A Comment -- General Comments From an Expert (A Commentary)

Mainly the heavy oil side, the pure oil players. The whole industry will benefit from tighter spreads.

Believes crude oil prices will remain high throughout 2024. Under investment in energy development will ensure relatively high oil prices. Energy stocks are the cheapest they have been in recorded history. Is bullish on Canadian oil and gas sector. Gold prices have recently pulled back, and is a good time to buy. Any time investors have ability, it is a good time to buy gold. Physical gold is a very good hedge against inflation. Gold equities should close the cap between physical assets prices, and stock market valuations. Believes owning physical gold trusts is a good option for investors - don't have to physically own it "in person".

Market Update:

Canada’s inflation cooled down faster than expected in June to 2.7 percent compared to the consensus estimate of 2.8 percent, increasing the odds of another rate cut. On the other hand, the European Central Bank left interest rates unchanged at 3.75 percent after June’s cut, indicating that borrowing costs will remain restrictive for some time to ensure inflation returns to 2 percent. The Canadian dollar was 73.01 cents USD. The U.S. S&P500 ended the week down 0.5%, while the TSX was up 1.0%.

All but one sector rose this week. Real estate and financials added 3.2% and 1.8%, respectively, while consumer discretionary and industrials added 1.2%, each. Consumer staples rose 1.1%. Energy and technology ended the week slightly up 0.2% while materials gave up 0.2%. The most heavily traded shares by volume were Royal Bank of Canada, Bitfarms, and Air Canada.
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Panel guests:

Rob Butler
Butler Mortgage

Lauren Haw
Zoocasa

Bob Dugan
CMHC

Bob Dugan: Shortage of supply of housing in Canada, not building it quickly enough. Puts pressure on affordability. Tremendous growth in demand through population growth. Last year, Canada saw strongest population growth since 1957.

Because of high interest rates, home prices have come down. But because of mortgage payments at those higher interest rates, we still have an increased cost of home ownership. A lot of that population growth is moving towards the rental market, and we're seeing some frightening numbers in terms of rent growth, especially in units where there's turnover. Rent control protects a lot of people while they live in the unit, but as soon as they move out and someone else moves in, the rents correct to market prices.

Lauren Haw:  That's right. A lot of mortgages are still up for renewal. A lot of homeowners brought forward their refinancing to 2021 and early 2022, when you could essentially get free money. And then we had a 500 basis point jump. There are a lot of sellers in the market, but we haven't seen forced selling to a big degree.

Ron Butler:  Risk didn't turn out at all well for people with variable mortgages. The next 2 years in variable mortgages will probably be the most impactful renewal cycle. We have 4 banks that didn't raise payments, but interest payments just built up and built up, so that's going to be a sizable impact. So in many cases, mortgages actually grew over the last year and a half.

Bob Dugan:  A lot of people are facing payment increases. When you get behind on your amortization schedule because your payments aren't covering the interest, upon renewal you have to get back on your original schedule. Those people will be facing payment shocks down the road. 

Then you have folks with fixed rate mortgages renewing at higher rates, and that'll be a big payment shock as well. The BOC did some work and estimated that over the next couple of years, 50% of mortgages will be renewing at higher rates.

On one hand, you see interest rates coming down at the margin, but the effective interest rate for a lot of people renewing is going to be higher.

Lauren Haw:  They aren't. You can get 5-year fixed at under 5% right now, pretty reasonable. As Bob said, supply continues to be the true issue. Rates went down so low, and prices shot so high, because money was free. 

Now you have a number of sellers who don't want to sell for less than the peak. There's a pretty big spread between what sellers are willing to sell for and what buyers can afford to pay.

Ron Butler:  Some homeowners are hanging on, and some are starting to slide off because it's becoming too unmanageable for them. Uniquely in the last 6 months, we've started to see increases in unemployment. If that rises, then the impact of the renewal combined with the possible loss of income to the family could be the real problem we're going to see in the next year.

Bob Dugan:  Absolutely. Last year they came in much higher than expected, and a lot of that was multiple starts in Toronto and Vancouver that exceeded CMHC forecasts. A lot of the reason for that was that a lot of big projects had pre-arranged financing at rates that pre-dated interest rate increases. They were operating in a bit of an artificially positive environment.

But now what we see is that a lot of these multiple projects are not going to be happening to the same degree, particularly in Toronto and Vancouver. So overall, starts will decrease this year. Unfortunate, because the size of the supply gap means that the pace of housing starts has to double each and every year over the next 10 years to close that gap. Instead, starts are coming down, but we need them to go in the other direction.

Lauren Haw:  It's not. She believes that stats for Ontario are that 31% of the costs of a new development are taxes and government fees. If your average production cost is about 16% tax and housing's 31%, we're not going to tax our way into more housing supply.

Bob Dugan:  Very good question, and becomes more relevant as the BOC has more and more success combating inflation. In June 2022, inflation rate was 8.1% YOY, and it was fairly broad-based. More and more, the different components of inflation have been settling down. 

One of the strongest components right now is the cost of shelter, accounting for about 25% of the CPI. And a big part of that shelter cost has to do with mortgage interest costs. It's one of the fastest-growing parts of the CPI right now.

Speaks to the difficulty of running monetary policy. Tricky balancing act, because the BOC has to make sure that inflation is defeated before they start to cut too far. If inflation were to rear its ugly head again, the BOC would have to reverse course, detrimental to their credibility. On the other hand, if you keep rates high for too long, you can exacerbate inflation through higher mortgage interest costs and perhaps create too much of a slowdown in the economy.

BOC's doing a pretty good job so far, and inflation's coming down fairly gradually. The latest June number of 2.7% for year-over-year CPI is in the target range of 1-3%. Core measures have come down, but still outstanding issue of high shelter cost. That should start to come down as interest rate decreases continue over the coming years, as the BOC gets back to a more neutral policy.

Lauren Haw:  A spicy question these days, with all the changes to commissions going on in the States. The quick answer is that you actually don't. If you decide to hire a real estate agent to sell your house, you can decide at that time if you want to offer a commission to a buying agent or not.

A lot of people don't understand this, but you can sell your house however you'd like to as part of the negotiation. What is likely to get me the highest net $$ in my pocket at the end? 

A lot of people choose to sell their house using a real estate agent because if you're going to do this transaction only 1, 2, or 3 times in your life, and it's a big meaty transaction, you want to make sure that you're putting it in the hands of a professional.

People choose to incentivize buyers' agents to come and bring their buyers to homes. The nuts and bolts of why it  makes sense for the seller to often pay the buyer's agent is that they can then put that fee on the mortgage, instead of paying cash at time of closing. For the last 30 years at least, most sellers have decided to do it this way.

Ron Butler:  The reality is that we have a very low default mortgage rate in Canada, one of the lowest in the entire world. 

The loan loss provisions are rational because they're not just for mortgages. They're also for credit cards, auto loans, etc. They will prove to be correct; there will be substantial credit losses at the banks. So they're provisioning properly.

As far as mortgages are concerned, we will see increased defaults in mortgages. As to the idea that they're just giving out mortgages to anyone who wants them, he can assure people that it's just not that easy.

Lauren Haw:  It is a tricky environment to be a landlord. Though it's also a tricky environment to be a tenant. If it's in your own home, that has a number of different layers. If you need the income, then it's a matter of rolling the dice and doing a lot of really good tenant screening. Do your best up front to create a good structure. The reality is that most tenants are great.

You can evict a tenant for non-payment, however, it can take upwards of a year. So it is possible for most environments, most of the time, to go through the Landlord and Tenant Board and have a tenant evicted for non-payment.