Garry Marr
Highlights of CAAMP report:
- 23% of mortgage borrowers voluntarily increased their regular payments- 19% made lump sum payments
- 10% made both lump sum payments and increased their regular payments
- 50% of borrowers pay at least $100 per month above their required payments
- 74% of borrowers who renewed in the last year saw their rate decrease by an average of one-half percentage point
- 83% of Canadians have at least 25% equity in their home
Canadians have been taking advantage of record-low interest rates to lock in their mortgages, a new survey suggests.
The Canadian Association of Accredited Mortgage Professionals, in its annual spring release, says among the 3.8 million Canadians with a fixed rate mortgage, 14% chose to lock in during the past year.
“This data supports comments by lenders that they have high numbers of new borrowers who start with variable rate mortgages but soon opt for the security of fixed rates,” says CAAMP in the report. Overall, 29% of those with mortgages have a variable rate leaving them with exposure to any changes in the Bank of Canada’s lending rate which the prime rate — used in those loans — tends to track.
The survey also found Canadians are making significant efforts to reduce their debt with 23% of respondents saying they voluntarily increased their regular payments, 19% making lump sum payments and 10% doing both.
For those who increased their regular payments, the average amount of the increase was $400-$450 per month. With about 5.85 million mortgage holders in Canada and roughly 1.35 million increasing their payments, it translates into about $7-billion per year. Lump sum payments averaged $12,500, and with about 1.1 million people making these payments, that equals about $13.75-billion.
“Despite daily warnings in the media about mortgage indebtedness — or maybe because of them — Canadians are making responsible decisions about their mortgages and they’re exhibiting confidence in their own situations,” said Jim Murphy, chief executive of CAAMP. “We should feel encouraged by this behaviour — it means Canadians are well positioned to weather a potential rise in interest rates.”
Overall Canadians have $994-billion in mortgages on their primary residences and $161-billion in controversial home equity lines of credit or HELOCs which allow them access to the equity in their home.
The total equity takeout from residences was $46-billion in the past year with renovations accounting for $17.25-billion of the money used. Another $10-billion was used for investments and $9.25-billion for debt consolidation.
Amortization periods, which have been legally shortened by Ottawa for insured government backed loans, are shortening. Lengths are down 20% but Ottawa legally reduced the length a mortgage could be amortized from 40 to 30 years over the past three years.
Craig Alexander, chief economist with Toronto-Dominion Bank, said the locking of mortgage rates has protected consumers from future rise in rates. “It’s a very positive thing that people are shifting to fixed rate because it provides greater security in protecting from upside risk in interest rates,” he said.
The survey also found despite the fact three of the major banks are either out of or backing out of the mortgage broker channel, it still is an important segment of the market. Brokers account for 26% of the market overall and captured 31% of activity in 2011.
The report is based on information gathered by Maritz Research Canada in a survey of 2,000 Canadian consumers in April and May 2012.
Thursday 31 May 2012
Wednesday 30 May 2012
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Tuesday 29 May 2012
Is another round of mortgage wars on the way?
John Greenwood
Renewed concern around the crisis in the eurozone has investors heading for the exits, and once again Canada is emerging as one of the biggest beneficiaries with rising demand pushing yields on even corporate bonds close to record lows.
But analysts warn the soaring popularity is a double-edged sword. Bank funding costs have tumbled as well, and that typically translates into falling mortgage rates which in turn drive increased consumer borrowing — the last thing Canada needs according to its policy makers.
‘In a world almost devoid of triple-A credit in the sovereign space, Canada is taking on a new importance’
“What you’re seeing is a tremendous flight to quality in the Canadian market,” said Ian Pollick, a fixed income strategist at RBC Capital Markets. “In a world almost devoid of triple-A credit in the sovereign space, Canada is taking on a new importance.”
The yield on Government of Canada five year bonds, a market benchmark, slipped to a record low of 1.84% on Wednesday. And where government bonds go, so go bonds issued by banks.
Bottom line: It now costs a whole lot less for a bank to borrow money than it has historically.
According to Mr. Pollick, five-year bonds issued by banks to fund their home loans are enjoying such high demand that their funding costs are lower today than they were in the so-calledmortgage wars of early February, “when we stated to see the 2.99% specials.”
Coming in the wake of repeated warnings from Bank of Canada Governor Mark Carney about the country’s excessive household debt levels, the mortgage wars drew criticism from Finance Minister Jim Flaherty, who made his concerns known directly to the banks.
Low interest rates especially after the financial crisis have created incentive for consumers to take on more debt and helped drive a run-up in housing prices across Canada, especially in Vancouver and Toronto. Economists worry that a rise in interest rates or unemployment could precipitate a serious housing correction with potentially disastrous consequences for consumers as well as the broader economy.
The federal government has taken a series of steps to try to cool the market, most recently by putting theCanada Mortgage and Housing Corp., the biggest provider of mortgage default insurance, directly under the control of the Office of the Superintendent of Financial Institutions. Earlier this spring OSFI announced proposals for tough new mortgage rules that will likely come into force before the end of the year.
Analysts say those efforts have already begun to have the desired effect, with a sharp deceleration in consumer loan growth in the first four months of the year.
But with bank funding costs now slumping again, some worry that it’s only a matter of time before phase two of the mortgage wars gets underway.
“The Canadian banks as a group have enjoyed very good access to wholesale funding since the crisis and borrow at spreads well inside those of their global peers,” said David Beattie, an analyst at credit rating agency Moody’s.
With yields where they are banks “can absolutely afford to cut mortgage rates again,” said another leading credit analyst who asked not to be named. “But factors such as “pressure from [the federal government] will probably lead them to hold off on more rate cuts — but anything’s possible.
Observers said the spread between Government of Canada bonds and bonds issued by banks has been up and down in recent years — they’re wider now that it was six weeks ago, before the eurozone flared up — but yields have come in so much that banks are still better off.
Renewed concern around the crisis in the eurozone has investors heading for the exits, and once again Canada is emerging as one of the biggest beneficiaries with rising demand pushing yields on even corporate bonds close to record lows.
But analysts warn the soaring popularity is a double-edged sword. Bank funding costs have tumbled as well, and that typically translates into falling mortgage rates which in turn drive increased consumer borrowing — the last thing Canada needs according to its policy makers.
‘In a world almost devoid of triple-A credit in the sovereign space, Canada is taking on a new importance’
“What you’re seeing is a tremendous flight to quality in the Canadian market,” said Ian Pollick, a fixed income strategist at RBC Capital Markets. “In a world almost devoid of triple-A credit in the sovereign space, Canada is taking on a new importance.”
The yield on Government of Canada five year bonds, a market benchmark, slipped to a record low of 1.84% on Wednesday. And where government bonds go, so go bonds issued by banks.
Bottom line: It now costs a whole lot less for a bank to borrow money than it has historically.
According to Mr. Pollick, five-year bonds issued by banks to fund their home loans are enjoying such high demand that their funding costs are lower today than they were in the so-calledmortgage wars of early February, “when we stated to see the 2.99% specials.”
Coming in the wake of repeated warnings from Bank of Canada Governor Mark Carney about the country’s excessive household debt levels, the mortgage wars drew criticism from Finance Minister Jim Flaherty, who made his concerns known directly to the banks.
Low interest rates especially after the financial crisis have created incentive for consumers to take on more debt and helped drive a run-up in housing prices across Canada, especially in Vancouver and Toronto. Economists worry that a rise in interest rates or unemployment could precipitate a serious housing correction with potentially disastrous consequences for consumers as well as the broader economy.
The federal government has taken a series of steps to try to cool the market, most recently by putting theCanada Mortgage and Housing Corp., the biggest provider of mortgage default insurance, directly under the control of the Office of the Superintendent of Financial Institutions. Earlier this spring OSFI announced proposals for tough new mortgage rules that will likely come into force before the end of the year.
Analysts say those efforts have already begun to have the desired effect, with a sharp deceleration in consumer loan growth in the first four months of the year.
But with bank funding costs now slumping again, some worry that it’s only a matter of time before phase two of the mortgage wars gets underway.
“The Canadian banks as a group have enjoyed very good access to wholesale funding since the crisis and borrow at spreads well inside those of their global peers,” said David Beattie, an analyst at credit rating agency Moody’s.
With yields where they are banks “can absolutely afford to cut mortgage rates again,” said another leading credit analyst who asked not to be named. “But factors such as “pressure from [the federal government] will probably lead them to hold off on more rate cuts — but anything’s possible.
Observers said the spread between Government of Canada bonds and bonds issued by banks has been up and down in recent years — they’re wider now that it was six weeks ago, before the eurozone flared up — but yields have come in so much that banks are still better off.
Monday 28 May 2012
Canada’s economic growth expected to come up short of Bank of Canada’s forecast
Randall Palmer, Reuters
OTTAWA — The Canadian economy probably expanded at a significantly slower rate in the first quarter than the Bank of Canada had predicted in January, and in fact its spare capacity may have risen, a Reuters survey of analysts showed on Friday.
The median forecast of an annualized growth rate of 1.9% compared with the central bank’s 2.5% forecast and matched the lukewarm fourth-quarter rate.
The Bank of Canada has estimated that the growth in economic capacity rises by 2% a year, so any economic growth below that rate means a wider output gap.
And a wider output gap – the difference between potential and actual output – would make the Bank of Canada (BoC) less likely to raise interest rates because it reduces the chances of a pickup in inflation.
for hikes in the second half,” said Doug Porter, deputy chief economist at BMO Capital Markets, which predicts 1.8% growth in the quarter.
“But at the same time we’re seeing a major flare-up in concerns about Europe and some cooling of the U.S. economy.”
The central bank said on April 17 that it might have to start raising interest rates and referred again to that language as recently as May 8. But overnight index swaps, which track the central bank’s main policy rate, are now beginning to point to the possibility of a rate cut instead.
Still, more than a third of the analysts surveyed by Reuters see first-quarter growth at 2% or more.
“As long as you’re above 2%, you’re still absorbing capacity, you’re still describing a Canadian economy that remains fairly strong domestically but still struggled a little bit against some of those external headwinds,” said David Tulk at TD Securities, which is predicting a 2.2% first-quarter growth rate.
Net exports, an inventory build and, to a lesser extent, consumption are expected to have contributed to growth, partly counteracted by a dropping off of government stimulus.
On a monthly basis, real gross domestic product rose by 0.1% in January from December before falling by 0.2% in February. The Reuters survey points to a much stronger March performance of 0.4% growth.
OTTAWA — The Canadian economy probably expanded at a significantly slower rate in the first quarter than the Bank of Canada had predicted in January, and in fact its spare capacity may have risen, a Reuters survey of analysts showed on Friday.
The median forecast of an annualized growth rate of 1.9% compared with the central bank’s 2.5% forecast and matched the lukewarm fourth-quarter rate.
The Bank of Canada has estimated that the growth in economic capacity rises by 2% a year, so any economic growth below that rate means a wider output gap.
And a wider output gap – the difference between potential and actual output – would make the Bank of Canada (BoC) less likely to raise interest rates because it reduces the chances of a pickup in inflation.
for hikes in the second half,” said Doug Porter, deputy chief economist at BMO Capital Markets, which predicts 1.8% growth in the quarter.
“But at the same time we’re seeing a major flare-up in concerns about Europe and some cooling of the U.S. economy.”
The central bank said on April 17 that it might have to start raising interest rates and referred again to that language as recently as May 8. But overnight index swaps, which track the central bank’s main policy rate, are now beginning to point to the possibility of a rate cut instead.
Still, more than a third of the analysts surveyed by Reuters see first-quarter growth at 2% or more.
“As long as you’re above 2%, you’re still absorbing capacity, you’re still describing a Canadian economy that remains fairly strong domestically but still struggled a little bit against some of those external headwinds,” said David Tulk at TD Securities, which is predicting a 2.2% first-quarter growth rate.
Net exports, an inventory build and, to a lesser extent, consumption are expected to have contributed to growth, partly counteracted by a dropping off of government stimulus.
On a monthly basis, real gross domestic product rose by 0.1% in January from December before falling by 0.2% in February. The Reuters survey points to a much stronger March performance of 0.4% growth.
Sunday 27 May 2012
Rising mortgage debt rendering ‘Canadian households stretched thin’: DBRS
Barry Critchley
DBRS, the Canadian headquartered credit rating agency, has joined a long list of organizations that have weighed in on the matter of the Canadian residential housing market.
