Article

Managing Mortgages in a Sizzling Market

illustrated red houses with a growth line chart on the roofs
By David Israelson

12 minutes

The housing market across Canada has been hot and frantic since the COVID-19 pandemic hit, and credit unions have had to be nimble.

“The pandemic has certainly changed behavior,” says CUES member Bill Boni, SVP/chief financial officer at $10 billion/160,000-member Alterna Savings and Credit Union Ltd., Ottawa, Ontario.

Many of the changes may stick, even as the pandemic fades gradually. It’s also true that the wild market has shown signs of abating a bit, and that housing markets are not the same in every part of the country.

Still, the overall trends remain the same: Even though interest rates are low, it costs more and more to buy a house all the time, and the supply of both new and existing homes is historically low, pushing up prices. In Ontario, $13.2 billion Central 1 Credit Union reports that in June 2021, a “cooling” market means that average prices moved up “only 0.4% in June to $843,113.”

COVID-19 Brings Change

The fact is, COVID-19 has brought sweeping changes to everything, including real estate. It has also affected the relationship Canadians, including credit union members, have with housing and the types of homes to which they aspire.

COVID-19’s lockdowns and restrictions have been altering the way people work, study and live, persuading many Canadians that the time to buy a home is now—or they may never be able to afford one. This, in turn, has affected the types of properties people are looking for and the anxiety many feel about finding what they want fast.

“After the pandemic hit, many people reassessed their housing needs for various reasons,” says Dave Schurman, chief strategy officer and corporate ombudsman at $4.8 billion/124,000-member FirstOntario Credit Union, Hamilton.

“Some were uncomfortable living in large, congested cities and wanted to relocate to smaller centers where houses come with bigger yards and more open space. With families in lockdown, they looked for home recreational amenities like swimming pools, hot tubs, backyard decks and kids’ home playground sets. Many people were also working from home and needed space for home offices and more room to facilitate kids learning remotely at home.

“When supplies are low and demand is high, people bid on properties for way more than the properties normally would be,” he says. “All of this, along with low interest rates, makes for a really hot market that keeps continuing.”

Hot, Hot Market

The macroeconomic evidence reinforces this assessment. Interest rates remain low, with the Bank of Canada’s key target overnight rate at a rock-bottom 0.25%. The bank, in line with other central banks in the developed world, has signaled that it intends to keep rates low for the foreseeable future, at least until the economic fallout from the pandemic is decisively behind us.

Meanwhile, prices keep jumping and demand for homes continues to outstrip supply. Royal LePage’s House Price Survey, released in mid-July 2021, found that in the second quarter, the aggregate price of a home in Canada increased a whopping 25.3% year-over-year to $727,000, with 89% of regions seeing double-digit price gains.

Housing markets are most intense in Canada’s most heavily populated regions, the Greater Toronto and Golden Horseshoe area and British Columbia’s Lower Mainland, which includes Vancouver.

Managing the Market

For credit unions, a lot of the job right now is helping members to navigate the frenetic market and not make any rash decisions that will bite them financially later, says Jason Davenport, branch manager at $23 billion/387,000-member Meridian Credit Union in Toronto’s East End.

“We’re still seeing detached and semi-detached homes hot, with not a lot of them on the market and many bidders. Buyers have to be aggressive,” he says.

“And outside Toronto, we’ve seen many people trying to move out of major metropolises, looking for more space, and those outside markets have heated up as well,” Davenport adds.

The most important piece of advice credit unions can offer members who seek a mortgage is not to bite off more than they can chew, Davenport says. Interest rates may be low now, and this may continue even through to the end of 2022 and beyond, but inevitably they will rise.

A big challenge for credit union managers right now is to keep up with the number of members who come in looking for mortgages, Davenport says. “It’s always part of our job to help our members be sure that they make responsible decisions. That hasn’t changed, but the volume of business certainly has.”   

