Home: buying, selling and renovations

Hello, everyone and welcome to Property Perspective. So today we are going to be talking about the challenges that we're facing in real estate construction. And as usual, we have the privilege of having Matthieu Arseneau with us. So, hello Matthieu.

Hello Nancy.

So, you'll be talking to us about what's happened in the last couple of weeks regarding the macroeconomics that are affecting our environment and our economy on a daily basis. And we have a new guest today, Guy Dallaire. Hello. Hello.

Hello Nancy.

Guy is Vice President in 1859, commercial and real estate construction. So, you'll be giving us very interesting insight as to what's happening in the world of new constructions.

Absolutely.

So, without further ado, Matthieu, I'll start with you. Of course, economists are focusing on inflation, and it's been the case for many, many months. We know that the central bank here in Canada, but everywhere in the world banks are trying to resolve this issue. It's not working that well in Canada, is it?

No, there's no good news on that front since our last talk. When you look at the at the last two release of CPI in Canada, in fact it was a disappointment for economists and a disappointment for the central bank as well. back in June it was interesting to see a headline inflation, so annual inflation being in the target range that the Bank of Canada want to see it so at 2.8% but since then it registered a significant rebound. A rebound was expected because of last year’s base effect, but clearly there has been the impact of energy prices rising with the OPEC production cut announced in the current context. But that's not the only reason for this rebound, that is the big disappointment. In fact, when you look at August all the eight major components were rising above the central bank target. So that was widespread across the economy in one month in August, but still a concern for the central bank. If you look at that chart, you can see that core inflation, when economists talk about core inflation, is when you remove all the more volatile components each month to get another to get a view on the underlying trend. You can see that it was stuck in the 3.54% band since last August. That was already a concern for the central bank, not seeing it come back to 2%. And can you imagine how they reacted when they saw that bouncing back to 4.5%? Of course, the probability of a rise in rates increases due to this report that we got in August. But still there's further data that will come out before the next decision, but still the probability of a rate hike increase over the past few weeks. Yeah.

So, if I hear you correctly, the last time we spoke there was not any increase. So, we were sort of happy now that we see the August numbers, 99% of the chances it will go up next time, 25 bps, 50 bps.

What do you think for the moment when we look at the expectation of the market, it's 50, only 50% probability of a 25% rate hike. So, we are close to the top, the top of rate that we will we expect to get in this cycle. But we have to keep in mind that inflation is a lagging indicator and that's my concern. So yes, August was strong, and it was strong this summer given the energy situation that I just mentioned. But at the same time that's the dilemma for the central bank. On one side the inflation is strong, but the economy is showing clear weaknesses. Since the start of the year, there has been disappointment on that front and on the same week that we got the information for that rebound of inflation, we got very, very poor data on retail sales in Canada. So, when you look at nominal retail sales, they look resilient, not booming but stable. Oh, when you look, we corrected for inflation to see the real purchase of households. You can see that it's a downward trend since the start of the year and if you look at it on a per capita basis because there's a population boom and you want to see how and in fact the monetary policy impact household individually, you can see that it's in a downward trend since 2021. So yes, the tightening in monetary policy is impacting the economy, is impacting the consumer and we can see that on that chart. So big decision to take. Inflation still strong but clear weakness that we are currently seeing in the Canadian economy. The Bank of Canada needs to be very careful especially that we are currently seeing the slowdown that will continue based on the last CFIB survey, that's a survey that has been done. They are looking at the intention and perception of small businesses and what we can see there, it's a big switch that occurred over the past few weeks in fact since the 2021 shortage of unskilled labor was a more concerning versus insufficient domestic demand. But they're now there has been a switch, no more unskilled labor shortages. And what I'm concerned about now is the vigor of the domestic economy.

So, in such a context, the Bank of Canada needs to be very careful given the weakness that we are currently seeing. And when you see that how this is affecting what some people are now calling the housing crisis in Canada, that's a very, very difficult situation for housing.

We already talked about this in our prior talks. There has been a significant rebound in home sales given the population boom and we are seeing a home price rebounding on prices, and we are now essentially back to where we were at the peak in 2022 before the rate hike. So, at 2% of the level that we saw back then. So, this they're rebounding on prices combined with the rebound in mortgage rates which are the highest in more than 20 years in Canada for the five-year rate, the experience, and an improvement in affordability over the past three quarters. But there's it’s what we're going to see a deterioration in Q3 given the current context for homeowners and it’s not better for the rental market when we look at the CPI rent, so rent is increasing at that moment at 6.5% year over year. We didn't see that since the 80s in the context of very, very low vacancy rate. So, this is a very, very difficult situation. Affordability is tough on both sides. So, for homeowners to get together to get access to a property and to get rent. So, the problem is that this is one of the components of the CPI, so pushing inflation up leading the Bank of Canada to increase rates and this is a disincentive for construction. So that's a big problem at this point and Guy will talk about it in a couple of minutes.

