Tightened lending for mortgages will cool market – but by how much?

TARA PERKINS AND ORA MORISON

The Globe and Mail

Ottawa’s move to hit borrowers with a dose of cold water will have an impact on house prices from coast to coast by squeezing a number of potential home buyers out of the market.

The questions are how much, and how quickly?

Many experts agree that home prices are currently inflated, particularly in Toronto and Vancouver, and are due for a correction. But there is much disagreement about how much of a prod the market actually needed.

The biggest change for home buyers is that Ottawa will no longer insure mortgages of longer than 25 years, a move that aims to encourage people to pay off their debts faster but will also increase monthly payments. It has the same effect as an increase in interest rates – and, when combined with other changes made by the federal government Thursday, will likely reduce high prices by 5 percentage points from what they otherwise would have been, said Craig Alexander, chief economist at Toronto-Dominion Bank.

But for Finance Minister Jim Flaherty, the gamble is that his measures will lead to a gradual softening on home prices – not a steep drop. And the debate about whether he has gone too far highlights the tightrope that the Harper government is walking as it seeks to stop Canadians from racking up too much debt.

“We believe that these measures are coming too late and that the housing market and household debt are already over-stretched,” Charles St-Arnaud, an economist at Nomura Securities International Inc., said in a research note. “Moreover, changes to the amortization period have the risk of providing a very powerful negative dynamic in a housing market that is already showing signs of slowing.”

Phil Soper, the CEO of Royal LePage, said that the Conservative government, which had already tightened the rules three times since 2008, should have let the market correct itself at this point.

“I supported the previous moves but I’m disappointed with this particular set of changes,” he said. “The market is clearly cooling on a national basis, and I’m concerned that what is essentially a Toronto problem is being attacked with a blunt instrument that’s going to hurt the housing market nationwide.”

Mr. Soper argued that many experts are too focused on house price growth, while signs of slower sales in the last month suggest that prices will fall on their own.

While the national average home price edged down 0.3 per cent in May from a year earlier, to $375,605, some economists believe the market is overvalued by at least 10 per cent. National averages are being inflated by Toronto. House prices in Toronto rose by 8.5 per cent in April from a year earlier, while they fell 7.5 per cent in Vancouver.

“I remain concerned about parts of the Canadian residential real estate market, particularly in Toronto but not only in Toronto,” Mr. Flaherty said Thursday. The government anticipates that less than 5 per cent of new home buyers will be affected by these changes.

Andrew Baulcomb, 27, has been hunting for a two-bedroom bungalow in the $200,000 to $250,000 range with his fiancée in Hamilton. He expects that they might have to wait a year or two longer because of the new rule that cuts the maximum amortization period on insured mortgages.

“Even financially responsible couples may not have a high household income during their mid-twenties, when you’re in that age you’re often paying back student loans, and in our case we have a wedding coming up,” he said. “I think that’s a difficult point to deal with.”

The moves are likely to have the greatest impact on first-time buyers looking for mid-priced homes. Economists say that Mr. Flaherty is delivering the equivalent of a 1-per-cent increase in interest rates with the cut to amortization.

The Canadian Association of Accredited Mortgage Professionals estimates that 40 per cent of buyers have recently been choosing amortization periods longer than 25 years.

The measures announced by Mr. Flaherty will also have an effect on the higher end of the market, because homes at $1-million or more will no longer be eligible for mortgage insurance, meaning the buyer must have a down-payment of at least 20 per cent.

“I think that the luxury home market will be significantly impacted by it,” said Calum Ross, a mortgage planner who works with many buyers in Toronto’s high-end market.

He thinks that’s a good thing. “It’s ridiculous that these people have ever been allowed to get high-ratio mortgage insurance,” he said. Last week, he secured a mortgage approval for more than $1.25-million for a couple that he worries can’t afford the home, a situation he sees often.

“I told them they were taking on too much risk,” he said.

Ottawa’s new mortgage rules will lead to ‘long-term stability’: Carney

JEREMY TOROBIN

Ottawa — The Globe and Mail

The Canadian government’s latest move to tame the mortgage market will support the “long-term stability” of the housing market and guard against the economic risks posed by excessive borrowing, Bank of Canada Governor Mark Carney said Thursday.

