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Real Estate and Business

Household Debt in Canada A Buying Opportunity?

Debt at historical high. According to Federal Reserve Bank of St. Louis’ (FRED) economic research, Household Debt to GDP for Canada was

Toronto Housing Market
Toronto Housing Market

at about 70 in Q1 of 2006 and stood at over 100 in Q1 OF 2017. (https://fred.stlouisfed.org/series/HDTGPDCAQ163N). On the other hand, also according to FRED, the U.S. Household Debt to GDP for United States piqued at about 99 in Q1 of 2008 and dropped to about 80.0 in Q1 of 2016. ( https://fred.stlouisfed.org/series/HDTGPDUSQ163N?utm_source=series_page&utm_medium=related_content&utm_term=related_resources&utm_campaign=categories).

Meanwhile, Ontario’s Financial Accountability Office released a report January of 2018 where it stated that an average Ontario household owed nearly $154,000 in 2016, up from $119,000 in 2010. Its analysis shows that paying down that debt cost an average Ontario family about $12,500 in 2016. As interest rates rise, those repayment costs will grow by nearly 25 per cent to $15,500 a year by 2021.

According to a BNN article, Progressive Conservative finance critic at the time stated” “The Liberals under (Premier) Kathleen Wynne have made life more unaffordable by driving up the cost of everything, including higher taxes and fees and skyrocketing hydro costs,”…”Families are borrowing more than ever to make ends meet.” (https://www.bnn.ca/ontario-household-debt-rising-increasing-economic-risk-accountability-office-1.976178)

Since the announcement of the upcoming provincial election and the release of survey data showing Wynne at a 81% disapproval rating, the government has been announcing billion dollar spending initiatives with almost daily promises of more money for various voter groups. It is difficult to understand how all these programs can be financed, let alone administratively implemented. Nonetheless, they indicate a worsening affordability situation in Ontario. This is furthered by increasing inflation as provincial legislative changes have made labour and housing more expensive in the province amidst the implementation of the carbon tax.

Seasoned investors may recognize this as an opportunity in the making to acquire real estate assets at a much lower prices than the pique in the spring of 2017. The higher interest rates get and the tougher it is to borrow money, the less individuals are willing and/or able to pay for real estate. As motivated sellers are forced to take whatever price buyers are willing to pay, it will drive price down. Those sitting on cash and liquid assets will be in a negotiating position.

Many individuals have already sold their homes and are now renting in expectation of a real estate market correction, which has to a large extend already taken place. Some are expecting further correction leading up to the next provincial and federal elections. As a result of their liquidity, these individuals are among the best positions to buy back into the market at favourable terms.

Regardless of the economic environment, a skilled and experience real estate professional will help you obtain the best price for your property and will help you find your next home. Call me at 416-564-0245 and get me working to get you the deal you want.

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OSFI Changes May Signal Expectations of 2% Increase in Mortgage Interest Rates

This month the Office of Superintendent of Financial Institutions for Canada is finalizing changes in legislation that will include requiring those that purchase a home with a minimum down payment of at least 20%, not needing mortgage insurance, to prove they could still afford their mortgage payments if interest rates were 200 basis points (two percentage points) higher than the rate they negotiate.

Jeremy Rudin, the Superintendent of Financial Institutions, told reporters. “But we do know this: Housing prices are still near their all-time highs, and mortgage rates are still near their all-time lows. And while sound underwriting is always important, it’s never been more important than it is now.”

Though OSFI, nor the banks have stated that interested rates are headed 2% higher, the fact that they are stress-testing for this to happen, tells me that they are planning for it to happen.

Meanwhile, the Bank of Canada has already announced that they are expecting to increase interest rates again later this month.

Banks have already tightened their lending policies and I’m getting reports of strong applicants having their mortgage applications turned down by the banks.

