Millenials better at saving than their parents?

Labelled as the “lazy and entitled” generation, Millenials have seen their share of criticism. But revel in this – a recent study shows that millennials are better at saving than their parents, the baby boomers.

According to bankrate.com, 60 percent of 18 to 26-year-olds are planning ahead compared to just 25 percent of the older generation. Another study, conducted by Nerd Wallet, shows that millennial parents are putting away 10% of their annual income, compared to Gen X saving 8% and Boomers saving 5%. NerdWallet also found that only 7% of millennials surveyed were not saving for retirement. These numbers are most likely linked to the fact that Millenials had a front-row seat to the 2007 financial crisis. If millennials continue to save at this rate, Nerd Wallet say’s the will outsave previous generations

Regardless of the fact that Millenials are paying more bills than their parents, and facing a much higher cost of living, they still lead when it comes to savings and retirement plans. Given that most millennials have between 20 to 40 years before they retire – there is plenty of time for that money to grow. This is a very smart financial decision on their part.

 

 

The Bank of Canada Holds its Ground

The Bank of Canada was generally expected to raise its benchmark interest rate from 1.00 to 1.25 this week, but decided to hold its rate at 1.00. The Bank cited strong economic growth and the desire to moderate its pace of rate increases so consumers and the economy can better adjust to more expensive money. The Bank’s decision was met with interest as many expected it to stick to its aggressive rate hike pace. Many, however, believed the bank would hold off as surveys and media coverage showed that consumers were weary about the speed of interest rate increases and were worried about their ability to service the increased costs.

The immediate market reaction saw the dollar fall 0.65 cents and the TSX drop 60 points. Investors reported their view that the interest rate holding would lower economic growth for next year. Market watchers will take mixed views. Those in the real estate sector will cheer, as new taxes and stress test rules recently implemented will inevitably serve as a disincentive for builders to construct new homes and for buyers who are already under tremendous scrutiny from banks and insurers, especially first-time buyers.

The decision to hold shows that the Bank is concerned about excessively pressuring the real estate sector, given the new stress test rules will add cooling effects to an already lukewarm market at best. The Bank is likely to keep a close eye on inflation, GDP figures, and job numbers in the coming weeks and months before deciding to raise rates again in the next quarter. Fundamentally, the international trend is focused on raising rates, increasing the cost of capital, cooling consumption, and adding space and breathing room for central banks to decrease rates in any future economic challenges.

Stress Tests May Squeeze Homebuyers

Home buyers could lose a quarter of their home buying power if federal officials get their way in establishing guidelines to prevent people from borrowing too much. Federal officials are proposing stress testing uninsured mortgages. Uninsured mortgages are ones with a 20% minimum down payment. The government is wary about the financial sustainability and serviceability of these mortgages if interest rates rise.
If stress testing becomes a norm, it will reduce the ability of Canadians to borrow money and take on mortgage debt, and will place enormous pressures on an already pressured market to respond. Developers will see their pool of potential customers decreased, and demands for cheaper housing, which is already high, will continue to increase.
The federal agency responsible for stress tests in the financial system is the Office of the Superintendent of Financial Institutions (OSFI), located in Toronto with offices around the country. OSFI’s mandate is to ensure that risk and contagion in the financial system is a low as possible. One particular area of concern has been the long-term reality of low-interest rates and their impact on mortgage insurance, banks, overall debt in the country, and the stability of the financial system.
While many recent changes to regulation, down payment standards for housing purchases, and interest rate increases have added stability and cooled what was an inflamed market, OSFI continues to work towards tougher and tighter standards in anticipation of future market risks. When recently questioned about the state of the housing market and the need for tougher measures, Federal Finance Minister Bill Morneau made the point that he felt enough had been done and that further action was not necessary for the time being.
With future interest rate rises on the horizon and the possibility of stress tests, it is clear that regulators are weary and vigilant about the potential risks to Canada’s housing market – a market that has become crucial to economic activity and the livelihoods of hundreds of thousands.

After the Rate Hikes

The Government of Canada is carefully examining the effects of two rapid Bank of Canada rate hikes on the economy, the real estate market, and consumers. The immediate impact of the hikes saw prime mortgage rates increase across the entire spectrum in Canada, with variable rate mortgage holders affected the most. The rate hikes will likely slow down economic momentum, cool the housing market, and encourage consumers to keep on eye on their borrowing and spending habits – which were the intentions of the rapid hikes to begin with.

