Is now a better time to rent or own?

By Deirdre McMurdy, MSN Money, March 30, 2012

The war is over — at least for now.

After months of inter-bank battling to win market share by offering Canadian consumers the lowest mortgage rates, Royal Bank of Canada and Toronto-Dominion Bank recently reached a truce: they raised their respective "special offers" on a four-year, fixed-rate house loan by half a percentage point to 3.49 per cent.

Whether other lenders follow that bid to improve bottom line profit margins by dispensing with cut-rate financing offers, whether slightly higher rates will cool the surging spring real estate market, remains to be seen.

But it doesn't alter a more foundational issue: is it the right time to buy a house now — or ever?

It's always tough to time any market: the ideal entry and exit points are never clearly displayed. But when it comes to residential real estate — the largest single investment for most people — messing it up can cause a serious, long-term financial setback. Especially when the return on a sale factors in adjustment for inflation and the five per cent commission on a sale.

The tricky issue of timing — along with record prices, bidding wars and increasing uncertainty about the sustainability of the current housing market — are just a few of the reasons why some experts in
Admittedly, getting your head around that notion takes a bit of effort. After all, in Canada, low borrowing costs combined with a belief in the merits of owning a home have resulted in a 10 per cent increase in home ownership since 2000. Today, two-thirds of Canadian households live in privately owned homes, rising to 70 per cent in Vancouver and 74 per cent in Calgary. That's high by any international standard.

Culturally, we've all been inculcated since birth to regard home ownership as the holy grail of personal financial achievement. Emotionally, owning a home goes along with stability, commitment, security, family, community — all things we're hot-wired to value. It's an integral part of our identity.
sist that renting rather than owning, is the better way to go.

And then there's the lifestyle that's built around owning a home and customizing it to your specific needs — everything from interior decoration to pottering in the garden. The cost of which can, of course, be justified as enhancing your investment.

Then there's the formidable vested interest of the economic engine that pushes home ownership. Governments encourage it because it not only provides for satisfied voters, it ensures that voters are engaged stakeholders when it comes to elections and issues. There are several program and tax incentives to encourage home ownership in Canada (including access to RRSP funds and the capital gains exemption), even though mortgage interest isn't deductible as it is in the U.S.

It's also at least as important to understand that the aspiration of owning a home is an economic cornerstone for almost every sector from manufacturers, resource companies, retailers and bankers to those who provide service to homeowners. Consumer spending, lest we forget, still represents about two-thirds of gross domestic product. And much of that consumer spending is centered on housing.

So, if you can somehow manage to set all of that baggage to one side — and it's obviously a big "if" — is there a rationale for renting rather than owning?

First, there's the fact that house prices have climbed steadily over the past decade to the point where the average price in Canada is now $366,000. At the same time, rental prices have remained steady and even softened as more people have bought homes in a period of sustained low interest rates.

Then there's the fact that carrying costs — everything from municipal taxes to insurance to utility costs — have significantly increased in recent years. (A rule of thumb is that they run one to four per cent of a property purchase price.)

According to some calculations, it currently costs twice as much to buy as it does to rent in most major Canadian cities (three times if you live in Vancouver). That compares mortgage payments to rent only, excluding all the other costs that can almost double the monthly cost of paying down a mortgage.

Furthermore, in the first years of ownership, your payments go primarily toward covering mortgage interest. And the opportunity cost of using capital as a down payment can also result in a serious disadvantage for homeowners who can usually get better — and certainly more consistent returns — from the most conservative investments.

Arguably, of course, we make lots of irrational choices when it comes to spending our money. And return on investment is ultimately a very subjective calculation.

Speaking personally, I'm still tinkering with the financial model that justifies having two kids who are pure overhead. Not to mention my ROI on them.

Genworth using internal resources to deal with foreclosures

Tara Perkins FINANCIAL SERVICES REPORTER—From Thursday's Globe and Mail

Genworth MI Canada Inc. (MIC-T21.700.010.05%), the country’s largest private sector mortgage insurer, has set up its own internal group of real estate agents to deal with foreclosure sales.
The move is one of the steps mortgage insurers are taking to minimize their losses after seeing claims rise for the first time in decades. The insurance sold by Genworth and its main rival, Canada Mortgage and Housing Corp., compensates banks when homeowners default. The majority of it is backstopped by the federal government.

Genworth previously relied on the bank that made the mortgage loan to take the property through to foreclosure. Now, its internal agents help to sell houses sooner, and for a higher price. They’re using basic techniques such as fixing up houses with fresh paint and hosting open houses.
They’re also staging houses to make them more attractive, and making it less obvious that they are foreclosure sales, said Paul Holden, an analyst at CIBC World Markets.

And it’s paying off, according to Genworth chief executive officer Brian Hurley.
“This much more active role we’re taking by hiring our own realtors in house has certainly helped mitigate our losses and has been very effective,” Mr. Hurley told analysts at a conference on Wednesday.

