Qualifying Rate is Going Down
Qualifying Rate is Going Down
My previous post was an article on how the pandemic has affected the jobs market and has frozen the Canadian economy during this Covid-19 lockdown. Data recently released from the Canadian Real Estate Association (CREA) showed national home sales fell to a record 56.8%, showing that the housing sector is no exception. Among Canada’s largest markets, sales fell by 66.2% in the Greater Toronto Area (GTA), 64.4% in Montreal, 57.9% in Greater Vancouver, 54.8% in the Fraser Valley, 53.1% in Calgary, 46.6% in Edmonton, 42% in Winnipeg, 59.8% in Hamilton-Burlington and 51.5% in Ottawa.
The residential real estate industry is not standing still, however. Technological innovation is creating new ways of buying and selling homes. According to Shaun Cathcart, CREA’s Chief Economist, “Preliminary data for May suggests things may have already started to pick up a bit for both sales and new listings, in line with evidence that realtors and their clients have adopted new and existing virtual technology tools. These tools have allowed quite a bit of essential business to safely continue, and will likely remain key for some time.”
I have heard agents discussing software that virtually “stages” properties, allowing potential buyers to see the possibilities of existing and renovated floor plans and options in decor and design. The software replaces the need for expensive “physical” staging and can be far more creative. Where there is challenge, there is opportunity, and the people that create and adopt these innovative virtual solutions could be big winners.
Keeping the lid on price pressures, the number of newly listed homes across Canada declined by 55.7% m-o-m in April. The Aggregate Composite MLS® Home Price Index declined by only 0.6% last month, the first decline since last May. While some downward pressure on prices is not surprising, the comparatively small change underscores the extent to which the bigger picture is that both buying and selling is currently on pause.
Mortgage Qualifying Rate Set To Drop
The mortgage qualifying rate, the so-called Big Bank posted rate, has been above 5% since the OSFI stress test began on January 1, 2018. Despite dramatic declines in the government of Canada bond yield, which currently hovers at a mere 0.388%, and a huge fall in contract mortgage rates, the banks have kept their posted rates elevated. The minimum stress test rate began in 2018 at 5.34%, then finally fell to 5.19% and more recently to 5.04%–all still at a historically wide margin above market-determined rates.
In the past week, RBC and BMO have cut their 5-year posted rates slightly further to 4.94%. If no other banks follow, the Bank of Canada’s OSFI stress test rate will fall to 4.99%. If at least one other bank goes to 4.94%, the qualifying rate will drop to 4.94%. Every little bit helps.
Highlights of the Bank of Canada’s Financial System Review
With the first news of the COVID-19 pandemic threat, the BoC report said that “uncertainty about just how bad things could get created shock waves in financial markets, leading to a widespread flight to cash and difficulty selling assets. Policy actions are working to:
The Bank of Canada’s actions have put a floor under the economy. These along with the federal government spending initiatives and the mortgage deferral program have cushioned the blow to households and businesses. Governor Poloz said, “our goal in the short-term is to help Canadian households and businesses bridge the crisis period. Our longer-term goal is to provide a strong foundation for a recovery in jobs and growth.”
With the economic outlook remaining highly uncertain, the BoC erred on the side of caution in projecting mortgage arrears and non-performing business loans based on the more severe economic scenario it laid out in the April Monetary Policy Report. The pessimistic reading would be that even with policymakers’ extraordinary actions, that scenario would see mortgage and business loan delinquencies eclipse previous peaks. A more optimistic reading would be that policy support has prevented a significantly worse outcome, and a resilient financial system will be able to absorb losses and leave the foundation in place for an eventual economic recovery. And, as Governor Poloz mentioned, a better economic scenario is still within reach as many provinces are beginning to gradually re-open their economies.
The projections in today’s FSR are based on a scenario in which Canadian GDP is 30% lower in Q2 and recovers slowly thereafter. In that scenario, mortgage arrears are projected to increase to 0.8% by mid-2021 from 0.25% at the end of 2019–nearly double the peak in arrears seen in 2009. Meanwhile, non-performing business loans are forecast to rise to 6.4% at the end of this year from 1% at the end of last year, significantly higher than past peaks of less than 5% in 2003 and 2010.
The upshot is that while we might see a significant increase in mortgage arrears and troubled loans over the next two years in this pessimistic economic scenario, these outcomes would have been much worse without the extraordinary programs that have been put in place to support businesses and households. That has important implications for the banking sector. The BoC’s analysis suggests that, with these policy measures, large bank’s existing capital buffers should be sufficient to absorb losses. Without those interventions, “banks would be faring much worse, with important negative effects on the availability of credit to households and businesses.”
Of course, the pandemic shutdown has strained the financial wherewithal of many households and businesses. That was deemed the price we must pay to mitigate the severe health threat and contain its spread. The BoC report acknowledges the economic fallout of the necessary measures and promises to take additional actions to assure the economy returns to its full potential growth path as soon as feasibly possible. Cushioning the blow for those most in need.