Speaking in Halifax just hours after Finance Minister Jim Flaherty announced a series of changes that come into effect next month, Mr. Carney reiterated his concerns about the effects that his ultra-low interest rates have had on the behaviour of both borrowers and lenders, warning the economy cannot “depend indefinitely” on debt-fuelled spending, especially as incomes stagnate.

At the same time, Europe’s growing crisis is expected to keep the central bank on hold for a long time yet, leaving regulation as the only real avenue for reining in housing-related investment, which Mr. Carney said now makes up “an unusually elevated share” of the economy.

“In this context, Canadian authorities are co-operating closely to monitor the financial situation of the household sector, and are responding appropriately,” Mr. Carney, who confirmed later that he was consulted on the decision, said in a speech to the Atlantic Institute for Market Studies.

“Today, federal authorities have taken additional prudent and timely measures to support the long-term stability of the Canadian housing market, and mitigate the risk of financial excesses.”

Last week, Mr. Carney and his policy team warned that Europe’s worsening drama could slam Canada with a “major shock” if it is allowed to spread out of control and further infect healthier regions, particularly the still-fragile U.S. economy. They also warned that more Canadian households could find themselves under water with their debt payments if a big unemployment shock were to result, and sharpened their warnings about Toronto’s booming condo market.

On Thursday, Mr. Carney acknowledged in a news conference after his speech that his economic forecast for Canada in 2012 will likely be revised lower when he publishes a mid-July update of projections from April.

This will not shock most economists. A first quarter in which the economy grew at an annual rate of 1.9 per cent - well short of Mr. Carney’s 2.5 per cent estimate from mid-April - had already likely thrown his projection of 2.4 per cent growth for 2012 off course. And recent turmoil affecting Europe and the U.S. has all but guaranteed weaker growth in Canada, too.

“Since our previous forecast in April, there has been a further slowing in global activity, including marginally in the U.S., and the first quarter was somewhat weakened,” Mr. Carney told reporters. “Arithmetically, what that means for 2012 growth in Canada, it would on the margin be down.”
Some investors are betting the situation in Europe and the failure of the U.S. economy to gain more traction could force the central bank to cut interest rates from the current 1 per cent level some time later this year. However, in his speech, Mr. Carney strongly hinted he is not even considering a reduction in rates, echoing language from his June 5 rate statement.

“Despite these ongoing global headwinds, the Canadian economy continues to grow with an underlying momentum consistent with the gradual absorption of the remaining small degree of economic slack,” said Mr. Carney, whose next decision is July 17. “Some modest withdrawal of the present considerable monetary policy stimulus may become appropriate.”

Still, he left himself the same wiggle room as in recent statements, saying the “timing and degree” of rate hikes would depend on how things play out.

Despite the worries about consumers over-borrowing, recent data suggest the housing market is already slowing down, and a report from Statistics Canada Thursday showed that in April, retail sales fell – both in prices and volumes. Some analysts have already warned that the mortgage moves could be too effective, and spark a sharp slowdown in a key area of strength for the economy.

At his press conference, Mr. Carney rejected the notion that the new measures might deprive Canada of a crucial source of growth.

“These measures reduce the No. 1 domestic risk to the Canadian economy,” he said. “What’s important is the sustainable evolution of the housing market. It does no good to have artificial strength in the housing market, or in consumption.”

Earlier Thursday, Mr. Flaherty confirmed that Ottawa will reduce the maximum amortization period to 25 years from 30 years, and will cut the maximum amount of equity homeowners can take out of their homes in a refinancing to 80 per cent from 85 per cent. Also, the availability of government-backed mortgages will be limited to homes with a purchase price of less than $1-million, and the maximum gross debt service ratio will be fixed at 39 per cent, and the maximum total debt service ratio at 44 per cent. All the changes will take effect on July 9.

Mr. Carney’s speech, meanwhile, was largely a re-hash of his views on what is needed to foster the more balanced and sustainable global economy on which export-heavy Canada’s fortunes largely depend, including an “open, resilient” financial system. The central banker, who is also chairman of the Group of 20-linked Financial Stability Board, again warned against delaying the implementation of reforms designed to make international finance safer for the global economy.

On Europe, Mr. Carney said it would be a mistake to “underestimate” the resolve of the region’s policy makers to stem the crisis, and endorsed their efforts to move toward a banking union, while saying the euro zone probably also needs something more akin to a fiscal union.