Like many of those previous studies and against the background of concerns being raised by the federal government and the Bank of Canada, DBRS found some positive — and negative — aspects about the sector that seems to consume Canadians. And with good reason: in many cases, the family home is the largest source of household wealth.
For instance, despite record high levels of household debt, DBRS argued that Canadian households have net worth that could withstand a property value decline of 40%.
But “rising household financial leverage and reduced affordability are of concern, rendering Canadian households stretched thin and vulnerable to liquidity shock or cash flow shortage, such as loss of income or unexpected expenses,” wrote DBRS.
At the end of 2011, Canadian mortgage lending amounted to $1.1-trillion — or more than double what it was a decade earlier. Add in home equity lines of credit and outstanding mortgage-related debt was about $1.3-trillion.
Along with rising mortgage and consumer debt, average house prices are now 4.9 times average gross family income — a level that would require Canadian household to allocate 37% of its pre-tax income to housing-related costs — the so-called “housing affordability ratio.” (House prices have risen faster than average household income.)
DBRS noted that the 37% ratio “is aided by the low interest rate environment and is only slightly worse than the long-term average.” But if interest rates were to jump by 2% the ratio could rise to 43% or more of pre-tax income. “Adding in other household expenses and payments, the average household is left with little residual cash flow or savings,” it said.
Affordability measurements based on national average values “are misleading and do not consider regional or market-specific preferences, differences or even property types,” DBRS said.
Accordingly and “barring a nationwide economic contraction, the real estate market for most Canadian cities appears balanced based on sales activities or housing inventory supply, but moderately overvalued based on the price-to-average income or affordability ratio, with potential overvaluations or pockets of vulnerability in certain markets and segments.”
So what are the big levers?
DBRS said that “a combination of higher interest rates, lower property values and a drastic increase in unemployment would be of great concern as mortgage defaults are closely related to employment and individual family situations.”
DBRS, the Canadian headquartered credit rating agency, has joined a long list of organizations that have weighed in on the matter of the Canadian residential housing market.
Like many of those previous studies and against the background of concerns being raised by the federal government and the Bank of Canada, DBRS found some positive — and negative — aspects about the sector that seems to consume Canadians. And with good reason: in many cases, the family home is the largest source of household wealth.
For instance, despite record high levels of household debt, DBRS argued that Canadian households have net worth that could withstand a property value decline of 40%.
But “rising household financial leverage and reduced affordability are of concern, rendering Canadian households stretched thin and vulnerable to liquidity shock or cash flow shortage, such as loss of income or unexpected expenses,” wrote DBRS.
At the end of 2011, Canadian mortgage lending amounted to $1.1-trillion — or more than double what it was a decade earlier. Add in home equity lines of credit and outstanding mortgage-related debt was about $1.3-trillion.
Along with rising mortgage and consumer debt, average house prices are now 4.9 times average gross family income — a level that would require Canadian household to allocate 37% of its pre-tax income to housing-related costs — the so-called “housing affordability ratio.” (House prices have risen faster than average household income.)
DBRS noted that the 37% ratio “is aided by the low interest rate environment and is only slightly worse than the long-term average.” But if interest rates were to jump by 2% the ratio could rise to 43% or more of pre-tax income. “Adding in other household expenses and payments, the average household is left with little residual cash flow or savings,” it said.
Affordability measurements based on national average values “are misleading and do not consider regional or market-specific preferences, differences or even property types,” DBRS said.
Accordingly and “barring a nationwide economic contraction, the real estate market for most Canadian cities appears balanced based on sales activities or housing inventory supply, but moderately overvalued based on the price-to-average income or affordability ratio, with potential overvaluations or pockets of vulnerability in certain markets and segments.”
So what are the big levers?
DBRS said that “a combination of higher interest rates, lower property values and a drastic increase in unemployment would be of great concern as mortgage defaults are closely related to employment and individual family situations.”
Thursday 24 May 2012
Mortgage brokers warn about new refinancing rules
TARA PERKINS— FINANCIAL SERVICES REPORTER
From Tuesday's Globe and Mail
Canada’s mortgage brokers are warning the banking regulator that its proposed mortgage underwriting rules could result in people losing their homes.
The brokers are concerned about a number of the potential rules, but the one that worries them most outlines what banks would have to do when a consumer wants to renew or refinance their mortgage.
The proposed rules suggest that banks recheck areas such as employment status, current income and the current value of the home for renewals and refinancings.
“This would be a significant, significant change,” Jim Murphy, the head of the Canadian Association of Accredited Mortgage Professionals (CAAMP).
Currently, when mortgages come up for renewal, banks tend to focus on the borrower’s payment history. They rarely appraise the property again and not all banks will check the borrower’s updated income level, Mr. Murphy said.
“CAAMP strongly recommends that this concept be clarified so that mortgages continue to be renewed at maturity without requalification,” the industry association said in a submission to the Office of the Superintendent of Financial Institutions (OSFI).
“If not, homeowners who have been in compliance may no longer qualify. This would result in a number of properties hitting the market at the same time and thereby driving down prices.”
Such a phenomenon could add further fuel to a real estate downturn if lower house prices and higher unemployment caused more people to lose their homes upon renewal, Mr. Murphy suggested.
Household debt driven by mortgage credit expansion is the main threat to the credit risk profiles of Canadian financial institutions, Fitch Ratings said in a report Monday.
OSFI unveiled the proposed new rules in March, and requested submissions from the industry. Rod Giles, a spokesman for the banking regulator, said it has received a significant number of submissions from trade associations, lenders, insurers and the brokers as well as private citizens.
OSFI is still reviewing them, but hopes to release final rules by the end of June, along with a summary of the submissions and the reasons for its decisions.
It released the potential rules after the Financial Stability Board, a global financial oversight body, called on all regulators to ensure mortgage lenders were adhering to certain underwriting principles.
But, with Ottawa seeking to prevent a runup in Canadian house prices from leading to a crash, Canada’s proposed guidelines go a bit further.
OSFI has signalled it wants banks to limit home equity lines of credit to 65 per cent of a property’s value.
“Many borrowers use HELOCs to invest in capital markets or even for their own business purposes,” CAAMP says in its submission. “In this way, many Canadians are using their HELOCs for retirement and job creation – a positive goal which the government is trying to encourage.”
Canada's six biggest banks held $912-billion worth of exposure to the residential mortgage market at the end of January, according to figures compiled by Fitch. That included $730-billion of mortgages and $182-billion of home equity lines of credit.
The mortgage brokers would like to see people with good credit and income be able to borrow more than 65 per cent of the value of their home.
One proposed rule that the group applauds would eliminate so-called “cash back” mortgages, which essentially allow a consumer to borrow their down payment from the bank.
In 2008, Finance Minister Jim Flaherty changed the rules so that consumers had to put at least 5 per cent down (after a period of time during which Ottawa had allowed mortgages with a zero down payment). However, Ottawa left the door open for consumers to borrow that 5 per cent. The big banks subsequently came out with products in which they will lend a mortgage and give the borrower an amount equal to 5 per cent of the value up front (at a steeper rate).
“Borrowers should have ‘skin in the game,’ ” CAAMP said in its submission.
From Tuesday's Globe and Mail
Canada’s mortgage brokers are warning the banking regulator that its proposed mortgage underwriting rules could result in people losing their homes.
The brokers are concerned about a number of the potential rules, but the one that worries them most outlines what banks would have to do when a consumer wants to renew or refinance their mortgage.
The proposed rules suggest that banks recheck areas such as employment status, current income and the current value of the home for renewals and refinancings.
“This would be a significant, significant change,” Jim Murphy, the head of the Canadian Association of Accredited Mortgage Professionals (CAAMP).
Currently, when mortgages come up for renewal, banks tend to focus on the borrower’s payment history. They rarely appraise the property again and not all banks will check the borrower’s updated income level, Mr. Murphy said.
“CAAMP strongly recommends that this concept be clarified so that mortgages continue to be renewed at maturity without requalification,” the industry association said in a submission to the Office of the Superintendent of Financial Institutions (OSFI).
“If not, homeowners who have been in compliance may no longer qualify. This would result in a number of properties hitting the market at the same time and thereby driving down prices.”
Such a phenomenon could add further fuel to a real estate downturn if lower house prices and higher unemployment caused more people to lose their homes upon renewal, Mr. Murphy suggested.
Household debt driven by mortgage credit expansion is the main threat to the credit risk profiles of Canadian financial institutions, Fitch Ratings said in a report Monday.
OSFI unveiled the proposed new rules in March, and requested submissions from the industry. Rod Giles, a spokesman for the banking regulator, said it has received a significant number of submissions from trade associations, lenders, insurers and the brokers as well as private citizens.
OSFI is still reviewing them, but hopes to release final rules by the end of June, along with a summary of the submissions and the reasons for its decisions.
It released the potential rules after the Financial Stability Board, a global financial oversight body, called on all regulators to ensure mortgage lenders were adhering to certain underwriting principles.
But, with Ottawa seeking to prevent a runup in Canadian house prices from leading to a crash, Canada’s proposed guidelines go a bit further.
OSFI has signalled it wants banks to limit home equity lines of credit to 65 per cent of a property’s value.
“Many borrowers use HELOCs to invest in capital markets or even for their own business purposes,” CAAMP says in its submission. “In this way, many Canadians are using their HELOCs for retirement and job creation – a positive goal which the government is trying to encourage.”
Canada's six biggest banks held $912-billion worth of exposure to the residential mortgage market at the end of January, according to figures compiled by Fitch. That included $730-billion of mortgages and $182-billion of home equity lines of credit.
The mortgage brokers would like to see people with good credit and income be able to borrow more than 65 per cent of the value of their home.
One proposed rule that the group applauds would eliminate so-called “cash back” mortgages, which essentially allow a consumer to borrow their down payment from the bank.
In 2008, Finance Minister Jim Flaherty changed the rules so that consumers had to put at least 5 per cent down (after a period of time during which Ottawa had allowed mortgages with a zero down payment). However, Ottawa left the door open for consumers to borrow that 5 per cent. The big banks subsequently came out with products in which they will lend a mortgage and give the borrower an amount equal to 5 per cent of the value up front (at a steeper rate).
“Borrowers should have ‘skin in the game,’ ” CAAMP said in its submission.
Wednesday 23 May 2012
Is there ever a bad time to invest in a rental property?
Fabio Campanella, Special to Financial Post
Record low interest rates coupled with an overly extended bull market for Canadian residential real estate has some investors questioning the validity of investing in a rental property.
Current economic indicators support these fears: mortgage rates scheduled to rise, a global economy not yet out of the recessionary trenches, residential real estate prices in Canada that have clearly outpaced increases in general earnings over the last decade.
This all paints a compelling picture supporting the hesitation some investors have when dealing with rental properties. But is this hesitation legitimate? Is there ever really a good or bad time to get into the real estate rental market? The answer is yes, and also no; it all depends on your current financial situation.
If the Toronto residential market is used as a barometer we can see that residential real estate has treated us quite well over the past 20 years. During the period from 1992 to 2011 the average sale price for a home in Toronto increased from $214,971 to $465,412 according to the Toronto Real Estate Board (TREB).
That’s a 116.50% ROI over 20 years or 3.94% compound annual return, and that’s just the price increase not including any potential rental profits. In fact, over the last 20 years we have only seen four years of negative returns in the Toronto market and they all fell between 1992 to 1996.
Assuming you were to have purchased an average single-family Toronto rental property in 1992, put 25% down, taken a mortgage for the rest, and found a tenant who’s rental payments covered only your property’s basic operating expenses, taxes, maintenance and the interest portion of your mortgage (leaving you to cover the principal portion yourself) you’d have achieved an 11.40% annualized return on investment as at the end of 2011.
Not bad considering that the TSX would have given you 8.69% over the same time period. Using the same assumptions in the previous example on rolling 20-year periods from 1966 to 2011 the average investor would have achieved annualized compound returns of 13.96%.
In fact even if you were to have purchased a property at the bull market peak just before the infamous GTA real estate crash of 1990 you would still have achieved an 8.94% ROI if you held the property with a decent tenant until 2008 even though the value of your investment would have dropped by 25% over the first 4 years.
So what’s the point? Are rental properties a good investment and is this the right or wrong time to make a move? The answer is yes but only if you’re in it for the long-haul and only if your current financial position allows you to do so. Novice investors tend to follow market momentum and stretch themselves thin. They see prices increasing year over year then go out and take massive amounts of leverage to get in on the action “before it’s too late.”