He pointed to the Calgary market, where a large chunk of Genworth’s 2011 losses were coming from. Mortgage delinquency rates in Alberta have been declining since the middle of last year but remain double the national average because Calgary’s housing market took the hardest hit during the recession. Unemployment doubled and home prices in the city dropped by 15 to 20 per cent, a spokeswoman for Genworth noted.

Before a home hits the point of being foreclosed on, Genworth works with the bank that holds the mortgage and will tend to forgive the borrower for a few months of missed payments. If there’s a longer period of unemployment or hardship, Genworth and the lender will look at tacking missed payments on to the back of the mortgage, Mr. Hurley said.

But if it’s clear that the borrower is going to default, Genworth takes ownership of the property earlier in the process to cut its losses. The company is responsible for interest that accumulates and maintenance that must take place during the time the borrower can’t pay. It now has 13 people dedicated to its new internal realty team.

“[If] we know it’s going to go to claim and we know we can’t remedy the borrower to keep them in their home, we’re taking those properties much earlier and we’re much more active,” Mr. Hurley said.
Genworth’s policies required banks to notify it within 90 days if a customer was delinquent, but it is now asking banks to let it know after about a month. “The earlier we can touch them, the better our success of keeping that individual in their home,” Mr. Hurley said.

Lenders have been more willing to forgive a couple of missed mortgage payments since the financial crisis hit.

“In general in the industry we really weren’t realizing any significant level of losses up until the last few years, at least not since the early 1990s,” Mr. Hurley said.

Losses and foreclosures remain relatively low. The number of delinquent mortgages for Genworth was 2,752 at the end of 2011, down from 3,401 at the end of 2010, Mr. Holden said. “I estimate that they handled approximately 3,500 foreclosures in 2011,” he said.

That number will likely be lower this year because of the reduction in delinquencies.
Genworth has done a good job mitigating the number of delinquencies by offering homeowners flexibility on missed payments. Now it’s trying to tackle the amount that it winds up paying on claims, Mr. Holden said. The average paid claim in the fourth quarter had risen to $80,500 from $71,000 two years ago. Genworth is hoping to cut this number back down by selling foreclosed homes faster and getting more for them, Mr. Holden said.

Genworth’s losses on claims were $62-million in the fourth quarter, $11-million higher than the same period a year earlier.

Mr. Hurley said Genworth’s stress tests suggest it could withstand either a 40-per-cent drop in home prices or a sharp spike in unemployment before its insurance business became unprofitable. But if a 25-per-cent drop in house prices were coupled with a prolonged increase in unemployment into double-digit levels, it would affect profitability, he said.

Mortgage rates have nowhere to go but up

Garry Marr Mar 27, 2012
The logic is pretty simple. You hit rock bottom and there is no where else to go but up.
Mortgage rates on terms of five years and 10 years have never been this low. You can go back 50 years and not find a rate of 2.99% from one of the major banks for a fixed-rate product for five years. The 10-year, an almost unheard of length for most Canadians to commit to, has touched down at below 4%.
Even sticking it out with a variable-rate product linked to the prime lending rate still looks pretty good with most major financial institutions offering some type of discount off their 3% floating rate.
Already there are signs rates could be on the increase. The bond market — which mortgage rates are based on — has been rising fast and the big banks say their most recent specials will come to an end this week. But even with a 50 basis point increase, a five-year fixed closed mortgage of 3.5% is almost unheard of historically.
“Everybody is looking at the bottom here and thinking, ‘When are rates going to go up?’” says Kelvin Mangaroo, president of RateSupermarket.ca which produces a monthly forecast from leaders in the mortgage industry.
Even among the experts, few foresaw this price war in the mortgage sector. “With the big banks getting very aggressive again, it took a lot of people by surprise,” said Mr. Mangaroo. “I think people were thinking the status quo would hold for a while.”
He says the last Bank of Canada announcement about the economy had people thinking at some point the overnight lending rate, which impacts the prime lending rate, would go up, but not this year.
“Now that people are thinking of early 2013, that has people talking but really that is just so far out says Mr. Mangaroo. “It’s really just an abstract concept at this point.”
Craig Alexander, chief economist with Toronto-Dominion Bank, says he can understand how there might be some fatigue from consumers hearing about rising rates.
“Unfortunately, we have been saying for years ‘that’s it, rates can’t go any lower than they are today’ and then they are [lower] 12 months later,” Mr. Alexander says.
But this time out, he says, it almost seems impossible that rates on a five-year closed mortgage could go lower than the current 3%. “Short of the Canadian economy going into a recession and causing the Bank of Canada to cut rates back to their all-time low, there really isn’t an environment that would lead to significantly lower mortgage rates,” Mr. Alexander says. “The downside here is extraordinarily limited.”

