Back to Blog
1 Jul

Changes to the stress test, Common first-time homeowner mistakes & Canadian Jobs Market – July 2021

Monthly Newsletter

Posted by: Matthew J. Charlton

JULY 2021

Hello!

In this issue:

  • The changes to the stress test rules put in place last month
  • All you need to know to avoid common first-time homeowner mistakes
  • Economic Insights with Dr. Sherry Cooper

Changes to the Stress Test and What You Need to Know

As you may have heard, the Bank of Canada recently changed the stress test rules as of June 1, 2021. With these changes, now both insured and uninsured mortgage borrowers will be subject to a stricter stress test when qualifying for their mortgage.

The new qualifying rate on uninsured mortgages – where the down payment is 20% or more – is now the contracted rate plus two percentage points or 5.25%, whichever is higher.

This means that any buyer whose down payment on a home is one-fifth of the purchase price or higher must show they can afford the mortgage payments if the interest rate was two percentage points higher than what the bank is offering, or the new five-year benchmark rate per the Bank of Canada.

Overall, the implementation of these tougher stress test rules will reduce buying power by roughly 4-5% for borrowers. To help illustrate  how this change affects you, consider the following scenario with $100,000 gross income:

The previous stress test at 4.79% would give this individual the ability to borrow $469,530 (based on good credit score with max GDS/TDS qualifications at 39/44%). Now, with the current scenario of 5.25% stress test rate, the they can now only borrow $448,880 (based on good credit score with max GDS/TDS at 39/44%). This is a difference of $20,650 which reduces your home options.

To ensure you are searching in the right price range and budgeting accordingly, it is important to consider this stress test change. If you are looking to purchase your first home or move, please don’t hesitate to contact me today for a better understanding of the rules and what you qualify for.


Avoid These First-Time Homebuyer Mistakes

As a first-time buyer, I am here to give you some tips on homebuyer mistakes to be on the lookout for so you can avoid them for the best experience possible!

Thinking You Don’t Need a Real Estate Agent
You might be able to find a house on your own, but there are still many aspects of buying real estate that can confuse a first-time buyer. Rely on your agent to negotiate offers, inspections, financing and other details. The money you would have saved on commission can be quickly gobbled up by a botched offer or overlooked repairs.

Going With The First Real Estate Agent You Find 
As much as not having a real estate agent can be a disadvantage, having the wrong one can also make the process more difficult. You don’t want to get halfway into house-hunting before realizing your real estate agent is the wrong fit for you. Ideally, you want to source an agent from a friend or family referral. However, if you are stuck or looking for more options, I’d be happy to introduce you to a Realtor partner that’s best suited for your specific search and location.

Getting Your Heart Set on a Home Without Doing Your Homework 
The house that’s love at first sight may not always be what it seems, so it is important to keep an open mind. If you jump in too fast you may be too quick to go over budget or you might overlook a potential pitfall. Taking the time for proper inspections, budget comparisons and long-term family planning can go a long way in ensuring your first home is the right home!

Committing to More Than You Can Afford 
This is one of the most common mistakes that first-time homebuyers can run into, but to ensure your future financial security it is imperative to truly consider your budget. You don’t want to sacrifice retirement savings, an emergency fund or potential holiday for mortgage payments. You need to stay nimble to life’s changes and overextending yourself could put your investments—including your house—on the line.

Fixating on the Lowest Interest Rate
A reasonable interest rate is important, but not at the expense of heavy restrictions and penalties. Make a solid long-term plan to pay off your mortgage and then find one that’s flexible enough to accommodate life changes, both planned and unexpected. I would be happy to discuss all of your mortgage options with you to ensure that you get the best overall mortgage product with a rate that suits YOU!

Choosing a Fixer-Upper Simply for the Cheaper Listing Price
That old character home may have loads of potential, but it is vital to be extra diligent during the inspection period. What will it really cost to get your home to where it needs to be? Negotiating a long due-diligence period will give you time to get estimates from contractors in case you need to back out.

Diving Into Renovations as Soon as You Buy
Whether or not you choose a fixer-upper or simply want to update some things in your new home, it is important not to rush into them. While renovations may increase the value of your home, overextending your credit to get upgrades done fast doesn’t always pay off. Take time to make a solid plan and the best financial decisions. Living in your home for a while before renovating will also help you plan the best functional changes to the layout.

Not Researching the Neighbourhood
It may be the house of your dreams, but annoying neighbours or a nearby industrial zone can be a rude awakening. Spend some time in the area before you make an offer and talk to local business owners and residents to determine the pros and cons of living there.


Economic Insights with Dr. Sherry Cooper

Canadian Jobs Market Rebounds in June As Lockdown Eases.

Canada’s Jobs Recovery Resumed in June As Lockdown Began to Ease
This morning, Statistics Canada released the June 2021 Labour Force Survey showing employment rose 230,700 (1.2%) in June, rebounding from a cumulative decline over the previous two months of 275,000. Total hours worked were little changed. The national unemployment rate fell 0.4 percentage points to 7.8%.

Jobs continue to swing back and forth as the various COVID waves drive lockdowns and reopenings. Hopefully, we’re in the last of the reopenings. Services accounted for all of the gains. Hospitality jobs were the biggest gainer, as expected, adding 101k positions, but they remain well below pre-virus levels. Restrictions are expected to continue easing through the summer, which should mean more solid gains over the next couple of months. Other sectors seeing a boost from the reopening were retail/wholesale (+78k), education (+26k) and health care (+20.5k). Goods sectors were down across the board, with losses concentrated in construction (-23k) and manufacturing (-12k).

