When it comes to the Canadian mortgage industry, experts point to a vulnerable global marketplace as a backdrop for the tepid economic predictions being issued by Canadian economists.
As a result, experts are calling for what might be described as a cautiously optimistic outlook for 2012 with the emphasis on cautiously. Expect a number of challenges.
Toronto mortgage agent David Larock thinks 2012 will be marked by less borrowing overall. “I think 2012 will be a tough year for economies everywhere, including Canada,” Larock says, “and with our domestic mortgage rates already at record low levels, there is little scope for further reductions in borrowing costs to stimulate our real estate markets the way they have over the past several years.” Larock believes that will naturally work to slow borrowing and, if that doesn’t occur, he suspects another round of mortgage rule changes as federal Finance Minister Jim Flaherty tries to rein in overall consumer debt levels.
In March, Flaherty effectively removed marginal borrowers from the market by reducing the maximum amortization on a mortgage from 35 years to 30 years, reducing refinancing of mortgages from 90% to 85%, and withdrawing government backing from HELOC’s. However, the impact on the market was quite negligible.
Leslie Penney, a St. John’s mortgage broker, suspects the government will crack down on mortgages once again next year. He thinks that because lately he’s noticed that insurers are scrutinizing and requiring more documentation on many deals that wouldn’t have been requested previously. Regardless, Penney believes if the government is truly concerned about household debt it should consider enforcing tighter guidelines with respect to credit cards and lines of credit, which are just too easy to obtain and may get out of control.
“I’ve said it before and I’ll say it again, this should be the area to focus on to reduce consumer’s vulnerability to increased debt and subsequent economic changes,” says Penney.
While Flaherty’s mortgage changes did not bode well especially for first-time buyers, Calgary mortgage broker Tyler Tost expects low interest rates will save the day come 2012. He believes rates will stay low in order to stimulate the economy and the housing market, which he expects will continue to grow throughout next year. “When money is this cheap that’s obviously when people get their foot in the door,” says Tost. “They realize it may not get any better than this.” He’s even heard rumblings that interest rates could continue downward. “There’s talk that fixed rates could drop lower yet,” says Tost. “I don’t know how much lower they could go, but there’s indicators that there’s room in the bond market that rates could drop further.”
Penney, however, doubts rates will fall further especially during the early part of the year. “Again, there’s just so much volatility, and with Europe on the brink of a recession, it will certainly delay any rate hikes in the short term,” he says.
“Europe faced tough choices. But as so many economists have predicted, 2012 will start slow; however, we’ll have to hang tight to see what will transpire later in the year. With some economists predicting a drop in Canadian housing prices of 5 to 10 %, appraisals will likely become more contentious, says Larock. He points out that appraised values tend to agree with market values in a real estate market that’s rising, but in one that’s dropping values come in lower than market values and therein lies the problem. “This will be an issue for purchasers with small down payments who are hard pressed to come up with more money, and for refinancing borrowers who are looking to pull equity out of their homes,” he says. “Also, I expect to see fewer ‘drive-by’ or casual appraisals and more full appraisals, which are more expensive and which borrowers are often required to pay for.”
For that growing segment of self-employed Canadians (approximately 16 % in 2010, according to Statistics Canada), borrowing money in 2012 will be more difficult, says Kristian Harris, a mortgage broker with MonsterMortgage.ca. Traditional lending institutions loosened their lending rules about a decade ago, says Harris, which was good news for the approximately 2.7 million Canadians who are self-employed. But with OSFI cracking down recently expect banks and traditional credit unions to pull in the reins. The problem for this segment of the population is that they whittle down their incomes in an effort to pay less in income tax, but that bodes poorly for them when it’s time to get a loan. “It’s going to make it tougher for these people to get mortgages,” says Harris. “Of course, there will always be a lender will to loan them money, but they’ll have to pay higher rates.”
Larock believes it will be game on between banks and non-bank lenders as competition heats up between the two thanks to expanded staffing, product offerings and improved contract terms that make their contract terms and conditions more competitive. The banks have the brand recognition and huge advertising budgets, says Larock, but rely on a lot of inexperienced advisors, while non-banks generally have better offerings and more experienced planners in their corner, but they spend almost nothing on advertising.
But Penney believes this extra competition could actually be good for business for both sides. “This may be good for two reasons. Once, they believe that the mortgage business has a positive outlook and should experience growth and they want to ensure they get their share, and two, the more that come into the business on the bank side may end up increasing our presence as well. If the banks didn’t believe we were getting some of their business they wouldn’t increase their presence.”
Larock also believes mortgage professionals need to pay closer attention to smarter, technology-savvy consumers, who can learn and acquire knowledge online as opposed to putting their faith in a mortgage professional. “The mortgage experts who embrace this trend and help to educate clients during their decision making process will thrive,” he says, “and those who don’t or can’t will find it tough sledding.”