The real risk for the consumer might be not locking in right now. While no one is expecting the overnight rate to go up anytime soon — discounts off the prime lending rate might even improve if the economic uncertainty calms in some parts of the world — the 50-year-low rates today could become hard to find.
“If the economic forecasters are wrong about the outlook for growth and things turn out better than anticipated, then bond yield will rise, we’ll have a steeper yield curve and higher fixed mortgage rates,” Mr. Alexander says. “You won’t be able to get what is offered today in 12 months time. They could go up half a percentage point or higher.”
In the interim, Gregory Klump, chief economist with Canadian Real Estate Association, says in terms of profitability, there is room for the banks to go lower on rates, but margins for the banks are so thin he doesn’t expect it happen.
“We are not out of the woods yet in terms of a clear picture that growth is going to strengthen,” says Mr. Klump about the catalyst that could drive up bond rates, which would impact mortgage rates. “My own view is growth may well weaken.”
He predicts that any rise in rates will happen slowly, which the housing market would more easily absorb. “I do not expect it,” Mr. Klump says about the type of interest rate shock that could send housing sales tumbling.
Author Garth Turner, a noted pessimist on the fortunes of housing these days, thinks those who want to be in the market for a house should probably be grabbing on to long-term products.
He says the banks know the housing market is already shrinking and are scrambling for a larger share of the mortgage market, something that also allows them to cross-sell other products like RRSPs to consumers.
“The writing is already on the wall, prices will be declining,” Mr. Turner says. “The Bank of Canada will be raising rates.”
A Bank of Canada hike will make variable rates rise fast, and he agrees the present day rates could look very good in a few years. “If you want to be a homeowner, it is an appealing product. Three or fours years from now, these rates could look absurd. I have no problem with being in real estate as long as it’s not the bulk of your net worth. If you are getting into real estate now though and leveraging up, you are going to be unhappy about it,” says Mr. Turner, adding the raising rate environment will hurt sales and prices will follow quickly.
Don Lawby, chief executive of Century 21, says the rate wars going on right now combined with the unusually warm winter have already boosted housing sales, which could leave little demand left for the spring market.
“Interest rates are low and they probably can’t go any lower than they are,” says Mr. Lawby, who thinks there is not much room for housing prices to go higher. “I looked around and say if the local economy stays good, the market can stay good. But these low rates are very key.”

Mortgage Industry: How Refreshing

Boris Bozic. March 27, 2012
Straight talk from a politician is rare and yet when we hear it we still look for the underlying message. We are conditioned to look for what wasn’t said. I have a great deal of respect for Minister Flaherty, and his willingness to speak in clear terms. That’s not easy for a politician to do because it opens them up to criticism and it gives them little wiggle room if they want to back track. You may not agree with what Flaherty has to say but at least you know where he stands on issues. Minister Flaherty gave a speech in Stittsville, Ontario last week, and it was another example of straight talk.
His speech was about the state of the Ontario economy, and his thoughts regarding the pressure being put on the federal government to further tighten mortgage rules. There was no ambiguity in his speech, here’s what you may have missed in his speech:
“I find it a bit odd that some of the bank executives are taking the position that the minister of finance or the federal government somehow should tell them how to run their business. We have bank executives in Canada going and saying ‘really, the rules on insured mortgages should be lightened up.’ They must forget that they are actually the ones that issue mortgages. It’s their market. It’s not my market. They decide what they want to charge in interest rates. They’re the ones that make the profits out of this business, so I find it a bit much when some of the bank executives turn to the government and say ‘you ought to change the rules and make it tighter.’ It’s very interesting commentary from them.”
Try as I might but I can’t find a hidden message in the statement above. No Clinton like speak here. The message is clear and what else is clear is that some bank executives got a verbal public spanking. For months now the pressure has been relentless that the government must act and tighten mortgage rules. The fact that some of those that are sounding alarm bells have introduced or decided to follow the irrational interest rate pricing game is “special”. Let’s see, “we’re concerned about consumer debt so we’ve decided to lower rates so consumers can take on more debt, and add gasoline to an already hot housing market.” Alex, I’ll take double speak for $200 please.
I understand and agree that the concern about consumer debt is real, and it needs to be addressed. The Bank of Canada, and the Ministry of Finance, are walking a tightrope. Cooling down the housing market, while not negatively impacting the overall economy, is not an easy task. Recently CAAMP provided a report to the Ministry of Finance about the impact of the housing industry has on employment in Canada. The report was written by Will Donning, CAAMP’s Chief Economist. I encourage you all to read the report, and to receive a copy please visit CAAMP’s website atCAAMP.org
Here’s a few highlights from the executive summary:
The housing and mortgage industry has been particularly important to job creation these past 5 years. From 2006 to 2011, it’s estimated that 18% of all job creation occurred as a direct and indirect result of growth in the housing and mortgage sector.
The biggest threat to the health of the Canadian housing and mortgage industry is a recession that results in job losses. The best way to support the housing and mortgage industry and to sustain its positive impact is to pursue policies that continue to create jobs. At the same time it is important that qualified buyers have choice when seeking mortgages to finance or re-finance their home.
As an industry we have a responsibility to the government to provide facts, which ultimately can assist the government with a safety net. Is our message getting through? All I know is that the government decided to not change the mortgage rules at this time. I would like to believe that our efforts to date have had a positive impact. One thing I am certain of is that we have to stay the course, and not talk through both sides of our mouth.