Mortgage Rules, The Hidden Code

Article written by Boris Bozic

If you’re in the mortgage industry and you’re not aware of the announcement made by the Ministry of Finance and OSFI last week, welcome back from the other planet you were visiting. If you’re spaceship was delayed in getting back to mother earth, here’s what you missed. Mortgages bad, government very wise. We’re all aware of the changes, amortization period reduced, LTV for refinances was cutback, and GDS and TDS was adjusted as well. And if you can afford a home over one million dollars, who cares about you. All very straightforward and in it of itself not devastating to the housing and mortgage sector. But we cannot look at these changes in isolation. It’s the cumulative effect of all the changes that have taken place in the last three years which gives us reason for pause and be concerned.

We have every right to be concerned because this industry is our livelihood. Unlike “elected” political officials and government “employees” this industry is more to us than a theoretical exercise. As an industry we have a responsibility to support efforts as it relates to the long term viability of the housing sector. Anyone, with a modicum of common sense, understands the concept of short term pain for long term gain. However, stakeholders have every right to call out decision makers if there’s concerns that the decisions made today may have unintended consequences. We also have every right to ask decision makers to articulate, in a clear and cogent fashion, the rationale behind the decisions they made.

When clarity is missing you’re left to your own interpretations and code breaking ability. From my viewpoint these changes mean that interest rates will remain at historical lows for an extended period of time. Given what the US Fed said recently, unemployment rate will be higher than 8% and slow growth until Q4 of 2014, interest rates are not going up anytime soon. The changes also suggest that government is guessing how Canada will fare within the global economic reality. It was three months ago that Fed’s said no further changes to mortgage rules was necessary. So what happened in the last ninety days? Nothing in Canada, but in Europe, the US and China, a whole lot happened. That’s our new reality, Europe, the US and China sneezes, Canada grabs a tissue and wipes its nose.

There’s a risk with every move the government makes. It’s clear that the government cannot slow down the housing market through monetary policy so they’ll attempt to do so through regulations. If the government is too “successful” in slowing down the market which leads to job loss and erosion of wealth, well, home owners will look for someone to blame. It’s one thing for voters to believe that we all fell off the real estate cliff together due to a natural real estate cycle. It’s altogether different when the home owner can say, “we were pushed off the cliff”. 

Until next time
Cheers

‘’Vancouver eyes new housing body to end ‘affordability crisis’

Frances Bula
Vancouver — The Globe and Mail

Vancouver is hoping to make a dent in the demand for housing from less-wealthy residents by creating a housing-development agency, the way the city’s two universities and the ski resort of Whistler have.

A task force on affordable housing recommended that the city set up a separate agency that could negotiate with private developers on deals to build units on discounted city land. The rents would have to be guaranteed at lower rates than usual for new units.

As well, the agency would then manage the hoped-for thousands of units created to ensure they go to people with lower incomes.

But Vancouver is willing to take on that more aggressive role because the city is “in an affordability crisis,” said Mayor Gregor Robertson, the political leader of a city where the average sale price for a house is around $800,000, more than 10 times median income.

“The city hasn’t had a big focus on stimulating the development of affordable housing historically,” the mayor said, as he announced the task-force recommendations.

He didn’t have any numbers on the cost of setting up a housing authority or on the value of city land that Vancouver might commit to future housing projects.

The recommendations also included creating new “transition zones” that would be geared to different forms of housing than the towers and single-family homes that dominate in Vancouver. There was also a requirement for developers to include more affordable options in major projects.

A housing authority would create a specialized team operating at arm’s length from the city and able to move more quickly to take advantage of real-estate trends and opportunities.

Both the University of B.C. and Simon Fraser University have, through their property-development divisions, focused on creating new models of affordable housing.

Vancouver deputy city manager David McLellan said the city agency would be most like the UBC Properties Trust, which set a goal of building 20-per-cent rental among the new housing developed on its extensive holdings.

“We put the land in and that makes it possible for our rental units to operate on a cost-recovery basis,” said Paul Young, the trust’s development director. The university has created 380 apartments that rent for less than the usual market rates, which go to faculty and students only, and another 375 that are rented at standard rates to anyone.

Whistler started its housing authority in 1977 as, like many high-end ski towns, it discovered that its local residents, essential for the resort’s service businesses, were being priced out of the market. It now manages almost 2,000 rental and home-ownership units.