What often happens is they buy more than they can handle, they don’t do proper due diligence on their tenants, and they get caught with a dud investment that they can’t support with their personal cash flow. This frequently leads to panic selling in order to raise funds to pay off large amounts of debt consequently resulting in losses.
Smart investors take their time. They seek out properties in desirable neighbourhoods, scrutinize their tenant’s ability to make rent payments before they take them on, manage the property with a keen eye, but most importantly they do not over-extend their leverage. Smart investors realize that there may be times that tenants can’t make rent or that markets may temporarily turn south.
Even if the original intention for a real estate investment is a short term flip, the smart investor will not purchase a property they aren’t able to hold over a long period of time should price momentum not go their way in the short run.
Direct investment in real estate is not like buying a passive investment such as a mutual fund. It requires a time commitment, experience, and patience but the long-term results can be superb when done properly.
Record low interest rates coupled with an overly extended bull market for Canadian residential real estate has some investors questioning the validity of investing in a rental property.
Current economic indicators support these fears: mortgage rates scheduled to rise, a global economy not yet out of the recessionary trenches, residential real estate prices in Canada that have clearly outpaced increases in general earnings over the last decade.
This all paints a compelling picture supporting the hesitation some investors have when dealing with rental properties. But is this hesitation legitimate? Is there ever really a good or bad time to get into the real estate rental market? The answer is yes, and also no; it all depends on your current financial situation.
If the Toronto residential market is used as a barometer we can see that residential real estate has treated us quite well over the past 20 years. During the period from 1992 to 2011 the average sale price for a home in Toronto increased from $214,971 to $465,412 according to the Toronto Real Estate Board (TREB).
That’s a 116.50% ROI over 20 years or 3.94% compound annual return, and that’s just the price increase not including any potential rental profits. In fact, over the last 20 years we have only seen four years of negative returns in the Toronto market and they all fell between 1992 to 1996.
Assuming you were to have purchased an average single-family Toronto rental property in 1992, put 25% down, taken a mortgage for the rest, and found a tenant who’s rental payments covered only your property’s basic operating expenses, taxes, maintenance and the interest portion of your mortgage (leaving you to cover the principal portion yourself) you’d have achieved an 11.40% annualized return on investment as at the end of 2011.
Not bad considering that the TSX would have given you 8.69% over the same time period. Using the same assumptions in the previous example on rolling 20-year periods from 1966 to 2011 the average investor would have achieved annualized compound returns of 13.96%.
In fact even if you were to have purchased a property at the bull market peak just before the infamous GTA real estate crash of 1990 you would still have achieved an 8.94% ROI if you held the property with a decent tenant until 2008 even though the value of your investment would have dropped by 25% over the first 4 years.
So what’s the point? Are rental properties a good investment and is this the right or wrong time to make a move? The answer is yes but only if you’re in it for the long-haul and only if your current financial position allows you to do so. Novice investors tend to follow market momentum and stretch themselves thin. They see prices increasing year over year then go out and take massive amounts of leverage to get in on the action “before it’s too late.”
What often happens is they buy more than they can handle, they don’t do proper due diligence on their tenants, and they get caught with a dud investment that they can’t support with their personal cash flow. This frequently leads to panic selling in order to raise funds to pay off large amounts of debt consequently resulting in losses.
Smart investors take their time. They seek out properties in desirable neighbourhoods, scrutinize their tenant’s ability to make rent payments before they take them on, manage the property with a keen eye, but most importantly they do not over-extend their leverage. Smart investors realize that there may be times that tenants can’t make rent or that markets may temporarily turn south.
Even if the original intention for a real estate investment is a short term flip, the smart investor will not purchase a property they aren’t able to hold over a long period of time should price momentum not go their way in the short run.
Direct investment in real estate is not like buying a passive investment such as a mutual fund. It requires a time commitment, experience, and patience but the long-term results can be superb when done properly.
Tuesday 22 May 2012
Canada’s big banks facing credit risks, Fitch warns
Julia Johnson
Fast-rising home prices and record-levels of household debt are posing a possible threat to Canadian banks’ credit portfolios, according to a report Monday by U.S. ratings agency Fitch.
The agency examined the exposure of Canada’s six largest banks to mortgage risk and found that household debt fuelled by mortgage credit expansion in Canada is the largest threat to credit profiles.
‘We’re not talking about a U.S.-style situation at this juncture’
“These are quite high levels of debt for households and the movement in house prices, we don’t think this is sustainable in the long term,” said report author Fabrice Toka, senior director at Fitch.
The six banks have a combined $730-billion in mortgage exposure and an additional $182-billion in home equity loan exposure, the report noted.
High unemployment or interest rate shock “could aversely affect the ability of leveraged homeowners to meet their mortgage obligations,” the report said.
Fitch said the debt-to-income ratio in Canada is higher than pre-recession levels in the U.S., but Canadian banks aren’t vulnerable to a similar sub-prime mortgage crisis because of fundamental differences in the markets and the way the industry is regulated.
“We’re not talking about a U.S.-style situation at this juncture and there are market structure elements that are different between the two countries that you have to keep in mind as you go between the analysis,” Mr. Toka said.
He pointed to the fact that mortgages were often sold on in the U.S., whereas in Canada banks tend to hold the origination themselves. Also, independent mortgage brokers — often blamed in the mortgage crisis for loose lending — are used much less in Canada.
Fitch analyzed the risk by testing the affect of cumulative bank losses in scenarios where the losses were between one and 10%.
When comparing the banks’ domestic mortgage value relative to total loans, CIBC and RBC were exposed to the most potential risk, while TD Canada Trust and Bank of Montreal were the least. The agency also noted that TD uses more insurance relative to the others while RBC had the least.
“BMO has a different approach to the market than others. For two years now, we have been actively promoting fixed rate products with a maximum amortization of 25 years. With our offering, Canadians can pay less in total interest, become mortgage free faster, and protect themselves against the risk of rising rates,” said Paul Deegan, vice-president government and public relations at BMO Financial Group
“If you run that limited single-factor stress test what you would see is that RBC and CIBC would be viewed as the most exposed, given the size of their mortgage books and also the fact that in the case of RBC, you have a comparatively lower usage of insurance,” Mr. Toka said.
‘Under moderate stresses the banks were all in a position to absorb moderate stress cases’
The agency said Canadian households have become more vulnerable to adverse market shocks in the past decade. The housing market has been pushed upward by low interest rates in the past 10 years. Since housing prices have risen at a faster pace than household income, household debt levels are at record highs, the report said.
“Interest rate levels – being where they are – it still makes debt appear affordable,” Mr. Toka said.
Canadian banks are all regulated by a single regulator. “That would tend to help in terms of reducing conflict of interest and making sure the players behave in the same way,” Mr. Toka said.
Overall, the report found that Canadian banks had sufficient capital to withstand reasonable market stress.
“Generally we found that under moderate stresses the banks were all in a position to absorb moderate stress cases,” Mr. Toka said.
Fast-rising home prices and record-levels of household debt are posing a possible threat to Canadian banks’ credit portfolios, according to a report Monday by U.S. ratings agency Fitch.
The agency examined the exposure of Canada’s six largest banks to mortgage risk and found that household debt fuelled by mortgage credit expansion in Canada is the largest threat to credit profiles.
‘We’re not talking about a U.S.-style situation at this juncture’
“These are quite high levels of debt for households and the movement in house prices, we don’t think this is sustainable in the long term,” said report author Fabrice Toka, senior director at Fitch.
The six banks have a combined $730-billion in mortgage exposure and an additional $182-billion in home equity loan exposure, the report noted.
High unemployment or interest rate shock “could aversely affect the ability of leveraged homeowners to meet their mortgage obligations,” the report said.
Fitch said the debt-to-income ratio in Canada is higher than pre-recession levels in the U.S., but Canadian banks aren’t vulnerable to a similar sub-prime mortgage crisis because of fundamental differences in the markets and the way the industry is regulated.
“We’re not talking about a U.S.-style situation at this juncture and there are market structure elements that are different between the two countries that you have to keep in mind as you go between the analysis,” Mr. Toka said.
He pointed to the fact that mortgages were often sold on in the U.S., whereas in Canada banks tend to hold the origination themselves. Also, independent mortgage brokers — often blamed in the mortgage crisis for loose lending — are used much less in Canada.
Fitch analyzed the risk by testing the affect of cumulative bank losses in scenarios where the losses were between one and 10%.
When comparing the banks’ domestic mortgage value relative to total loans, CIBC and RBC were exposed to the most potential risk, while TD Canada Trust and Bank of Montreal were the least. The agency also noted that TD uses more insurance relative to the others while RBC had the least.
“BMO has a different approach to the market than others. For two years now, we have been actively promoting fixed rate products with a maximum amortization of 25 years. With our offering, Canadians can pay less in total interest, become mortgage free faster, and protect themselves against the risk of rising rates,” said Paul Deegan, vice-president government and public relations at BMO Financial Group
“If you run that limited single-factor stress test what you would see is that RBC and CIBC would be viewed as the most exposed, given the size of their mortgage books and also the fact that in the case of RBC, you have a comparatively lower usage of insurance,” Mr. Toka said.
‘Under moderate stresses the banks were all in a position to absorb moderate stress cases’
The agency said Canadian households have become more vulnerable to adverse market shocks in the past decade. The housing market has been pushed upward by low interest rates in the past 10 years. Since housing prices have risen at a faster pace than household income, household debt levels are at record highs, the report said.
“Interest rate levels – being where they are – it still makes debt appear affordable,” Mr. Toka said.
Canadian banks are all regulated by a single regulator. “That would tend to help in terms of reducing conflict of interest and making sure the players behave in the same way,” Mr. Toka said.
Overall, the report found that Canadian banks had sufficient capital to withstand reasonable market stress.
“Generally we found that under moderate stresses the banks were all in a position to absorb moderate stress cases,” Mr. Toka said.
Friday 18 May 2012
Half of Canadians plan to retire with mortgage: survey
Garry Marr
The one thing Canadians won’t be retiring anytime soon is their mortgage debt, according to a new survey.
Bank of Montreal says 51% of Canadian homeowners plan to carry their mortgage into their retirement years.
“It’s a phenomenal number I think,” said Tino Di Vito, head of the BMO Retirement Institute.
‘People are more sophisticated in their approach to personal finance today than the previous generation’
But Phil Soper, chief executive of Royal LePage Real Estate Services, said times have changed and he believes Canadians can handle the burden.
“People are more sophisticated in their approach to personal finance today than the previous generation,” says Mr. Soper. “People are living longer, working longer and making real estate plans longer or further into their lives.”
Another trend, one which was not considered by the industry before, is people moving into more expensive, upscale homes after retirement. “Traditionally people paid off their mortgage and people lived in their home until it was time to downsize,” he says. “It’s not necessarily a dangerous trend.”
Another part of the trend could very well be strategic. With rates on a five-year closed mortgage at about 3.5%, paying down that debt might not seem as high a priority for many homeowners. That logic might not be so sound, says Doug Porter, deputy chief economist at Bank of Montreal.
“The extremely low level of interest rates is acting both as an inducement for people to take on more debt than they would have in the past and on the flipside not encouraging them to save as in the past.”
People could end up working longer and it might also mean there will be that much less equity in the home you’ll be leaving to heirs.
The attitude of homeowners could also reflect the longer amortizations the mortgage industry saw before the government cracked down on the rules, Mr. Porter said.
Traditionally, mortgages were amortized over 25 years, but that number ballooned to 40 before Ottawa twice lowered the limit, which now stands at 30. Many are calling for it to be reduced back to 25 years.
Ms. Di Vito says the issue is how it’s affecting retirement with half of Canadian homeowners saying their debt load was hindering their ability to plan and save.
‘Carrying debt into retirement is a threat to financial security’
“Carrying debt into retirement is a threat to financial security,” says Ms. Di Vito, who believes Canadians need about 70% of their pre-retirement income to maintain the same lifestyle. “That assumes other expenses such as mortgages are already taken care of.”
She says half of Canadian homeowners age 50 to 59 still have mortgage debt based on Statistics Canada information. By 60 to 69, 25% of those people still have a mortgage.
It doesn’t help that real estate prices continue at all-time highs. The Canadian Real Estate Association said this week the average home price reached $372,608 in April. In Vancouver, even though prices dropped almost 10% year over year, the average sale price in April was $735,315. Almost 60% of B.C. homeowners expect to take mortgage debt into retirement.