Bill Boni
SVP/Chief Financial Officer
Alterna Savings and Credit Union Ltd.
asset size — $10 billion
Credit unions have to realize that the traditional ways of understanding consumer behaviour may not play out the same way into the future, and we need to plan for these contingencies. We need to understand what it will mean to be ‘back to normal.’

The situation is similar in British Columbia, says Bryan Yu, chief economist at Central 1 Credit Union in Vancouver.

“The pandemic had a behavioral impact, such as people shifting their workspace to home, and people looking for more open space in rural areas,” he says. Even as lockdowns ease and people drift back to offices, there are going to be more buyers than sellers for a while.

“Inventory is generally plumbing the lowest levels, going back to at least 2000 across regions, … supporting rapid price gains as buyers enter intense bidding wars,” Yu says.

Finding Affordable Options

Credit unions are responding to the steep spike in housing prices triggered by the economic and social fallout from COVID-19 that has put homeownership—and sometimes housing itself—out of reach for many Canadians.

One solution is co-op housing. Just like credit unions, housing co-ops are owned by their members, and they provide a third way beyond the options of either homeownership or renting.

While co-op residents rent their units, the rents are set by members of the co-op to cover operating and maintenance costs. Residents don’t get evicted just because a landlord wants to renovate and get a higher return, and families aren’t hit with unreasonable rent increases that force them to move out.

Credit unions do their part by partnering with co-ops, community agencies and builders to help finance and develop co-op housing. For example, Alterna Savings has recently renewed its partnership with the Co-operative Housing Federation of Toronto. This partnership has provided more than $3 million over the past 25 years to enable CHFT and other co-op federations to boost their financial stability so they can serve the residents that live in co-op units and buildings.

In another example, in St. Catharines, Ontario, FirstOntario Credit Union partnered with Penn Terra Group Limited and Bethlehem Housing and Support Services, as well as municipal and regional governments and local agencies, to develop affordable co-op housing for 127 families.

These families moved into the St. Catharines building in June 2020, just as the COVID-19 pandemic tightened its grip.

“It’s our responsibility as a credit union to invest our profits in the needs of the communities where our members and neighbours live and work,” said Lloyd Smith, CCE, CEO of FirstOntario CU.

“We recognized there was a need for affordable housing in the Niagara Region, so we came together in partnership to help provide a homegrown solution and make the dreams of this secure, family-friendly community development a reality,” Smith says.

Teachable Moments

At the same time as credit union executives and managers analyze the superheated market, this market also offers teachable moments both for credit union members looking to buy homes and those who seek to sell, says CUES member Frugina Ball, region head of member experience for the Greater Toronto area at Alterna Savings.

“We have many more first-time buyers coming to us for mortgage pre-approval. We help them to understand what they can afford, and we’re educating them on what this means,” she says.

“We also help them understand that it’s probably going to take longer to find the home they’re looking for and to be aware that there will often be multiple offers on the property they seek to buy,” Ball adds.

“We’re governed by similar credit-granting guidelines, just like everyone else.” But unlike banks and other lenders, which are accountable to shareholders, credit unions “have to be responsible to our members to make sure they can afford what they are purchasing, should mortgage rates rise,” she says.

While much attention is being paid to the tension felt among prospective buyers, Ball notes that many credit union members are also prospective sellers right now, hoping that high prices mean more savings for retirement or for helping their children with down payments.

To help members free up funds, Alterna and other credit unions keep coming up with more flexible mortgage products, such as mortgages with a home equity line of credit that allows property holders to borrow against the value of their current home.

“We’re also seeing a rise in what you might call ‘unconventional’ ownership—for example, friends or a number of different families holding the same property. So, we created a multi-ownership mortgage for these buyers,” Ball says.

Managing the Credit Union Business

The mortgage business of credit unions itself is being affected by the hot housing market, says Alterna’s Boni.

“We also need to look at the deposit side of the balance sheet. Our depositors are also facing challenges with the ultra-low rates they’re getting for their savings,” he explains. This means that credit unions need to offer mortgage rates that are competitive to be able to balance the interest paid to depositors.