Mortgage Rules: The Heat is Getting Turned Up

Article written by Boris Bozic

Media coverage of “consumer debt” and “inflated home values” in Canada has been relentless. The national newspapers have used up plenty of ink to cover these stories. There’s been no shortage of so called experts willing to quote on these issue. Opinions range from mild concern to abject hypocrisy. Given that the temperature gauge has risen significantly over these issues, I have to assume that the federal government will be forced to respond. This is not a story with 24 hour life cycle, and the government will want political shelter if the so called experts are right.

I have a great deal of empathy for the good folks at CMHC. For some time now they’ve been in cross-hairs. The press, economists and some within the financial sector have taken liberties as it relates to CMHC’s credibility. Does anyone really believe that CMHC does not know what it is doing? That they do not have the required expertise to manage their business? That they would act recklessly or in some way irresponsibly? The answer clearly is no. Yet, there’s been coverage recently about CMHC’S solvency. Their financial statements clearly show that they have enough capital on hand to withstand market variances. They continually run stress tests to ensure their financial viability, which equates to being responsible to the tax payer. Their most recent stress test indicated that insolvency was not an issue, with the following caveat. Our economy would have to go into multi-year recessionary period, and unemployment would have to reach 13%. Who among the so called experts are willing to put their reputations on the line by guaranteeing that dooms day scenario? I suspect not many. As for 13% unemployment, could it happen? Certainly, it reached 13.2% in December of 1982. Anything can happen but the question is what’s the probability? That’s what CMHC manages day in and day out, and from where I sit they’re pretty damn effective.

As for the other favorite target, the Ministry of Finance, I find it fascinating that some within the financial sector are publicly stating that the government must act now and tighten mortgage rules. They suggest that we’ve reached a critical stage, consumer debt it too high, home values are inflated. Really? If that’s the case why don’t they do the responsible thing and act independently. They could change their credit policies tomorrow. If they believe that the government should change the mortgage rules to reflect a maximum 25 year amortization, a minimum down-payment of 10%, and that borrowers should be qualified at the 5 year posted rate, then they should be prepared to lead by example. If they’re not prepared to lead, and do it on their own, we have to assume that present day circumstances poses no risk to their share holders. For if it did, they would do the right thing. Just like the folks at CMHC have been doing.

How Canadians can boost home value through renovation

ByGail Johnson
With the popularity of home-decorating shows like Trading Places soaring, suddenly everyone's an interior designer. But from a real expert's point of view, where are home-owners' renovation dollars best spent?
"Kitchens and bathrooms are the best place to start," says Toronto's Howie Track, owner of Traxel Construction, which specializes in high-end residential and commercial renovation and construction. "Kitchens and bathrooms are the first places people look, and if a new buyer sees that the kitchens and bathrooms have been done, then there's less for them to do."
Figures from the Appraisal Institute of Canada support Track's claim. According to the Ottawa-based property-valuation association, bathroom and kitchen renovations continue to be the most popular on the list of perennial home improvements, with a recovery rate of between 75 and 100 percent.
The organization defines "recovery rate" as the likely increase in a home's resale value that could be attributed to a renovation. If a $10,000 renovation increases a home value by $6,000, for example, the recovery rate is 60 percent.
Landscaping vies for top spot too, according to Track. "If you can wow potential buyers with some curb appeal and the kitchen or bathrooms have also been done, then selling will be that much easier," he says.
When it comes to renovating older homes, Track suggests updating wiring and plumbing. "Most knowledgeable home buyers will see this as a definite bonus. That said, many first-time homebuyers may not appreciate the work that has been done."
Approximately 1.9 million households in 10 major Canadian centres did renovations in 2010, totalling almost $23 billion. The average cost of renos was nearly $13,000.
According to the AIC's most recent data, energy-efficient upgrades are another popular focus for renovations, with an average recovery rate of 61 percent.
Other renovations that have higher recovery rates include the use of non-neutral interior paint colours (67 percent), the addition of a cooking island in the kitchen (65 percent), and the installation of a Jacuzzi-type bath separate from the shower stall (64 percent).
The biggest mistake people make when it comes to renovating is expecting Champagne-style results on a beer budget.
"Clients will say to me, 'Get a few prices and we will go with the cheapest,'" Track explains. "In construction, you get what you pay for, and if you only consider price, then you are asking for trouble. It's important not to overpay, but quality trades come at a cost. I always tell my subtrades that I want good work at a fair price."
Above all, planning is crucial. It takes at least two to three months to plan for a simple kitchen renovation, Track notes, urging people to read magazines and clip pictures of everything from layouts to paint colours.
"People who don't plan always run into problems," Track says. "People need to hire a good architect and a good designer to help them make informed decisions on materials and design. So many times I have clients who don't want to spend money on a good architect or designer, and inevitably this leads to problems. The better you plan, the less the chance of making mistakes and the better the chance of coming in on time and on budget.
"Try to make as many decisions as possible before you start," he adds. "By planning, you'll have a better idea of how long the job will take and how much it will cost. Also, make informed decisions about materials and do some research."
Budgeting is another basic, as is asking contractors for references and asking for examples of past projects.
"If you set a realistic budget for a job, you have a better chance of not exceeding it," Track says. "It's common for contractors to low-bid a job so that they get it. Once the job is underway, the client has no alternative but to pay all additional costs that arise in order to get the job done. There's a square-footage or unit price for almost everything in construction, so the only real difference between contractors should be the fee they charge."
Renovations that add features to a home that others in the neighbourhood already have, such as a second bathroom, have higher recovery rates than features not shared by adjacent properties, according to the AIC.
Poorly done renovations may have no positive impact or could actually reduce the value of a home.
Recovery rates and resale value aside, the AIC can't put a cost on professionally done renovations when it comes to home owners' sense of satisfaction and enjoyment. That's priceless.