Author Talbot Stevens wonders how people will survive in their retirement.
“People get a hold of a line of credit and they spend $40,000 on upgrading their home. At least with that, you have something to show for it, maybe 40¢ on the dollar,” says Mr. Stevens, who worries about more frivolous spending. “We really have to be more responsible with debt and what we are using it for.”
The one thing Canadians won’t be retiring anytime soon is their mortgage debt, according to a new survey.
Bank of Montreal says 51% of Canadian homeowners plan to carry their mortgage into their retirement years.
“It’s a phenomenal number I think,” said Tino Di Vito, head of the BMO Retirement Institute.
‘People are more sophisticated in their approach to personal finance today than the previous generation’
But Phil Soper, chief executive of Royal LePage Real Estate Services, said times have changed and he believes Canadians can handle the burden.
“People are more sophisticated in their approach to personal finance today than the previous generation,” says Mr. Soper. “People are living longer, working longer and making real estate plans longer or further into their lives.”
Another trend, one which was not considered by the industry before, is people moving into more expensive, upscale homes after retirement. “Traditionally people paid off their mortgage and people lived in their home until it was time to downsize,” he says. “It’s not necessarily a dangerous trend.”
Another part of the trend could very well be strategic. With rates on a five-year closed mortgage at about 3.5%, paying down that debt might not seem as high a priority for many homeowners. That logic might not be so sound, says Doug Porter, deputy chief economist at Bank of Montreal.
“The extremely low level of interest rates is acting both as an inducement for people to take on more debt than they would have in the past and on the flipside not encouraging them to save as in the past.”
People could end up working longer and it might also mean there will be that much less equity in the home you’ll be leaving to heirs.
The attitude of homeowners could also reflect the longer amortizations the mortgage industry saw before the government cracked down on the rules, Mr. Porter said.
Traditionally, mortgages were amortized over 25 years, but that number ballooned to 40 before Ottawa twice lowered the limit, which now stands at 30. Many are calling for it to be reduced back to 25 years.
Ms. Di Vito says the issue is how it’s affecting retirement with half of Canadian homeowners saying their debt load was hindering their ability to plan and save.
‘Carrying debt into retirement is a threat to financial security’
“Carrying debt into retirement is a threat to financial security,” says Ms. Di Vito, who believes Canadians need about 70% of their pre-retirement income to maintain the same lifestyle. “That assumes other expenses such as mortgages are already taken care of.”
She says half of Canadian homeowners age 50 to 59 still have mortgage debt based on Statistics Canada information. By 60 to 69, 25% of those people still have a mortgage.
It doesn’t help that real estate prices continue at all-time highs. The Canadian Real Estate Association said this week the average home price reached $372,608 in April. In Vancouver, even though prices dropped almost 10% year over year, the average sale price in April was $735,315. Almost 60% of B.C. homeowners expect to take mortgage debt into retirement.
Author Talbot Stevens wonders how people will survive in their retirement.
“People get a hold of a line of credit and they spend $40,000 on upgrading their home. At least with that, you have something to show for it, maybe 40¢ on the dollar,” says Mr. Stevens, who worries about more frivolous spending. “We really have to be more responsible with debt and what we are using it for.”
Thursday 17 May 2012
The Costs of Buying a Home - Closing Costs
Before you take possession of your new abode, you need to consider any and
all additional costs of obtaining your mortgage. We call these closing costs.
Generally estimated around 1 - 1.5% of the price of the home, these are the
unavoidable costs that are the last hurdle between you and glorious home
ownership.
Deposit
Due upon the acceptance of your purchase offer, a deposit is essentially a gesture of good faith between the buyer and the seller. A minimum deposit is usually around $5000.00. This is something your realtor will help you with.
Mortgage loan insurance
This is a mandatory expense for buyers who make a down payment of less than 20%. Administered through one of the three insurers we have in Canada; the Canada Mortgage and Housing Corporation (CMHC), Genworth Financial or AIG, the cost of this insurance depends on the amount of your down payment and also certain details of your application. The premium ranges from between 0.5% all the way up to around 6% if you are self employed and putting only 5% down. This premium is charged on the amount of the mortgage and can be added on to the mortgage.
Home inspection
Real estate agents normally counsel buyers to make an offer on a home conditional on the outcome of an independent home inspection. A home inspector looks for items that could affect the price and desirability of a home, such as outdated wiring, shabby roofing, an elderly furnace or cracks in the foundation. The fee depends on the home's size, age and the amount of time it takes to do a thorough inspection. Approximate cost $400-500.00.
House insurance
Canadian law states that a home owner must have fire insurance on his or her new property effective when he or she takes possession. If the home inspection turned up antiquated wiring or other problematic features, a potential insurer may refuse to cover you unless you get it fixed. Rule of thumb: Factor in all costs required to pacify the insurance company.
Legal fees
A lawyer is vital to any home deal. He or she is responsible for research, handling documents, mediating with the seller's attorney, transfer of land title and much more. Approximate cost $800-1300.00.
Title insurance
This protects you from any unpleasant revelations about your property's history that might crop up in the future. Unless you pay for a survey, it's difficult to ascertain a comprehensive history of your property. In order to deal with potential errors or omissions in the public registry or secret heirs to the land, most new homeowners buy title insurance. The fee depends on two factors. The first is whether the property is urban or rural; title insurance costs more out in the country because there's a greater chance that the property may contain an undisclosed structure, such as a well or a septic tank. The second factor depends on whether it's a single residence or a multiple-family dwelling (such as an apartment); the cost is more in the latter case. This is obtained through your lawyer and is approximately $200-250.00
Interest adjustment
Unless you take possession on the first of the month, you must prepay the amount of interest accrued up to the first day of the next month. This depends on what payment structure you have chosen (monthly, bi weekly, weekly, etc). That sum is due on your closing day or with your first payment, depending on the lender.
Prepaid bills
The seller may be entitled to a reimbursement, from you, if she has prepaid bills (water, gas or hydro) or property taxes.
Moving expenses
Whether you're hiring professional haulers or conscripting friends and family to lug boxes, you can expect an outlay of cash on moving day.
Service activation fees
Once you move into your new dwelling, you'll inevitably have to pay activation fees for utilities such as phone, cable, gas and electricity.
Forwarding your mail
You've made a point of apprising the important people in your life -- family, friends, employers, the bank, the utilities, your credit card company -- of your new address. But you're bound to forget someone. To ensure you don't miss any crucial mail, you should get Canada Post to forward mail sent to your old address to your new residence. You can sign up for the service online or at any post office. The cost is about $30 for six months, but peace of mind is priceless.
Appraisal
An appraisal may be required to determine the market value of the property you are buying. If you are putting more than 20% down the appraisal is at your cost and they generally start at $350 and go up depending on the appraisal company, the size of the property and its location. For example, properties over 1800 square feet have a higher cost as well as acreages depending on the amount of land and where they are located.
Deposit
Due upon the acceptance of your purchase offer, a deposit is essentially a gesture of good faith between the buyer and the seller. A minimum deposit is usually around $5000.00. This is something your realtor will help you with.
Mortgage loan insurance
This is a mandatory expense for buyers who make a down payment of less than 20%. Administered through one of the three insurers we have in Canada; the Canada Mortgage and Housing Corporation (CMHC), Genworth Financial or AIG, the cost of this insurance depends on the amount of your down payment and also certain details of your application. The premium ranges from between 0.5% all the way up to around 6% if you are self employed and putting only 5% down. This premium is charged on the amount of the mortgage and can be added on to the mortgage.
Home inspection
Real estate agents normally counsel buyers to make an offer on a home conditional on the outcome of an independent home inspection. A home inspector looks for items that could affect the price and desirability of a home, such as outdated wiring, shabby roofing, an elderly furnace or cracks in the foundation. The fee depends on the home's size, age and the amount of time it takes to do a thorough inspection. Approximate cost $400-500.00.
House insurance
Canadian law states that a home owner must have fire insurance on his or her new property effective when he or she takes possession. If the home inspection turned up antiquated wiring or other problematic features, a potential insurer may refuse to cover you unless you get it fixed. Rule of thumb: Factor in all costs required to pacify the insurance company.
Legal fees
A lawyer is vital to any home deal. He or she is responsible for research, handling documents, mediating with the seller's attorney, transfer of land title and much more. Approximate cost $800-1300.00.
Title insurance
This protects you from any unpleasant revelations about your property's history that might crop up in the future. Unless you pay for a survey, it's difficult to ascertain a comprehensive history of your property. In order to deal with potential errors or omissions in the public registry or secret heirs to the land, most new homeowners buy title insurance. The fee depends on two factors. The first is whether the property is urban or rural; title insurance costs more out in the country because there's a greater chance that the property may contain an undisclosed structure, such as a well or a septic tank. The second factor depends on whether it's a single residence or a multiple-family dwelling (such as an apartment); the cost is more in the latter case. This is obtained through your lawyer and is approximately $200-250.00
Interest adjustment
Unless you take possession on the first of the month, you must prepay the amount of interest accrued up to the first day of the next month. This depends on what payment structure you have chosen (monthly, bi weekly, weekly, etc). That sum is due on your closing day or with your first payment, depending on the lender.
Prepaid bills
The seller may be entitled to a reimbursement, from you, if she has prepaid bills (water, gas or hydro) or property taxes.
Moving expenses
Whether you're hiring professional haulers or conscripting friends and family to lug boxes, you can expect an outlay of cash on moving day.
Service activation fees
Once you move into your new dwelling, you'll inevitably have to pay activation fees for utilities such as phone, cable, gas and electricity.
Forwarding your mail
You've made a point of apprising the important people in your life -- family, friends, employers, the bank, the utilities, your credit card company -- of your new address. But you're bound to forget someone. To ensure you don't miss any crucial mail, you should get Canada Post to forward mail sent to your old address to your new residence. You can sign up for the service online or at any post office. The cost is about $30 for six months, but peace of mind is priceless.
Appraisal
An appraisal may be required to determine the market value of the property you are buying. If you are putting more than 20% down the appraisal is at your cost and they generally start at $350 and go up depending on the appraisal company, the size of the property and its location. For example, properties over 1800 square feet have a higher cost as well as acreages depending on the amount of land and where they are located.
Wednesday 16 May 2012
Yes, you can reestablish your credit rating
Canada’s delinquency rate is falling, according to one of the country’s credit agencies. Equifax Canada said the rate — defined as missing three or more consecutive payments on debt obligations— dropped by 7.6% from the previous year, according to the agency’s Q1, 2012 National Credit Trends Report.
The national delinquency rate is now 3.04% which means 738,526 Canadians are falling behind on their payments.
“Almost three-quarters of a million Canadians now have the opportunity to improve their creditworthiness as the economy improves,” says Nadim Abdo, vice-president of consulting and analytical services with Equifax Canada.
Equifax has outlined some steps to reestablish your credit rating.
• Start small. Try a credit card with a department stores or your local credit union.
• Ask for help. Get a family member or fried to co-sign for a loan.
• Consider a secured card. They are guaranteed by a deposit you make with the credit grantor but offer purchasing power of a major credit card.
• Use new accounts in moderation. Make payments for more than the minimum amount owed and make them on time. Keep a small balance on your new accounts so that your positive payment history will continue to show up on your credit report.
• Keep balances low. Avoid carrying a balance of more than 30% of your credit limit. Lenders may view this as excessive debt with which you may not be able to stay current.
• Reduce household spending. Review your household expenses and determine which ones you could do without. Consider creating a budget to track exactly where your money goes each month.
• Call lenders. Explain the situation. Some lenders will work out a plan for you to pay back what you owe.
• Contact a reputable credit counseling agency. But beware of agencies that offer a quick fix.
• Monitor your progress. Check to see if your rating has improved. This can be done for a fee on a regular basis or for free through the mail.
Tuesday 15 May 2012
Why now might be a good time to sell your home
The Canadian Press
For most Canadians their home is the biggest investment they'll ever make — but they might be surprised to learn you can use if for more than just sleeping.
People generally don't think of their homes as a potential pile of cash in the bank, but experts say it's something worth pondering now that home prices in Canada may have hit their peak.
In fact, analysts say if finance is the only consideration, conditions now and into next year or so form a seldom seen sweet spot for using home equity as a type of asset for investment.
Why might it be a good time to sell?
