12 Mar

Will the cost of money fall in 2019?

Interest Rates

Posted by: Garth Chapman

On March 6th The Bank of Canada (BoC) held the line on the Overnight Rate which drives the Banks’ Prime Rates.  The direction the BoC decides to take with rates is a direct reflection of today’s economic state; a threat of a recession or other industry-related downturn will prompt it to cut its rate in efforts to encourage liquid borrowing and stimulate the economy.  Read more here

I believe it is quite possible we will see that happen later in 2019, as the Canadian economy continues its slide, suffering from softer consumer spending, an under-performing housing market, and lower-than-expected exports and business investment.

Capital Economics, a London-based research consultancy notes the recent tone from senior officials signals the bank is set to sideline plans to raise the trend-setting rate to its neutral range, between 2.5 and 3.5 per cent. ““It’s not hard to see why officials are concerned,” Brown wrote in a research note. “The available data suggest that GDP fell for the second month running in December, by 0.1 per cent. Worse still, that weakness appears to have been broad-based.”

More from Capital Economics here.

This is good news for borrowers.

25 Oct

Bank of Canada’s Rate Hike Had A Hawkish Tone (meaning more to come)

Economy

Posted by: Garth Chapman

The article ‘Poloz Rate Hike Had A Hawkish Tone’ originally appeared on the DLC website Poloz Rate Hike Had a Hawkish Tone

Note: All the Banks have already follow suit with 0.25% increases to their Prime Rates.

 

As was universally expected, the Bank of Canada’s Governing Council hiked overnight rates this morning by 25 basis points taking the benchmark yield to 1-3/4%. This marked the fifth rate increase since the current tightening phase began in July 2017 (see chart below). The central bank stated it would return the overnight rate to a neutral stance, dropping the word ‘gradually’ that was used to describe the upward progression in yields since this process began. Market watchers will certainly note this omission. For the first time in years, the Bank has acknowledged it expects to remove monetary stimulus from the economy entirely.

So what is the neutral overnight rate? According to today’s Monetary Policy Report (MPR), “the neutral nominal policy rate is defined as the real rate consistent with output sustainably at its potential level and inflation equal to target, on an ongoing basis, plus 2% for the inflation target. It is a medium- to long-term equilibrium concept.” For Canada, the neutral rate is estimated to be between 2.5% and 3.5%, which implies that at a minimum, three more 25 basis point rate hikes are likely over the next year or so.

The Bank of Canada emphasized that the global economic outlook remains solid and that the U.S. economy is particularly robust, but is expected to moderate as U.S.-China trade tensions weigh on growth and commodity prices. The new U.S.-Mexico-Canada Agreement (USMCA) eliminated a good deal of uncertainty for Canadian exports, which will reignite business confidence and investment. Business investment and exports have been of concern in recent quarters, and the Bank is now looking towards a resurgence in these sectors, augmented by the recently-approved liquid natural gas project in British Columbia.

A continuing concern, however, is the decline in Canadian oil prices. Western Canada Select (WCS), a local blend that represents about half of Canada’s crude oil exports, has declined about 60% since July as global oil prices have risen (see chart below). WCS plunged below US$20 a barrel last week posting the biggest discount to West Texas Intermediate (WTI) on record in Bloomberg data back to 2008. WCS generally tracks heavy oil from Canada, which typically trades at a discount to WTI because of quality issues as well as the cost of transport from Alberta to the refineries in the U.S.

Canadian pipelines are already filled to the brim. The inability of the Canadian oil industry to build a major pipeline from Alberta to either the U.S. or the Pacific Ocean is increasingly dragging down domestic oil prices. Oil-by-rail shipments to the U.S. are at an all-time high, but this is an expensive and potentially unsafe option and precludes Canadian oil exports to China and Japan.

An even broader concern is the impact of higher interest rates on debt-laden consumers. The Bank is well aware of the risks, as the MPR cited that “consumption is projected to grow at a healthy pace, although the pace of spending gradually slows in response to rising interest rates… Higher mortgage rates and the changes to mortgage guidelines are affecting the dynamics of housing activity. Housing resales responded quickly to the new mortgage guidelines, and the level of resale activity is expected to continue on a lower trajectory than before the changes. New home construction is shifting toward smaller units, although stronger population growth is estimated to raise fundamental demand for housing.”