Yes. So, we're sort of stuck in a spiral right now. That's what I heard from you. But Guy, maybe you can tell us a bit about the landscape in the new housing, new constructions.

Yeah, absolutely, Nancy. So, the biggest challenge that we face right now is really the gap between the demand and the offer. So, the demand is extremely strong as we speak right now with everything that we're seeing and what matter was telling us about the increase of population in Canada. And on the other side, the supply is really reducing as we speak because of various factors like the increase in interest rate and so on and the impact of all the inflation that we are living right now as we speak.

So basically, the gap between supply and demand, this is the biggest impact that we can see right now in the market. And in your opinion, what is the cause of this slowdown?

Well, there's multiple factors that we can look at. First, interest rate hikes, this is definitely one of them. The rise as well of all the cost construction that we're seeing right now in the market since the beginning of COVID, those cost construction has risen very, very much. And 2nd and 3rd, it's really and the one that I think it's really important here is the delay in obtaining permits from the different level of government authorities to reduce and it takes so much time right now for a builder to obtain those permits so they can start construction. This different aspect is definitely affecting the slowdown as we speak right now. OK, but we need a couple of good news or good ideas. So, are there any solutions that we could implement so that we could accelerate?

Absolutely. I think that it will need really a very big teamwork between all different levels of authority, whether it's the different level of government authorities, whether it's coming from municipalities, whether it's coming from the federal government or provincial government. As an example, you know, the federal government announced the reduction of the GST for new construction regarding multi residential properties. This is definitely a good aspect on the side. The stabilization of interest rates, I think this will be a key factor as well. But what Matthieu is telling us, inflation is still going up, so definitely this is kind of a catch 22. Inflation is going up; interest rates should go up at the same time. So, it's going to be quite challenging on that side of it. And if we continue stabilization of the interest rate, a different level like National Bank, you know we're here to support our clients and so on. So, talking about that stabilization, we launched a couple of months ago our green initiative, right? So it's going to be really important for us to focus on that aspect and bring our customer to build new homes where they're going to have that green component that we were going to be able to give to those new builders, kind of a stabilization of interest rate, give better offer of like better amortization and so on. So, these are the different aspects that we can definitely work on, and I think that could be kind of the possible such solution to go forward and improve the current situation that we're living in right now.

Yeah, those are very, very good points. And I mean, even though today this, this little moment is a little bit darker than the others, I mean, it's only a period of time, right? And we still need to go back to the basics and the other videos we filmed together. You know increase your savings, use the vehicles that exist to you know like the CELIAPP (FHSA) which gives the opportunity to save money in nontaxable vehicles. So those are two things that we can do for now and there are still buildings going up there. I mean just look out the window. So, it still will happen, and I think your point in working together with all the different levels of government could definitely make a difference.

And Matthieu, we'll know about the interest rate increases in our next little video. So, thank you for being here today.

Thank you, Nancy.

And thank you Guy as well.

Thank you, Nancy.

Hope to see you soon. Thank you for being here.

Hello everyone and welcome again to this edition of Property Perspective. Today I am still accompanied by Matthieu Arseneau. Hello Matthieu. 

Hello Nancy. 

He is part of our team of economists here at the bank. So obviously with Matthieu we're going to have a discussion about what are the macroeconomic things that are happening that can have an impact on the decision to purchase or not a property. And we have a new guest today, Milan Digiovanni. Good morning, Milan. 

Good morning. 

Milan is a manager in our residential financing team. And Milan, you're going to help us understand the difference between preauthorization and prequalification and what are the advantages of doing that? 

Absolutely, yes. 

So Matthieu, there's a lot of things happening and as we've seen, the Canadian real estate market is bouncing back. You explained to us the last time that part of it is due to the growth of population that we have. But, is the housing shortage still a big factor in this and what will happen? 

