Canadian Real Estate Information

Timeline for Changes in Canadian Mortgage Rules

2003 –September (Interest Rate 3.00%):

• Canadian Mortgage Housing Corporation (CMHC) insures 5% down, 25 year amortizations and removes all price ceiling limitations.  Mortgages of any amount are insured by the government removing the risk from banks regardless of cost

 2004 –March (Interest Rate 2.50%):

•  CMHC introduces Flex-Down product allowing 5% down to be borrowed and 1.5% closing costs to be borrowed.

 2006 –March (Interest Rate 4.00%):

• CMHC introduces 0% down 30 year amortizations.
•  AIG Enters the Canadian mortgage insurance market.
•  Genworth announces 35 year amortizations.

 2006 –June (Interest Rate 4.50%):

• CMHC introduces 0% down 35 year amortizations. Interest only payments allowed for 10 years.

 2006 –November (Interest Rate 4.50%):

• CMHC introduces 0% down, 40 year amortizations.  Interest only payments allowed for 10 years.

 2008 –October (Interest Rate 2.50%):

• CMHC tightens to 5% down and reduces amortizations to 35 years.

 2010 –April (Interest Rate 0.50%):

• Borrowers must meet the standards for a five-year fixed-rate mortgage, even if they choose a variable mortgage with a lower rate or a shorter term.
• The maximum Canadians can withdraw when refinancing their mortgages is reduced to 90 per cent of the value of their home, from 95 per cent. 
•  A minimum 20% down payment is required to qualify for CMHC insurance for non-owner-occupied properties purchased as an investment.

2011 –March (Interest Rate 1.25%):

• CMHC reduces amortizations to 30 years.
• The upper limit that Canadians can borrow against their home equity was lowered from 90 per cent to 85 per cent.
• Government insurance backing on home equity lines of credit, or HELOCs, has been removed.

2012 –July (Interest Rate 1.25%):

• CMHC reduces amortizations to 25 years. 
• The upper limit that Canadians can borrow against their home equity is reduced from 85 per cent to 80 per cent. 
•  Proof of income is required to obtain CMHC insurance.  Self declared statements of income are no longer accepted.

Historical Prices

Historical Interest Rates
 

Int Rates 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 January 3.00% 2.75% 2.75% 3.75% 4.50% 4.25% 1.25% 0.50% 1.25% 1.25% February 3.00% 2.75% 2.75% 3.75% 4.50% 4.25% 1.25% 0.50% 1.25% 1.25% March 3.25% 2.50% 2.75% 4.00% 4.50% 3.75% 0.75% 0.50% 1.25% 1.25% April 3.50% 2.25% 2.75% 4.25% 4.50% 3.25% 0.50% 0.50% 1.25% 1.25% May 3.50% 2.25% 2.75% 4.50% 4.50% 3.25% 0.50% 0.50% 1.25% 1.25% June 3.50% 2.25% 2.75% 4.50% 4.50% 3.25% 0.50% 0.75% 1.25% 1.25% July 3.25% 2.25% 2.75% 4.50% 4.75% 3.25% 0.50% 1.00% 1.25% 1.25% August 3.25% 2.25% 2.75% 4.50% 4.75% 3.25% 0.50% 1.00% 1.25% 1.25% September 3.00% 2.50% 3.00% 4.50% 4.75% 3.25% 0.50% 1.25% 1.25% 1.25% October 3.00% 2.75% 3.25% 4.50% 4.75% 2.50% 0.50% 1.25% 1.25% November 3.00% 2.75% 3.25% 4.50% 4.75% 2.50% 0.50% 1.25% 1.25% December 3.00% 2.75% 3.50% 4.50% 4.50% 2.50% 0.50% 1.25% 1.25%

Mexico's Manufacturing Renaissance

A growing number of manufacturers are seeking more bang for their buck south of the American border.  Mexico's low landed costs for American companies is an attractive consideration when comparing other developing country options.  With higher fuel prices, companies are looking for ways to manage shipping costs.  Shipping a container to the USA from China costs roughly $5000, compared with roughly $3000 to truck the same freight in from Mexico.   Nearness to the US market as well as the consumer base fulfill just in time requirements.  Advanced protection of patents and other intellectual property compared to other low costs producing countries make Mexico an attractive options for American companies.

