Mortgages

It’s already well into 2020, and it’s time to look back and look ahead.

We’re almost three years removed from the stress-test and it’s fair to say that it’s here to stay, and people are now used to it being around.

People’s buying habits have shifted primarily to condos (both end-users and investors) and prices in the lower and middle parts of the market have experienced steady increases after the summer 2017.

It looks like the story of 2020 so far is the drastic difference between the HUGE demand, and the lack of supply that has been driving prices up in the first 60 days of this year.

Here are some things we’re watching for when we look ahead to the rest of the year (and beyond).

Keep in mind that they’re not predictions… just things that are on our radar:

1. Interest Rates Down?

The Bank of Canada held firm on rates yet again January 22nd, but left the door open to a decrease in 2020. Bay Street traders have said there’s a 50/50 chance of this happening.

If you look at the bond rates, which are very closely tied to interest rates on mortgages, they’ve gone way DOWN.  We are headed for some slowdowns in the economy, and the new coronavirus will affect markets globally.  When the economy slows, interest rates go DOWN.

The Spring market will almost certainly see rates go down.  It starts with one bank dropping, and the rest quickly follow suit.

2. Changes to the Stress Test?

From a policy making perspective, the stress-test has been a resounding success.  It has unfairly affected the higher-end properties by pushing buyers into the lower price ranges, but it has worked in making sure the “fringe” buyers don’t push the margins too much.

IF change happens this year, it won’t be a complete overhaul.  Whispers are that the qualifying rate will change to the LOWER of the +2% OR the 5-year posted rate, instead of the current test, which uses the HIGHER amount.

How will this impact borrowers? An average borrower with less-than 20% down MIGHT be able to borrow up to 8% more under this new rule.

Not a whole lot of difference, but it certainly helps.  The original stress-test knocked about 16-17% off the maximum budget, so a clawback of up to 8% means it’s HALFWAY better than before.

3. Consumers are Spending Too Much

Insolvencies are at an all-time high. This is alarming because a higher rate of insolvencies will lead to less spending (obviously) but also less consumer confidence.

Jake Abramowicz, one of our favourite mortgage brokers and the inspiration for this post, believes that two things drive our housing market:

Being CONFIDENT in your financials, and LOW RATES.

We’ll have the latter, but will we have the former?

4. Shared-Equity Mortgages

The new CMHC shared-equity program is the first of many offerings to the market. Expect at LEAST two new start-ups launching in the GTA very soon. We don’t know the details, we don’t know who the lenders are that will participate, but we do know that there’s enough risk appetite for this kind of thing in the market.

These programs are designed to help those buyers who do not have satisfactory down payments, but who can afford the monthly payments.

Time will tell if this concept will take off in 416/905, but so far it has been slow and steady. It looks like most people don’t want to give up any equity!  The CMHC program has only had $55,000 of $1.25B applied for (and approved).

That means only 4% of the allocated budget is being spent.  Part of the reason is the cap on income at $120,000, and a max qualifcation of $480,000.  That doesn’t get you much, even in Milton.

It will be interesting to see if more aggressive offerings by private companies will increase the popularity of these shared-equity programs.

5. Ten-Year Mortgages

If the Government changes the above-mentioned stress-test, they will do this:

Anyone who wants five years or less qualifies at the current rules.

Anyone who wants to go longer-term will qualify at easier rules.

The writing is on the wall.  The Bank of Canada (BOC) talked about ten-year mortgage products late in 2019, and the BOC is also buying ten-year bonds to bring the yields down.

This is 1+1 = 2 math.  Very simple to see what is going on.

So all-in-all, our prediction is that 2020 will be a good year for everyone.  Ideally, we don’t want rapid, out-of-control price gains or losses.  Just slow and steady, 5% increases per year… which is the most sustainable and ideal goal to work towards for a healthy real estate market – now and in the future.

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