Um, yes, we discussed that and it's still very, very strong at this at this point in time. When you look over the past 12 months, we mentioned that in our last edition, 1.2 million new increase in population, not directly newcomers, but the increase in population of 1.2 million to give an idea, prior to the pandemic, the five years prior to the pandemic it was 500,000 a year and we were the most aggressive country among the G7 for population growth. So that's a big increase. Of course, this is unsustainable, there's going to be issues because there's not enough construction given that base of increase.

There has been coming back of temporary immigration, students, workers, temporary workers as well. It's going to decline but the recent pace is still very, very strong and for the remaining of the year it's going to remain strong in our view. So, on one side you have interest rate that are high and on the other side you have the support for housing coming from this demographic situation. That's the rebound we've experienced. One of the other reasons and it was generalized as you can see because population growth was really strong in all markets in Canada. So, this is the four largest provinces. But the other reason is there has been a decline in prices in several markets. So perhaps a couple of owned buyers decided that it was a good moment to jump in in in the market and given the rebound in resale activity, we also experience a rebound in the home prices here. It's a bit of a complicated chart, but I really like it because it summarizes a lot of information. On the X axis, that's the correction from 2022 peak to through and the rebound we are currently experiencing since the trough. As you can see the markets that experienced the largest declines in prices during the increase in rates are currently registering very strong rebounds. Namely Toronto, Vancouver, Halifax, experiencing really, really strong rebound in the current context. So, like I said, it's going to be a tug of war between the interest rates headwind to housing and demographic being a tailwind to housing in the next few months.

And we know that this summer we've experienced two interest rates hikes, which was a surprise for us. What do you think will happen from now till the end of the year?

It's a good question and at this point there are investors expecting perhaps another rate hike in October at this point. We are not in that camp. I think, we think, that the Bank of Canada should be very cautious at this point. The reason why they could go with another hike is that inflation in July was a bit stronger than their expectations higher than economists expectation as well. But we have to keep in mind that inflation is a lagging indicator. Monetary policy impacts the economy with a significant tag and the economy impact the inflation with a significant lag. So, when you look at economic indicators over the past few months, we are clearly seeing a slowdown. If you look at real GDP, it's still increasing. It doesn't seem to be a problem. But watch out, as I mentioned, population growth is so strong when you correct it for population growth. So real GDP per capita, in fact it's declining over the past 12 months. 1.7% decline. We haven't seen a decline of this magnitude outside of a recession historically. So that's significant and in our view the Bank of Canada should be cautious that its monetary tightening is having an impact on the economy. We are more numerous in the economy but individually we're feeling the hit of those rate hikes. When you look at the labour market, same story. As you can see on the chart, that's the increase in the red line is the increase in population 15 and over. Significant boom. I'll say that in the last half of 2022, corporations hired those newcomers at a very, very fast pace. There was a lot of scarcity of labour at that point, but you can see that appetite declining and over the past four months, unemployment rate has increased by 5 ticks. It doesn't look on the chart that it's a big deal but in fact, that kind of rise didn't happen outside of the recession. And more importantly, the Central Bank never raised rates when there was such kind of increase. So, we recommend being cautious and to wait to see the impact of what they already done to see how the economy copes with the recent tightening we just got. And also, I mean the rates have increased, yes, but we also see the five-year bond rate that has increased as well and that's something that's very different from let's say what we had in January of this year. So, can you comment about that a bit?

Yes, that's that, that's an important thing that we think that the Central bank should take into account. Bank of Canada controls short term rates with the policy rate. But global factors are at play for the long for five-year rates, 10-year rates and what we're currently seeing, you can see on the chart I'm presenting right now, the five-year mortgage rate is at this highest since 2002. And so, in fact, yes, 50 basis point of increase on the policy rate, but larger increase on the five-year rate. So, it has an impact on business investments, it has an impact on housing as well. What we saw recently when we look at our housing affordability index, the mortgage payment as a percentage of median income, we have experienced an improvement over the past three quarters. That could explain the revival of the housing market over the first half of 2023. But given the rise in mortgage rates that we are currently experiencing in Q3, given and the rebound in housing prices that we're currently seeing, there should be a deterioration in home affordability over the in the second half of 2023. And that's going to be headwind for the rebound in housing at this point. 

So Matthieu, again, thank you so much. Your graphs are so well done. They speak for themselves; you explain them very well. So, thank you very much and we hope that the rest of the year will remain with the same rate, and we'll talk again soon to see if we were right or wrong. It was a pleasure. Thank you.  Milan. People still have the project of buying a house even though the rates are a bit higher. So how can we know how much we can borrow? What are the tools? We'll talk pre-qualification and pre-authorization. Could you demystify this for us? 

