Federal Reserve is cutting rates, again

Global accommodating cycles are intensifying as economic apprehension and wariness over the potential of a slowdown grows.

A few days ago Fed Chair Jerome Powell announced that the Fed would cut rates again from 2% to 1.75%. This comes as the rate of home flipping (buying early, renovating and/or holding, and then rapidly selling) has reached 8 year lows and news of a manufacturing recession in Germany transitioning to the services sector hit markets. Trump can claim another big win with the Fed’s decision. Market reactions have been mixed, with many claiming the cut was premature and obviously a political sign of subservience to the President. As rates are falling, the price of gold is hitting many-year highs, the pressure on emerging market currencies are also rising.

Bloomberg, a major U.S. financial services and news organization is predicting that Central Banks in Brazil, Russia, Nigeria, South Africa, Australia, and India among many European countries will all cut rates to stimulate credit creation and softening economies. Several trends are of concern to market analysts, the aforementioned Germany slowdown one of them, but Mexican car production is also going down, as is some U.S. industrial activity. The emerging signs of industrial weakness around the world was repeatedly cited by Jerome Powell as one of the reasons he chose to cut rates again so quickly after his earlier cut. A reminder for readers that U.S. interest rates are determined by members of the FOMC (Federal Reserve Open Market Committee).

CBC News is reporting that the two rate cuts by Powell will likely force Bank of Canada Governor Jerome Powell to reduce rates here in Canada. While Bloomberg reported that it doubts a BOC rate cut in Canada for 2019, there is still time left in the year for a decision in the fourth quarter. A late 2019 rate cut would have a positive impact on real estate and consumer spending for the holiday season and would help the economy prepare for 2020. A rate cut would have a positive and immediate psychological impact on the real estate market as it would lower mortgage costs; within a few days possibly.

On Rent Control

In yesterday’s Fall Economic Statement, Ontario Treasurer Vic Fedeli outlined that new housing units and previously unoccupied rental units would be exempt from the Wynne government’s rent control reforms.

Caption: Ontario Finance Minister Vic Fedeli
The Fall Economic Statement is an outline of fiscal and policy changes and economic news a government seeks to outline before its budget, where overall fiscal policies and most spending plans are explained. 
The previous government under Premier Wynne implemented its ‘rent control’ reforms shortly before this year’s election which limited rent increases to 1.8% for 2018 and broadened tenant rights at the expense of landlords. Tenants and poverty groups applauded the reforms, while  landlords complained that the changes would make them more selective of tenants. Developers stated that rent control would redirect their attention to build units for sale, not rent, further augmenting southern Ontario’s housing and rental supply problem.
With vacancies at absolute rock bottom record lows, the competition for favourable rental housing space in downtown Toronto is relentless. Builders and renters are applauding the Ford Government’s dilution of rent control, saying it will result in more supply, but over the long term and not immediately. Poverty groups and tenant advocates say the move will cause rental costs to skyrocket and will result in evictions. While it is agreeable to have strong protections for tenants in place, rent control has been proven to restrict supply and reduce the quality of housing stock in most of the jurisdictions where it is implemented. 

Bank of Canada Hikes Rates

The Bank of Canada to increased rates at its decision meeting on Wednesday, July 11th. The central bank increased its key rate to 1.5 per cent from 1.25 per cent.

bank of canada picture

The forces that favoured an increase in the cost of money outweighed those that supported continued loose money policies. The Canadian economy remains in very good shape. Inflation hasn’t reared its ugly head, household consumption is neither increasing recklessly nor falling precipitously. Growth and unemployment figures are very positive. Lack of price growth dynamism in the real estate markets, trade issues with the United States, and high levels of private and public debt are the key structural problems. Weighed against one another, the balance skews toward a rate hike.

Central Banks Around The World Are Adamant.

Central banks have begun and will continue a long term policy plan of ever higher rates, and more scrutiny on international banks and financial institutions. The Bank of Canada is no different. The key facts that most worry senior officials, politicians, and Central Bankers are the enormous levels of household and government debt, particularly mortgage debt. A generation of historically unprecedented record low interest rates has blown up large debt bubbles which elites are now desperate to deflate as carefully as possible.