Oliver Clegg, a 31-year-old who has worked as a hotel and golf course employee and in property management, just bought a three-bedroom townhouse in the resort as a result of the program.
“It’s the best thing I’ve ever done,” said Mr. Clegg, who had to agree to Whistler’s rules that homebuyers can only get a limited amount of profit out of their homes, pegged to the rate of inflation.

The creation of a city agency to develop lower-cost housing is also similar to what Toronto has done – once in the late 90s and again more recently – after federal and provincial funding evaporated, said Mark Guslits, a former chief development officer with the Toronto Community Housing Corporation. Mr. Guslits was a member of Vancouver’s housing task force. (TCHC’s recent woes over managing its older social-housing properties isn’t connected to any of the agency’s housing development work.)

Mr. Guslits said having a separate agency, staffed by people who understand the real-estate market and can negotiate with developers, gives any city its best chance at finding ways of using the private market plus city assets and non-profit agencies to create lower-cost housing.

“When cities have tried to be a developer [without that separate agency], they have either failed or spent far too much money,” said Mr. Guslits.

Many other cities have created housing authorities or corporations to find ways of developing lower-cost housing where the private markets don’t seem to be serving their residents well.

20 Observations on the New Mortgage Rules

Robert McLister, CMT

Three months ago, Finance Minister Jim Flaherty told banks to tighten lending on their own. Now he’s doing it for them.

The Department of Finance (DoF), in concert with OSFI, released a buffet of mortgage rules Thursday. By our count, there are eight salient changes that, when combined, will have a measurable impact on housing.

The motivation for these moves is captured in Flaherty's press briefing comment: "I have been listening to the market, and quite frankly I don't like what I hear.” Loose translation: The debt and housing train is in danger of running off the rails.

The DoF's solutions to this problem will influence our market for years to come. Below are 20 musings on the new mortgage rules, sprinkled with a few tips and predictions:

1. Hurried Implementation:

The government knew full well that borrowers would try to front-run these restrictions. So it provided only 18 days lead time until the changes take effect. Most lending execs had no idea that new mortgage insurance rules were imminent. As a result, lenders were not fully prepared.

Because of this, and because banks like to appear prudent to regulators, there's a chance some lenders may implement rules (like the 25-year amortization restriction) before the July 9, 2012 deadline.

2. The Stampede:

Seemingly every mortgage adviser in the country is blasting out emails advising clients about these changes. The sense of urgency will spike mortgage volumes near-term. But high-ratio borrowers who rush to get a 30-year amortization or 85% loan-to-value (LTV) refi should be warned:

• Underwriting during the interim period (June 21-July 8) may be especially vigilant, in an effort to weed out the marginal borrowers who spring from the woodwork
• For the next three weeks, the lenders with the best rates, or those that are less efficient or less staffed, could have abnormal underwriting delays (keep that in mind if you have financing condition deadlines)
• In most cases, mortgage rule changes are not a reason to rush a home purchase.

3. Rate Warfare:

If you’re a well-qualified borrower, you’ll be happy to know that you just became more appealing to lenders. These rules will shrink the pool of prime borrowers. As a result, we’ll see bankers and brokers battle harder for your business. That means the rate wars that Flaherty “discourages” will intensify, whether banks publicize it or not.

4. Side-Effects:

Shorter amortizations, higher qualification rates and lower debt ratio limits will restrict buying power. To that, Flaherty says: “Good. I consider that desirable.”

Canada's 9.6 million existing homeowners, however, may not deem it so desirable—not if these actions trigger a bigger or longer-than-normal selloff that jeopardizes their home equity.

Equity is the biggest source of retirement savings for millions of Canadians. For this reason, even Flaherty would admit that these proposals are essentially a calculated gamble.

On the other hand, waiting for the market self-correct has its own risks, namely a much longer economic recovery if the speculative balloon is punctured.

Either way, the market is propelled by payment affordability. Reducing buying power will weigh on prices. Whether other supply/demand factors offset this pressure is unknowable.

The DoF wants Canadians to believe the side-effects won’t be extreme. And, if market reaction is anything like the 2008, 2010, and 2011 mortgage changes, it won't be.

Flaherty states that "less than five per cent of new home purchasers" will be affected by these changes. If he simply means buyers of brand new homes, five per cent equals ~9,600 people a year (based on CAAMP's 2012 housing starts estimates).