Absolutely. Thank you, Nancy. A pre-approval is really very important. It's one of the integral processes for a mortgage financing process. Definitely, if you're new to the country, new home buyers, looking to purchase your new cottage, it's really going to help you understand your maximum borrowing capacity and it's essential for knowing which type of property you'd like to purchase and what you can afford. Your borrowing capacity is used by lending institutions to establish your financial situation. It's basically a calculation, Nancy, that's going to help you understand your monthly debts, your monthly payments with, along with your new mortgage payment. So, it's definitely going to establish a clear picture on what can you afford and what is your global budget. And a pre-approval is also going to give you a better competitive advantage because it's going to let the sellers know that you are serious to make that home purchase.

That's very interesting. And now that I know based on the debts, I had an what the debts would be if I'm purchasing this new house. There are also people talking about pre-qualification. So, what does that mean and what are the advantages of getting that preapproval compared to pre-qualification? That's a very good question, Nancy. Absolutely a pre-approval is a document that's going to certify your maximum borrowing capacity. It doesn't necessarily guarantee that you will get the loan, but it does establish your buying power.

But please do keep in mind like you mentioned, a mortgage pre-approval is not to be confused with pre-qualification. Both are very different. Prequalification will give you a borrowing capacity, but it's not going to guarantee the loan and it's not going to protect your interest rate. So, the best to do is to have a pre-approval because it's going to include something called an interest rate guarantee. This is going to allow the homeowner to pick a favorable interest rate and they can lock it up to 180 days. 

So, this is very beneficial go ahead with a pre-approval. Again, not to be confused with the pre-qualification. And in addition, Nancy, I would say that a pre-approved buyers definitely have a much smoother and nicer process when closing their property because most of all their financial documents and application is already in process with the bank. So definitely they'll have a much smoother and faster experience and they'll definitely have negotiating leverage because when they are purchasing their home, the sellers will know that they've come with their pre-approval in hand and they'll give them a definite edge with their purchase.

OK. So, if I summarize what you said pre-qualification would be when I'm thinking of buying a house and just figuring out high level how much I could borrow exactly. But then getting serious into the project I go to my bank. I get the pre-approval which will take into account what I have in debts right now in payments, what I can borrow. I'm going to have a document that I can show to my future vendor so that I'm credible and the bank will guarantee up to 180 days of the rate interest which is very important if we have another rate increase this fall. Absolutely. OK. So, thank you for making this so simple and I hope this brought new colour to those terms that are very often confused. And please don't hesitate to come and see Milan's teams so that you can have this preapproval with you. And Matthieu, thank you again for sharing all your knowledge. 

I hope you enjoyed this capsule. Thank you.

Hello everyone and welcome to Property perspective. Today, we have the privilege of having our two guests again, Matthieu Arseneau who will be talking to us about the macroeconomic environment. Hello Matthieu.

Hello Nancy.

And we also have Andrée Desrosiers. Hello, Andrée.

Hello, Nancy.

And today, Andrée will tell us what the costs are surrounding the transaction of actually buying a house, So, hang in there. You're going to see that the list is quite long.

So, before we start with you Andrée, Matthieu, since we last spoke, we've had two rates increase, 50 bps. And are you surprised because we thought then that it would not happen or at least we hoped that it would not, and it did. And what do you think prompted such a decision?

I was not that much surprised. There were some signs of discomfort from the Bank of Canada. There was a disappointment back in April for inflation and that led to the start of other rate hikes starting in June and another one in July as you can see on that chart, another 50 bps as you mentioned. As a result, we have the highest policy rate since 2001, which is a very restrictive monetary policy. So not surprised, but I do not agree that much with the decision. Even according to the Bank of Canada, Nancy, the transmission of monetary policy, it takes between 18 to 24 months to have the full impact on the economy. So that means that the first hike we got back in in March 2022, we don't have the full effect yet. So, so for that reason I think it was a bit premature, it was a bit perilous risk of recession is there. So, I would've waited a bit to see the impact of those rate hikes that have been done previously before raising it again. And I'll say that the development since then, economic indicators did not change my point of view on that. There has been improvement on the inflation front over the past two months and as you can see on that chart headline CPI, so total inflation. is now back in the target range desired by the Bank of Canada. And if you exclude mortgage interest cost by excluding it, it's because the Bank of Canada is responsible for this, this surge that we're currently we are currently experiencing. So, if you exclude that in fact, we are right on the 2% target that the Bank of Canada wants to see. The Bank of Canada is looking at fewer volatile components, what we call underlying inflation, which excludes the most volatile components each month. They are still rising a bit too high at this point because mostly wages, a tight labor market. But even on that front, you can see on that chart that there has been improvement with a rise of the unemployment rate over the past two months, so a .4 increase at this point. We don't see that often historically to see the Bank of Canada still raising rates while the unemployment rate is on an upward trend. That's what we are currently experiencing. And as you can see on that chart, even wages are moderating, which is also good news for inflation down the road. And what I showed you is a very tight monetary policy with other impacts coming in the next few months. so slow down is coming probably hiring freezes, which will lead to a further increased unemployment rate. In such a context, yes, maybe it was a bit premature, and Bank of Canada could be surprised. On the downside, they are relatively optimistic for growth. We are more prudent in our current forecast.