At about $370,000 average nationally — and just under $800,000 in Vancouver — home prices are already at record levels. Many observers believe prices are long due for a downward correction of anywhere from 10 per cent to 25 per cent, perhaps more in some of the hottest markets.
“Home prices to income, housing price to rent, all the indicators are setting off warning signals,” said Derek Burleton, a senior economist with TD Bank. “If you are purely in it for reaping profits, now is not a bad time to sell” before prices drop.
The profits from selling a home can be used to build savings, eliminate debt, make traditional investments or, ironically, buy more real estate — albeit in a different market where home prices are lower.
Of course, even if it makes sense financially, selling the family home to rent or move to a less expensive housing market doesn't make lifestyle sense for the vast majority of Canadians.
Mr. Burleton knows how they feel.
“I wouldn't want to sell my home right now even if I wind up taking a hit on the home price, just because I enjoy where I'm living and moving is a pain,” he said.
While there's no guarantee of a correction, observers note there are additional signs that the housing market could cool off in a big way.
With ownership levels near a record 70 per cent, demand is expected to wane, making it a buyers market for the first time in years.
And Bank of Canada governor Mark Carney warned last month he was preparing to hike rates, which along with tighter lending rules being applied by federal authorities could trigger a flight from real estate.
In market terms, selling a home at the peak is a way of “locking in” profits accumulated over the past decade of price appreciation — and tax free if it's the principal home.
Meanwhile, home valuations have been rising far faster than the rent they would fetch since at least 2000. Canada's home price-to-rent ratio is well above historic norms and among the highest in the advanced world.
That is a hard indicator that homes are over-valued, but also that renting is relatively cheap compared to buying.
David Madani of Capital Economics, who anticipates a 25 per cent price crash over the next few years, cautions that like selling stock shares, timing is always tricky.
“We're dealing with irrational exuberance. We've been treating housing like some magical financial asset that is going to solve all our problems because prices are always going up,” he said.
“Of course, when the turn comes, the over-confidence that drove the market up can turn to fear. You are dealing with emotion ... so I don't believe in a soft landing.”
The market is clearly at or near peak, he said, so soon may indeed be the time to act.
But then again he felt that way a year ago, he points out, and if households had acted on his advice they might not have gotten all the value they could from the premature sale.
For most Canadians their home is the biggest investment they'll ever make — but they might be surprised to learn you can use if for more than just sleeping.
People generally don't think of their homes as a potential pile of cash in the bank, but experts say it's something worth pondering now that home prices in Canada may have hit their peak.
In fact, analysts say if finance is the only consideration, conditions now and into next year or so form a seldom seen sweet spot for using home equity as a type of asset for investment.
Why might it be a good time to sell?
At about $370,000 average nationally — and just under $800,000 in Vancouver — home prices are already at record levels. Many observers believe prices are long due for a downward correction of anywhere from 10 per cent to 25 per cent, perhaps more in some of the hottest markets.
“Home prices to income, housing price to rent, all the indicators are setting off warning signals,” said Derek Burleton, a senior economist with TD Bank. “If you are purely in it for reaping profits, now is not a bad time to sell” before prices drop.
The profits from selling a home can be used to build savings, eliminate debt, make traditional investments or, ironically, buy more real estate — albeit in a different market where home prices are lower.
Of course, even if it makes sense financially, selling the family home to rent or move to a less expensive housing market doesn't make lifestyle sense for the vast majority of Canadians.
Mr. Burleton knows how they feel.
“I wouldn't want to sell my home right now even if I wind up taking a hit on the home price, just because I enjoy where I'm living and moving is a pain,” he said.
While there's no guarantee of a correction, observers note there are additional signs that the housing market could cool off in a big way.
With ownership levels near a record 70 per cent, demand is expected to wane, making it a buyers market for the first time in years.
And Bank of Canada governor Mark Carney warned last month he was preparing to hike rates, which along with tighter lending rules being applied by federal authorities could trigger a flight from real estate.
In market terms, selling a home at the peak is a way of “locking in” profits accumulated over the past decade of price appreciation — and tax free if it's the principal home.
Meanwhile, home valuations have been rising far faster than the rent they would fetch since at least 2000. Canada's home price-to-rent ratio is well above historic norms and among the highest in the advanced world.
That is a hard indicator that homes are over-valued, but also that renting is relatively cheap compared to buying.
David Madani of Capital Economics, who anticipates a 25 per cent price crash over the next few years, cautions that like selling stock shares, timing is always tricky.
“We're dealing with irrational exuberance. We've been treating housing like some magical financial asset that is going to solve all our problems because prices are always going up,” he said.
“Of course, when the turn comes, the over-confidence that drove the market up can turn to fear. You are dealing with emotion ... so I don't believe in a soft landing.”
The market is clearly at or near peak, he said, so soon may indeed be the time to act.
But then again he felt that way a year ago, he points out, and if households had acted on his advice they might not have gotten all the value they could from the premature sale.
Monday 14 May 2012
Would you sell your home to lock in profits before real estate prices drop?
Julian Beltrame, The Canadian Press
OTTAWA — For most Canadians their home is the biggest investment they’ll ever make — but they might be surprised to learn you can use if for more than just sleeping.
People generally don’t think of their homes as a potential pile of cash in the bank, but experts say it’s something worth pondering now that home prices in Canada may have hit their peak.
In fact, analysts say if finance is the only consideration, conditions now and into next year or so form a seldom seen sweet spot for using home equity as a type of asset for investment.
Why might it be a good time to sell?
At about $370,000 average nationally — and just under $800,000 in Vancouver — home prices are already at record levels. Many observers believe prices are long due for a downward correction of anywhere from 10 per cent to 25 per cent, perhaps more in some of the hottest markets.
“Home prices to income, housing price to rent, all the indicators are setting off warning signals,” said Derek Burleton, a senior economist with TD Bank.
“If you are purely in it for reaping profits, now is not a bad time to sell” before prices drop.
The profits from selling a home can be used to build savings, eliminate debt, make traditional investments or, ironically, buy more real estate — albeit in a different market where home prices are lower.
Of course, even if it makes sense financially, selling the family home to rent or move to a less expensive housing market doesn’t make lifestyle sense for the vast majority of Canadians.
Burleton knows how they feel.
“I wouldn’t want to sell my home right now even if I wind up taking a hit on the home price, just because I enjoy where I’m living and moving is a pain,” he said.
While there’s no guarantee of a correction, observers note there are additional signs that the housing market could cool off in a big way.
With ownership levels near a record 70 per cent, demand is expected to wane, making it a buyers market for the first time in years.
And Bank of Canada governor Mark Carney warned last month he was preparing to hike rates, which along with tighter lending rules being applied by federal authorities could trigger a flight from real estate.
In market terms, selling a home at the peak is a way of “locking in” profits accumulated over the past decade of price appreciation — and tax free if it’s the principal home.
Meanwhile, home valuations have been rising far faster than the rent they would fetch since at least 2000. Canada’s home price-to-rent ratio is well above historic norms and among the highest in the advanced world.
That is a hard indicator that homes are over-valued, but also that renting is relatively cheap compared to buying.
David Madani of Capital Economics, who anticipates a 25 per cent price crash over the next few years, cautions that like selling stock shares, timing is always tricky.
“We’re dealing with irrational exuberance. We’ve been treating housing like some magical financial asset that is going to solve all our problems because prices are always going up,” he said.
“Of course, when the turn comes, the over-confidence that drove the market up can turn to fear. You are dealing with emotion … so I don’t believe in a soft landing.”
The market is clearly at or near peak, he said, so soon may indeed be the time to act.
But then again he felt that way a year ago, he points out, and if households had acted on his advice they might not have gotten all the value they could from the premature sale.
OTTAWA — For most Canadians their home is the biggest investment they’ll ever make — but they might be surprised to learn you can use if for more than just sleeping.
People generally don’t think of their homes as a potential pile of cash in the bank, but experts say it’s something worth pondering now that home prices in Canada may have hit their peak.
In fact, analysts say if finance is the only consideration, conditions now and into next year or so form a seldom seen sweet spot for using home equity as a type of asset for investment.
Why might it be a good time to sell?
At about $370,000 average nationally — and just under $800,000 in Vancouver — home prices are already at record levels. Many observers believe prices are long due for a downward correction of anywhere from 10 per cent to 25 per cent, perhaps more in some of the hottest markets.
“Home prices to income, housing price to rent, all the indicators are setting off warning signals,” said Derek Burleton, a senior economist with TD Bank.
“If you are purely in it for reaping profits, now is not a bad time to sell” before prices drop.
The profits from selling a home can be used to build savings, eliminate debt, make traditional investments or, ironically, buy more real estate — albeit in a different market where home prices are lower.
Of course, even if it makes sense financially, selling the family home to rent or move to a less expensive housing market doesn’t make lifestyle sense for the vast majority of Canadians.
Burleton knows how they feel.
“I wouldn’t want to sell my home right now even if I wind up taking a hit on the home price, just because I enjoy where I’m living and moving is a pain,” he said.
While there’s no guarantee of a correction, observers note there are additional signs that the housing market could cool off in a big way.
With ownership levels near a record 70 per cent, demand is expected to wane, making it a buyers market for the first time in years.
And Bank of Canada governor Mark Carney warned last month he was preparing to hike rates, which along with tighter lending rules being applied by federal authorities could trigger a flight from real estate.
In market terms, selling a home at the peak is a way of “locking in” profits accumulated over the past decade of price appreciation — and tax free if it’s the principal home.
Meanwhile, home valuations have been rising far faster than the rent they would fetch since at least 2000. Canada’s home price-to-rent ratio is well above historic norms and among the highest in the advanced world.
That is a hard indicator that homes are over-valued, but also that renting is relatively cheap compared to buying.
David Madani of Capital Economics, who anticipates a 25 per cent price crash over the next few years, cautions that like selling stock shares, timing is always tricky.
“We’re dealing with irrational exuberance. We’ve been treating housing like some magical financial asset that is going to solve all our problems because prices are always going up,” he said.
“Of course, when the turn comes, the over-confidence that drove the market up can turn to fear. You are dealing with emotion … so I don’t believe in a soft landing.”
The market is clearly at or near peak, he said, so soon may indeed be the time to act.
But then again he felt that way a year ago, he points out, and if households had acted on his advice they might not have gotten all the value they could from the premature sale.
Thursday 10 May 2012
Banks talk down consumer debt hysteria
Garry Marr, Financial Post
The Bank of Canada may be thinking about raising interest rates but there’s apparently no need to because Canadians are hunkering down to cool debt obligations on their own.
“The pace of growth in household credit is no longer a reason for the Bank of Canada to move from the sidelines any time soon,” says Benjamin Tal, deputy chief economist at CIBC World Markets.
He wrote a report released Wednesday that suggests central bank intervention is not needed, especially with consumers already seeing interest payments on debt eating into 7.3% of their disposable income as of the fourth quarter of 2011, even at today’s low rates.
“Why are you raising rates? To slow down credit growth — but it’s already slowing,” Mr. Tal says. “I say let the market slow naturally. We are so concerned about this but it’s moving in the right direction.”
Toronto-Dominion Bank economist Francis Fong also weighed in, suggesting Canadians have begun to get the message about having too much debt, based on the slowdown in consumer credit growth.
Even the chief executive of one of the big five banks joined the discussion, hoping to extinguish some of the panic about Canadian debt.
“When we look at the overall marketplace, there might be pockets of vulnerability but we remain quite comfortable,” said Gord Nixon, chief executive of Royal Bank of Canada “Frankly, I’d like to see the rhetoric come down a little bit.”
None of the talk is doing much to dissuade author Gail Vaz Oxlade from her beliefs that Canadians have far too much debt.
“Yeah, yeah, I have heard it,” Ms. Vaz Oxlade says. “The number don’t lie. If the numbers say we are decreasing and only adding by 0.1%, I’m not going to argue. But the fact is we are already carrying too much debt and it’s still going up.”
She wonders whether Canadians are getting the message, if they are not actually paying down debt. She doesn’t care if more of the debt is going into long-term mortgages: “What’s the difference? That’s just debt we’ll pay three or four times more for.”
The CIBC report does note that as of March 2012, mortgage debt rose by 6.3% on a year-over-year basis, which is below the average rate of growth seen in the past two years of 7.3%.
Mr. Tal says there will be a gradual softening in the housing market with prices falling 10% in the coming year or two. He says tougher rules from regulators on loans will cool the market and notes the banks themselves are questioning values, citing “the increased use of full-scale appraisals as part of the adjudication process.”