Canada stands ready to tighten mortgage rules: Flaherty

By Randall Palmer
STITTSVILLE, Ontario – The Canadian government, dealing with signs of an overheated property market, is ready to tighten mortgage insurance rules again if necessary, Finance Minister Jim Flaherty said on Thursday.
Mr. Flaherty also chided bank executives for asking the government to impose more restrictions, noting that the banks are the entities that offer mortgages.
Canada’s banking regulator, trying to curb risks posed by record-high levels of household debt, said this week it wanted lenders to be more transparent about their mortgage businesses.
Mr. Flaherty has imposed tougher requirements for government-backed mortgages three times since 2008.
“With respect to tightening up the mortgage insurance market we’ve done it three times … and we watch, we monitor the market, and if we have to tighten it some more we will,” he told reporters in Stittsville, Ontario.
“The new housing market produces a lot of jobs in Canada so there’s a balance that needs to be addressed. I’d like the market to correct itself, quite frankly, if it can.”
Mr. Flaherty said he had noted indications of softening in the Toronto condominium market, which he said was a good sign.
Canada’s household debt-to-income ratio hit a record high of 151.9% last year, largely the result of mortgage borrowing. The ratio dipped slightly in the fourth quarter but at 150.6% was not far off the record.
Mr. Flaherty said “it was a bit odd” that some banks were pressing him for tighter rules.
“We have bank executives in Canada saying ’You know, really the rules on insured mortgages should be tightened up’. They must forget that they are actually the ones that issue the mortgages — it’s their market, it’s not my market,” he said.
Since 2008, Mr. Flaherty has lowered the maximum amortization period for new mortgages to 30 years from 40 years, raised minimum down payments required to qualify for government insurance, and required all borrowers to qualify for a five-year fixed-rate mortgage to get insurance.
If he decided to act again, Mr. Flaherty could announce new measures in his March 29 budget.
Mr. Flaherty, who has promised to cut spending to eliminate the federal government’s budget deficit by the 2015-16 fiscal year, said he would be proposing moderate cutbacks in the budget.
“This is not an austerity program,” he said, adding the focus would be on long-term growth, prosperity, innovation and sustainable social programs.

