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Frank Mueller

OSFI to Make Conventional Mortgage Approvals More Difficult

As we mentioned in our Weekly Update for July 28th 2017, the Office of the Superintendent of Financial Institutions (OSFI) released a set of proposals that would serve to tighten up the conventional mortgage market. The objective of these proposals is to protect would-be home buyers from over-extending themselves during our current low-rate environment against further rate increases; additionally, the measures look to protect banks from creditor default risk.

On a more basic level, the proposed measures have been put forth to protect the economy overall. Canadians owed an average of $1.67 per $1 of disposable income, according to a debt-to-income report released by Statistics Canada in December of 2016. The Bank of Canada, as well as many of the “Big 5” banks, has been vocal about household debt levels. The Bank of Canada has also raised concern over inflated house prices in major Canadian markets such as Toronto, Vancouver, and recently including Victoria and Hamilton. Rising rates and an uptick in unemployment could lead to increased mortgage defaults.

How Would It Work?

The counteractive proposal for uninsured, conventional mortgages would require potential buyers to qualify for their mortgage using a new stress-test qualifying interest rate. Where the high-ratio stress-test rate is simply the Bank of Canada’s 5-year fixed rate (recently raised to 4.84%), the conventional stress-test rate would be the street rate offered by the lender plus 200 basis-points (2%).

So, let’s say you have a mortgage rate offered by your bank or credit union for 2.85%. When qualifying, your bank/credit union would use the stress-test rate of 2.85% + 2.00% = 4.85%. The logic is simple: if you can qualify – and afford – your payments at a rate of 4.85% in this case, then surely, you’ll be able to absorb an interest rate hike of 25bps (as we’ve experienced twice now in the last 3 months).

Of course, it’s important to remember that the borrower would only be exposed to the increased rate when their current mortgage term expires.

What’s the Bottom Line?

Analysts believe that if enacted, prospective borrowers would lose about 20% of their purchasing power. For instance, if without the stress-test, a borrower could qualify for a $1 Million mortgage, when using the stress-test, the same borrower would only qualify for an $800K mortgage.

If enacted, this proposal would look to cool the overheated Canadian real estate markets with a more precise, surgical approach, rather than the more broad-based interest rate hikes (which affect the economy overall due to cost of borrowing, the effect on the Canadian dollar, etc).

Frank Mueller

Weekly Update – August 25, 2017

“Beware of little expenses; a small leak will sink a great ship” – Benjamin Franklin

TSX Drops to End Week

The Toronto Stock Exchange’s S&P/TSX composite index ended Friday down 20.17 points, or 0.13% to finish the week at 15,055.99. For the week, the TSX was up 0.7% for the week.

The Loonie rose by 31 basis points to finish the week a nose above 80 cents at 80.18 cents to the Greenback; for the week, the Loonie rose by nearly a penny.

West Texas Intermediate (WTI) rose by 44 cents (USD) to finish at $47.86 per barrel, as Hurricane Harvey moves through the Gulf of Mexico and toward a touchdown in Texas. It was recently upgraded to a category 4 storm.

Gold rose to $1,296.50 USD per ounce on Friday, a rise of $4.50 per ounce on the day. It has been, along with many markets, relatively flat over the last few weeks.

U.S. Markets See Slight Rise on Friday

Federal Reserve Chair Janet Yellen spoke this week but stayed quiet about a potential rate increase. Her speech, at the annual meeting of central bankers in Jackson Hole, Wyoming, gave no hints at the potential timing of a future rate hike.
U.S. Treasury yields dropped lower following Yellen’s speech.

Analysts expect President Trump to turn his attention toward another of his key agenda items: tax reform. This expectation helped to move U.S. markets higher.

The Dow Jones Industrial Average (DJIA) closed with a 30.27 point (0.14%) rise at 21,813.67.

The Standard & Poors 500 (S&P500) rose 4.08 points on Friday, 0.17%, to close at 2,443.05.

The NASDAQ was down 5.68 points on Friday, dropping 0.09% down to 6,265.64.

Sources: Thomson Reuters DataStream, Globe Advisor, BNN

Frank Mueller

Weekly Update – August 4, 2017

“The biggest problem is not to let people accept new ideas, but to let them forget the old ones” — John Maynard Keynes

TSX Rises, Jobs Growth Keeps Rate Hike Door Open

The Toronto Stock Exchange’s S&P/TSX composite index closed at 15,257.97, up 0.43%, or 66.01 points on Friday. The Friday closing number represents a 0.85% increase on last week’s finishing mark of 15,128.65.

Decreased energy shipments pulled Canadian exports down in June, further widening the trade gap; however, strong and sustained jobs growth is keeping the door open for further rate hikes in 2017. The export numbers, however, did weigh on the Loonie on the way to a close of 79.02 cents U.S., down .39 of a cent.