The economic data to be released in the next few weeks will likely influence the Bank’s decision on rates in October. There is a strong expectation that the Bank will likely increase rates again, as its position has become very hawkish. If the economic and real estate data is exceedingly poor and falls flat of baseline expectations, the Bank is likely to send warmer signals to the market that it will take its time on rates and raise them in a more gradual way over the medium to long term.

Governments around the world are very sensitive to interest rates. Increases that are too fast and too significant can significantly dampen economic growth and can spawn considerable resentment and unpopularity amongst voters. One of the key indicators of a government losing an election is the trajectory of interest in the run up stages. Federal Finance Minister Bill Morneau did not appear to voice his intention or opinion to act further on cooling the housing market. Interest rates in Canada are set by the Bank of Canada, which is fully independent of the government and which has complete and total purview over monetary policy.

Bank of Canada tightening tough on Markets

The Bank of Canada’s (BOC) decision to raise interest rates by a quarter basis point again last week came as a surprise to many and solidified the reality that the Bank has taken an aggressively hawkish position on the cost of money. The BOC had already reversed a historically unprecedented 7-year policy of record low interest rates on July 12th by topping the rate up to 0.75%. The second-rate rise in less than 2 months sent the value of Canadian dollar up but also had a direct impact on increasing mortgage costs and making business and commercial lending more onerous on borrowers as well. 

Canada’s big five banks immediately responded to the hike by announcing that their own respective mortgage rates would increase as well. The increase will have a powerful impact on the national housing market. In some regions where recent changes already had a significant cooling effect, the increase will only further make borrowing costs higher, particularly for first time buyers trying to enter the market. The move will also dissuade better prepared buyers who already have equity in the market from buying more or better-quality housing as equity growth and buying demand cools due to loss of market dynamism.

30% of Canadian homeowners who have variable rate mortgages will now have to adjust their household spending to make ends meet. While the rate rises may seem insignificant, the pace of the rate increases means that incrementally more expensive borrowing costs will accumulate and add up. This month’s increase also suggests that the Bank will likely increase rates again in October, as this matches the now emerging pattern of accelerating rates and lines up with the BOC’s increasingly hawkish and tightening rhetoric, and market expectations.

Why?

Many are scratching their heads as to why the BOC is raising rates so quickly. Inflation is very low at 1.2%. The BOC is known and respected throughout the world as one of the most successful inflation targeting Central Banks. This reputation was earned in the late 80s and early 90s as the Bank increased and maintained very high interest rates to break the back of double digit inflation caused by the 80s stock market and credit growth booms. The effect of these rapid rate rises on real estate, borrowing costs for consumers and businesses and consumer spending will be adverse. Tembo has several ideas.

First, the national economy is experiencing a big growth spurt and GDP growth rates increased by 4.5% in the second quarter. This was largely due to strong consumer spending, made affordable by a stable and healthy job market, some modest wage gains, and cheap borrowing costs. By raising rates, the BOC expects growth to cool to more sustainable medium to long term levels while sending signals to consumers to spend and borrow more Conservatively. There is also a broader international push by Central Banks to end the era of dirt cheap money, and the BOC, in the trendsetting style its admired for, is charging ahead.

Buying A New Home Vs. Buying A Resale

There are many decisions to make when beginning your search for a home in the current real estate market. Not only do you have to consider financial aspects such as your budget and mortgage costs, it is also important to consider the type of home and area that you would like to live in. There are advantages and disadvantages to purchasing both a new development as well as a resale property.

Move-In Date

From the time of purchase, new homes can take years to build and are often met with delays that prolong your move-in date. If you are looking to make a quick move, purchasing a resale home is your best option as you are able to secure a move-in date within a reasonable time frame.  On the other hand, purchasing a home that will be built within a few years from the purchase will allow the buyer to save more money over time for the down payment and closing costs. Depending on your needs and financial situation, it may be best to purchase a new development and make smaller payments until closing.  

Warranties & Costs

New construction homes in Canada are typically protected by a warranty, which will cover any costs related to issues with the construction and maintenance of the home. In Ontario, these concerns are addressed through the Tarion Warranty Program. This allows homeowners to save on costs and protect themselves financially from any damages related to the assembly of the home. Resale homes do not come with such a warranty, leaving any maintenance or fixes to the expense of the purchaser. Older homes may also require more maintenance over time, as the lifespan of the furnace and other appliances may be limited.