And here we're here to talk about obviously the property perspective. So, the real estate market and what do you think are the implications for our clients that are looking at buying a new house or buying their first house and what do you expect for the rest of the year?

As you can see on this chart and see, there has been a surprising rebound in the housing market. With rates increasing, affordability being a challenge for new home buyers. Despite that rebound in home sales as you can see on this chart, the blue line home prices are going up rebounding. There has been at this point between 8 to 9% decline until the trough and now it's rebounding. Of course, in the current context, the explanation of this rebound is demography. We got 1.2 million increases in population in Canada. It's just terrific in terms of the magnitude of this size, it represents 2 Newfoundlands joining, joining the federation in one year. That's a huge increase. Usually, it takes some time for immigrants to become homeowners, we'll say on average three years. But given the magnitude of this 1.2 million, there has been a couple of them that became homeowners and supported the market despite high interest rates. So, the confirmation of that is what we see when you look at the largest urban market on that chart are cities that experienced the largest increase in population are experiencing a higher level of activity in the resale market at this point with Alberta with more than 4% growth. and resell activity above historical norm in the current context. So clearly population growth as you see on that chart is driving the resale market at this point and will continue to do so. There's divergence at this point. So, increase, strong increase in population during the last quarter and housing starts declining. The incentive to build for home builders is not there that much with still very high construction costs and high capital costs. Interest rates are high, so profitability is not there for some projects. So, we are in a situation where there's going to be a scarcity of dwellings in the coming months. So yes, rates have increased, policy rate, five-year rates, which are headwinds for the housing market. Labor market will deteriorate a bit, but on the flip side, there's a very strong demography. So, we expect some weakness but there's a support for not seeing a crisis at this point in Canada in the housing market.

Yeah, very well explained. Your graphs are amazing, they are so clear. So, thank you very much. It's still going to be a very interesting follow up on the next couple of months to see how those strengths, but there are pull and push happening at the same time in the housing market. So, thank you, Matthieu.

And Andrée, so you have quite a list of costs. So obviously we know, and we talked about it the last time when we buy a house, we'll think about you know my monthly payment and we have talked about variable rates compared to fixed rates. So, I want to know how much I'm going to pay for me for my mortgage fee, right, my mortgage on a monthly basis for example. But there's so many more costs that we need to think of. So can you give us the list that you've made-up so far. And what does it represent? Because I think it's quite substantial.

Exactly, Nancy. Acquiring a property involves many costs of which either we're not aware of or that we don't think about when we buy, when we buy the house because we're too excited. Exactly, exactly. So you have the down payment that you have to make for your house but up above that you have to estimate approximately 2 to 3% of the value of the property that you're buying as other costs and we're going to look at this cost 1 by 1 and as you said there are there are quite a lot of them Yes, definitely.

First, if we look at the appraisal fees, so expect for that appraisal to cost you around you know $350.00. It's usually used by the loaner also to provide you your mortgage loan and it gives and define the market value of the property. So, it reassures you that the price you're paying for your house is the right price. So that's what the appraisal will do for you.

The second fees that you have to look for is the inspection fees. This fee starts at around $500.00 and we encourage you to use someone that is recognized by an association or an order to provide you with insurance if you ever have something, you know, that wasn't disclosed to you when you bought the house and that you're confronted with when you move into your house. We encourage you also to put that in your purchase offer as a condition, OK, so that you will buy the house until you have a proper inspection telling you that you know everything is OK. Also, this will tell you what you will have to invest in that house in the years to come. OK, so that's interesting to know so you can budget you know. Some of major smaller or higher renovation that you will have to do, and you will be able to budget around that for the years to come.