Bank regulator targets mortgage disclosure

Canada’s bank regulator has issued a set of draft guidelines on mortgage underwriting that, if approved, would significantly increase the level of transparency around one the industry’s most important and least understood businesses.
Based on similar principles released by the Switzerland-based Financial Stability Board at the end of last year, the proposed rules require bank boards of directors to approve their institution’s mortgage underwriting polices at least annually, and that those policies be based on “timely, accurate, independent and objective reporting” on the risks related to the mortgage business.
Lenders would also be required to provide a lot more information on their mortgage portfolios than they do now, including the use of default insurance, geographic concentration of loans and lending to employees.
Related
Tighter regulations needed against overheating real estate, household debt: TD
National Bank Financial analyst Peter Routledge said he was “surprised” at the lengths the guidelines go toward shining a light on what many observers say is a poorly understood part of banks’ business.
“This will broadly increase the level of disclosure and it will certainly help investors figure out who has more credit risk,” Mr. Routledge said.
The Office of the Superintendent of Financial Institutions has invited public comment on the draft rules until May 1. Brock Kruger, a spokesman for OSFI, said the completed guidelines will likely be issued before year-end. The announcement comes amid growing worry around the country’s housing market and escalating household debt.
Mark Carney, the governor of the Bank of Canada, has identified record consumer borrowing as the biggest domestic threat to the stability of the financial system, warning that the situation has left Canada exposed to economic shocks such as a spike in unemployment or interest rates.
“Although financial institution mortgage portfolios continue to perform well, a number of vulnerabilities in the financial system exist, including high household indebtedness,” Mark Zelner, assistant superintendent, said in a statement. “OSFI is acting in an effort to prevent these vulnerabilities from evolving into problems for the financial system.”
Although the proposals put out by OSFI are based on guidelines issued by the Financial Stability Board, the top international regulator, there are several key differences including the requirement for board-approved underwriting principles, potentially the most important.
Players would also have to exercise the same due diligence and abide by the same lending standards on loans collateralized by homes — called home equity lines of credit, or helocs — as they do on mortgages.
In addition, they would be required to provide sufficient disclosure on residential home loans for investors “to be able to conduct an adequate evaluation of the soundness and condition of a federally regulated financial institution’s residential mortgage operations.
“This is a welcome development because it gives us a lot of visibility that we didn’t have before,” said Dave Beattie, an analyst at Moody’s Investors Service.
The guidelines cover all federally regulated financial institutions involved in mortgage underwriting or insurance. However they do not cover the Canada Mortgage and Housing Corp., the largest issuer of mortgage insurance, which is overseen by the federal Department of Human Resources and Skills Development.
Canadian mortgages outstanding currently total about $1-trillion, about 60% of which is covered by CMHC default insurance.
Analysts say a central concern is lack disclosure around helocs, one of the most popular retail products ever offered by the banks. While some lenders include the value of helocs in their mortgage portfolios, others break them out separately. Still others lump them with consumer loans. The new guidelines would go a long way toward clearing up the picture.
Another problem that the rules would fix is what some observers regard as excessive flexibility around heloc repayment. As revolving lines of credit, these loans don’t necessarily come with strict amortization requirements. Indeed, some lenders only stipulate that at a minimum borrowers make interest payments. With interest rates close to record lows, this makes it easier for borrowers conceal financial problems.
Under the new rules, lenders would have to impose the same level of due diligence on heloc underwriting as on sub-prime mortgages. They would also have to ensure that the borrower has the ability to expect “full repayment over time.”

Home renovation tips

Maintenance and repair renovations protect your investment

Renovations have been a growing trend for Canadian homeowners, considering the transaction costs involved in selling and rebuying real estate! Motivations for renovations vary; homeowners consider renovations for lifestyle reasons. This might involve building a second level on the house to increase the number of rooms.

Renovations are also considered for a retrofit project. Older wartime houses may be in need of improving the mechanical systems to fit today's standards.  Maintenance and repair renovations are probably the most common renovation projects homeowners' tackle. Maintenance and repair renovations protect your investment and involve projects such as hiring a contractor to install a new roof or new energy efficient windows to update your property to today's standards.

Before you get started on your renovation project, you may want to answer the following key questions:

·         Is your renovation practical?

·         Will your investment in renovation costs make sense through savings in heating or will the investment increase the value of your home for future resale? Will your investment payback over time?

·         Will your renovation create long-term usefulness for your family and lifestyle?

·         How can you incorporate Healthy housing principles to maximize environmentally friendly returns to your renovation project?

·         How will you finance the renovation project?

Investing your time by thoroughly planning out a step by step process will pay you dividends through your project.

Before you renovate, follow this simple 8 step by step process.

Step 1 Set your priorities.

Step 2 Know what's possible. Investigate the practicality of the scope of your project.

Step 3 Do the math. Understand the costs, potential roadblocks, time to complete. Make sure you organizing your financing so you have the funds to cover the project.

Step 4 Pick your partners. Research your contractors and trades. Know who you are dealing with and minimize any surprises.

Step 5 Get it in writing. All contracts and estimates should be thoroughly documented.

Step 6 Don't worry about the mess.

Step 7 Inspect as you go.

Step 8 Give the Thumbs Up! Good luck with your project!