Overall, Mr. Tal says that for the first time since 2002 consumer credit is rising more slowly than in the United States.
“Consumer credit [growth] is basically zero,” he says, adding Canadians have been optimizing their credit situation by taking high-interest credit card debt and transferring it to lines of credit.
TD’s Mr. Fong agrees that Canadians are starting to “hunker down” and pay off their debt, but at the same time he suggests a two-percentage-point increase in rates would leave many households at risk.
“It is safe to say that with household debt levels at record highs, a sizeable number of Canadians households are ill-prepared and could lead to difficulty keeping up with higher interest payments,” said Mr. Fong, who added efforts of Canadians to lock in their rates should cushion the coming blow.
Scott Hannah, president and CEO of the Credit Counselling Society, still thinks there is plenty to be worried about. “Things are pretty fragile,” he says. “Debt is still growing and we’ve got to start paying it down. We have to be concerned with the level of debt the average Canadian is carrying.”
The Bank of Canada may be thinking about raising interest rates but there’s apparently no need to because Canadians are hunkering down to cool debt obligations on their own.
“The pace of growth in household credit is no longer a reason for the Bank of Canada to move from the sidelines any time soon,” says Benjamin Tal, deputy chief economist at CIBC World Markets.
He wrote a report released Wednesday that suggests central bank intervention is not needed, especially with consumers already seeing interest payments on debt eating into 7.3% of their disposable income as of the fourth quarter of 2011, even at today’s low rates.
“Why are you raising rates? To slow down credit growth — but it’s already slowing,” Mr. Tal says. “I say let the market slow naturally. We are so concerned about this but it’s moving in the right direction.”
Toronto-Dominion Bank economist Francis Fong also weighed in, suggesting Canadians have begun to get the message about having too much debt, based on the slowdown in consumer credit growth.
Even the chief executive of one of the big five banks joined the discussion, hoping to extinguish some of the panic about Canadian debt.
“When we look at the overall marketplace, there might be pockets of vulnerability but we remain quite comfortable,” said Gord Nixon, chief executive of Royal Bank of Canada “Frankly, I’d like to see the rhetoric come down a little bit.”
None of the talk is doing much to dissuade author Gail Vaz Oxlade from her beliefs that Canadians have far too much debt.
“Yeah, yeah, I have heard it,” Ms. Vaz Oxlade says. “The number don’t lie. If the numbers say we are decreasing and only adding by 0.1%, I’m not going to argue. But the fact is we are already carrying too much debt and it’s still going up.”
She wonders whether Canadians are getting the message, if they are not actually paying down debt. She doesn’t care if more of the debt is going into long-term mortgages: “What’s the difference? That’s just debt we’ll pay three or four times more for.”
The CIBC report does note that as of March 2012, mortgage debt rose by 6.3% on a year-over-year basis, which is below the average rate of growth seen in the past two years of 7.3%.
Mr. Tal says there will be a gradual softening in the housing market with prices falling 10% in the coming year or two. He says tougher rules from regulators on loans will cool the market and notes the banks themselves are questioning values, citing “the increased use of full-scale appraisals as part of the adjudication process.”
Overall, Mr. Tal says that for the first time since 2002 consumer credit is rising more slowly than in the United States.
“Consumer credit [growth] is basically zero,” he says, adding Canadians have been optimizing their credit situation by taking high-interest credit card debt and transferring it to lines of credit.
TD’s Mr. Fong agrees that Canadians are starting to “hunker down” and pay off their debt, but at the same time he suggests a two-percentage-point increase in rates would leave many households at risk.
“It is safe to say that with household debt levels at record highs, a sizeable number of Canadians households are ill-prepared and could lead to difficulty keeping up with higher interest payments,” said Mr. Fong, who added efforts of Canadians to lock in their rates should cushion the coming blow.
Scott Hannah, president and CEO of the Credit Counselling Society, still thinks there is plenty to be worried about. “Things are pretty fragile,” he says. “Debt is still growing and we’ve got to start paying it down. We have to be concerned with the level of debt the average Canadian is carrying.”
Wednesday 9 May 2012
RBC’s Gordon Nixon weighs in on housing bubble furor
Andrew Mayeda and Chris Fournier, Bloomberg News
The head of Canada’s biggest bank and one of the country’s leading developers said the housing market is not in a bubble, even as one economist said Toronto is caught in a “condo craze.”
Canadian housing starts rose to the highest since September 2007 last month, led by multiple-unit projects, Canada Mortgage & Housing Corp. said Tuesday. The annual pace of home starts rose 14% to 244,900, Ottawa-based CMHC said.
Participants at Bloomberg’s Canada Economic Summit in Toronto said talk of a housing bubble is overblown.
‘I’d like to see the rhetoric come down a little bit’
“When we look at the overall marketplace, there might be pockets of vulnerability but we remain quite comfortable,” said Gordon Nixon, chief executive officer of Royal Bank of Canada “Frankly, I’d like to see the rhetoric come down a little bit.”
A residential real-estate boom in the world’s 10th-largest economy has prompted senior policy makers such as Bank of Canada Governor Mark Carney and Finance Minister Jim Flaherty to warn that Canadians may be taking on too much debt.
Mr. Carney told lawmakers April 24 that high levels of household debt remain the greatest domestic risk to Canada’s economy. In an appearance before a parliamentary committee, he reiterated that a rate increase “may become appropriate,” and warned Canadian families to exercise “caution” with their debt levels.
Mr. Carney has kept his key lending rate unchanged at 1% since September 2010 in the longest pause since the 1950s.
10% overvalued
Housing prices in Canada are probably about 10% overvalued, economist Paul Fenton said at the Bloomberg summit.
There doesn’t seem to be a sense that there’s been overbuilding, and housing doesn’t pose a systemic threat to the function of the nation’s financial system, said Mr. Fenton, senior vice-president and chief economist at Caisse de Depot et Placement du Quebec.
The 244,900 housing starts last month released Tuesday beat economists’ expectations. The highest forecast in a Bloomberg economist survey with 21 responses was a 222,600 rate.
“Wow. This report reflects unbelievable strength in Canadian housing starts, and all of the gain was in multiples again which reflect the ongoing condo craze,” Scotia Capital economist Derek Holt said in a research note.
Sales of new condominiums in Toronto reached 6,070 units in the first three months of the year, a record for the first quarter, market research firm Urbanation Inc. reported May 7. As many as 40 new projects with more than 11,000 units could come on the market in the second quarter, a trend that may cause inventory of unsold units to approach a record set in 2008, Urbanation said.
Risk Averse
Condo builders “tend to be risk averse,” insisting that 70% of a project is presold and buyers put down at least a 20% deposit, according to Jim Ritchie, senior vice president of sales and marketing at Tridel, a Toronto-based real estate developer.
Concerns about foreign buyers are overdone, given about 95% of purchasers are ‘locals’
“It’s all about managing risk,” Mr. Ritchie said. There’s a market for condos because average house prices in Toronto’s 416 area code are about $830,000, compared with $400,000 for a new condo, he said.
Almost 60% of people buying condos in that area are either single or couples without children, said Mr. Ritchie, who said concerns about foreign buyers are overdone, given about 95% of purchasers are “locals who have social insurance numbers and local addresses.”
RBC’s exposure to the condo markets in Toronto and Vancouver isn’t “significant,” Mr. Nixon said. “Part of the reasons for that is firstly a lot of the condo buyers in those markets are cash buyers. At the margin there’s certainly a significant foreign component to them, and I think to some degree the banks are a bit slightly more cautious,” he said.
No Bubble
The increase in housing prices in Canada is unsustainable, said Finn Poschmann, vice president of research at the Toronto- based C.D. Howe Institute. It’s difficult for market participants to tell a bubble has formed before it has deflated, he said.
“The big question people ask is, is Canada’s housing market in a bubble. Our answer to that is no,” said Jim Murphy, chief executive officer of the Canadian Association of Accredited Mortgage Professionals. The association’s research suggests growth in mortgage credit is below average, he said.
Canada’s housing agency said Tuesday there is no compelling evidence of a price bubble based on factors such as household income and interest rates.
“Clear evidence of a bubble is lacking,” Canada Mortgage & Housing Corp. said in its annual report. “CMHC continues to monitor very closely housing prices and underlying factors such as demographic and economic fundamentals and financial conditions across all major urban centers, including condominium markets.”
The head of Canada’s biggest bank and one of the country’s leading developers said the housing market is not in a bubble, even as one economist said Toronto is caught in a “condo craze.”
Canadian housing starts rose to the highest since September 2007 last month, led by multiple-unit projects, Canada Mortgage & Housing Corp. said Tuesday. The annual pace of home starts rose 14% to 244,900, Ottawa-based CMHC said.
Participants at Bloomberg’s Canada Economic Summit in Toronto said talk of a housing bubble is overblown.
‘I’d like to see the rhetoric come down a little bit’
“When we look at the overall marketplace, there might be pockets of vulnerability but we remain quite comfortable,” said Gordon Nixon, chief executive officer of Royal Bank of Canada “Frankly, I’d like to see the rhetoric come down a little bit.”
A residential real-estate boom in the world’s 10th-largest economy has prompted senior policy makers such as Bank of Canada Governor Mark Carney and Finance Minister Jim Flaherty to warn that Canadians may be taking on too much debt.
Mr. Carney told lawmakers April 24 that high levels of household debt remain the greatest domestic risk to Canada’s economy. In an appearance before a parliamentary committee, he reiterated that a rate increase “may become appropriate,” and warned Canadian families to exercise “caution” with their debt levels.
Mr. Carney has kept his key lending rate unchanged at 1% since September 2010 in the longest pause since the 1950s.
10% overvalued
Housing prices in Canada are probably about 10% overvalued, economist Paul Fenton said at the Bloomberg summit.
There doesn’t seem to be a sense that there’s been overbuilding, and housing doesn’t pose a systemic threat to the function of the nation’s financial system, said Mr. Fenton, senior vice-president and chief economist at Caisse de Depot et Placement du Quebec.
The 244,900 housing starts last month released Tuesday beat economists’ expectations. The highest forecast in a Bloomberg economist survey with 21 responses was a 222,600 rate.
“Wow. This report reflects unbelievable strength in Canadian housing starts, and all of the gain was in multiples again which reflect the ongoing condo craze,” Scotia Capital economist Derek Holt said in a research note.
Sales of new condominiums in Toronto reached 6,070 units in the first three months of the year, a record for the first quarter, market research firm Urbanation Inc. reported May 7. As many as 40 new projects with more than 11,000 units could come on the market in the second quarter, a trend that may cause inventory of unsold units to approach a record set in 2008, Urbanation said.
Risk Averse
Condo builders “tend to be risk averse,” insisting that 70% of a project is presold and buyers put down at least a 20% deposit, according to Jim Ritchie, senior vice president of sales and marketing at Tridel, a Toronto-based real estate developer.
Concerns about foreign buyers are overdone, given about 95% of purchasers are ‘locals’
“It’s all about managing risk,” Mr. Ritchie said. There’s a market for condos because average house prices in Toronto’s 416 area code are about $830,000, compared with $400,000 for a new condo, he said.
Almost 60% of people buying condos in that area are either single or couples without children, said Mr. Ritchie, who said concerns about foreign buyers are overdone, given about 95% of purchasers are “locals who have social insurance numbers and local addresses.”
RBC’s exposure to the condo markets in Toronto and Vancouver isn’t “significant,” Mr. Nixon said. “Part of the reasons for that is firstly a lot of the condo buyers in those markets are cash buyers. At the margin there’s certainly a significant foreign component to them, and I think to some degree the banks are a bit slightly more cautious,” he said.
No Bubble
The increase in housing prices in Canada is unsustainable, said Finn Poschmann, vice president of research at the Toronto- based C.D. Howe Institute. It’s difficult for market participants to tell a bubble has formed before it has deflated, he said.
“The big question people ask is, is Canada’s housing market in a bubble. Our answer to that is no,” said Jim Murphy, chief executive officer of the Canadian Association of Accredited Mortgage Professionals. The association’s research suggests growth in mortgage credit is below average, he said.
Canada’s housing agency said Tuesday there is no compelling evidence of a price bubble based on factors such as household income and interest rates.