Customization

Depending on what you are looking to do with the home, either option may be feasible. New homes have limited options when it comes to design and available upgrades, whereas older homes can be purchased for a lower price and remodeled to meet the exact needs of the home owner. Some individuals purchase homes as investment properties, which can be renovated and resold. If you are looking to flip a house or customize your dream home, purchasing an older home may be in your best interest. Whereas others may prefer to select a model from a new development and move right into a brand-new home.

There is no definite answer to determine which type of home to purchase. Purchasing a new home versus a resale home is dependent on the buyer’s needs and preferences. Depending on the location and necessary amenities, some may prefer to purchase an older home as opposed to a new development, and vice versa.

A New Market Emerges

Several forces have recently emerged to re-shape what was the most dynamic seller’s market in the history of southern Ontario. The first was the arrival of the summer season and a vast torrent of new government rules, initiatives, intervention and the famous 15% foreign buyer’s tax. The tax has succeeded in dissuading new foreign entrants into the housing market and has helped to reduce demand.

The second force is a surge of new listings that have increased the supply of homes. This increase is helping alleviate one of the great historical shortages of supply in our market but is also contributing to the cooling of prices. The listings surge will continuum for the short to medium term as new construction units and houses reach the market.

The third force has been the recent increase in interest rates announced on July 12th by the Bank of Canada, with another interest rate hike likely in October of this year. The hike will increase borrowing costs for businesses and consumers and will immediately make mortgages more expensive. The real, full impact of higher rates will be felt in the coming years as mortgages are renewed.

Individually, these forces would have had important but not necessarily market shifting impacts. But as they have been combined and implemented in quick succession, the market has balanced itself away from sellers in favour of buyers who for years, had been squeezed out of securing a home by relentless bids, low supply, and very high prices and price growth.

Realtors across the GTA and southern Ontario are reporting lower demand, falling prices, a marked reduction in open house attendance, fewer bidding wars, and fewer foreign buyers. Attractive houses can still be found selling for above listed prices and overall demand and market health remains robust. The new vibe is one of balance between sellers and buyers.

The end of an interest rate era

On July 12th, the Bank of Canada confirmed what many had suspected for weeks; a 25 basis point increase in interest rates was confirmed, pulling the rate up to 0.75%. Weeks of pro-hike language and hinting gave the market plenty of time to anticipate and psychologically prepare for the increase. The immediate effect of the increase saw the Canadian dollar rise slightly, and the prime rates of Canada’s five major banks increase by 0.25 points as well. Tembo previously outlined that one of the reasons for a potential increase would be to ensure the value of the Canadian dollar remains stable as other central banks tighten their rates as well. (Higher rates at the Federal Reserve increase the value of the American dollar, putting downward pressure on the Canadian dollar and thus requiring our Central Bank to increase rates as well).

The increase was the first in over 7 years and brought an unprecedented period of rock bottom rates to an end. Throughout the early to mid 90s interest rates were in the double digits and averaged 3-5% in the early to mid 2000’s. Never in Canadian history had interest rates been so low for so long. With the increase, the Bank of Canada has followed its international counterparts in beginning the unwinding of easy money, reducing economic dependence on cheap debt, and preparing breathing space for lower rates in the future when the next economic headwinds arrive. The effect of the five big banks increasing their prime rates mean that variable rate mortgages will now be more expensive, making it slightly harder for first-time homebuyers to access credit.

Lines of credit, whether business or personal, will also be more expensive. Car lease rates will likely go up, and facility lines of credit will also go up. Commercial and business borrowing will be more expensive and this will have an impact on business bottom lines, hiring, long term spending plans, and investment strategies. Housing is just one piece of the borrowing picture. The positive aspect of the increase is that since the Bank began discussing the possibility of higher rates and now with the official announcement, the value of the Canadian dollar has recovered substantially. From a low point of 73 cents on the dollar in May, the dollar has risen to 78 cents recently. This will reduce pressure on prices, make imports cheaper, but will make exports more expensive for foreigners. Overall, it now appears that rates will likely return to more historical normal in the long term, the age of ultra low is now over.