Globe and Mail article on OSFI announcement

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Home Capital To Settle Class Action Matters

NEWS RELEASE
HOME CAPITAL ANNOUNCES AGREEMENTS TO SETTLE OSC AND CLASS ACTION MATTERS

TORONTO – June 14, 2017 – Home Capital Group Inc. (“Home Capital”) is pleased to announce it has reached two agreements which together comprise a global settlement with the Ontario Securities Commission (the “Commission”) and with respect to the putative class action commenced in February 2017 by Claire R. McDonald, Action No. 349/17CP (the “Class Action”) relating to allegations of misleading disclosure. The settlements are subject to approval (by the Commission and by the Ontario Superior Court of Justice respectively) and each settlement is conditional upon the approval of the other. The main terms of the two settlements for which approval is being sought are set out below. It is expected that full copies of both agreements will be publicly filed if both agreements receive final approval. Home Capital expects to fund substantially all of the costs of such settlements through available liability insurance.

Commission Settlement

Under its proposed settlement with the Commission, Home Capital will make a payment of $10 million and reimburse Commission costs in the amount of $500,000. Gerald Soloway (“Soloway”) will be reprimanded, prohibited from acting as a director or officer of any reporting issuer for a period of four years and pay an administrative penalty in the amount of $1 million. Each of Robert Morton (“Morton”) and Martin Reid (“Reid”) will be reprimanded, prohibited from acting as a director or officer of any reporting issuer for a period of 2 years and pay an administrative penalty in the amount of $500,000.

Of the $12 million (other than costs) being paid by the respondents in the Commission Settlement, $10 million will be paid by Home Capital directly for the benefit of Home Capital investors who comprise the proposed class in the Class Action (the “Class”). $2 million will be paid to the Commission. Staff of the Commission will recommend that $1 million be allocated to the Class and the remaining $1 million be allocated or used by the Commission in accordance with the Securities Act.

Class Action Settlement

Home Capital will make a payment of $29.5 million to be distributed (net of costs and other expenses) to the Class as defined in the Class Action, all subject to the approval of the Superior Court of Justice as to certification of the Class for settlement purposes (as well as leave under the Securities Act) and after notice to the Class of the proposed settlement, review and approval of the settlement by the Court. The $29.5 million includes $11 million of the payments being made in the Commission Settlement. Releases of all defendants and dismissals in the usual form are part of this settlement. There will be no deduction for legal fees of counsel for the class plaintiff in respect of the $11 million being paid in the Commission Settlement.

Approval Process

The Commission has issued a Notice of Hearing for a date to be set by the Commission, at which time the Commission will consider whether it is in the public interest to approve and give effect to the settlement agreement by making certain orders against Home Capital, Soloway, Morton and Reid as described therein. The parties to the Class Action are in the process of obtaining a date for the initial court hearing.

Company Statement

Brenda Eprile, Chair of the Home Capital Board, stated that “These settlements will enable us to move forward with regaining the confidence of our depositors and shareholders and creating value for all our stakeholders.” She noted, as indicated below, “Home Capital will accept full responsibility for failing to meet its disclosure obligations to the marketplace and appreciates the importance of the serious concerns raised by the Commission with respect to continuous and timely disclosure.” Eprile continued, “The Company also acknowledges that the Commission is not to blame for the events of recent months involving its liquidity position.” Upon final approval by both the Commission and the Ontario Superior Court of Justice, Home Capital believes that it will have taken full and appropriate responsibility for this matter.

Pursuant to the terms of the settlement agreement with the Commission, Home Capital will not be making any further statements on this matter outside of the approval proceedings.

Caution Regarding Forward-looking Statements

This press release contains forward-looking information within the meaning of applicable Canadian securities legislation. Please refer to the Home Capital’s 2016 Annual Report, available on Home Capital’s website at www.homecapital.com, and on the Canadian Securities Administrators’ website at www.sedar.com, for Home Capital’s Caution Regarding Forwardlooking Statements.

About Home Capital Group Inc.

Home Capital Group Inc. is a public company, traded on the Toronto Stock Exchange (HCG), operating through its principal subsidiary, Home Trust Company. Home Trust is a federally regulated trust company offering residential and non-residential mortgage lending, securitization of insured residential mortgage products, consumer lending and credit card services. In addition, Home Trust offers deposits via brokers and financial planners, and through its direct to consumer deposit brand, Oaken Financial. Home Trust also conducts business through its wholly owned subsidiary, Home Bank. Licensed to conduct business across Canada, Home Trust has offices in Ontario, Alberta, British Columbia, Nova Scotia, Quebec and Manitoba.

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