The Canadian government’s announcement that it is easing mortgage lending terms will have detrimental consequences for Canada’s real estate sector and may even make near-term rate cuts by the Bank of Canada less likely.
The new changes will drive more demand into a market with deep supply shortfalls and will worsen housing affordability over time. They are also likely to add to housing’s contributions to GDP growth, but may even worsen Canada’s productivity problem.
Be wary of these changes – there may be significant unintended consequences.
Make little mistake, this and other housing measure changes that are being announced are political and designed to address the federal government’s sagging appeal to younger Canadians on the assumption they won’t grasp the economics of the likely outcomes.
Here’s what Canadian Finance Minister Chrystia Freeland announced on Thursday:
· The mortgage amortization period for insured mortgages taken out by first time homebuyers buying newly built homes including multis was raised from 25 to 30 years effective August 1st this year. At least that part is out of the Spring housing market, but that was probably intended to support home sales into an election year instead of just now.
· The withdrawal limit for the Home Buyers plan is being raised from $35k to $60k effective on Budget Day next week. The HBP can be combined with the Tax-Free First Home Savings Account that allows contributions up to $8k per year to a lifetime limit of $40k.
· HBP participants between January 21st 2022 and December 31st 2025 are now allowed an extra three years to repay the amount to their RRSP for a total of five years.
· Lenders will now have to contact borrowers up to 24 months in advance of a renewal, imposing further regulatory costs.
· Temporary amortization extensions in the face of mortgage resets will now be possible to make permanent for all homeowners without fees or penalties. For example, a 25-year insured mortgage holder that temporarily extends to 35 years won’t have to renew back at the original 25 years and can now, depending on circumstances, make this extension permanent.
Some folks will stand to benefit from these changes but it’s vital to point out the following:
· The last thing that the housing market needs is more demand pressure on top of wildly excessive immigration, little supply, and a strong job market. This will complicate efforts to have supply catch up on the heels of the latest solid attempt at estimating the gigantic shortfall of housing that existed even before these recent measures. Ottawa continues to pursue an odd mixture of demand and supply measures that are conflicting with one another if the goal is to improve affordability over time.
· Added housing demand probably lessens prospects for rate cuts by the Bank of Canada and pushes them out. It would be unreasonable to throw rate cuts onto the housing market especially after Ottawa just threw jet fuel onto the market.
· The more money and resources that get fed to the housing beast, the less that is available for addressing the nation’s productivity problem. There is evidence that housing plays a role in the productivity problem at home and abroad. With these measures, even more of the share of the economy will go to short-term spending including consumption, housing and short-term government spending. That share is already running around its highest since the late 1980s and early 1990s when Canada was coming off of a major inflation and competitiveness problem.
· The conversion from temporary to permanent amortization lessens the impact of mortgage rate resets. That’s welcome to the affected folks who can lessen the near-term hit by taking longer to repay. It also means that the rate sensitivity of housing to BoC hikes has been dampened which could lessen the case for policy easing.
· The peak effects of these changes are designed to pump next Spring’s housing market in an election year more so than this Spring’s market. That’s why they delayed the 30-year extension to August 1st. The HBP changes are effective next Tuesday, but I suspect that few first timers have $60k kicking around in their RRSPs to use in the HBP right away. They’ll reallocate savings and income over the coming year into RRSPs to get the tax deduction and then face the 90 day waiting period before they can withdraw the amount. The RRSP season could be pulled forward and amplified by these changes at least until the withdrawals hit.
· The extended amortization period and raised HBP withdrawals limits will bring more cash into the market to drive house prices higher. There will be a first mover advantage on the changes. Second and subsequent round effects will see higher house prices that eat away at the benefits of the changes for subsequent entrants who are likely to witness worsened affordability. All you have to do is plug some numbers into your handy dandy mortgage or bond calculations and see what happens to the extra amount of house that can now be purchased as a result of the changes; applying leveraged likely means an extra six figures of housing can be purchased. The hot air and ink that Ottawa spends on the importance of improving affordability through debatable supply side measures is in marked contrast to policies that have induced wildly excessive immigration, very strong government spending, and now easier mortgage terms. It’s an unparalleled lack of policy coordination.
· Because of the requirement that RRSP contributions cannot be withdrawn under the Home Buyers’ Plan for 90-plus days, the effects of this change will occur in two or more stages. Those who already meet that criteria can start withdrawing the extra amount from next Tuesday onward. Anyone else will have to wait including people making fresh contributions that won’t be accessible until July.
· Extending amortizations to 30 years for new but not resale homes is a gift to builders who will capture some of the incidence effects through higher new home prices that through arbitrage may indirectly raise resale prices over time but by less and slowly. They can’t build enough homes fast enough due to skilled labour and materials shortages so prices and features will ration some of the demand. The flow through benefits will also go to folks building the homes and supplying materials.
· Only making 1st timers eligible will create unintended effects. It discriminates against other individuals already in the market who may be facing affordability pressures. It could also be gamed by, for instance, getting the first timer in a household to buy a home and not the one who already has title. Or parents can gift bigger RRSP contributions for the HBP eligibility.
