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Housing and the Big, Bad, Budget
A lot has been said about Thursday's budget announcement. From Flaherty's shoe selection to a vague job-training program, many Canadian's were left slightly confused following the much-anticipated announcement. With that being said, Flaherty's eighth (and potentially final) budget announcement could have been worse, especially for the mortgage industry. Thursday's budget included a tightening of controls on mortgage lending once again, as well as another promise to further limit lender access to bulk mortgage insurance. While this will inconvenience some lenders, it's actually good news for taxpayers. The announcement is just the latest in a long line of moves from the Finance Department that touch on concerns over the housing market. As Canadian's continue to sink themselves deeper into household debt, Flaherty once again verbalized his mounting anxiety over interest rates. “Our concern, my concern for a number of years, is with very low interest rates that people can afford their mortgages when interest rates go up,” Flaherty told reporters while purchasing is budget-day shoes, a long-running Canadian tradition, at a Roots factory in Toronto on Wednesday. The Housing Market Under a MicroscopeFlaherty has made a career out of meddling in the in the mortgage market, influencing a number of policy changes in the past decade. And while home sales have slowed significantly and prices are beginning to drop in some of the critical markets since Ottawa's intervention last summer, Flaherty still feels that more needs to be done to protect consumers from themselves. As the economy slowly begins to right itself and interest rates eventually begin to rise, economists like Flaherty are worried that current mortgage holders won't be able to meet their increased mortgage payments. And since Ottawa backstops mortgage insurance, the Canadian taxpayer would be on the hook to cover this exposure. The Bad Side of Bulk Mortgage InsuranceMortgage insurance, which is backed up by the Canadian Mortgage and Housing Corporation, is intended to help consumers with low down payments enter the housing market more easily. Unfortunately, over time, it's also become a tool for banks to manage their risk. Banks' appetite for bulk mortgage insurance (also referred to as portfolio insurance) has continue to grow over the years. In fact, it's one of the main factors behind the government-owned CMHC's growing balance sheet. You see, whenever a new homeowner purchases a house without the mandatory 20 percent down, the mortgage needs to be insured to protect the lender. However, banks also offer this extended coverage to insure large swaths, or portfolios, of mortgages that don't necessarily need the protection. The budget states that, “With the financial crisis well behind us, the government is amending the rules for portfolio insurance to increase market discipline in residential lending and reduce taxpayer exposure to the housing sector.” New RulesFallout from the budget will include new rules that will gradually limit the sale of insurance on low loan-to-value mortgages (i.e. mortgages where the consumer ponies up a higher down payment) to those that are being used in Ottawa's securitization program through the CMHC. This will prevent banks from insuring their portfolio mortgage products in order to reduce their capital requirements. Flaherty's changes will also enable Ottawa to stop the use of any taxpayer-backed insured mortgages (even the high ratio ones)as collateral in securities that are not sponsored by the Canadian Mortgage and Housing Corporation. This will protect Ottawa's potential exposure. Flaherty and the Department of Finance noted that they intend to further consult with the finance industry before implementing this rules later in the year. In the meantime, financial institutions will continue to have access to a broad array of financing options. As always, we'll follow this story as it unfolds right here on the Mortgage Talk Canada Blog.
Bank of Canada/OSFI pilot helps Canadian financial sector assess climate change risks
The Bank of Canada and Office of the Superintendent of Financial Institutions (OSFI) released the results of a pilot project on climate scenario analysis. This pilot was an important step in helping Canadas financial sector improve its ability to analyze economic and financial risks affecting financial institutions that could arise from climate change.
Together with six Canadian financial institutions, the Bank and OSFI developed scenarios that will help the financial sector identify, measure and disclose climate-related risks. These scenarios were not intended to be forecasts or predictions. Rather, they were specifically designed to capture a range of potential outcomes and illustrate the kinds of stresses on the financial system and economy that could occur as the world transitions to a low-carbon future.
All scenarios showed that this transition will entail important risks for some economic sectors. Mispricing of transition risks could expose financial institutions and investors to sudden and large losses. It could also delay investments needed to help mitigate the impact of climate change.
Scotiabank Nowcast: Employment Gains Continued Prior to Omicron Spread, Q4-2021 GDP at 6.22%
This note is part of a series that will be published after important data releases, documenting mechanical updates of the nowcast for Canadian GDP coming from the Scotiabank nowcasting model. The evolution of this nowcast will inform Scotiabank Economics official macroeconomic outlook.
The Canadian labour market continued to power ahead in December according to Statistics Canadas labour force survey (LFS), with the net gain of +55K jobs for the month that brought the unemployment rate down to 5.9%, just 0.2 ppts above the level of February 2020. This bodes well for the overall Canadian GDP growth in December and is in line with our Q4-2021 estimate of +6.22% Q/Q SAAR.
The timing of the survey (December 5 to 11) means that it largely missed the beginning of the spread of the Omicron variant and the late-December tightening in public health measures that occurred in response to it. The flooding in BC, a source of downside risk to the short term outlook, occurred after the LFS was completed in November. In December, however, the LFS picked up the beginning of the reconstruction phase, according to StatCan. As a result, we are not likely to find out the true impact of this disaster on the labour market until the November survey of employment, payrolls and hours (SEPH) is released in late January.
With these caveats, the underlying picture of the labour market in Canada is one of continuing recovery. The ratio of employment to population (61.5%), the labour force participation rate (65.3%), the unemployment rate (5.9%) are all within 0.2 0.3 ppts of their respective February 2020 levels, signalling a rapid diminishing of the labour market slack. Even the ranks of those unemployed for 52 weeks or longer, while still significantly elevated at 293K (Feb 2020: 179K), continued to fall rapidly in December.
The tightness in the labour market spurred a recovery in wages, which grew 2.7% y/y in December, although this increase was much weaker than the rate of inflation over the same period. While the spread of the Omicron variant will likely lead to short term weakness in employment, in particular in the high-contact industries that are subject to public health restrictions, it is already exacerbating labour shortages in essential services as scores of employees self-isolate having tested positive for the virus.
With inflation running significantly above the Bank of Canadas inflation-control target range, the labour market slack essentially gone and wages picking up, the short term impact of the Omicron spread is unlikely to alter the Bank of Canada on its path to higher rates in 2022.
Source: Scotiabank Global Economics