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What a Difference a Year Makes

The year is drawing to a close and what a crazy year 2015 has been. Oil falling, markets falling, the dollar falling, rates falling (and now rising), house prices falling.  A complete 180 from 2014.  The purpose of the newsletter this month is to take a look at a few key areas in the markets and to provide some insight and a bit of a forecast on what may happen going forward and how best you can prepare.

Housing in Canada:

The overvaluation of housing in Canada has been a hot topic for years, especially in Vancouver and Toronto.  The same story is again bubbling to the surface with Toronto continuing to be a concern, but as a whole the housing outlook for Canada remains quite strong. Housing demand is still robust in many regions.  BC, Ontario and Quebec are benefiting from lower commodity prices and a weaker dollar (as these provinces are non-commodity exporters).  Employment is growing (slightly) and although immigration is down somewhat, another 225,000 new immigrants are expected to move to Canada this year.  Manitoba is once again the gateway to the west, as it has seen the most significant employment growth in the country.  Surprisingly, Alberta has shown the second strongest employment growth in 2015.  However, much of this is in the public sector (primarily in healthcare and educational services, countering significant job losses in the private sector.  Jobs in oil and gas extraction and professional and technical services have seen a decline of about 11%. Many of these jobs are higher paying and the loss of this employment has and will continue to negatively impact the housing market in Alberta. Unemployment is now just shy of 6% in the region. Real GDP growth is forecast to contract by 1% in 2015 and this contraction will continue with lower oil prices. Capital investment is decreasing, energy exports are declining and consumer spending is down.  Once the beacon of light for employment, Alberta has seen net migration into the province drop in half year over year.

Housing in Calgary:

Is the sky falling?  No, not yet. However, there are some signs for real concern. Firstly, demand is down (both housing starts and MLS sales are down 30 percent, with active listings up 36 percent).  What we have not seen happen is significant price decreases, as the average price is only down about 2 percent.  However, there are different markets within the Calgary market.  The first time buyer market (housing under 500,000 dollars, is still moving quite well, whereas the higher end market, as well as the condo market has certainly seen a declining shift).  Furthermore, a Realtor colleague that is a foreclosure expert in Calgary, recently shared data with Mortgage Connection showing foreclosure initiation has doubled in Calgary over the last 6 months.  The number is relatively low, but the percentage increase is alarming.  The one thing that may keep prices from a free fall is that Calgary is not experiencing the gluttony of supply that it did when housing crashed in 2009.  As mentioned, builders have not had nearly the same amount of starts and inventory is still being absorbed at 90 percent (meaning 90 percent of builds and listed homes are being bought).Record low interest rates and a very tight rental market has potentially kept the market moving, but we are starting to see rates rise for rock bottom record lows this past Fall and vacancy rates are now close to 4 percent (a healthy place to be, but close to a 200 percent increase from 2014).

Rates and Mortgage News:

Over the last few weeks fixed interest rates have started to rise.  Much of this is based on the fact that the US Fed is expected to raise rates in December and throughout 2016.  Fixed rates are priced off the bond market and thus investor driven. With bond yieldsincreasing lenders have increased corresponding mortgage rates (the profit is the spread between the bond yield and the corresponding fixed mortgage interest rate).  We saw a similar reaction to rates in June 2013, when the US Fed announced it was no longer going to buy bonds-this turned out to be a bluff and rates crashed back down. however, this is not the same story.  Growth in the US is real.  The rate increases at the US Fed are real and rising rates in Canada are real.  Does this mean we are about to see rates skyrocket?  Certainly not, but 5 year fixed rates in the lower 3 percent range is likely where things will fall over the next 12-18 months.  If you are in a variable rate mortgage, with a good discount off of Prime, locking in may not be the right play, as there is very little pressure for the Bank of Canada to raise the overnight rate, even though the US is likely to.  Last week the Bank of Canada once again maintained the overnight rate and provided little commentary that a rate hike is coming anytime soon.  One aspect of the current rate market that is surprising is that banks and lenders are decreasing the discount off of Prime on variable rate mortgages.  A few months ago Prime -.75% was available and now similar mortgages are being offered at Prime - 40%.  The advantage of going variable on a new mortgage is not there with spreads between fixed and variable rate now so narrow.  Furthermore, if you have a mortgage renewing in 2016, it makes sense to review things early, as paying out a term prior to the renewal date may lead to significant savings based on where rates are and where they very well may end up this coming year.

The latest chatter from the Department of Finance is potential changes to minimum down payment requirements in early 2016.  What we are hearing is as follows:

House price: under 500,000 dollars (5 percent)

House price: 501,000-700,000 dollars (7 percent)

House price: 701,000-999,999 dollars (10 percent)

Over 1,000,000 dollar purchases already require 20 percent down payment.

This is not official, but we will keep a keen eye and ear to this potential change over the coming months.

Mortgage Connection would like to thank you all for a wonderful and challenging 2015.  If you want to review anything regarding your mortgage or plans for 2016, please do not hesitate to contact your broker!