Beyond the headline increase, one of the bigger stories in this report is the sharp 0.6 ppt rise in the participation rate to 65.2%. That’s the largest increase in a year and leaves the rate 3-4 ticks away from pre-COVID levels. Compare that to the U.S., where the participation rate is still nearly 2 ppts lower than in early 2020. The rise in the participation rate limited the decline in the jobless rate to 0.4 ppts to 7.8%, still some wood to chop there. The rising participation rate should alleviate some concerns about widespread labour shortages.The bulk of the gains were in pandemic-exposed sectors, like retail, food and accommodation, that got hit most by the new containment measures. Employment in accommodation and food services was up 101,000. The retail sector added 75,000 jobs.

Increasing vaccination rates and falling Covid-19 case counts have allowed the country to finally re-open restaurants, bars and retail stores after months of closures. Ontario began allowing patio dining earlier this month, and several cities in Quebec have further relaxed restrictions, allowing indoor dining for the first time this year.

With the June gains, Canada has recovered 2.65 million of the 3 million jobs lost at the height of the pandemic last year. The nation created 263,900 part-time jobs, with full-time employment down 33,200.Employment growth in June was entirely in part-time work and concentrated among youth aged 15 to 24, primarily young women. Increases were greatest in accommodation and food services and retail trade, consistent with the lifting or easing public health restrictions affecting these industries in late May and early June in many jurisdictions.

The number of employed people working less than half their usual hours fell by 276,000 (-19.3%) in June. Total hours worked were little changed and were 4.0% below their pre-pandemic level.

The employment increase in June was in part-time work, which rose by 264,000 (+8.0%) following combined losses of 132,000 over the previous two months. The overall level of part-time employment was essentially the same as in February 2020, before the COVID-19 pandemic. Increases in the month were driven by accommodation and food services and retail trade—two industries where part-time workers represent an above-average proportion of employment—and were concentrated among youth.

After falling by 143,000 over the previous two months, full-time work was little changed in June and was 336,000 (-2.2%) lower than its pre-pandemic level.

GAINS WERE DRIVEN BY PRIVATE-SECTOR EMPLOYEES, WHILE SELF-EMPLOYMENT DECLINES.
The number of private-sector employees rose by 251,000 (+2.1%) in June, following two monthly declines. As of June, the number of private-sector employees was 2.5% lower (-313,000) than in February 2020.

In the public sector, employment rose by 43,000 (+1.1%) in June, bringing it to 180,000 (+4.6%) above pre-pandemic levels. Employment in this sector has trended up following the initial wave of the pandemic, particularly driven by increases in health care and social assistance, public administration, and educational services.

The number of self-employed workers fell by 63,000 (-2.3%) in June and was down 7.2% (-207,000) compared with February 2020. Self-employment is a broad category that includes workers in various situations, including working owners of incorporated or unincorporated businesses and independent contractors. Compared with June 2019, declines in the number of self-employed were widespread across multiple industries and were concentrated among the self-employed with paid help.

THE EMPLOYMENT RATE REMAINS BELOW PRE-PANDEMIC LEVELS.
To fully understand current and emerging labour market trends, it is essential to consider employment change against the backdrop of population change, which totalled 1.1% (+334,000) between February 2020 and June 2021. To keep pace with this population growth and maintain a stable employment rate—that is, employment as a proportion of the population aged 15 and over—employment would have had to grow by 203,000. Instead, total employment was 340,000 lower in June than in February 2020, and the employment rate was 1.7 percentage points lower (60.1% compared with 61.8%).

NUMBER OF CANADIANS WHO WORKED FROM HOME DROPS BY NEARLY 400,000
Among Canadians who worked at least half their usual hours in June, the number who worked from home fell by nearly 400,000 to 4.7 million. For 2.6 million of these people, working from home represented an adaptation to the COVID-19 pandemic, as this was not their usual work location. At the same time, the number of people working at locations other than home rose by approximately 700,000 to 12.3 million.

Almost one-third (31.4%) of workers aged 25 to 54 and more than one-quarter (27.2%) of those aged 55 and older worked from home in June. Due to their concentration in industries where working from home is less feasible, such as accommodation and food services, a far smaller proportion of youth aged 15 to 24 (12.9%) did so.

Regionally, Ontario and Quebec led the way higher, though B.C. and Nova Scotia had solid increases as well. Interestingly, even with restrictions easing through most of the country, only five provinces reported job gains.

Bottom Line 

The jobs report is the last major piece of economic data before next week’s Bank of Canada policy decision, where it’s expected to continue paring back its stimulus efforts. The Bank of Canada is among the first from advanced economies to shift to a less expansionary policy, having already cut its purchases of Canadian government bonds to $3 billion weekly from a peak of $5 billion last year.

Analysts anticipate that will come down to C$2 billion per week at the July 14 meeting before eventually falling to a weekly pace of about C$1 billion by early next year. In addition to the bond tapering, the market has priced in at least one interest rate hike by this time next year.

Canada’s economy remains 340,000 jobs shy of pre-pandemic levels. The unemployment rate was below 6% before the pandemic.

With vaccination rates rising and restrictions easing, economists are predicting a strong rebound in the second half. According to a Bloomberg News survey of economists earlier this month, Canada’s expansion is seen accelerating to an annualized pace of 9.1% in the third quarter, with a 6% gain in the final three months of 2021. Consumer and business confidence regarding the outlook has recently hit record highs.

Please Note: The source of this article is from SherryCooper.com/category/articles/ 

Are you reading this newsletter on the web or was it forwarded to you? Sign up to receive Monthly Home, Lifestyle & Mortgage News here.