Naturally you have the legal fees and that's you know, around, you know between $1500 and $3000 it's the notary or the lawyer fee, depending on if you are in Quebec or in other provinces. And these experts take care of the deed of sale, for example. They will make sure also that your title search is okay, and they will register your property at the municipality and government registration, so it is mandatory. in Quebec to go to a notary. In other provinces, we highly encourage that you go to a lawyer because it's usually lawyers that are specialized in property acquisitions that will help you with that.

You also have what we call the mortgage loan insurance premium. That you know, can be that premium could be up to 4% of the amount of the mortgage loan that you're going to have.

Significant.

Significant, yeah. And it depends on the percentage that you put as a down payment. So, if you put less than 20% of the value of the property, you have no choice. You know, it's a regulatory requirement. So, you have to have that premium and that premium will be up to 4%. And in some provinces, Quebec, Ontario and Saskatchewan, you will have to pay as well provincial sales taxes on this premium. And this premium, the premium itself you can add up to your loan, to your mortgage loan. However, the tax on that premium you will have to pay when you finalize the transaction with the lawyer or the notary.

If you buy a new house, you will also have to pay taxes on it. Federal taxes for sure and in other provinces, except Alberta. In fact, Alberta is the only one that is charging only the federal tax. You will have to pay the provincial tax.

You have to pay when you go to the notary or to the lawyer, right?

It's not something that you can put on your mortgage. Exactly and it can go up to 15% if you're, you know, in some provinces, however, I encourage you to go on the federal government website because you can have a refund. In some provinces. Exactly. And you know, some, some it's the entire tax, some it's a part of it. But go and look what you can have. You know, depending on where you're at, you're buying your property.

The other one, that everybody loves, the welcome tax or the land transfer tax. So that cost, you know, is usually progressive and it's on the amount you pay for your house or the evaluation that the municipality has made of your house and it's the higher one, always, always, always, okay. And this, you know is progressive as I told you. So, depending on the amount, the percentage that you pay go less as you go higher. But you know the spread is the same for the scale that you have. And make sure that you plan for it. And even if you haven't received it six months after you moved, I've seen cases where they sent it, you know, a year after, but they won't forget you.

A couple of months after?

Exactly, but they won't forget you for sure you're going to receive it.

The last cost that we have are for moving and one that we always forget the decorating costs. So, moving, naturally if you hire a company, you know movers will charge between $50 and $250 an hour. It will depend greatly on where you move. On what season you are if you move, for example in Quebec, if you move on July 1st, you're going to be on the higher end of the scale if you move the 1st of January to be good type of someone, but it's going to be a lot cheaper. You can also decide to do it yourself. So, calculate around $300, you know to rent a truck. And don't forget the pizza and beer for everyone that will come and help you, so that's important. And the decorating cost, like I told you, is something that we almost everyone forgets. So, there may be an orange wall in one room that we will want to change. Lighting, blinds, furniture as well. You know, you may need some. So, you have to think about that as well. Yeah.

And I would add, because you were talking about the new house before, if you buy a new house then you have to do, you know, make sure that you have, you plan the landscaping and the fences and maybe a tree and it can add up very, very quickly.

Yeah. And there are many cities now that are that are giving you, you know, a year to do these things. You cannot do them only when you want to do them. Yeah. You have a limit. Exactly, exactly. Okay.

So that's quite a list. It's surprising that it's only two 3%. So, we really need to do the math because there's a lot of things to think of and but also and it's more for the first-time home buyer because others have gone through it. But if it's the first time that you, you buy a house. There are monthly payments that you have to do. So, couple of ideas for us?

Yeah, you've got annual payment that are coming, you know every year and that you have to plan for. You have for example the municipal and school taxes which in some cities are quite high. You have if you buy a condo, you probably have the co-owner tax.

That's also a monthly fee?

Exactly. You have a home insurance, and many lenders will tell you it's required. And don't forget you know, monthly, that you have to pay for your internet, your cable, you’re eating, your electricity, your gas. So, you have to look at your budget and make a new budget when you buy a house to make sure that you can provide for all these fees and costs that you will have.