Perhaps the biggest allure is the relatively low cost of Mexican labor.  HSBC notes the average Mexican salary was $2.10 in 2011 up 19% from $1.72 in 2001.  By comparison labor costs in China have increased nearly four fold from $0.35 in 2001 to $1.63 in 2011.  The difference in labor costs is expected to continue to shrink in the years to come.

However, companies looking to Mexico as a base of manufacturing have noted the relatively high rate of corruption exceeds that of low cost European manufacturing centers.  Employment and labor laws impose strong penalties for laying off workers. 

With half of the nearly 19.4 billion in foreign direct investment reaching Mexico's manufacturing sector, it appear the trend towards near shoring by North American companies is set to continue.

A Shift in the Wind

It was September 2006 and members of the National Golf Buyers Association (NGBA) were meeting in Texas at their annual trade show. The NGBA was formed to protect the interests of independent golf retail members and the Houston trade show was an ideal forum for store owners to exchange ideas and discuss the state of the industry.   Included in this group were a selected number of Canadian members.  Walking the floor and perusing the booths of vendors and their American distributors, I could not help but notice the gap between Canadian and  American wholesale prices.

Supply chains had adapted slowly to the emergence of a new form of retail.  Back in 2006, most golf companies had separate distribution systems for the Canadian and American markets.  The internet was becoming a serious threat to brick and mortar stores in the smaller Canadian market.  Economies of scale, restrictive government duties and a strengthening Cdn dollar hedged for lower values resulted in glaring discrepancies between Canadian and American wholesale prices.  This translated into higher Canadian retail prices.  Contractual agreements with our suppliers limited our abilities to source merchandise out of the less expensive American market.  Arbitrage opportunities existed for Cdn consumers shopping online at US retail websites.   Years later, the decline of traditional brick and mortar retail would give rise to terms such as show rooming to describe consumer preferences for trying out the good before going online to get the lowest price.

While smaller retailers focused on providing superior service and specialized in the fitting & customization of golf equipment to meet the consumers needs, it was all too apparent that for most consumers the best service meant getting the best price.   In later years, our premonitions about the future of retail would come true.  As early as 2002, the consolidation of North American supply chains and retail operations seemed an inevitable reality.  Compounding the problem was the decline of golf as a sport.   In later years, USGA rules on equipment would limit the benefits of innovation driving prices down as vendors competed for market share.  By 2010, equipment retail prices had fallen by over 50%.  It was an extremely difficult operating environment.

Recently the cross border consolidation of the retail operations of Golf Town and Golf Smith has created a mega retailer large enough in size to have significant influence over their suppliers. Even the biggest manufacturers of golf equipment could see over 25% of their sales going to this massive account.  Manufacturers such as Callaway have shuttered both their American and Canadian distribution warehouses in favor of a single low cost venue located in Mexico. 

Even today the trend continues to manifest itself as consolidated brick and mortar operations face stiff competition from online retailers that threaten their survival.  The plight of high profile retailers such a Best Buy have drawn awareness to the new dynamics of retail.  Attempts by brick and mortar stores to create neurological connections with consumers and preemptively distribute products have met with limited success.  As with the sale of any commoditized product, it is the low cost provider that ultimately seems to win the majority of a customer's business.

It's slowly becoming apparent that more power now lies in the hands of manufacturers.  In order to control the whole value chain and shopping experience, companies including Apple have set up their own retail operations.  Control of retail operations allows manufacturers determine the type of neurological connection they create with their consumers.  Using social media as an effective marketing tool allows manufacturer to preemptively distribute their products by involving themselves in the lives of their consumers.  Creative advertising from companies such as Old Spice have gone viral increasing company market share.  Rather than taking on the risk of carrying inventory, a new generation of retailers hopes to act as brokers that offer a venue for consumers to purchase directly from the manufacturer.

Full value chain control, creating a strong neurological connection with consumers and preemptively distributing product have become the new rules of retail.

China & the Rise of Shadow Banking

On November 9^th 2008, the Central Peoples Government of China announced a 586 billion dollar stimulus package through investments in infrastructure, real estate and social welfare to combat the economic slowdown created by the global financial crisis.  In 2011, Daniel Rohr noted that China’s gross capital formation, or GCF (investment in physical capital), has grown to an astonishingly high 50% of GDP since the implementation of the stimulus package.  Residential and non-residential real estate now accounts for 25% of GDP and as of 2012, 64 million new apartments remained empty.   In late 2011, economists predicted as much as 20% of all outstanding loans would eventually default and be written off.  