“In the long term, you have to price both sides of the balance sheet appropriately,” Boni says. This is important because at the same time as the housing market is super hot, consumer saving in Canada (and other countries) is much higher than it was before the pandemic, meaning that more money is sitting in deposits in credit unions.

Bill Boni
SVP/Chief Financial Officer
Alterna Savings and Credit Union Ltd.
asset size — $10 billion
But let’s face it—margins have been squeezed in this business for the last 30 years. Not just for us, but our competitors. So, we always have to be sure we’re earning an appropriate return. We’re not quarter-to-quarter watchers [compared with profit-focused lenders], but we do have to watch over the long term.

“Credit unions have to realize that the traditional ways of understanding consumer behaviour may not play out the same way into the future, and we need to plan for these contingencies. We need to understand what it will mean to be ‘back to normal’,” he says.

The low interest rates that are helping to fuel the pandemic housing market affect credit unions' margins overall—the percentage between their lending rates and the rates paid to members’ savings accounts. Credit unions need to be attentive to this, Boni says.

“But let’s face it—margins have been squeezed in this business for the last 30 years. Not just for us, but our competitors. So, we always have to be sure we’re earning an appropriate return. We’re not quarter-to-quarter watchers [compared with profit-focused lenders], but we do have to watch over the long term,” he adds.

Service Over Profit

“As a credit union, profit is not our main reason for being,” adds FirstOntario’s Schurman. He agrees with Boni that margins have been tight for a long time, squeezed as interest rates declined from double digits to today’s decimal-point readings.

“Margins used to be 5 or 6% when I started in this business in the early '80s, and there has been a steady decline in margins for decades, so COVID hasn’t really changed that,” he says. 

“Being owned by the community and our members, we can live on smaller bottom lines and lower margins. We exist to provide high value in financial products and services to our members.

“We hope that translates not only into lower mortgage rates and higher savings rates but also to more consumer-friendly features and benefits,” he adds.

Like the banks, the push on the product and service side includes boosting online and mobile access to banking for customers and members. This helps cut costs, which ultimately can show up in lower service charges and fees for credit union members, Schurman says.

Being accountable to members rather than shareholders also can translate into larger benefits for credit union users, Schurman adds.

“For example, prepayment penalties. Customers of banks say these penalties are something that really ticks them off,” he says.

Prepayment penalties are levies imposed when a mortgage holder ends the mortgage before it’s due—for example, by selling the house and not taking a new mortgage. They usually amount to payments of several extra months and can end up costing thousands of dollars.

“Our prepayment penalties are structured so that the rates people have to pay back are low, unlike inflated rates that banks sometimes charge for prepayment. Our goal is just to make sure our depositors, who lend the mortgage money, are made whole, not to make huge profits,” Schurman says. “We try to keep it simple.”

Managing Risk

Another challenge is helping members who become mortgage holders manage the risk they face once they take on the obligation, Ball says.

“As real estate prices have gone up, it has become more challenging, because people need to redefine what they can afford,” she says. It’s a balance between stretching the budget to meet a high purchase price in today’s market while understanding that a skimpy mortgage rate right now might shoot up in a few years when it’s time to renegotiate terms.

“Everybody’s situation is different. It’s important to help people understand what it will mean to carry the mortgage. We don’t want to put somebody into something that will become financially difficult for them,” she says. Ultimately, “we work with individuals and look at their financial plan and advise them not to get in over their heads.”

Boni adds, “We’re not just letting people go in and take mortgages because they’re at the lowest rates they’ve ever been. We look with our members at where they’ll be in a few years and whether they’ll still be able to afford it.”

While the COVID-19 era may be unprecedented in many ways for the financial sector, dealing with the unexpected is nothing new for credit unions, he says.

“We’ve had many crises over the years, [like] interest rates that move more than 1% in one night or day at least four times. We’ll have to continue to manage change under today’s circumstances.” cues icon

David Israelson is a non-practicing lawyer, writer and consultant based in Niagara-on-the-Lake, Ontario. 

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