Nevertheless, there are businesses that will close permanently and others that will scoop up declining competitors. Some will benefit from the new opportunities created by social distancing, enhanced sanitation, remote activity, new forms of entertainment and advances in healthcare. Others will no doubt die, although many of these companies were at death’s door before the pandemic emerged. Creative destruction is always painful for the losers, but it opens the way for many new winners and those existing businesses and individuals that are creative enough to adapt quickly to the changing environment.
Reported by Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres
A Recession Like No Other
The Canadian economy has been put in a medically induced coma. Never before in modern history have we seen a forced shutdown in the global economy so, not surprisingly, the incoming data for April is terrible. There is a good chance, however, that April will mark the bottom in economic activity as regions begin to ease restrictions.
The economy will revive, but the psychological shock is perhaps the most unnerving. Rest assured, however that, as severe as this is, there are real opportunities here along with the challenges. There are economic winners, not just losers. More on that later.
Employment in Canada collapsed in April, with 2 million jobs lost, taking the unemployment rate to 13.0%, just a tick below the prior postwar record of 13.2% in 1982 (see chart below). The record decline is on the heels of the 1 million job loss in March, bringing the cumulative two-month total to 15.7% of the pre-virus workforce.
Economists had been expecting double the job destruction–a 4 million position decline in April–in reaction to the reports that over 7 million Canadians had applied for CERB. Today’s news reflected labour market conditions during the week of April 12 to April 18. The applications for CERB are more recent, so we may well see these additional losses reflected in the May report.
The 13% unemployment rate underestimates the actual level of joblessness. In April, the unemployment rate would have been 17.8% if the labour force participation rate had not fallen. Compared to a year ago, there were 1.5 million more workers on permanent layoff not looking for work in April – and so not counted as unemployed.
Also, the number of people who were employed but worked less than half of their usual hours for reasons related to COVID-19 increased by 2.5 million from February to April. As of the week of April 12, the cumulative effect of the COVID-19 economic shutdown—the number of Canadians who were either not employed or working substantially reduced hours—was 5.5 million, or more than one-quarter of February’s employment level.
In April, both full-time (-1,472,000; -9.7%) and part-time (-522,000; -17.1%) employment fell. Cumulative losses since February totalled 1,946,000 (-12.5%) in full-time work and 1,059,000 (-29.6%) in part-time employment.
Decline In Employment is Unprecedented
The magnitude of the decline in employment since February (-15.7%) far exceeds declines observed in previous labour market downturns. For example, the deep 1981-1982 recession resulted in a total employment decline of 612,000 (-5.4%) over approximately 17 months.
More of the drop in employment now is the result of temporary layoffs. In April, almost all (97%) of the newly-unemployed were on temporary layoff, whereas in previous recessions, most of the dismissals were considered permanent.
In April, more than one-third (36.7%) of the potential labour force did not work or worked less than half of their usual hours, illustrating the continuing impact of the COVID-19 economic shutdown on the labour market. But job losses were also still weighted, on balance, more heavily in lower-wage jobs. Average wage growth for those remaining in employment spiked sharply higher as a result to 11% above year-ago levels.
All provinces have been hard-hit
Employment declined in all provinces for the second month in a row. Compared with February, employment dropped by more than 10% in all regions, led by Quebec (-18.7% or -821,000). Quebec leads the country in the number of COVID-19 cases and deaths.
The unemployment rate rose markedly in all provinces in April. In Quebec, the rate rose to 17.0%, the highest level since comparable data became available in 1976, and the highest among all provinces. The number of unemployed people increased at a faster pace in Quebec (+101.0% or +367,000) than in other regions.
Employment dropped sharply from February to April in each of Canada’s three largest census metropolitan areas (CMAs). As a proportion of February employment, Montréal recorded the largest decline (-18.0%; -404,000), followed by Vancouver (-17.4%; -256,000) and Toronto (-15.2%; -539,000).
In Montréal, the unemployment rate was 18.2% in April, an increase of 13.4 percentage points since February. In comparison, the unemployment rate in Montréal peaked at 10.2% during the 2008/2009 recession. In Toronto, the unemployment rate was 11.1% in April (up 5.6 percentage points since February), and in Vancouver, it was 10.8% (up 6.2 percentage points).
Employment Losses By Sector
In March, almost all employment losses were in the services-producing sector. In April, by contrast, employment losses were proportionally larger in goods (-15.8%; -621,000) than in services (-9.6%; -1.4 million). Losses in the goods-producing sector were led by construction (-314,000; -21.1%) and manufacturing (-267,000; -15.7%).
Within the services sector, employment losses continued in several industries, led by wholesale and retail trade (-375,000; -14.0%) and accommodation and food services (-321,000; -34.3%).
Industries that continued to be relatively less affected by the COVID-19 economic shutdown included utilities; public administration; and finance, insurance and real estate.
In both the services-producing and the goods-producing sectors, the employment decreases observed in the two months since February were proportionally larger than the losses observed during each of the three significant labour market downturns since 1980.
As economic activity resumes industry by industry following the COVID-19 economic shutdown, the time required for recovery will be a critical question.
