2021 Mortgage Commentary
Investors were a bit nervous this month as financial markets saw a rapid rise in government bond yields leaving some uneasy about the impact this could have on the economic recovery. While the Canada 10- year bond yield did rise more than 60 bps in just a few weeks to surpass 1.4%, it must be considered in context. Bond yields are coming off their historic lows and the 10- year currently still sits well below its pre-pandemic 10-year historical average of 2.1%. A similar scenario plays out for the Canada 5- year bond yield which has surged to nearly 1.0% in the year-to-date compared to its historical average of 1.6%.
Part of the concern with such a sudden spike in bond yields is that it could signify the return of inflation as well as possible early interest rate hikes by central banks seeking to curb said inflation. Further complicating the situation is the looming US$1.9 trillion fiscal stimulus plan in the U.S. that some economists believe might cause the economy to overheat. On the other hand, both the Federal Reserve and Bank of Canada have dismissed such concerns as they continue to see little evidence of rampant inflation and reaffirm their commitments to providing monetary stimulus well into the recovery.
- CBRE Canada
Overall, lending discipline has tightened and a borrower’s cash flows are now under increased scrutiny. As a result, there has been a notable compression in the maximum loan-to-value (LTV) lenders were willing to finance for top-tier commercial real estate in Canada. In 2019, the bulk of lenders were comfortable with providing loans on 66 to 75% of real estate asset values. In the current economic environment, lenders have shifted down their thresholds with the majority of respondents now capping LTVs in the 61 to 70% range.
While lenders may continue to have abundant capital available for the real estate sector, their 2021 budget intentions reveal that capital may be slightly harder to come by for certain property types. After a moderate rise in the overall number of lenders coming in below their 2020 budgets, some lenders have opted to further reduce their budgets next year for property types under pressure. Nearly half of lenders are looking to reduce their 2021 lending budgets for retail, 34 .3% for office, and 28 .6% for hotel properties. But even in light of the adversities seen with these property types, a significant number of lenders are still looking to maintain, or even increase, their budgets for these properties.