If Vegas made an over/under line on that 5% figure, we’d bet the “over.”

In the new-build market, there are 95,000 first-time buyers each year alone. If you include new and resale purchases, there are roughly 261,000 newbie buyers annually. These are people who are disproportionately affected by these changes, albeit a minority of them.

On top of this you have a minimum of five per cent of repeat buyers (20,000+ a year) that will likely be curtailed by the rule changes to amortizations, qualifications rates, stated income, and debt ratios.

5. The Amortization Effect:

Reducing amortizations to 25 years from 30 chops the maximum theoretical mortgage by roughly 9% (versus ~7% when amortizations dropped from 35 to 30 years). That’s equivalent to paying almost 1% more on your mortgage rate.

Put another way, a qualified family earning $75,000, with no debt, will qualify for $49,000 less mortgage by being forced to take a 25-year amortization.

According to CAAMP, 40% of new mortgages last year had amortizations over 25 years. Of all the new rules, this will have “the most direct impact on the Canadian housing market,” states RBC. It “will raise the barrier to entry into Canada’s housing market.” (That is Flaherty's point, of course.)

TD thinks it could take up to a year for changes like this to negatively impact prices. But some expect a more imminent result.

Robert Kavcic of BMO Nesbitt Burns notes: “After the 35-year amortization was eliminated last March…existing home sales fell by more than 3 per cent over the subsequent two months.”

6. Market Stability:

Most industry observers, ourselves included, believe in the merits of shifting some housing risk to the private sector and building savings rates. "Our economy cannot . . . depend indefinitely on debt-fuelled household expenditures, particularly in an environment of modest income growth,” explains BoC chief Mark Carney.
The government adds that these new rules will bring “long-term stability” to Canada’s real estate market. Note: They say “long term” because they know the effects could be adverse in the short term. The DoF calls that risk “manageable,” however.

Home prices, which are already self-correcting in various regions, will see additional pressure as payment affordability drops. (Ironically, a correction in prices would then, in theory, improve affordability.)

Flaherty has “tapped the brakes at precisely the right time,” says BMO CEO Frank Techar. From our viewpoint it's more like stopping short than a little tap.

All one can hope for is that the brakes don’t lock up, with mortgage affordability being so intimately related to home prices.

That’s partly why the Canadian Association of Accredited Mortgage Professionals (CAAMP) feels the government has “overreached” with this latest round of changes. In a statement Thursday it said:

“CAAMP believes that Canadians understand the importance of paying down their mortgages. These changes, together with new OSFI underwriting guidelines…may precipitate the housing market downturn the government so desperately wants to avoid.”

But heck. With housing-related activity comprising 1/5 of GDP and resale housing adding ~$20 billion in spending and 165,000+ jobs this year, what’s the worst that could happen?

7. So Much for High-Ratio Refis:

Refinances above 80% LTV will soon be a memory at prime lenders. Refinance volumes will then fall off a small cliff. The last time the Ottawa lowered LTVs on refis, insured refinances tumbled 22% (source: CMHC).
The result will be more people being saddled with high interest debt that they can’t refinance. (Insert your favourite home-ATM analogy here.)

We’ll also see home improvement spending slow. The renovation business is a $66 billion industry and $17+ billion a year is financed with mortgages and HELOCs. (Reining in overleveraged and chronic home renovators is healthy. They are a small wedge of the refi pie, however.)

If you own an average priced home, you’ll be able to refinance $18,780 less debt to your mortgage. If your rate on that debt is 19.99%, for example, the 80% LTV refi restriction could cost you an extra $9,000+ in interest (or more if it takes greater than five years to pay off that rolled-in debt).

On the upside, a loan-to-value ≤ 80% would save you $5,587 in default insurance premiums.

Now more than ever, it will pay to have a competant mortgage adviser run the math and compare all your refi options.

8. Non-Prime is Where It’s at:

Alternative lenders like Equitable Trust and Home Trust are lovin’ life. Their target market has just expanded as regulators force banks to turn away more near-prime borrowers.

If alternative lenders can manage defaults through the eventual housing downturn, they’ll profit handsomely from this volume boost. We're talking borrowers who are less rate sensitive (because they have fewer options) and at least three times more profitable than “A” borrowers.

In addition, given greater demand for Alt-mortgages and a constant funding supply, we may see "B" lenders exert more pricing power for a period of time.

