January 2017 Quarterly Mortgage Outlook

Wow. Even Donal Trump didn’t think he was going to win the election. He had a vacation planned for immediately afterwards. I thought things in our industry were uncertain before the election!

With Trump entering office and if he follows through with only half of what he suggests the future for the economy, mortgage rates and in general the stability of world economics is the most unpredictable in my life time. As history has shown, unpredictability usually leads to bad results in general. So fingers crossed the damage done is minimized and that at mid-term elections the Democrats can bring some balance to his power and ambitions. But until then life goes on and we need to make decisions based on what we know today. Assuming to see or trying to predict the future, as the Democrats found out, is equally risky.

Potential Outcomes

Looking at Trump statements at face value we can expect a few likely results.

Repatriating Jobs

Repatriating jobs to America and/or increasing the import tax on goods is going to cause prices to rise. That will result in inflation rising also which is why bond yields in the USA at first dropped significantly (causing rates to rise). Since then US Mortgage rates have dropped a bit as it is realized that it will take time for Trump to implement his plans. While this does not cause a direct impact on Canada, rising US sourced products and a stronger US Dollar will make goods Canada imports more expensive and cause some inflation here, although not due to a strong economy. This will create a difficult situation for the Bank of Canada. Rising inflation without the recovery of jobs and the economy in general.

America First

Trumps focus on America first including tearing up NAFTA creates a very high amount of uncertainty as to the impact on the Canadian economy. As our largest trading partner we have to expect some impact on the Canadian economy. What and how deep makes it unclear. What is probably a safe bet is that the Canadian economy is not likely kicking into overdrive any time soon and the Bank of Canada is more likely to lower the prime rate than raise it over the next couple of years.

China Effect

In BC, the impact of Foreign Tax has become obvious. While only directly impacting the high end of the market, there is still a trickle down effect. Month over month volumes on properties in Vancouver’s Westside are down 90% after the tax was implemented. The trickle down effect was that those selling on the Westside where putting that money elsewhere. Either additional properties such as investments, children’s purchases or investing it in some way. That Chinese money was being put into the Canadian economy in the end. The positive side is that price appreciation has slowed in most areas and the insanity of 10 offers, most subject free, with some 10-20% over asking price has eased… but not ended. In those 10 offers were only 5 Chinese. Demand still seems to exceed supply. Homes priced fairly are still selling quickly and in many cases with 1 to 3 offers.

Outflow Clamps

China has always had cash outflow restrictions in place, but as seems the Chinese way with these things, how tight the restrictions are enforced can vary. More recently due to the weakening Yuan, largely due to the mass outflows of cash by citizens along with slowed exports, the government has tightened the restrictions and put more pressure on the was around the rules. Over the next 6 months, if the tighter grip is held,  we should see a reduction in Chinese buying across Canada which might give some relief to nationalized buyers.

Interest Rate Outlook

Fixed Rates

As expected, the changes in Federal Government Insurance Rules, new OSFI Capitalization Rules and the US Mortgage Bond Market Yield drop, fixed rates in Canada have risen by about 0.3%. The biggest impact on the fixed rate side is the spread between Insured/Insurable mortgages and non-insured mortgages. In the past this spread was 0-0.1%. Now it is close to 0.25% or more. There is a fair chance fixed rates will continue to creep up. At this point in time we are still in the mid to high 2% range of a 5-year fixed term. By historical standards we are talking very cheap money.

Variable Rates

While the government changes put some pressure on Variable Rate Mortgage discounts the net effect has been about a 0.1% reduction in the discount. This time of year we tend to see a reduction in Variable Rate discounts anyways so it is a little unclear as to what he causes were. At writing we do see some super specials of Prime -0.6 which puts us at 2.1%. However the conditions of such a mortgage are less than optimal or available to all consumers. Prime -40% is more the norm with the big banks having shifted to Prime-0.1 (based on the benchmark prime).

The big surprise was that TD raised their Prime rate by 0.15% while no other lenders followed suit. This has created more confusion in the market as they can now advertise a greater Variable discount rate while producing the same end rate relative to their competitors. It also means that those already in a Variable Rate Mortgage or with Lines of Credit are paying 0.15% more by being a TD customer versus any other of the banks. It has been over 6 weeks and TD hasn’t reversed course and no other Bank has followed suit so it will be interesting to see how this plays out. The big winners could be clients that take a TD Variable rate mortgage now and if TD either drops their Prime Rate again or doesn’t raise it next time the others do.

Variable rate mortgages have always had unclear differences between lenders and that is only increasing. Getting expert independent advice as to which lender and mortgage to choose is more important than ever.

Trump takes office Jan 20. The only thing that is certain is that interesting times are ahead.

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