Customers

The Bank of Canada left its key interest rate unchanged today, as expected. But it’s accompanying statement had a more neutral than dovish tone than some observers had expected, calling into question the certainty of an October rate cut.
The bank said the country’s economy is operating “close to potential” while inflation is on target.

“In this context, the current degree of monetary policy stimulus remains appropriate,” read this morning’s statement.

However, given growing concerns over the global outlook and rising trade tensions, the BoC’s first rate cut in more than four years is still increasingly likely. The only thing that isn’t so certain is the timing of such a rate move.

“…escalating trade conflicts and related uncertainty are taking a toll on the global and Canadian economies,” the BoC added. “…As the Bank works to update its projection in light of incoming data, Governing Council will pay particular attention to global developments and their impact on the outlook for Canadian growth and inflation.”

What Investors are Saying…

Markets had priced in roughly a one-in-10 chance of a rate cut this month, with a 60% chance the BoC will reduce rates at its next meeting on October 30, according to Westpac.

OIS swap markets still believe a rate cut is likely before the end of the year, pricing in a 97% chance of a cut by the bank’s December meeting.

What Economists Are Saying…

Some observers had expected Bank of Canada Governor Stephen Poloz to give a clearer signal that an easing of current monetary policy is in the cards.

“Since its July meeting, conversation has shifted from ‘if’ to ‘when’ the BoC will join its many global peers in lowering interest rates,” wrote RBC economist Josh Nye. “But that evolution wasn’t obvious in today’s policy statement, which was more neutral than expected and lent support to the Canadian dollar.”

He noted the bank gave no direction on future policy moves, but instead reiterated that “the current degree of accommodation remains appropriate.”

CIBC’s chief economist Avery Shenfeld said that while the BoC will eventually be forced to cut rates, the tone of today’s statement left the door open to the timing of any cut.

“The Bank of Canada left rates where they were, and drafted a statement designed to give them some time to think about what to do next, rather than dropping a clear hint of an October cut,” he wrote.

Courtesy: Canadian Mortgage Trends

Five months ago the Liberal government unveiled the First-Time Home Buyer Incentive, a new initiative aimed at easing affordability for first-time homebuyers.

The FTHBI officially came into effect Monday and will start providing interest-free shared-equity loans to interested buyers in the form of down payment assistance.

To recap how the program works, participants must put down at least 5% of the home’s value with their own money, while the government (through the Canada Mortgage and Housing Corporation) would contribute an additional 5% of the down payment if the purchase is of an existing home, or 10% if it’s a new build.

The buyers don’t need to make any monthly payments, though the loan must be repaid after 25 years or when the home is sold.

The CMHC also shares proportionately in any future gains or losses in home value.

Of course, there are certain restrictions:

The mortgage must be default insured
It’s only available to first-time buyers with a household income under $120,000
Participants must have a minimum 5% down payment
The mortgage amount plus incentive cannot be more than four times the participants’ annual household incomes (approx. $565,000)
Critics have pointed out that, based on the above math, buyers would qualify for less home than they could otherwise purchase by not participating in the program.

“By limiting borrowers to a purchase price of four times their income, the FTHBI program caps a first-time buyer’s maximum purchase price at about 10% less than they could otherwise afford,” mortgage expert Dave Larock wrote previously on his blog. “It seems strange to me that a program that was designed to help borrowers with affordability explicitly reduces it.”

Others have noted the program is likely to be of less value for buyers in the Greater Vancouver and Toronto regions, where finding a home for under $500,000 is a challenge, if not impossible.

homeownership“We think it’s definitely going to have very regional application,” Paul Taylor, President and CEO of Mortgage Professionals Canada, said previously. “In the two most expensive cities, where we would suggest first-time homebuyers need the most support, this solution is not really going to do that.”

CMHC President and CEO Evan Siddall has responded to criticism over the effectiveness of the program in these markets by saying: “No program is going to work as well in higher-priced markets. Using 2018 data, 2,300 homebuyers would have qualified in Toronto and 1,100 in Vancouver. Around 25% of home sales in Toronto in 2018 were for homes under $500K and 17% in Vancouver.”

The CMHC expects 100,000 homebuyers to participate in the program over the next three years.

Industry experts say it will be interesting to see the actual participation rate, given that a similar program launched by the B.C. government in 2016—the Home Owner Mortgage and Equity Partnership—was cancelled due to a low participation rate.

It was expected that 42,000 B.C. homebuyers would participate over three years, though the program received just 3,000 applications.

 

Courtesy: Canadian Mortgage Trends