And one thing, Andrée, also, you know, as a financial planner, we always say that we need to have an emergency fund. Very often we've seen that people will use that emergency fund to increase their down payment so that they don't pay the premium for insurance as much. But then there will be things that will happen. So, you really need to make sure that you don't touch it, that would be the best world, if not you need to rebuild it very quickly because emergencies will happen while being an owner of a house. So that's something not to forget either.

Yeah, you're very right about that.

Well, thank you, Andrée, so as you can see, very important to do the budget and to plan accordingly. And I thank you for your presence today. I hope you've learned a lot.

Matthieu, thank you for your clear presentation.

Andrée, thank you for that list. It was very educating.

I hope and we'll see you soon. Thank you very much.

Hello everyone and welcome to Property Perspective. My name is Nancy Pacquet, Senior Vice President, Personal Banking at National Bank of Canada. And I'm here today with my colleague, Matthieu Arseneau. Matthieu is Deputy Chief Economist at National Bank. Hello, Matthieu, Hi, Nancy. And I'm also here with Andrée Desrosiers. Andrée, you're the residential financial lead for National Bank as well. Exactly. So welcome, Andrée, and thank you for being here. So the goal of this little video is to understand the macroeconomic impact on the residential market. And also what are going to be the move for interest rates and the impact on our clients.

So without further ado, I would start my first question with you, Matthieu. As we know, economic growth and job market have been very strong even though we've seen many interest rates. So, what does that mean? Does that mean that Bank of Canada has not done enough yet and will there be any further interest rates increase?

That's a good question, Nancy Yes - you're right there has been an impressive tightening in monetary policy that occurred in 2022. We talk about 425 basis point of increase from March to January 2023. As a result, as you can see on that chart, overnight trade policy rate for the Bank of Canada is back to its level that it was back in 2007. But back then it was just an increase of 250 basis point. So it's much more, it's a more significant increase this time around. So, same rates, but we have to keep in mind that. Perhaps the economy is more sensitive this time around to the interest rates given that household debt as a percentage of disposable income has increased 45% since then. So we have an economy more sensitive to rate hikes and that's the reason that - in our view - that the Bank of Canada should be very prudent. Especially that the impact of rate hikes occurs with a lag on the economy. We talk about 18 to 24 months like to have the full impact of those rate hikes. So it's going to slow down the economy still over the next few months. So, in our view, there has been some progress on the inflation front. So maybe at the Bank of Canada should be prudent, but of course there's pressure. As you mentioned it, we just got this week GDP data. So the economy bouncing back strongly in Q1 3.1% growth annualized in the first quarter. This is consistent with what we are seeing on the labor market. So with the 248,000 jobs created so far this year, that's the best performance for the first four months in each year, as you can see on that chart. Usually that type of job creation lead to a decrease of the unemployment rate, but we didn't see that in the data. As you can see on that chart, yes the unemployment rate is low, still low, but it hasn't decreased despite this, this surge, it's because population is growing so fast as you can see on that chart. In fact, when you look at the population data, Canadian population increased by 1,000,000 more than 1,000,000. this year there has been the return of students after the pandemic. There has been temporary workers, Ukrainians as well and we know that we have an aggressive immigration policy, so a lot of resident permanent as well but and those who wanted to integrate the labor market it it went well as you can see on that chart. But - OK, So strong employment growth but not a hotter labor market. So no decline in the unemployment rate and that's really important to keep that in mind. And I will say even maybe the labor market is less tight than it was a couple of months ago while the unemployment rate is essentially at the same level. There's another indicator that bodes well for less wage pressure and that's good news for the Bank of Canada. She wants to be sure that there's no contagion from inflation to wage inflation because that's going to be a trouble for them down the road to control inflation. But as you can see job vacancy rate has declined significantly since its peak in last May in and it was generalized across the industries, wages are moderating as well. So less appetite for hiring. That's good news for wage pressure and in our view, there's already sign of a slowdown in the labor market. Profits are down for three consecutive quarters. Investment in machinery and equipment is down as well for three consecutive quarters. Usually it does not bode well for hiring in the following months. For that reason, I repeat, the Bank of Canada should be prudent - keep maybe the rates at their current level and continue to see the impact, the slowing impact of this tightening over the next few months before probably must decline rates but not before Q4 or even Q1 in 2023 2024, sorry for that, when the economy will need this, this support.

It's still far and we've seen the resale housing market very active, we've even seen some pressure and people you know giving more than what the seller was expecting. So how do you explain that? What does that mean?

