recorded level." The good news is that the central bank thinks the new rules will eventually achieve the goal of bringing down debt levels.
A Look Ahead to 2017
Canada's leading economists, analysts and realtors share some predictions as to trends Canada will see unfold over the coming year:
Last November, RBC and TD Bank raised their fixed mortgage rates, even in light of the Bank of Canada having announced it would hold the overnight interest rate at 0.5%. A senior Canadian economist predicts a more pronounced downturn in housing activity to prompt the bank to cut interest rates to 0.25%.
The Bank of Canada cut its economic forecasts through 2018, predicting a slower housing market and conceding the export sector is not rebounding the way it had anticipated.
Gross domestic product growth is expected to pick up to 2% in 2017 and 2.1% in 2018. The bank expects the Canadian economy to return to full capacity by mid-2018, about six months later than it had previously expected.
The weaker outlook is due largely to slower-than-expected growth in the export sector and an anticipated slowdown in housing sales — two major engines of growth.
Benoit Durocher, a senior economist at Desjardins, cites a 3.5% Q3 rebound in real GDP, job creation, heightened consumer confidence, and potential stimulus from federal spending on infrastructure, a pillar of Prime Minister Justin Trudeau’s campaign.
According to CREA (The Canadian Real Estate Association), 2017's national sales are forecasted to represent 518,900 units. Transactions in B.C. and Ontario are anticipated to remain strong but fall short of 2016's record levels, as a result of deteriorating affordability, an ongoing shortage of affordably priced listings for single family homes, alongside newly tightened mortgage regulations (see above). British Columbia home sales are forecasted to decline by 12.2%, while annual sales in Ontario are forecasted to retreat by 2.7%.
Sales are also forecasted to pull back slightly in Saskatchewan (-1.2%), Nova Scotia (-2.1%), Prince Edward Island (‑2.2%) and Newfoundland and Labrador (-1.4%).
Sales in 2017 are forecasted to rise by 3.5% in Alberta and by 1.2% in Quebec. Improvements are also forecasted in Manitoba (+0.8%) and New Brunswick (+1.6%).
The national average price in 2017 is forecasted to decline by 2.8% to $475,900, with modest price gains near or below inflation in Manitoba, Ontario, Quebec, New Brunswick and Nova Scotia, combined with small declines of a similar degree in Alberta, Saskatchewan, Prince Edward Island and Newfoundland and Labrador.
While the average sale price in British Columbia is expected to decline by 7.8% in 2017, this largely reflects an anticipated decline in single family home sales activity at the higher end of the market – particularly in the Lower Mainland.
The forecast drop in the national average price in 2017, in conjunction with a decline in BC, is expected to mirror the trend of 2012, when a more normal year for activity in Greater Vancouver followed record level sales activity for multi-million dollar homes in 2011. The forecast decline reflects the influence experienced by the composition of sales activity on average prices (as it did in 2012 versus 2011).
The Trump Card
With Donald Trump becoming President of the US on January 20th, there is a lot of speculation as to how his position will impact Canada. Some speculation and predictions across Canada follow. Only time will tell if they're on the mark.
University of Calgary tax-policy expert Jack Mintz has said Canada’s ability to lure business investment and top talent would be threatened if the U.S. moves ahead with Trump’s vows to significantly cut tax rates for U.S. corporations and for the highest income earners.
Trump has also made it clear he wants Buy American rules in his planned $1-trillion infrastructure program, which could leave out Canadian companies.
Trump has also called for the renegotiation of the North American Free Trade Agreement, which could put many Canadian jobs in jeopardy.
That will also mean tough negotiations on softwood lumber, most likely an expanded Buy American government procurement program that freezes out Canadian competition and, most dangerous of all, the threat of a 35-per-cent penalty on goods entering the U.S. from American-owned manufacturers.
The purpose of that tariff would be to prevent American companies from moving operations to Mexico and elsewhere to take advantage of lower wages. But would it also apply to goods entering the U.S. from American-owned companies with operations in Canada? Common sense says no. The two economies are inextricably intertwined.
Although there are lots of dire predictions, some experts say the expectations of Trump’s business-friendly promises are poised to lift the U.S. economy, which would help Canada. Canada's might also benefit if the American economy continues to react positively (US dollar hit an 11 month peak since his win), a stronger U.S. dollar could send even more buyers north of the border.
Mining is Shining!
In contrast to the Canadian dollar, the mining sector saw shares of many companies rise in response to the former reality TV star's promise of major infrastructure spending. As a result, the price of copper alone rose around 30 per cent. Relied upon heavily in infrastructure, the metal is used for electric cables that power cars, telecommunications, and manufacturing.
With lots of speculation as to the ripple affect our southern neighbours will have on the Great White North, we should start to see the beginnings of new trends, whether upwards or downwards, in the coming months.
Wishing everyone a very happy and prosperous 2017!