Gold futures dropped 1.1% to $1,254.5 per ounce, which weighed on Gold miners both north and south of the 49th.

Crude oil rose by 49 cents (USD) to close at $49.52 per barrel, although the data showed strong U.S. output and rising OPEC output which might usually lead to a drop in oil pricing.

Strong U.S. Jobs Report for July & Notes on Earnings Season

The non-farm payrolls number increased in July by 209,000 jobs, beating the street expectations of 183,000 jobs. In addition, the June jobs numbers were revised upward, from 222,000 jobs to 231,000 jobs.

U.S. unemployment dropped to 4.3%, although it should be noted that “unemployment” figures do not count employable people who are not actively looking, or who have been actively looking for over a year. Still, 4.3% is a respectable figure.

The potential knock-on effect of the strong jobs figures was felt as analysts increased the odds of a December rate hike from 46% to 50%. The Federal Reserve may also consider shrinking its $4.5 Trillion bond portfolio starting in September.

Although the S&P 500 is currently trading at 18 times expected earnings (the 10-year average is 14 times earnings), the strong earnings season has partially mitigated fears of over-valuation. The S&P 500 closed Friday at 2,476.83, a modest increase of 4.67 points, or 0.19%.

The Dow Jones Industrial Average (DJIA) rose above 22,000 for the first time ever on Wednesday, amidst hitting record highs for 8 straight days as of Friday. The DJIA closed Friday at 22,082.12.

Sources: Thomson Reuters DataStream, Globe Advisor

Frank Mueller

Weekly Update – July 28, 2017

“It’s easy to meet expenses – everywhere we go, there they are.” — Anonymous

TSX Flat (Again) as Rising Oil Offset by Financials, Energy and Consumer-Discretionary

The Toronto Stock Exchange’s S&P/TSX composite index closed at 15,128.65, a drop of 0.41% for the day. The Friday closing number is a small decrease compared to last week’s finish of 15,180.93. The Loonie was at 79.76 cents to the USD at time of market close. 9 of the 10 main index groups lost ground on Friday.

Fears of oil oversupply tend to wax and wane, and this week they waned. Consequently, Friday saw surge in oil prices, and U.S. crude finished at $49.71 (USD), its highest mark since May. The surge can be attributed not only to a recent demand run but also to potential signals that Saudi Arabia may reduce supply in August; finally, traders also felt some short-covering was at play as well.

S&P Earnings Season Continues

As earnings season continues, now just past the halfway mark, the S&P 500 was weighed down by negative investor reactions of some high-profile companies’ earnings reports. However, the Dow Jones Industrial Average (DJIA) was bolstered by some positive results.

So far, earnings season overall has been strong. In addition, data has shown the U.S. economy accelerated during Q2 on increased consumer spending and increasing business investment in equipment. The DJIA closed at 21,830.31, a modest increase of 33.76%, while the S&P 500 dropped 3.32 points to finish at 2,472.1. The NASDAQ dropped 7.51 points to 6,374.68.

Repeal of Affordable Care Act Fails, Investors Concerned About Tax Cut Agenda

In a stunning turn of events, the Republican-Majority Senate failed to win a simple majority vote to put into effect the so-called “Skinny Repeal” of the Affordable Care Act, dubbed “Obamacare”. It is unusual for a vote to be called without victory already assured, so this public defeat of the repeal was an embarrassing result for the Republicans.

The inability to follow through on what amounts to a 7-year long promise to repeal Obamacare has led investors to question President Trump’s ability to push through other major agendas, such as the Wall Street-friendly tax reform promise.

Naturally, this speculation acted as a counter to the promising Q2 economic data mentioned above.

OSFI Proposes a Conventional Mortgage “Stress-Test”

The Office of the Superintendent of Financial Institutions (OSFI), an independent agency of the Government of Canada, was established in 1987 with the task of ensuring a solvent Canadian financial system. They supervise and regulate federally regulated financial institutions as well as private pensions that are subject to federal oversight. “Federally regulated financial institutions” covers a broad base, including all banks in Canada, all federally incorporated or registered trust and loan companies, insurance companies, cooperative credit associations, fraternal benefit societies and private pension plans.

In the face of increasing Canadian household indebtedness, inflated housing markets in Vancouver and Toronto (among others), increasing numbers of new uninsured mortgages (20% down payment or greater) and a higher number of uninsured mortgages coming in at or near the minimum of 20% down, and of course the current low-rate environment, the OFSI has proposed the introduction of a second “stress-test” qualifying rate. The first such stress-test was introduced last year and applied only to high-ratio (less than 20% down payment, thus requiring CMHC default creditor insurance) mortgages.