Household credit growth has slowed, and the share of new mortgages with high loan-to-income ratios has fallen. The ratio of household debt to income has levelled off and is expected to edge downward (see chart below).

Low-ratio mortgage originations declined by about 15% in the second quarter of 2018 relative to the same quarter in 2017 (see charts below). The MPR shows that “while activity fell for all categories of borrowers, the drop was more pronounced for those with a loan-to-income ratio above 450%, leading to a decline in the number of new highly indebted households”.

Bottom Line: The Bank of Canada believes the economy will grow about 2% per year in 2018, 2019 and 2020, in line with their upwardly revised estimate of potential growth of 1.9%. The Bank asserts that mortgage tightening measures of the past two years have “reduced household vulnerabilities,” although the “sheer size of the outstanding debt means that vulnerability will persist for some time”. That is Bank of Canada doublespeak. What it means is expect three more rate hikes by the end of next year. 

18 Oct

New mortgage Stress test to be imposed on Canadians effective Jan 1, 2018

Economy

Posted by: Garth Chapman

On October 17th Canadians awoke to the news that the nation’s banking regulator (OSFI) has announced that they will in fact go ahead on Jan 1, 2018 with a stress test for all conventional mortgage borrowers (those with more than 20% down).

This new Stress test will require that home-buyers (and those refinancing existing homes) who do not require mortgage insurance because they have a down payment (or existing equity) of 20% or more, will have to prove they can continue to make payments if interest rates rise by 2.0%. In fact it even goes a little further than that. “THE MINIMUM QUALIFYING RATE FOR UNINSURED MORTGAGES TO BE THE GREATER OF THE FIVE-YEAR BANK OF CANADA BENCHMARK RATE (that rate today is 4.89%) OR THE CONTRACT RATE PLUS 2.0% ”

The impact on buyers will be a reduction in their maximum mortgage amount of at least 20% and as high as 25%.

So if you are currently considering the purchase of a home, it is important to know that a purchase that closes after Dec 31, 2017 will have to qualify under the new rules, unless (maybe, we’ll know soon) you have a firm contract and a signed mortgage commitment in hand prior to Dec 31. Barring your having that, the mortgage amount you now qualify for will not be the amount you qualify for on Jan 1, 2018.

As has happened with past rule changes we expect that there will be clarifications issued around these dates to ensure that banks will honour the mortgage commitments signed by buyers, borrowers who have a home under contract and have waived all conditions. If so then buyers with firm purchase contracts and signed mortgage commitments should be able to close those purchases after Jan 1 as planned.

As to new-builds, well the question there is “how far out will they be able to close those deals under the terms of the mortgage commitments they have signed”.

On that front, Jencor has access to new-build mortgage commitments for 12 months at 3.29% where the appraisal can be done prior to signing the mortgage commitment and removing the finance condition, with an inspection just before possession to confirm completion of the build only.

This is huge, as there is thereby no risk of a lower future value wreaking havoc with the financing at time of possession.

If you are a pre-qualified purchaser you should now call your Mortgage Advisor or Banker and find out what your new maximum purchase price is effective Jan 1, 2018.

Garth

26 Apr

9 Steps to recession-proof your Real Estate business

Challenging Times

Posted by: Garth Chapman

How will you ensure your real estate business prospers in tough times?  What are you doing to adjust your business to our new economic realities?

Here are my practices, built on what I learned in 44 years in business, and as published in REIN Life magazine here http://magazine.reincanada.com/2016_Issue1/ on pages 33 & 34. 

1) Keep a balanced view: take your view from the 10,000 foot level (get out of the forest and above the trees). Don’t be pulled back and forth by the daily news headlines. Do read beyond the headlines; remember that the last paragraph sums up the true story much better than the headline does. The headline’s role is to entice you to read the story. Pay attention to the longer term trends and statistics – they will keep you balanced and help you to make better decisions. Pay attention to both the positive and the negative things that are happening around you. Be realistic as you evaluate of what is going on. Be positive but don’t be mistaken for Pollyanna. A positive mindset is a powerful ally in getting things done, but must be accompanied by a realistic view on things to allow you to focus on that which is achievable.