· More people will be incentivized to make the minimum downpayment to get insured mortgages in order to secure the extra five-year amortization period. This will pivot demand more toward insured versus uninsured mortgages over time. Bear that in mind in terms of issuance volumes and market implications.
· Bigger withdrawal limits and longer repayment periods for Homebuyers’ Plan participants amount to a wealth transfer from the future. More retirement savings will flood into housing and raise potential challenges later.
· OSFI’s efforts to tighten mortgage finance markets over the years just suffered a setback. Ottawa continues to pursue totally uncoordinated housing policies by stimulating more demand amid severe housing shortages and driving risk higher.
HALIFAX – Ottawa is negotiating a $500-million bailout for Nova Scotia’s privately owned electric utility, saying the money will be used to prevent a big spike in electricity rates.
Federal Natural Resources Minister Jonathan Wilkinson made the announcement today in Halifax, saying Nova Scotia Power Inc. needs the money to cover higher costs resulting from the delayed delivery of electricity from the Muskrat Falls hydroelectric plant in Labrador.
Wilkinson says that without the money, the subsidiary of Emera Inc. would have had to increase rates by 19 per cent over “the short term.”
Nova Scotia Power CEO Peter Gregg says the deal, once approved by the province’s energy regulator, will keep rate increases limited “to be around the rate of inflation,” as costs are spread over a number of years.
The utility helped pay for construction of an underwater transmission link between Newfoundland and Nova Scotia, but the Muskrat Falls project has not been consistent in delivering electricity over the past five years.
Those delays forced Nova Scotia Power to spend more on generating its own electricity.
This report by The Canadian Press was first published Sept. 16, 2024.
TORONTO – Roots Corp. may have built its brand on all things comfy and cosy, but its CEO says activewear is now “really becoming a core part” of the brand.
The category, which at Roots spans leggings, tracksuits, sports bras and bike shorts, has seen such sustained double-digit growth that Meghan Roach plans to make it a key part of the business’ future.
“It’s an area … you will see us continue to expand upon,” she told analysts on a Friday call.
The Toronto-based retailer’s push into activewear has taken shape over many years and included several turns as the official designer and supplier of Team Canada’s Olympic uniform.
But consumers have had plenty of choice when it comes to workout gear and other apparel suited to their sporting needs. On top of the slew of athletic brands like Nike and Adidas, shoppers have also gravitated toward Lululemon Athletica Inc., Alo and Vuori, ramping up competition in the activewear category.
Roach feels Roots’ toehold in the category stems from the fit, feel and following its merchandise has cultivated.
“Our product really resonates with (shoppers) because you can wear it through multiple different use cases and occasions,” she said.
“We’ve been seeing customers come back again and again for some of these core products in our activewear collection.”
Her remarks came the same day as Roots revealed it lost $5.2 million in its latest quarter compared with a loss of $5.3 million in the same quarter last year.
The company said the second-quarter loss amounted to 13 cents per diluted share for the quarter ended Aug. 3, the same as a year earlier.
In presenting the results, Roach reminded analysts that the first half of the year is usually “seasonally small,” representing just 30 per cent of the company’s annual sales.
Sales for the second quarter totalled $47.7 million, down from $49.4 million in the same quarter last year.
The move lower came as direct-to-consumer sales amounted to $36.4 million, down from $37.1 million a year earlier, as comparable sales edged down 0.2 per cent.
The numbers reflect the fact that Roots continued to grapple with inventory challenges in the company’s Cooper fleece line that first cropped up in its previous quarter.
Roots recently began to use artificial intelligence to assist with daily inventory replenishments and said more tools helping with allocation will go live in the next quarter.
Beyond that time period, the company intends to keep exploring AI and renovate more of its stores.
It will also re-evaluate its design ranks.
Roots announced Friday that chief product officer Karuna Scheinfeld has stepped down.
Rather than fill the role, the company plans to hire senior level design talent with international experience in the outdoor and activewear sectors who will take on tasks previously done by the chief product officer.
This report by The Canadian Press was first published Sept. 13, 2024.
VANCOUVER – Mediated talks between the union representing HandyDART workers in Metro Vancouver and its employer, Transdev, are set to resume today as a strike that has stopped most services drags into a second week.
No timeline has been set for the length of the negotiations, but Joe McCann, president of the Amalgamated Transit Union Local 1724, says they are willing to stay there as long as it takes, even if talks drag on all night.
About 600 employees of the door-to-door transit service for people unable to navigate the conventional transit system have been on strike since last Tuesday, pausing service for all but essential medical trips.
Hundreds of drivers rallied outside TransLink’s head office earlier this week, calling for the transportation provider to intervene in the dispute with Transdev, which was contracted to oversee HandyDART service.
Transdev said earlier this week that it will provide a reply to the union’s latest proposal on Thursday.
A statement from the company said it “strongly believes” that their employees deserve fair wages, and that a fair contract “must balance the needs of their employees, clients and taxpayers.”
This report by The Canadian Press was first published Sept. 12, 2024.