Rates Hike To Negatively Impact Consumers

The likely hike will no doubt have a negative impact on consumers and on the real estate market. Banks are likely to raise their mortgage rates in response. The debt to disposable income ratio in Canada has hit a record of almost 175%, much higher than in the United States before the start of the Great Recession. A rate hike will be of no help to those looking for high prices for their real estate holdings. Debt to income ratios for the poorest Canadians are especially high. The lowest quintile of earners average a debt ratio of almost 350%. While higher rates will come at a cost, many believe they are absolutely necessary, and few doubt they are avoidable.

 

 

Bank of Canada holds its ground despite surging economy

Bank of Canada holds its ground despite surging economy

Yesterday the Bank of Canada held firm and its very recent change in tone and policy by confirming it would hold its benchmark interest rate to 1%. The Bank increased rates twice in quick succession, once in July, as the housing market was searing hot in some parts of the country, and again in September, after a wide spate of government measures had by then significantly cooled prices and demand.

The Bank offered no hint as to when rates would be raised again and this week’s decision is the final rate decision for 2017.

We will have to wait until next year to wait and see for further hikes. Some market watchers were expecting a hike as strong economic activity, robust GDP growth, and very high employment growth were all recently reported.

The most recent employment numbers are off the charts, with 80,000 new jobs being created in the month of November – market expectation was 10,000 new jobs. Ontario generated the lion’s share of these jobs (44,000).

The national unemployment rate hit a 10-year low because of these gains, falling to 5.9%. in Quebec, unemployment has hit an all-time record. Unemployment should continue to fall as retailers add some more positions for the holiday surge before year end. Hourly wages are also up just under 3% nationally, an unusually big increase.

Canada unemployment chart

The best piece of news is that 37,400 manufacturing jobs were created. These are solidly middle-class, high paying, productive positions that Canada has generally underperformed in creating.

Usually, central banks respond to strong figures like these by raising rates in fear of higher inflation from more spending and more borrowing. The Bank of Canada is internationally recognized and renowned as being extremely focused and hawkish on meeting its inflation targets. The broader market expectation is that further rate hikes will be on the table early next year if wage, employment, and GDP growth continue their robust increases.

Now Creative Group November 14, 2017 No Comments

The Market Rebound Begins

In a promising sign that the traditionally positive seasonal effects of Fall on the real estate market are once again kicking in, October sales of homes in Toronto rose over 12% from September figures. The increase will be well received by realtors and prospective sellers, as it shows that the market is showing renewed resilience and that demand and buying potential remains firm. Growth in October is usually expected by teal estate professionals in a usual year, but the 12% increase is slightly stronger than usual metrics.

Prices for average homes also increase slightly, hitting roughly $780,000.00. Prices have been increasing for very conservative but the October increase shows an acceleration from September numbers – again, this is a very promising sign. The increase in prices and sales shows that a market that had faced rapid and dramatic cooling from a long list of government and regulatory measures after peaking in May is once again begin the slow but steady process of warming up again.

While sales and prices are slowly returning to health, concerns about a continued large gap in the supply of homes versus still shy demand remain with close market watchers and realtors. The gap may be bad for those wanting to sell, but benefits buyers, who at the height of the market in May were hard pressed to get a bid in a prospective home, let alone a fair shot of sealing the deal with a buy. The large amount of supply continues to place downward pressure on sales and price growth.

Condo market surge continues

As a previous Tembo blog has outlined, the condominium market in Toronto remains very strong and shows strong price and demand growth. Although many pockets of the GTA have lukewarm and slow condo markets, the overall market, and particularly activity in the core continues to surge. Average October prices increased over 20% in October. The average price of a condo in Toronto now exceeds $520,000.00

As Tembo has repeatedly stated, the fundamental underlying pillars of the GTA real estate market remain firm and strong, and in the long term, the market will continue to be resilient and will continue to offer opportunities for buyers and sellers.

Now Creative Group October 31, 2017 No Comments

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.

Now Creative Group October 2, 2017 No Comments

How Millennials Can Prepare for a Real Estate Investment

If you’re a millennial thinking of venturing into the real estate world, there’s a few things you need to learn about before taking your journey. You might be already drowning in student debt, and generating low income, however, knowing how to make your process easier will ultimately help you stress a little less and reach your goal a lot faster.

Think about long term property value

The first step you can take is to do your research and to find a location that matches affordability with long term equity (value) growth potential. Once you figure out where you would like to see yourself living, plan around it. Find out about the local community, restaurants, malls, gas stations, neighbours and school districts. Setting a goal for yourself will not only help you narrow down where you want to live, but make your agent’s job easier in finding what you’re looking for.