“Clear evidence of a bubble is lacking,” Canada Mortgage & Housing Corp. said in its annual report. “CMHC continues to monitor very closely housing prices and underlying factors such as demographic and economic fundamentals and financial conditions across all major urban centers, including condominium markets.”
Tuesday 8 May 2012
B.C. housing starts rise 6.3 per cent in April: CMHC
National numbers surge in spring
By Derek Abma
OTTAWA — Housing construction starts blew past expectations in April, according to data released Tuesday.
Canada Mortgage and Housing Corp. said there was a seasonally adjusted annual rate of 244,900 housing starts last month. That was up 14 per cent from the previous month, and well ahead of what the 204,000 economists polled by Bloomberg had been predicting.
"While unseasonably warm weather has been helping starts in recent months, April's return to more normal seasonal temperatures still saw home building soar," CIBC World Markets economist Emanuella Enenajor said in a research note.
"That's even with data on building permits pointing to some moderation in home-building intentions. That suggests that low (interest) rates remain the principal catalyst for continued robust construction activity in Canada."
Urban starts were up 18 per cent to an annual rate of 226,200, while the estimate on rural starts were down 19 per cent to 18,700.
Construction on multiple-housing units in urban areas drove the overall gains. They were up 27.4 per cent to a rate of 158,500. Urban singles saw a gain of 0.6 per cent to 67,700.
Regionally, there was a surge of 56.5 per cent in urban housing starts in Quebec. They were up 12.2 per cent in Ontario, 6.3 per cent in the Prairies and British Columbia, and 2.6 per cent in Atlantic Canada.
By Derek Abma
OTTAWA — Housing construction starts blew past expectations in April, according to data released Tuesday.
Canada Mortgage and Housing Corp. said there was a seasonally adjusted annual rate of 244,900 housing starts last month. That was up 14 per cent from the previous month, and well ahead of what the 204,000 economists polled by Bloomberg had been predicting.
"While unseasonably warm weather has been helping starts in recent months, April's return to more normal seasonal temperatures still saw home building soar," CIBC World Markets economist Emanuella Enenajor said in a research note.
"That's even with data on building permits pointing to some moderation in home-building intentions. That suggests that low (interest) rates remain the principal catalyst for continued robust construction activity in Canada."
Urban starts were up 18 per cent to an annual rate of 226,200, while the estimate on rural starts were down 19 per cent to 18,700.
Construction on multiple-housing units in urban areas drove the overall gains. They were up 27.4 per cent to a rate of 158,500. Urban singles saw a gain of 0.6 per cent to 67,700.
Regionally, there was a surge of 56.5 per cent in urban housing starts in Quebec. They were up 12.2 per cent in Ontario, 6.3 per cent in the Prairies and British Columbia, and 2.6 per cent in Atlantic Canada.
Monday 7 May 2012
OSFI
Article written by Boris Bozic
I suspect everyone in our industry is familiar or has some basic understanding of OSFI’s responsibilities. The Office of the Superintendent of Financial Institutions is an independent agency of the Government of Canada, and the agency reports directly to the Minister of Finance. OSFI’S mandate? Simply stated OSFI’S role is to ensure that Canadians have confidence in the financial system. Given what’s transpired in the rest of the word since 2008, I suspect Canadian confidence in our financial system has not waned, at all. Yet most Canadians wouldn’t know who or what OSFI is. Maybe that’s not a bad thing. Regulators in the US have come under heavy criticism for their role or lack thereof leading to the financial crisis of 2008. The criticism that regulators in the US have received over the last four years contributes to the erosion of consumer confidence. When regulators make headlines you know change is coming. Consumer confidence is the underpinning of any established economy. If consumers are concerned about their jobs, they don’t spend. If Canadians ever questioned the stability of our banking system, well, the net result could be cataclysmic.
So what exactly is the responsibility of this shadowy agency that so few Canadian know about or even know of their existence?
1. Supervise institutions and pension plans whether they are in sound financial condition
2. To ensure that financial institutions are complying to law and supervisory requirement
3. To advise institutions of material deficiencies, and to require management and boards of said institutions to implement corrective measures
4. Create policy and procedures designed to mitigate risk
5. Monitor and evaluate system-wide or sectoral issues that may impact institutions negatively
We’re getting firsthand experience as it relates to the fifth mandate. OSFI has significant concerns about the state of lending in this country and the risk posed to financial intuitions if current lending practices continued. Lending practices are being questioned and change is coming. What’s unknown is the degree of change. OFSI requested for CAAMP to respond to their draft guideline – B-20 Residential Mortgage Underwriting Practices and Procedures. CAAMP was grateful for the opportunity to respond to OSFI and once again it demonstrates that CAAAMP has become the guardian of our industry. CAAMP’s response was well measured and focused.
As a teaser, CAAMP’s response focused on the following lending practices and procedures;
1. Loan Documentation
2. Debt Service Change –Additional Assessment Criteria
3. Loan to Value Ratio
4. Down Payment
5. Home Equity Lines of Credit
It is clear that OSFI is reviewing every aspect of lending and specifically the fundamentals of credit decisions. As an industry it would be naïve to believe that change would have no impact on our business. Change is coming and one has to hope that change is measured and based on facts. Over reaching changes to lending policies poses a risk. Confidence in the financial system is critical. However, if Canadians don’t believe that banks want to lend prudently, they’ll respond accordingly. There are different ways for Canadians to lose confidence in the banking system. It’s not just about writing bad loans…it’s also about writing no loans.
I suspect everyone in our industry is familiar or has some basic understanding of OSFI’s responsibilities. The Office of the Superintendent of Financial Institutions is an independent agency of the Government of Canada, and the agency reports directly to the Minister of Finance. OSFI’S mandate? Simply stated OSFI’S role is to ensure that Canadians have confidence in the financial system. Given what’s transpired in the rest of the word since 2008, I suspect Canadian confidence in our financial system has not waned, at all. Yet most Canadians wouldn’t know who or what OSFI is. Maybe that’s not a bad thing. Regulators in the US have come under heavy criticism for their role or lack thereof leading to the financial crisis of 2008. The criticism that regulators in the US have received over the last four years contributes to the erosion of consumer confidence. When regulators make headlines you know change is coming. Consumer confidence is the underpinning of any established economy. If consumers are concerned about their jobs, they don’t spend. If Canadians ever questioned the stability of our banking system, well, the net result could be cataclysmic.
So what exactly is the responsibility of this shadowy agency that so few Canadian know about or even know of their existence?
1. Supervise institutions and pension plans whether they are in sound financial condition
2. To ensure that financial institutions are complying to law and supervisory requirement
3. To advise institutions of material deficiencies, and to require management and boards of said institutions to implement corrective measures
4. Create policy and procedures designed to mitigate risk
5. Monitor and evaluate system-wide or sectoral issues that may impact institutions negatively
We’re getting firsthand experience as it relates to the fifth mandate. OSFI has significant concerns about the state of lending in this country and the risk posed to financial intuitions if current lending practices continued. Lending practices are being questioned and change is coming. What’s unknown is the degree of change. OFSI requested for CAAMP to respond to their draft guideline – B-20 Residential Mortgage Underwriting Practices and Procedures. CAAMP was grateful for the opportunity to respond to OSFI and once again it demonstrates that CAAAMP has become the guardian of our industry. CAAMP’s response was well measured and focused.
As a teaser, CAAMP’s response focused on the following lending practices and procedures;
1. Loan Documentation
2. Debt Service Change –Additional Assessment Criteria
3. Loan to Value Ratio
4. Down Payment
5. Home Equity Lines of Credit
It is clear that OSFI is reviewing every aspect of lending and specifically the fundamentals of credit decisions. As an industry it would be naïve to believe that change would have no impact on our business. Change is coming and one has to hope that change is measured and based on facts. Over reaching changes to lending policies poses a risk. Confidence in the financial system is critical. However, if Canadians don’t believe that banks want to lend prudently, they’ll respond accordingly. There are different ways for Canadians to lose confidence in the banking system. It’s not just about writing bad loans…it’s also about writing no loans.
Friday 4 May 2012
Thursday 3 May 2012
Jim Flaherty: Fix your own mess
Special to Financial Post
Why Canada will not provide IMF funds for eurozone
By Jim Flaherty
At the meeting of the International Monetary Fund recently, Canada decided against contributing more resources to support the eurozone. We also argued that all countries borrowing from the IMF should be treated equally. We took these positions because we believe they are in the best interests of the eurozone, of the IMF, and of the international community.
We have always supported the IMF’s important systemic role in promoting economic stability by providing loans to countries that have exhausted their domestic options, and placing these countries on a path to sustainability through time-limited interventions. But it is not the IMF’s role to substitute for national governments.
In order for any IMF action in Europe to be successful, a sense of direction and a comprehensive blueprint to return to sustainability are necessary. The question of sustainability cannot be separated from that of the future of the European monetary union. As such, its members should take the lead in defining a comprehensive and credible blueprint. This requires more than incrementalism and wishful thinking. Europe has taken important steps in this direction with the fiscal compact, with economic and fiscal reforms in Italy and Spain, with an enhanced firewall, and with the recent actions of the European Central Bank to provide liquidity support. However, more is needed to return the eurozone to sustainability and to address the systemic internal imbalances that threaten the monetary union.
Since 2008, and throughout the European debt crisis, I have been telling my international counterparts that it is important to overwhelm the problem and get ahead of the markets. This is what the United States did in 2008, and it is what Canada did in 2009 by deploying a fiscal stimulus of roughly 4% of GDP over two years in response to a crisis originating outside our borders. These bold actions paid off. Rating agencies have reaffirmed Canada’s strong AAA credit rating, and we are now on track to return to balanced budgets over the medium term. By contrast, actions taken by the eurozone have fallen short of overwhelming the problem. The “muddle through” approach has led to an erosion of confidence in public leadership and too many missed opportunities.
Ultimately, the adequacy of the actions taken will be judged by the markets. Repeated expressions of confidence by politicians are futile if the markets continue to cast their vote of non-confidence. The markets’ confidence in political leadership will only be restored when it is clear that politicians are willing to see the full scope of the problem, to focus on the key issues instead of pursuing sideshows such as the financial transactions tax, and to set out and implement a plan for tackling these issues.
The European debt crisis also raises a question of resources. The eurozone has sufficient resources to tackle its sovereign debt crisis, but there is an unwillingness to commit them to tackle the problem. In these circumstances, IMF loans are not an adequate substitute for a serious commitment by eurozone countries to resolve this crisis. We cannot avoid the question of fairness. Eurozone members benefit from increased exports and price stability. Spreading the risks of the eurozone around the world, while its benefits accrue primarily to its members, is not the way to resolve this crisis. We cannot expect non-European countries, whose citizens in many cases have a much lower standard of living, to save the eurozone. Further, the IMF, with roughly $400-billion, already has adequate resources to deal with imminent needs.
The manner in which the IMF provides support must also be fair. It has been very successful at resolving crises using its trusted model of time-limited lending agreements, with strict conditions imposed on the borrowing country. This is why I believe that all countries borrowing from the IMF should be treated the same. Canada’s position is that conditionality should be determined exclusively by the IMF, and not by the “Troika” of the IMF plus the European Central Bank and the European Commission.
If the eurozone is seeking assistance, it should not be setting the terms under which this assistance is provided. Further, Europe controls 34% of votes at the IMF. In that context, the simple majority required for the fund to make an investment is a relatively low threshold. Emerging markets play an increasingly important role in global economic issues. Canada has been a leader in recognizing changing international dynamics and advocating greater representation of emerging markets at the IMF. In this context, we believe that measures should be taken to ensure that major decisions about resources dedicated to Europe require more than a simple majority.
Canada believes in the eurozone’s ability to solve this crisis. We also believe in a strong and fair IMF where emerging economies can take their appropriate seat at the table. This is why we have decided not to provide additional resources to the IMF for the eurozone.
Financial Post
Jim Flaherty is Minister of Finance and the longest-serving finance minister in the G7. This article is also appearing in The Daily Telegraph, London.
Why Canada will not provide IMF funds for eurozone
By Jim Flaherty
At the meeting of the International Monetary Fund recently, Canada decided against contributing more resources to support the eurozone. We also argued that all countries borrowing from the IMF should be treated equally. We took these positions because we believe they are in the best interests of the eurozone, of the IMF, and of the international community.
We have always supported the IMF’s important systemic role in promoting economic stability by providing loans to countries that have exhausted their domestic options, and placing these countries on a path to sustainability through time-limited interventions. But it is not the IMF’s role to substitute for national governments.