With winter housing sales up, fears of meltdown in spring demand

Financial Post:
Melting snow across Canada may have helped heat up the housing market but the new worry is whether there will be any demand left for homes this spring.
Home sales across the country rose 1.4% from January to February on a seasonally adjusted basis while actual sales climbed 8.6% from a year ago, the Canadian Real Estate Association says. In the first two months of the year, 61,772 homes changed hands, a 6.7% increase from a year earlier.
CREA said in particular there has been a jump in demand for low-rise homes, which has put pressure on prices.
“There has been a preference in recent months, in Toronto and other markets, for single-family homes which are typically more expensive. This trend held in February, putting upward pressure on the national average sale price,” the real estate group said.
That demand has helped to keep home values from falling, with the average sale price of a home in February $372,763, a 2% increase from a year earlier.
The strength of the winter market has Don Lawby, chief of Century 21 Canada Ltd., wondering whether we have stolen some of the traditional spring market frenzy.
“Many parts of Canada had no winter. The question is has the market we have been experiencing taken business from the spring market,” Mr. Lawby said as he toured Montreal. “I can look at property and I don’t have to wait for the snow to melt to see what that property looks like. I’ve seen it.”
It doesn’t hurt that interest rates remain at record lows, with the major banks engaging in another round of cuts that have taken the five-year fixed-rate mortgage down to 2.99%, the lowest rate in history, which was already breached once before this year in January.
Ottawa-based CREA, which represents about 100 boards across the country, said about half of local markets recorded an increase in activity, led by major markets in Calgary, Toronto and Montreal.
Consumers have jumped on the change in market conditions with new listings climbing. CREA said that on a seasonally adjusted basis, ne listings were up 1.9% in February from a month ago.
Gerald Soloway, chief executive of Home Capital Group Inc., said the weather was already boosting the housing numbers.
“Canadians historically don’t like to buy houses in three feet of snow. This year with a little less snow, some of the numbers are up,” he said. “That’s been my experience. People get out and look. They might buy a month later, but they get out now and get around looking at new houses and subdivisions because their car doesn’t get stuck. In southern Ontario and the urban areas, there has been very little snow.”
For its part, CREA said the latest numbers are proof the market is on solid footing. “The national rise in both sales activity and the number of newly listed homes beyond the normal seasonal increase provides clear evidence that Canadians are confident in housing market prospects,” said Gary Morse, president of CREA.
Benjamin Tal, deputy chief economist at CIBC World Markets, says you can seasonally adjust statistics but you can’t necessarily take into account the extreme conditions we’ve had this year.
“It’s only adjusted for normal weather, it accounts for winter, but you cannot capture what has happened [this year],” Mr. Tal said. “Some of the activity we are seeing is weather-related.”
As for the idea that we have stolen some of the spring market activity, Mr. Tal contends there is truth to the theory. “I would say yes, absolutely. It’s an early spring, it started already,” he says.
So what will be left over when the spring begins for real? “I don’t think it will be strongest spring ever. I think we will see some [buyer] fatigue,” Mr. Tal said.

Breaking your mortgage: ‘It’s either worth it or it’s not’

Fixed-rate mortgages are at historic lows but if you are locked in to a contract with your bank, those benefits may be yet elusive.

First you have to do the math to see if breaking your contract is worth the penalties you may face.
“There is no grey area,” says Cindy David, a certified financial planner at Dupuis Langen Financial Management Ltd. in Vancouver. “It’s either worth it or it’s not.”
The big five banks are offering four and five year mortgages at just 2.99%.
“We’re even seeing 10-year fixed rate mortgages at 3.99%,” says Ms. David. “Think about that: Interest and principal at 3.99% for 10 years. From a financial planning perspective if any client approached me and said ‘Should I look into breaking my mortgage?’ My answer would be yes.”
Step one comes down to meeting with your financial institution or your Mortgage Broker and doing the math to determine whether or not the cost of breaking your mortgage is worth the anticipated savings from the lower rates. The fact is the penalty for breaking a mortgage can be thousands of dollars depending on when in your term you happen to be and in many cases, the cost and the future savings cancel each other out, in which case you may be wise to wait until your mortgage is up for renewal.

Housing cools as sellers hold back

From Thursday's Globe and Mail
The hot housing market that powered the country's post-recession recovery is slowing to a crawl.
The Canadian Real Estate Association said sales dropped and prices moderated in January, with the weakness spread among more than half of the country's cities. Sales in Vancouver and Toronto slowed to a crawl, with few houses available to would-be buyers.
The low number of listings means there could be a rush of sellers trying to capitalize on the spring market, keeping a lid on the bidding wars that have driven prices sharply higher in some of the country's largest markets.
“There is really a lack of product,” said Phil Soper, president of Brookfield Residential Real Estate Services, which operates Royal LePage. “We expect that to pick up considerably, and by the end of March Break you'll really be able to gauge the Canadian market's health. Or lack of health.”
Canada's sizzling property market has made headlines around the world, and so far defied some predictions that it's a debt-fuelled bubble bound to pop. Forecasts for home prices for the next several years vary wildly – with economists and analysts predicting everything from a 25 per cent drop to modest gains.
The latest figures suggest a levelling off. Home sales across the country were down 4.5 per cent in January from December, the sharpest monthly decline since July, 2010.
Average prices were 2 per cent higher than a year ago at $348,178, the smallest year-over-year increase in the past year.
It's not the first sign that the much-talked-about slowdown may have arrived.
The Teranet-National Bank index, an alternative measure of price gains that lags CREA by several months, showed prices dipped 0.2 per cent in November, marking the first drop since the fall of 2010.
In Toronto, the bidding wars have largely given way to a market where houses sit longer and sell for closer to their asking price, said Richard Silver, president of the Toronto Real Estate Board. But hot neighbourhoods continue to fetch top dollar, especially considering the lack of listings.
Matthew Slutsky, chief executive officer of real estate site BuzzBuzzHome.com, has been trying to buy a house in one downtown neighbourhood for months. Along with his wife Carlie Brand, he's been popping letters in mailboxes imploring their owners to consider a sale.
“I really hope it's the calm before the storm and more listings pop up,” he said. “Right now it feels like we are auditioning for a house, and I don't know if I want to wait and see what happens in the spring.”
There's been a sense of unease surrounding Canada's housing market for more than a year. The federal government tightened its mortgage qualification requirements to try to prevent buyers from taking on too much debt in a low-interest-rate environment, and the Bank of Canada has issued a steady stream of warnings about high levels of household debt.
The fear is that rates will rise as the economy improves, and many people who could afford their house when interest rates were low may find those same houses unaffordable as rates rise. Financial turmoil in Europe also has many market watchers concerned, with any default in Greece expected to have ripple effects around the world.
Lenders such as Gerry Soloway, CEO of Home Capital Corp., have cautiously tightened their lending standards in recent months as the economy wobbled. But he doesn't see prices crashing any time soon, even if things slow down considerably.
“I just don't see the catalyst for a big price drop,” he said.
It's a theory echoed by Ross McCredie, CEO of Sotheby's International Realty Canada, who recently had 16 buyers check out a $2.5-million home in Toronto.
“We are finding if the home is priced right and a quality home, it is moving fairly quick,” he said. “Too many people who are listing are expecting prices well above the market. We are spending a lot of time with our agents to ensure we are only taking on listings at the right price.”