After the previous downturns, employment in services recovered relatively quickly, returning to pre-downturn levels in an average of four months. On the other hand, it took an average of more than six years for goods-producing employment to return to pre-recession levels following the 1981-1982 and 1990-1992 recessions. After the 2008-2009 global financial crisis, it took 10 years for employment in the goods-producing sector to return to pre-crisis levels.
As bad as things are, there is some evidence that the economy is approaching a bottom. Business shutdowns are easing in most provinces, and while it will be some time before we see a complete reopening, early signs of improvement are evident. Business sentiment appears to have improved somewhat towards the end of April, as evidenced by data from the Canadian Federation of Independent Business. The Royal Bank economists report that credit card spending looked less weak at the end of April. Housing starts for April held up better than expected. And, most importantly, the spread of Coronavirus has eased, and regions are starting to relax some of the rules to flatten the curve.
Concerning the housing market, before the pandemic, we were going into the spring season with the prospect of record sales activity in much of the country. Aside from oil country–Alberta and Saskatchewan–all indications were for a red-hot housing market. So the underlying fundamentals for housing remain positive as the economy recovers. How long that will take depends on the course of the virus and whether we see a second wave in late fall.
Interest rates have plummeted. Thanks to the 150 basis point decline in the prime rate, variable rate mortgage rates have fallen for the first time since late 2018. Once the Bank of Canada was able to establish enough liquidity in financial markets, even fixed-rate mortgage rates have fallen.
The posted mortgage rate appears stuck at 5.04%, far above contract rates; but with any luck at all, this qualifying rate for mortgage stress tests will ease in the coming months. The Bank of Canada will remain extremely accommodating. In my view, interest rates will not rise until 2022.
Opportunities–There Will Be Winners
Even now, some businesses are enjoying a surge in revenues and profitability. Just to put a more positive note on this period of rapid change, I jotted down a list of companies that are thriving. Top of the list is Shopify, a Canadian company that helps businesses provide online shopping services. Shopify is now the most highly valued company in Canada, as measured by its stock market valuation, surpassing the Royal Bank.
Many who never relied on online shopping have become converts during the lock-down. Amazon is another business that is benefiting, but Amazon needs more competition, and many Canadians would welcome some homegrown online rivals.
Loblaws, with its groceries and drug stores, is booming. So are the cleaning products companies like Clorox and paper products company Kimberly Clark. Staying at home has boosted sales at Wayfair, the online furniture and home products site. Peloton and suppliers of dumbbells and other fitness equipment are seeing increased revenues as people look for in-home alternatives to the locked-down gyms and health clubs.
Demand for cloud services has boosted revenues at Microsoft and Dropbox. Home entertainment is booming, think Netflix and YouTube. Zoom and Cisco (Webex) are also big winners. Qualcomm stands to gain from a more rapid move to 5G. And Accenture and Booz Allen, among other business and government consultants, are busy helping companies reinvent their operations in a post-pandemic world.
Reported by Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres
In times of enormous uncertainty and volatility, people need expert advice and hand-holding, particularly concerning their finances. Please know that I am here to support you as you have done for me in these past years. If you or anyone you know need help or have any questions around mortgage options, or are simply looking for advice, please feel free to reach out to me directly via phone or e-mail.
Stay Safe. Stay Home. Save lives.
This is currently the motto for Canadians who are working hard across the country COVID-19 by staying home – including your mortgage brokers! While social distancing of this magnitude has never occurred previously, it is important to understand that we are all in the same boat. To help you get through this period, I have put together some tips for social distancing and staying safe (and proactive) at home:
Follow Best Practices:
Ideally, to make social distancing most effective, individuals are on only interacting with their household during this time and until the pandemic is under control. Some other best practices include:
Maintain Your Routine:
When the world feels like it is going crazy, one of the best things you can do to keep your sanity is to maintain your routine. Whether you’re out of work or working from home, making sure that you continue to get up at your normally scheduled time and go through your morning process is a great way to maintain stability. Taking your regularly scheduled breaks, such as lunch hour, while working from home are also important to maintain your schedule( and keep sane). Br sure to continue to maintain social distancing procedures during this time.
Get Up and Move:
It can be hard to feel motivated, but it is important to make sure to get up and get moving when you are able. From a home workout to a walk, everything works towards keeping your body and brain health; especially during times of extra stress. Carve out 15-60 minutes per day for some light physical activity and you will be amazed at how much better you feel!
Connect With Others:
In today’s world, we have a plethora of technology at our disposal. Even if you feel alone, there are ways to reach out to friends and family through Skype, Houseparty, Zoom Meetings, email, text and an old fashioned phone call. While it is vital to maintain physical distance, we as humans require connections so be sure to utilize the tools around you and don’t be afraid to share your feelings – your friends are all in the same boat and will understand.
Information is power and the more information you have at your disposal as this situation develops, the better prepare you will be to mange your household and finances. Donminion Lending Centres dedicated COVID-19 website is a great resource for staying up to date: https://dominionlending.ca/covid-19/