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House rules

Credit unions will continue to be challenged in 2020 by a fractious real estate sector made more complex by the political vagaries of America.

For a family, a good home is vital since it provides shelter, economic security and is a constant in a tumultuous world.

For a credit union, a good housing market is vital for the same reasons. As a core operation, mortgages provide a source of revenue and an important connection to members who need other financial services. For decades the housing market has been a cornerstone that has anchored a credit union’s balance sheet.

In recent years that anchor has pulled free, forcing credit unions to struggle to maintain a strong core. Skyrocketing house prices have pushed many members to the financial brink and the continuing compression of the spread between long-term and short-term interest rates has impacted credit union profits. Since 2018, mortgage stress tests aimed at cooling home prices have added another layer of complexity.

Buffeted by international trade wars, an influx of foreign money and price wars, the housing sector has even the experts scratching their heads when they look to the future. Helmut Pastrick, chief economist at Central 1 Credit Union, has been analyzing the housing industry for more than 30 years. Normally, that has meant gathering data and using economic models to forecast what’s coming next. Ask Helmut today what he sees for the next six months and he replies with a laugh and a joke about needing a degree in psychology, not economics. The uncertainty is caused by policy changes driven by the changing and often contradictory moves by United States President Donald Trump, says Pastrick. “These are unusual times where we are so dependent on the policy makers, as opposed to the economic fundamentals.”

Ken Bowman, director, mobile experience at Meridian Credit Union (350,000 members, $21.6 billion assets) couldn’t agree more. “Never have we been in such a situation where a tweet can have such an impact on an entire economy.” Adds Pastrick, “If we didn’t have the trade dispute between the US and China, economic fundamentals would mean higher rates.” Economic growth would be stronger and unemployment even lower if the trade dispute concluded meaning higher rates would be the likely forecast. “But I’m assuming things will worsen, hence my prediction of rate cuts,” Pastrick says. He expects the Bank of Canada to trim its key rate in January, but notes it could go sooner, or later — it just depends on politics. “My take is that China will not capitulate on anything major and, on the other hand, Trump needs a win because the election is coming up. If he could get a win with China that would be something he would go for.”

“These are unusual times where we are so dependent on the policy makers, as opposed to the economic fundamentals.” – Helmut Pastrick

Pastrick says Trump appears to negotiate hard in the beginning of a dispute and then back down. If he does in this case it would help the economy. Overall, looking ahead to 2020, Pastrick says that given current low interest rates the housing market should perform well and sales and prices continue to move higher.

New records for condo prices

After a downturn in 2018 driven by the application of tighter mortgage rules, most housing markets across the country have made gains in 2019. That momentum should continue into 2020 with condominium prices in Toronto and Vancouver continuing to set records. Pastrick notes that the market for single-family homes has stabilized in 2019 and he expects higher prices and tighter markets in 2020.

Bowman says that Meridian is seeing the same situation in the southern Ontario markets that it serves. “Across all of our customer segments, whether first-time homebuyers or otherwise, 2019 has been a rebound year from 2018,” says Bowman, who leads a team of 40 mobile mortgage experts. “In 2018 there was pullback for a multitude of reasons, the easiest one to point to would be the introduction of stress tests.”

Bowman says the slowdown was good for the market. “The introduction of the stress test helped reset a lot of thinking. Genworth Canada research shows that affordability tends to be a bigger consideration than the size of the home they are purchasing and that’s a great thing because they have a degree of education and a degree of concern that I think bodes well for the home purchase itself.”

A report by Canada Mortgage and Housing Corporation (CMHC) found that loan growth in 2018 was the slowest in 25 years while the Canadian Real Estate Association states that average home prices across the country dropped by four percent to $490,000 in 2018. That report also showed the average value of mortgages issued by banks in 2018 was $220,650 while the average for credit unions was $150,995. The delinquency rates for banks was 0.24 percent and 0.17 percent for credit unions.

Preference for long-term rates

The majority of Canadian mortgage consumers typically opt for fixed-rate mortgages with five-year terms but CMHC said in the first quarter of 2019 that the average share of new mortgages with a variable rate rose to 29 percent, up 12 points from the same period in 2017. However, says Bowman, Meridian’s members, new and old, are sticking with long-term rates. “We talk about we are enabling them to buy a home, not just a mortgage, we have to be more than just a mortgage seller, we’re helping them as part of their larger financial future,” he says. “So when you look at these historic low rates and you take a look at the understandable concerns about affordability, to be able to have price stability and to be able to know that for the next five years this is what your principal, interest and taxes are going to be, there is a lot of comfort in that.”

Margins are pretty skinny on mortgages, so Meridian focuses on taking a member whose gateway was a new mortgage and turn them into full members. “The reality is that we’re onboarding new members and they are quickly becoming full-service members,” Bowman says, which is a reflection of Meridian’s strong branch network that provides in-depth financial knowledge.

Pastrick notes that lending rates have come down faster than deposit rates, so the squeeze is getting tighter and he sees that continuing in 2020. “A trade deal would help long-term rates increase and get a more normal curve,” he says. Coast Capital Savings Federal Credit Union (572,000 members, $23.4 billion in assets) discussed the margin compression problem in its 2018 annual report, noting it has been a challenge for several years as the net-interest margin “declined as the higher rates earned on our assets were offset by the notably higher rates applied to our funding sources.”

It now takes a millennial aged 25 to 34 in Vancouver almost 30 years to save a down payment and 21 years in Toronto.

About 50 percent of first-time homebuyers are previous renters and that’s good because they have experience paying those bills and managing a budget, Bowman says. “Rather than living in Mom’s basement, which allows you to save as much money as possible for your down payment, being a tenant means you have lived in the world of home finance.” New buyers may face higher costs because their mortgage payment may be higher than their previous rent but at least they have experience juggling such costs, he says.

This past September, the new federal First-Time Home Buyer Incentive took effect. Operated by CMHC, the program is a shared equity program in which Ottawa puts up a portion of a buyer’s down payment to reduce monthly mortgage payments. The three-year, $1.25-billion program aims to back upward of 100,000 buyers. The program is limited to households with incomes of less than $120,000 and housing available for purchase tops out at about $565,000. Buyers have to come up with a five percent down payment. CMHC will then supply another five percent on existing homes and 10 percent on new homes. But even as the program started, changes were being promised. The Liberals said they would raise limits on homes that qualify if they got re-elected in last month’s federal election, a move that would help in the pricey markets of Vancouver and Toronto.

Renters out in the cold

Affordability remains a major issue. Research by Paul Kershaw, a University of British Columbia professor who founded a group called Generation Squeeze, shows that in the late 1970s it took the average young buyer in Vancouver or Toronto six years to save a 20 percent down payment on a home. It now takes a millennial aged 25 to 34 in Vancouver almost 30 years to save a down payment and 21 years in Toronto. The only ways to change this situation is to increase salaries or dramatically cut prices. Kershaw knows neither change is likely so he is urging governments to anticipate more people will be renting for longer periods of their lives, if not indefinitely. He urges them to ensure rents don’t skyrocket and encourage building more rental housing.

Pastrick has been appointed to the Expert Panel on the Future of Housing Supply and Affordability, a federal/provincial group looking at how to increase housing affordability in British Columbia. “From an ideal perspective, I would prefer to see the government focus on increasing the supply of units both at the low end of the market and at the middle,” he says. One option Pastrick would like to see is increased assistance for cooperative housing. Federal programs that boosted co-ops were slashed in the deficit-fighting 1990s and the sector has languished ever since. ◊