Standardizing Mortgage Penalty Calculations

Rob McLister, CMT
Two years ago, the government pledged to “standardize the calculation and disclosure of mortgage prepayment penalties.”
It addressed the disclosure problem last week (see:New Mortgage Penalty Disclosure), but it has done nothing to standardize the actual calculation itself.
This lack of action irritates some consumer advocates. They feel that lenders’ convoluted and algebraic penalty formulas allow them to overcharge people. (How to define “overcharge” is another question.)
As to why the government chose not to standardize penalty calculations, a Department of Finance (DOF) official told us:
“Mortgages can have a variety of mortgage prepayment calculations. Standardizing the calculation of the mortgage charges could have resulted in changes to lenders’ product offerings and created a disincentive for some lenders to offer discounted rates to the most creditworthy borrowers.”
The DOF concluded that, “This would not have been in consumers’ best interests.”
Instead, the DOF says “The Mortgage Prepayment InformationCode of Conduct focuses on disclosing key mortgage prepayment information that equips consumers to understand and benefit from a choice in mortgages.”
Unsurprisingly, that leaves two camps in the penalty standardization debate: Those for it and those against it.
Pro-Standardization
Some people are outraged at the thought of banks profiting from mortgage penalties. We’ve all heard stories of eye-popping prepayment charges in the tens of thousands of dollars.
There are many people who would therefore like to cap mortgage prepayment fees.
Others would prefer to see a standard penalty formula that is applied consistently regardless of the lender. In this case, breaking a mortgage with a given mortgage amount and interest rate would trigger the same penalty regardless of the lender.
Another idea is to allow lenders flexibility in how much they charge, but to legislate the penalty range and calculation method. In that case, all lenders would calculate the base penalty the same way. They could then charge a simple multiple (e.g., 1X, 2X, etc.) of that penalty at their discretion, subject to:
The base penalty formula being straightforward
The multiple being disclosed up front
The total penalty not exceeding the maximum allowed by law.
The Case Against Standardization
The original intention of mortgage penalties (more accurately called “interest compensation charges”) was to make a lender whole if the borrower backed out of a mortgage contract that he/she voluntarily agreed to.
Without such compensation, the lender would have less ability to cover costs and repay depositors and/or investors who provided the money to lend to the borrower.
Put another way, a mortgage penalty is similar to the compensation we might expect if we bought a 5% GIC and the bank cancelled it when rates dropped to 2%. We’d demand the rate we had been promised, especially if there was no place left to invest at a similar yield.
Most of the time, mortgage compensation charges are not the cash cow people think they are. (There are exceptions of course.) Last quarter, for example, CIBC reported that its prepayment fees collected from customers were actually lower than the true breakage costs to the bank. That appeared to be an industry-wide trend, according to CIBC's earnings release.
In many cases, when a customer breaks his/her contract, penalties only cover the interest a lender loses; lenders incur many more expenses when a mortgage is broken. Lost interest is just one.
Further, many would argue that standardized penalties are self-defeating. Forcing lenders to apply a single penalty formula for early termination would restrict lenders from charging what they deem necessary to become whole.
That one-size-fits-all penalty would likely drive lenders to add a rate premium to every single mortgage to compensate for the lost interest revenue. No one would be further ahead, monetarily anyways.
In a free market where mortgage lenders can generally choose what interest rate and fees to charge, it's difficult to justify legislating a specific calculation method for interest compensation. Lenders have different costs, different mortgage features, different mortgage flexibility, and different profit margins. Being forced to levy the same penalty for a given rate and loan amount makes little business sense.
Mind you, some lenders might be able to tolerate a compromise in which a set method is legislated for calculating a range of penalties. In that case, all lenders would determine the "base penalty" the same way, based on the borrower's contract rate, term remaining and standardcomparison rates. A lender could then charge some multiple of that base penalty, up to a regulated maximum. This system would help borrowers compare lenders’ penalties more easily, while still providing flexibility for lenders to recoup costs as needed.