From a broker perspective, this growth in near-prime lending is the silver lining of these rule changes. Comparison shopping is important for prime mortgages but it's utterly essential when it comes to non-prime mortgages. And brokers are the only significant source for this service.

9. Exceptions:
If you need a mortgage and have less than 20% equity, then as long as you apply before July 9, you will qualify under the old rules.

That’s true even if your purchase offer isn't final. “…The new parameters will not apply, even if the conditions of [a purchase] agreement have not been waived,” says the DoF.

If your application does not conform to the new insured mortgage guidelines, however, you’ll have to close by December 31, 2012.

Note: If your income situation, debt ratios or loan amount change, and you need to modify your mortgage after July 9, you may be bound by the new rules (even if you were already approved under the old rules).

10. Pre-approvals:

If you get pre-approved before July 9 and want to avoid the new rules, you’ll need to:

a) Have a purchase agreement dated before July 9, and

b) Apply for a full mortgage approval before July 9.

11. HELOC Pullback:

HELOC sales will drop once banks implement the B-20 guidelines. The reason: Fewer homeowners will meet the lower 65% loan-to-value (LTV) limit and higher qualification rates.

Fortunately, OSFI tells us it will not require existing HELOC holders with LTVs over 65% to drop down to 65% LTV.

Borrowers are still able to submit HELOC applications today at 80% loan-to-value. There’s no telling for how long. As the October 31, 2012 implementation deadline approaches for the big banks, we’ll see 80% LTVs start disappearing. It could happen sooner than some expect.

In the coming days, we’ll run a piece on how HELOC LTV changes impact the Smith Manoeuvre and similar leveraged investing strategies.

12. CB D/Ps R.I.P.:

According to one high-level bank exec we spoke with, Cashback downpayment mortgages look to be dead, effective October 31, 2012 (possibly much sooner). But no lender has announced anything on this, as of yet.
Cashback refinances, however, may live—unless the DoF ends up restricting them too.

Barring that, cashback refis may get more common as time goes on.

Borrowers can use CBs to refinance to 85% LTV, via an 80% LTV mortgage plus 5% cash back. They'll have to pay a cashback interest rate (1.70%+ higher on 5-year terms), but the "free" cash effectively reduces that rate premium to about 50 basis points. CB users also avoid the insurance premiums that typically apply to 85% LTV refinances.

Just beware of the cashback clawbacks if you get one of these mortgages and discharge it before maturity.

13. Debt Ratio Double-Whammy:

Debt ratios are one measure of how much mortgage you can afford. The new 39% gross debt service (GDS) limit will only impact high-ratio borrowers with a 680+ credit score. (High-ratio borrowers with scores below 680 are already capped at a 35% GDS.)

Dropping from 44% to 39% will restrict a subset of the market. Most people won’t be affected, however. The reason we say that is because the typical high-ratio buyer has a total debt service (TDS) ratio in the mid-30% range, according to analyst research we’ve seen. The latest CAAMP data on the subject estimates the TDS for all buyers combined at 32.5% (as of 2010).

That said, not everyone is immune from this GDS restriction. The new 39% cap will lower the maximum theoretical mortgage by roughly $57,000, or 12%, for a household earning $75,000. (This assumes a 3.09% 5-year fixed rate with a 25-year amortization, no debt and 5% down.)

If you combine that with the amortization reduction (from 30 to 25 years), it's quite a one-two punch—amounting to a 20% reduction in maximum theoretical purchasing power.

You better believe that will impact home prices, other things being equal. The good news is that the number of people this effects is relatively small and a 10% price drop would largely offset it. As mortgage rates rise, however, the GDS limit becomes more constraining.

14. Long-am Options:

After July 9, there will still be some lenders offering 30-year amortizations to people with 20% equity. But not the major banks.

If history is a guide, banks will enforce 25-year amortizations on all mortgages. Some might even do it before July 9.

15. Bundles:

According to OSFI, lenders will no longer be able to offer “a combination of a mortgage and other lending products (secured by the same property) in any form that facilitates circumvention of the maximum LTV ratio limit…”

There is question on how this will impact “bundle mortgages.” A bundle refers to an 80% LTV non-prime mortgage with another lender’s 5% second mortgage behind it. This lets non-prime lenders offer 85% LTV lending solutions.