For years, the miss allocation of capital has posed significant challenges to China’s long term economic health.  The lack of a social safety net forces migrant factory workers to save their meager earnings at interest rates outstripped by the rate of inflation. With few alternative legitimate investment options and facing high inflation it is difficult for savers to gain real returns on their savings.  China’s savings rate of 50% of GDP is the highest amongst the world’s major economies.  Access to capital at low interest rates allows banks to issue low interest rate loans to developers and construction companies fueling economic growth.  The low interest rate nature of these loans allows companies to undertake construction projects with questionable prospects for descent returns.  

Low interest rates on savings and government restrictions on outflow of capital have spawned the rise of a massive underground shadow banking industry that now accounts for 2.2 trillion or 25% off all outstanding loans.  Shadow banks –non banks, people, pawn shops, underground banks, trust companies and guarantors make money by borrowing at low rates from traditional banks and lending out at much higher rates of up to 36% to borrowers of questionable credit. 

Fueling the shadow banking industry are savers frustrated by losing money through inflation on their deposits.  Unable to take advantage of offshore investment opportunities due to government restrictions, savers are increasingly turning to shadow banking in search of real rates of return.  Counter-party to savers are small businesses, developers and home buyers.  90% of Chinese small businesses can not access capital from banks and turn to shadow bankers for loans.  Compounding the problem are young home buyers -China requires a 30% down payment to purchase real estate.  Unable to come up with the down payment through saving, young borrowers looking to purchase real estate turn to the shadow banking industry to acquire the funds required for a down payment.  With 70% of the purchase price of a home bought on leverage, the scheme works so long as real estate prices continue to increase at a reasonable rate. 

Opportunities to profit off shadow banking extend to commodity traders.  Traders borrow to buy copper or steel via a bank who issues a letter of credit to the seller on behalf of the trader. The trader can then take his new metal stock and pledge that as collateral for a normal bank loan, which he can then take and make money by lending the funds back into the shadow banking market at a higher interest rate.  

Failure of questionable construction projects, a stall or collapse in real estate prices or the inability of borrowers of questionable quality to make payments on their loans could trigger a Chinese financial collapse with far reaching global consequences.  Already the cracks are starting to appear.  The recent disappearance of shadow bankers in Wenzhou an export hub where up to 90% of families participate in underground trading may foreshadow what is to come.  Since August 11^th, 2012, over 100 people have fled and 800 lending brokers have gone under.  In this murky world, measuring the systemic impact of a shock to the underground financial system is impossible but what is clear, is the time has come for officials to regulate an industry that should have been regulated a long time ago. 

QE3 & American Jobs

QE3 provides a risk free tool for banks to profit from the sale of bundled mortgages known as mortgage back securities (MBS) to the FED in exchange for cash.  As QE3 is implemented the cost of a mortgage for consumers should decrease spurring growth in housing construction and other real estate related industries.  Banks remove the risk of mortgage defaults through the sale of MBS to the FED allowing them to lend at cheaper rates to consumers.  For a simplified version of the process note the following:

FED "Creates" Cash -> FED buys MBS from the banks -> Banks use money to issue more mortgages at cheaper rates

The unfortunate consequence of QE3 is the Fed is subsidizing banks by providing them with a risk free way to profit from the miss-allocation of capital into real estate related industries -Capital that is sorely needed by entrepreneurs and small businesses. Bank lending to higher risk small businesses and entrepreneurs is restricted by the opportunity for banks to profit from risk free returns resulting from the issuance of mortgages and the subsequent sale of MBS to the FED.

If America wants to bring back jobs, they need to get funds into the hands of entrepreneurs and small businesses.   The books of corporations are chock full of cash while small businesses and entrepreneurs with good credit are facing difficulties securing lending from reluctant banks.  98% of all businesses in the USA are small businesses and the government estimates they create 60% to 80% of all jobs.

QE3 should result in the following:
1) A weaker American dollar as the FED "creates" more money.
2) Lower interest rate mortgages for consumers.  
3) Increased profits for banks and businesses involved in real estate related activities
4) Higher priced commodities.

"We have to make sure that peoples 401's and IRA's go up so that there will be a wealth effect and people will go out and buy more things." -Ben Bernanke