2) Analyze your business: What are you doing well and what not so well? What can you improve on? What must you improve on? Review your Real Estate portfolio’s financial performance versus your budget. If you don’t yet have a budget then create one now. Measure what is significant so you will know what areas to put your time, effort and money into. Know your true numbers (for each property and your whole portfolio) – if you don’t you are not really managing your business, and that means you have put it at risk. Always know your current cash position and your projected monthly cash-flow going forward – if you don’t you risk running out of cash. Maintain sizeable cash reserves, and/or credit facilities. Positive cash-flow is critically important, and cash reserves will get you through the tough patches.

3) Review your business plan: both the short term and the long term, and adjust it as prudent investors should when the world you operate in changes big time. Be proactive. Don’t be buffeted by the changing seas. Don’t allow yourself to drift. Chart your course and make corrections as needed to keep your business on course.

4) Involve your team and other experts in this process. They are on your team for a reason. Get their input. Ask for their advice. Involve people you respect for their knowledge and experience. Most of your best ideas will come out of those discussions – both your ideas and theirs. And you will awake with eureka moments in the wee hours of the morning. That’s a good thing. It means you have engaged your subconscious mind.

5) Take a break. Get away and relax. Read some books, go sailing, walking, running, diving, flying, driving – whatever works for you. If you take the right amount of time, all that you have done so far in this process will distil in your mind and you will find clarity.

6) Now act to recession-protect your business. A few examples:

First, determine your cash-flow position, and if negative, by how much. In other words, what is Your Burn Rate? Are you cash-flow positive or break-even, or negative?  If negative, what is your Burn Rate?  The term essentially means ‘by how much does your cash outflows exceed your inflows?’  For this exercise I recommend you assume all spending is not funded by lines of credit or credit cards etc.  So do your monthly or annual budget in this manner to determine if you have a ‘burn’ or not.  And if you do, you need to act to minimize the burn rate as best you can.  Cut spending, increase income if you can, look for debt payment deferrals, and if that is not enough, then look to other debt instruments to help or sell assets.

  1. Extend amortization periods on those of your mortgages with shorter amortizations. Most lenders will do this without cost (or a very small processing fee). This can make for significant reductions in monthly payments. And once things improve you can always shorten the amortization periods again.
  2. Look for ways to increase revenues: provide cable TV, internet, other services, add rental units to your properties (suites, garages, parking spaces, coin-op laundry facilities, etc).
  3. Act pro-actively to decrease vacancies. Be creative in your advertising, write excellent ad copy, advertise online, in the neighbourhood and at the property itself. Offer incentives to fill vacant units, preferably one-time incentives so you preserve good cash-flow.
  4. Create new lines of credit where you have equity to provide a cash reserve you can draw on when needed. This could be utilized to fund unexpected costs or to purchase a great new property.
  5. Sell properties that simply won’t perform and those where the return on your equity is poor and cannot be improved. Then re-deploy that cash into good solid cash-flowing assets, or to reduce other debts.
  6. Set expectations for your team and clearly communicate them to each. Then regularly measure and report back to them their performance as against those expectations. Celebrate their successes and address how shortcomings will be improved. If a member just isn’t getting it done – fire and replace them.
  7. Continue to make decisions that fit with your long-term objectives. Don’t take the easy or quick solution as those often cost more in the long run and tend to move you further away from your goals rather than towards them.

7) Do the same for your personal life. Your family’s business also needs your attention. Treat your personal finances much like your business finances. If your personal financial health is good you will reduce financial pressures that often make for poor decision-making.

8) Review and repeat. Review what you did to determine how to do it better next time. Do this all again at least once a year. In these times maybe twice a year is more prudent.

9) Share what you have learned. This will help to make others’ businesses better as was yours. Much more will come back to you than you put out there, including many good ideas from others that you can employ yourself.

We have been managing our Real Estate business like this since we began in the business in 2002. The process ensures we stay on top of our business and continue to improve its performance year after year.

To your success,

Garth