It's interesting and I've been surprised by this rebound truly Nancy, you can see on that chart this is the resale market activity. So home sales rebounded in April significantly in Calgary, Vancouver, Toronto and there's signs that it's going to accelerate in Montreal as well in May. So I said it already 1,000,000 population growth, it's huge, it's the strongest among OECD countries. Perhaps there has been a couple of - usually it takes some time for immigrants to jump in the housing market. But with 1,000,000 population, it's possible that a couple of those immigrants were able to jump in the market. So that's one of the reason and the alternative which is rental. It's pricey, it's pricey, it's pricey, There's and it's vacancy rate in the rental market are very low, so it's complicated to find an apartment. And that's the reason why prices are accelerating, and they are rising at their fastest pace since the 1980s. In such a context perhaps some, some households decided that okay it's maybe time to look the other alternative and buy a home and this could be seen as an opportunity compared to prices that were like back in early 2022. Those are the correction that occurred in the 11 largest markets in Canada. So on average a 9% decline in prices. So perhaps when there was like overbidding in this episode, a couple of home buyers say okay, right. I've declined compared to what were the prices a year ago. So that's perhaps another explanation for what is going on with the current rebound. It's clear that for us. that this could be temporary. I don't think that that's the start of a new trend and a new boom in the housing market. I think it's going to be the activity will still be slow in the second-half of 2023 because of that reason. Yes prices decline and affordability improves - like you see on that chart. It improved in all markets slight decline in rates but mostly due to home price decline, but affordability, it's at its worst in Toronto and Montreal since the early 90s and in Vancouver since the early 80s. In such a context, I don't see a significant rebound in activity in the second-half of 2023. Perhaps it will come with rate cuts, but we'll see how fast it's going to go. But in such a context, yes. we are still expecting some softness in in the second-half of the year. Okay. Thank you, Matthieu That's a great answer. And I have a couple of points that I'll take in the closing remarks.

Andrée, you have the privilege of being the voice of our clients and the questions that they're asking our teams daily. So can you tell us about the current climate of interest rate and how has it changed and what's the impact on people that want to buy a house?

For sure we can say Nancy that the interest rate have radically, we have seen a radical change. It's going to be easier to say - a radical change in the rates over a period less than a year, OK. We went from 1/4 of a percent rate to 4 1/2% so that's major. And if the prime rate goes higher so do the mortgage rates. For a couple of years, we were talking about you know five years variable 5 year fix. That was the only choice or the only discussion we had with our clients. Now, they're looking at you know the rates how they are and they're taking maybe we're going to go into shorter term, you know with what's happening, but for sure with all the changes that we have foreseen in the last year.

We’re not having the same discussions with our clients, that's for sure. So instead of short long term, what are the types of discussions that we should have with our advisors in choosing a mortgage?

For sure we must take in account you know what's happening in the market. We cannot discount that in our discussion in our decision. However, we have to continue to always look at what is our financial need. Okay, are we a first buyer that is looking for a safe - you know - payment a yearly for the year exactly that's not going to change over the years that are coming or are we may be a senior that is thinking of a smaller house and want to sell. So, long term maybe not the right choice. So yes, we have to take into account what's happening on the market. But more and foremost, we have to take in account what's going to happen in our lives and what are our financial needs for the next years. That's what should dictate the choice that we make as far as the interest rate and the terms is concerned. So, I guess that's the value of advice in sitting down with one of your advisors and making sure that we understand okay the rates are one elements of the decisions. But there are so many other things and one answer that's good for you might not be good for the next person. So interest rates, they might move in Q4 of 2023 or early 2024. What does that mean? What do we do? But like Matthew said earlier, we are expecting that the interest rate will slowly start going down by the end of 2023, early 2024. But it's going to be very slow. And again, I'm going to give you the same answer as before Nancy, it's really what are you goals, what's going to happen in your life in the next 2, 3, 4, 5 years? That's what should be the, the, the foremost element that you consider when you're choosing your term or your interest rate. It's always that.

Well, thank you, Andrée. So, Matthieu, we've seen your graphs where there's still a very low unemployment rate, but wages are going down and you've told us that it takes some time for the interest rate hikes to really reflect on the economy. So we hope that in June it's going to remain stable. That's your prediction that at your, your office. So hopefully you're right for our clients who are looking to buy a house. And Andrée, thank you for bringing the questions of our clients to life here. And that's what we're gonna be continuing to do, making sure that we reflect what your questions are, what your needs are, so that we have in our next conversation other questions to answer. So, thank you all for being with us today.

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