This month, the OFSI released a set of proposals to tighten the conventional mortgage market. With the new proposals, buyers with greater than 20% down will now have to qualify using a stress-test rate of 200 basis points (2%) higher than the going street rate offered by the lender. For example, a lender offering a 5-year fixed rate of 3.00% would mean that a prospective borrower would need to meet GDS and TDS servicing ratios using a stress-test rate of 5.00%.

We’ll have a more concrete break-down on the new regulations if they come to pass, but in the meantime, an educated guess could see a hypothetical timeline of something like this:

• Federal Government announces new stress-test for uninsured mortgages per above, to take effect on January 1, 2018 (again, purely hypothetical date here)
• Would-be buyers who know they cannot qualify under the new stress-test, but can qualify currently, will most likely flood the market to try to make a purchase prior to the new regulations taking effect
• As a result, a short-term spike in housing prices prior to the new regulations is highly possible
• After the regulations take effect, there would be a natural reduction in demand (due to the stress-test rate introduction). This could lead to a pullback in real estate pricing
• There is the potential of an influx of sellers prior to the new regulation, in anticipation of the demand-side changes outlined above

In reality, it’s anyone’s guess if the OFSI will follow through on their proposal to the Federal Government, and if they do, that doesn’t mean the above hypothetical scenario will play out exactly as we’ve outlined it, but there is certainly a non-zero chance that our hypothetical scenario plays out as-is.

Sources: Thomson Reuters, Globe Advisor

Frank Mueller

Weekly Update – July 21, 2017

“One of the penalties for refusing to participate in politics is that you end up being governed by your inferiors” – Plato

TSX Flat, Loonie Rise Continues

The Toronto Stock Exchange’s S&P/TSX composite index closed at 15,180.93 on Friday, a small increase compared to last week’s finish of 15,174.81, although the TSX was down 83.71 points (0.55%) on the day. The Loonie was at 79.76 cents to the USD at time of market close.

Friday’s drop was broad-based, although the energy sector was particularly hard-hit as benchmark crude futures dropped $1.25 USD to close at $45.67.

Investors moved into Gold and U.S. Treasuries – traditionally seen as safe-haven assets – toward the end of the week. Gold jumped to $1,254.80 USD per ounce to end the week.

Wall Street Indices Remain Near Record Highs, Greenback Slumps

The U.S. Dollar sank to its lowest mark in over a year on Friday, as markets tried to make sense of President Trump’s domestic agenda and how he’ll handle another set of obstacles, including the latest collapse and death of the Obamacare “Repeal and Replace” Bill on the Senate floor.

The S&P 500, the Dow Jones Industrial Average (DJIA) and the NASDAQ all backtracked on Friday.

European Central Bank President Mario Draghi Comments on the Euro

On Thursday, the European Central Bank – headed by Mario Draghi – held their key rate at 0%. However, Draghi’s dovish comments did little to stop the Euro from rising to an 8-month high against the Pound Sterling and a 2-year high against the Greenback. Many analysts felt Draghi may try to talk down the currency, but this didn’t happen.

IG market analyst Joshua Mahony offered the following commentary: “It seems Mario Draghi lost some of his shine today, with markets largely ignoring the fact that the ECB governor failed to mention tapering, instead driving the euro higher despite his attempt to drive home a dovish tone.”

Indeed, if the Euro remains strong, the ECB’s target of 2% inflation may not be met.

European stocks dipped to end the week, affected by the Euro’s relative strength.

Links

CI Preferred Pricing Program – How Does It Work?

Sources: Globe Advisor, The Telegraph

Frank Mueller

CI Investments NEW Preferred Pricing Program – How Does It Work?

Many of our clients hold at least some CI funds, as CI has a stable of strong fund managers who have proven track records of sound fund management and good returns. Indeed, many of the CI funds that we recommend are top performers in their respective sectors.

We are happy to announce that CI is introducing a revamped Preferred Pricing program. Previously, in order to get set up with Preferred Pricing, eligible clients had to sign some documents to authorize the move their fund(s) into the reduced fee fund version(s). Eligible clients will receive a letter in the mail from FundEX about this.

Now, however, eligible clients will automatically have the reduced fee option triggered. Clients don’t need to do anything to receive this lower fee. Your statement will simply show the switch transaction on it.
For clients eligible for reduced pricing within their Non-Registered accounts, rest assured that this automatic switch will not trigger any taxable event and will not receive any other paperwork, such as fund fact documents, as the funds themselves won’t change.

CI is also rolling out an extended family account linking option which can be very beneficial and result in significant savings. Eligible family members who reside in the same address – and now even at different addresses! – can combine family assets for additional savings.

Should you have any questions about these changes, don’t hesitate to contact us at You First. We’re happy to let you know if you qualify for the automatic reduced pricing, as well as if your family qualifies for the family account linking.