Increase your credit score

There is a good chance that your credit score may not be as good as you would hope for it to be due to student loans, job insecurity, or unstable financial circumstances. If you plan on making your purchase within the next few years, it would be a good idea to spend the time leading up to it building a good credit score. Money lending officers will scrutinize your credit score and decide whether giving you a loan would be a good fit for them. Spend some time planning your finances and learn to discipline your spending habits.

Save up

Saving up could be a challenge especially if you are a millennial with student loans. But being able to save can be a testament to your self-restraint and what you can accomplish when you set your mind to it. Taking out a percentage of each of your paychecks and stashing it away, paying off high-interest loans first, making bigger minimum payments, and spending the rest on necessities will help you save a lot quicker.

Know the market

Start out by knowing your budget and how much you’re willing to spend on your home. Match this budget to what your desired location of stay is and work around it. Learn about how long it takes the houses in that area to sell, how many times they’ve been sold, and if the price ever drastically changed. Knowing all this information will validate which home will be the best investment.

Now Creative Group September 5, 2017 No Comments

Why Toronto is Immune from a Real Estate Crash

The imposition of a foreign buyer tax, stricter and more comprehensive rules and regulations, higher interest rates, and higher taxes has upended the Toronto real estate market. What was once the most dynamic sellers’ market in the history of the region in February of this year has now shifted in a much more balanced way towards buyers. A market where sellers were seeing double digit price increases and massive demand has been extinguished and now prices and sales are faltering with huge influxes of inventory hitting the market.

The talk now is of where the market will be in the medium to long term. Will prices and demand remain steady, recover, or crash? This is the grand question on the minds of professionals, buyers, sellers, politicians, regulators, bankers, and everyone else interested and affected by real estate. The best way to predict and ascertain the future is to look back to the past. The last time the market experienced a genuine, painful, and widely feared crash was in 1989. At the time speculation was rife, price growth explosive, money reasonably cheap, and demand strong.

But what triggered the ultimate inflection? What was the spark which led to a near decade long depression with a 40% real drop in prices? Ultimately, two factors broke the back of Toronto real estate. The first was a rapid increase in interest rates unveiled by the Bank of Canada to stem the inflation from the cheap money of the 80s boom and the second was a subsequently massive and sudden spike in unemployment. These two forces unleashed the early 90s recession which particularly hurt Ontario and caused 11% unemployment.

For the Toronto real estate market to crash, rates and joblessness would have to soar. The Bank of Canada has little reason to spike interest rates, as inflation is very low, and the economy is stable. Canada’s banks are healthy and sound, prices for many key commodities still remain competitive, and there are several economic sectors which are growing, particularly real estate, high tech, robotics, and advanced services. Leaving out a spectacularly sudden and damaging event, likely offshore, stability remains foreseeable in the medium to long term and jittery observers have little to fear from a full on 1989 real estate crash occurring

Now Creative Group August 29, 2017 No Comments

Canada’s Banks are Booming

Strong and sustained real estate activity nationwide, coupled with high consumer spending and a reasonably strong Canadian economy means the latest bank earnings are hitting all time records. Recently released figures show essentially all of the country’s banks generating massive quarterly profits. The first bank to disclose was RBC – generating a massive $2.8 billion quarterly profit.  The bank’s retail banking division posted a 6% increase in profits, showing that the recent increase in interest rates and the changes in the housing market did little to shake the bank’s trajectory and growth. One of the first acts the bank did after reporting the strong result was to increase its dividend by 5%, beating all expectations and fulfilling its obligation to shareholders.

CIBC, the smallest of the big 5 banks reported a $1.1 billion profit, also beating expectations and also increased its dividend. The bank recently acquired a Chicago based bank and has been expanding aggressively in the United States. Further results for TD, Scotiabank and BMO are incoming by the end of this week and next week. Analyst expectations are that strong results will be in the cards. A recurring theme among commentators and experts was to remain conservative and to brace for worse than expected news due to recent turbulence in real estate even as earnings expectations were high because of a strong economy.

The banks that did report voiced their approval of recent government measures introduced, particularly in British Columbia and Ontario, that were designed to halt rapid price growth and which have succeeded. The strong bank results underpin the general message that Tembo has repeated for the last several months; that is, that while ebbs and flows in real estate should always be expected, the fundamentals underlying pillars of the real estate sector are strong and will remain so for the foreseeable future.

Now Creative Group August 24, 2017 No Comments

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.