In order for any IMF action in Europe to be successful, a sense of direction and a comprehensive blueprint to return to sustainability are necessary. The question of sustainability cannot be separated from that of the future of the European monetary union. As such, its members should take the lead in defining a comprehensive and credible blueprint. This requires more than incrementalism and wishful thinking. Europe has taken important steps in this direction with the fiscal compact, with economic and fiscal reforms in Italy and Spain, with an enhanced firewall, and with the recent actions of the European Central Bank to provide liquidity support. However, more is needed to return the eurozone to sustainability and to address the systemic internal imbalances that threaten the monetary union.
Since 2008, and throughout the European debt crisis, I have been telling my international counterparts that it is important to overwhelm the problem and get ahead of the markets. This is what the United States did in 2008, and it is what Canada did in 2009 by deploying a fiscal stimulus of roughly 4% of GDP over two years in response to a crisis originating outside our borders. These bold actions paid off. Rating agencies have reaffirmed Canada’s strong AAA credit rating, and we are now on track to return to balanced budgets over the medium term. By contrast, actions taken by the eurozone have fallen short of overwhelming the problem. The “muddle through” approach has led to an erosion of confidence in public leadership and too many missed opportunities.
Ultimately, the adequacy of the actions taken will be judged by the markets. Repeated expressions of confidence by politicians are futile if the markets continue to cast their vote of non-confidence. The markets’ confidence in political leadership will only be restored when it is clear that politicians are willing to see the full scope of the problem, to focus on the key issues instead of pursuing sideshows such as the financial transactions tax, and to set out and implement a plan for tackling these issues.
The European debt crisis also raises a question of resources. The eurozone has sufficient resources to tackle its sovereign debt crisis, but there is an unwillingness to commit them to tackle the problem. In these circumstances, IMF loans are not an adequate substitute for a serious commitment by eurozone countries to resolve this crisis. We cannot avoid the question of fairness. Eurozone members benefit from increased exports and price stability. Spreading the risks of the eurozone around the world, while its benefits accrue primarily to its members, is not the way to resolve this crisis. We cannot expect non-European countries, whose citizens in many cases have a much lower standard of living, to save the eurozone. Further, the IMF, with roughly $400-billion, already has adequate resources to deal with imminent needs.
The manner in which the IMF provides support must also be fair. It has been very successful at resolving crises using its trusted model of time-limited lending agreements, with strict conditions imposed on the borrowing country. This is why I believe that all countries borrowing from the IMF should be treated the same. Canada’s position is that conditionality should be determined exclusively by the IMF, and not by the “Troika” of the IMF plus the European Central Bank and the European Commission.
If the eurozone is seeking assistance, it should not be setting the terms under which this assistance is provided. Further, Europe controls 34% of votes at the IMF. In that context, the simple majority required for the fund to make an investment is a relatively low threshold. Emerging markets play an increasingly important role in global economic issues. Canada has been a leader in recognizing changing international dynamics and advocating greater representation of emerging markets at the IMF. In this context, we believe that measures should be taken to ensure that major decisions about resources dedicated to Europe require more than a simple majority.
Canada believes in the eurozone’s ability to solve this crisis. We also believe in a strong and fair IMF where emerging economies can take their appropriate seat at the table. This is why we have decided not to provide additional resources to the IMF for the eurozone.
Financial Post
Jim Flaherty is Minister of Finance and the longest-serving finance minister in the G7. This article is also appearing in The Daily Telegraph, London.
Wednesday 2 May 2012
Why smaller down payments can lead to better mortgage rates
Garry Marr
It doesn’t make much sense, but a skimpy down payment on a home might actually get you a better mortgage rate in today’s market.
Blame the government subsidy known as mortgage default insurance, which ultimately makes it less risky to lend money to someone who has only 5% down compared to someone with 20%.
Consumers with less than 20% down must get mortgage default insurance in Canada if they are borrowing from a federally regulated bank. The cost is up to 2.75% of the mortgage amount upfront on a 25-year amortization but that fee comes with 100% backing from the federal government if the insurance is provided by Crown corporationCanada Mortgage and Housing Corp.
“It’s already happening,” says Rob McLister, editor of Canadian Mortgage Trends, who says secondary lenders are now offering rates that are 10 to 15 basis points higher for a closed five-year mortgage for uninsured consumers.
The crackdown on mortgage insurance announced by Jim Flaherty, the federal Finance Minister, could exacerbate the situation. Mr. Flaherty, who mused to theFinancial Post editorial board last week about getting CMHC out of the mortgage insurance business, has placed the agency under the authority of the country’s banking regulator, the Office of the Superintendent of Financial Institutions.
Mr. Flaherty also put in new rules on bulk or portfolio insurance. The banks had been paying the insurance premium on low-ratio mortgages — loans with more than 20% down — because it was easier to securitize them.
However, Mr. Flaherty says those loans will no longer be allowed in the government’s covered bond program.
“Long story short, it is going to tick up rates to some degree,” Mr. McLister says. “You are seeing an interesting phenomenon where if you go to get a mortgage today, you are oftentimes quoted a higher rate on a conventional mortgage. Presumably you have less risk because you have more equity.”
It all depends on the lender. For now, the Big Six banks have kept consistent pricing between low-ratio and high-ratio mortgages.
“There is a question on whether they will continue doing that or raise rates overall to compensate for higher conventional mortgage costs,” Mr. McLister says.
Farhaneh Haque, director of mortgage advice and real estate-secured lending at Toronto-Dominion Bank, says competition among the Big Six banks is keeping rates down and stopping any of them from raising rates for conventional mortgages.
“When we can’t securitize a deal, there is a different cost of funds but the bank continues to offer the same rate,” said Ms. Haque, adding her bank did charge a premium for stated income deals, which usually means self-employed people, but removed the difference last week. The premium was 20 basis points.
“Looking at the competitive landscape, it was a disadvantage,” she says. “We were aiming to target pricing that was specific and for the risk appetite for that deal itself. We didn’t want one [deal] compensating for the other.”
But the banks have bigger fish to fry than just your mortgage. Those with the larger equity position in their homes may be a costlier mortgage to fund, but they also could be a future line-of-credit customers. There’s also the potential for other business such as RRSPs and TFSA, so losing a few basis points might make more sense in the long run.
Peter Routledge, an analyst at National Bank Financial, says he wouldn’t want to be an investor in a bank that approached its business any other way, though he did acknowledge there is a cost to keeping those conventional mortgages. “It’s in effect a subsidy,” Mr. Routledge says.
While banks may be eating some of the costs for people who are not eligible for a subsidy, if they continue down that road they might not be able to match the rates some of the secondary lenders are able to offer with insured mortgages.
It doesn’t sound like much, but the difference between, say, 3.14% and 3.29% on a $500,000 mortgage amortized over 25 years would be about $3,500 extra in interest on a five-year term.
It’s true that those people getting the better rate pay a hefty fee up front in insurance premiums, but they also represent a greater risk to the taxpayer. Do they deserve a better rate?
It doesn’t make much sense, but a skimpy down payment on a home might actually get you a better mortgage rate in today’s market.
Blame the government subsidy known as mortgage default insurance, which ultimately makes it less risky to lend money to someone who has only 5% down compared to someone with 20%.
Consumers with less than 20% down must get mortgage default insurance in Canada if they are borrowing from a federally regulated bank. The cost is up to 2.75% of the mortgage amount upfront on a 25-year amortization but that fee comes with 100% backing from the federal government if the insurance is provided by Crown corporationCanada Mortgage and Housing Corp.
“It’s already happening,” says Rob McLister, editor of Canadian Mortgage Trends, who says secondary lenders are now offering rates that are 10 to 15 basis points higher for a closed five-year mortgage for uninsured consumers.
The crackdown on mortgage insurance announced by Jim Flaherty, the federal Finance Minister, could exacerbate the situation. Mr. Flaherty, who mused to theFinancial Post editorial board last week about getting CMHC out of the mortgage insurance business, has placed the agency under the authority of the country’s banking regulator, the Office of the Superintendent of Financial Institutions.
Mr. Flaherty also put in new rules on bulk or portfolio insurance. The banks had been paying the insurance premium on low-ratio mortgages — loans with more than 20% down — because it was easier to securitize them.
However, Mr. Flaherty says those loans will no longer be allowed in the government’s covered bond program.
“Long story short, it is going to tick up rates to some degree,” Mr. McLister says. “You are seeing an interesting phenomenon where if you go to get a mortgage today, you are oftentimes quoted a higher rate on a conventional mortgage. Presumably you have less risk because you have more equity.”
It all depends on the lender. For now, the Big Six banks have kept consistent pricing between low-ratio and high-ratio mortgages.
“There is a question on whether they will continue doing that or raise rates overall to compensate for higher conventional mortgage costs,” Mr. McLister says.
Farhaneh Haque, director of mortgage advice and real estate-secured lending at Toronto-Dominion Bank, says competition among the Big Six banks is keeping rates down and stopping any of them from raising rates for conventional mortgages.
“When we can’t securitize a deal, there is a different cost of funds but the bank continues to offer the same rate,” said Ms. Haque, adding her bank did charge a premium for stated income deals, which usually means self-employed people, but removed the difference last week. The premium was 20 basis points.
“Looking at the competitive landscape, it was a disadvantage,” she says. “We were aiming to target pricing that was specific and for the risk appetite for that deal itself. We didn’t want one [deal] compensating for the other.”
But the banks have bigger fish to fry than just your mortgage. Those with the larger equity position in their homes may be a costlier mortgage to fund, but they also could be a future line-of-credit customers. There’s also the potential for other business such as RRSPs and TFSA, so losing a few basis points might make more sense in the long run.
Peter Routledge, an analyst at National Bank Financial, says he wouldn’t want to be an investor in a bank that approached its business any other way, though he did acknowledge there is a cost to keeping those conventional mortgages. “It’s in effect a subsidy,” Mr. Routledge says.
While banks may be eating some of the costs for people who are not eligible for a subsidy, if they continue down that road they might not be able to match the rates some of the secondary lenders are able to offer with insured mortgages.
It doesn’t sound like much, but the difference between, say, 3.14% and 3.29% on a $500,000 mortgage amortized over 25 years would be about $3,500 extra in interest on a five-year term.
It’s true that those people getting the better rate pay a hefty fee up front in insurance premiums, but they also represent a greater risk to the taxpayer. Do they deserve a better rate?
Tuesday 1 May 2012
Rate hike will be gradual
On Tuesday April 17, the Bank of Canada (BOC) left its key interest rate untouched - it has remained steady at 1% since 2010. However, the BOC's Governor Mark Carney hinted at rate increases starting as early as this summer. If that happens, the cost for consumer loans, lines of credit and variable rate mortgages will increase. The key rate is the interest rate at which major financial institutions borrow and lend one-day funds among themselves.
Carney's decision to increase rates will depend on a number of variables being played out right now. Last July, Carney sent a strong signal that higher rates were coming, only to reverse that stance in September. His challenge now is to ensure inflation stays under control as the economy strengthens, but without dampening consumer spending and/or curtailing business investment that will be crucial to the country's growth over the next couple of years.
The BOC clearly laid out its case for raising rates. The bank boosted its 2012 growth forecast for Canada to 2.4%, from 2 % in January. While it cut its 2013 forecast to 2.4 per cent from 2.8 per cent, policy makers said the economy will be back at full tilt in the first half of 2013, instead of in the third quarter of that year.
But a few days ago, Statistics Canada reported the inflation rate had dipped to 1.9% in March -- the first time since September 2010 that the rate has fallen below the Bank of Canada's target of 2%. And since Carney's interest rate announcement, a few other factors have come into play.
The U.S. Federal Reserve Board is sticking with its near-zero rate until 2014, putting pressure on Canada to keep its current rate as is. The rebound in the United States, Canada's chief export market, is not as robust as analysts would have liked suggesting the U.S economy is still vulnerable. Considering this is an election year, it's likely to stay that way until the election is over.
The euro crisis is still making headlines, which is worrisome; and at the mere hint of an interest rate hike, the loonie shot up more than a full cent against the U.S. dollar, which is not good for many of our business sectors.
In his April 17 announcement, Carney did say the "timing and degree" of interest rate moves would depend on developments in the coming weeks. Those developments are already here. And while he has hinted at a summer hike, well, without a crystal ball, it's still too early to call.
One thing we can be sure of is that when the hikes do come, they will be gradual.
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