Bundles exist partly to avoid mortgage insurance. Federally-regulated lenders must insure mortgages over 80% LTV by law. If another lender holds the 5% second, it's a way around that limitation. (Borrowers can also arrange 5% seconds on their own if they like.)

As a side note, and slightly unrelated: This 80% uninsured LTV limit is rumoured to be one reason why TD shut down TDFS. The speculation was that OSFI didn’t like the fact TDFS was offering 85-90% LTV uninsured mortgages—albeit through a structure that was technically onside of the regs.

The OSFI spokesperson we asked wasn't able to offer clarity on the bundle question, other than to say, “The language in the guideline is clear.”

We can tell you, however, that many in the industry are anything but clear on it.

If one interprets OSFI’s rule as preventing lenders from promoting bundles (as we’ve defined them), that would seem unreasonable. The risk to the regulated first mortgage lender is negligible because the highest risk money (the extra 5% LTV) comes from a totally separate, private and uninsured lender with segregated capital. Moreover, the first mortgage lender underwrites its risk as if it were lending at 85% LTV or above anyway.

16. Million-Dollar Babies:

…are going down with the bathwater. People buying $1 million-plus properties will soon have to plunk down 20%. Otherwise, they’ll no longer qualify for high-ratio insurance.

That said, the Department of Finance tells CMT: “…$1 million properties with a down payment of at least 20% would still be eligible for (low-ratio) mortgage insurance offered by CMHC and private mortgage insurers.”

Flaherty says that wealthy people’s access to mortgage insurance is “not my concern…If someone can afford to pay a million dollars…they don’t really need CMHC. That’s not what CMHC is there for.”

If that’s true, Jim should probably update CMHC’s mandate. Last time we looked, its mandate was: “to allow as many Canadians as possible to access home-ownership on their own” and “in all parts of the country.” Vancouver and Toronto happen to be parts of the country, and they've got more $1+ million homes than homes under $300,000.

From a nationwide standpoint, high-ratio million-dollar mortgages are a small fraction of the pie. In Toronto and Vancouver, however, million-dollar home sales are 6-18% of the market respectively. 53% of single-family homes in Vancouver-proper are over a mil. (for now anyway).

By all accounts, a cut-off at $1 million is purely arbitrary. A million-dollar mortgage buys a lot less than it used to. Granted, it implies you’re better off than most, but it doesn’t make you “rich,” especially if you have to live in a major city.

There’s no public data on insured million-dollar mortgages, but CMHC tells us: “Of our total insurance-in-force distribution, five per cent of our mortgage portfolio had a loan amount exceeding $550,000 at origination. This includes high-ratio, low-ratio and multi-unit.” As a pure guess, high-ratio million-dollar mortgages are probably near or less than one per cent of CMHC’s overall portfolio.

Of course, even a fraction of one per cent of Canada’s 9.85 million homeowner households is tens of thousands of homes. If this news spooks a portion of those owners into selling more urgently, or concerned buyers defer buying, or buyers who need high-ratio insurance can’t get it, some high-end markets will suffer.
It’s worth noting that many million-dollar borrowers have sufficient net worth to make a 20 per cent down payment. They simply prefer to leverage their capital in other ways. Where that buyer has assets, impeccable credit and strong employment, those are very profitable low-risk insurance premiums for the government—premiums the government will no longer collect.

At day's end, assuming strong underwriting and conservative appraisals, the justification for this change is questionable. Alternatives could have been: (a) setting the $1M threshold higher, (b) raising premiums on $1M+ properties, or (c) scaling back insured loan-to-values over $1 million.

17. Appraisals:

OSFI says, “In general, FRFIs should conduct an on-site inspection on the underlying property…” Lenders can still use automated appraisals, but OSFI expects them to use live appraisers if an application is deemed higher risk.

It will be interesting to see if more high-LTV mortgages are appraised. Currently, lenders and default insurers rely on auto-valuation systems on most of these applications.

18. Renewals:

If you have a high-ratio insured mortgage with an amortization over 25 years, you shouldn’t have a problem renewing with your existing lender.

You’ll also still be able to switch lenders and keep an existing amortization over 25 years, assuming:

• You don’t increase your loan amount.
• Your loan-to-value doesn’t increase (which could happen if home prices dive), and
• You have a regular mortgage (i.e., it’s not a collateral charge mortgage).

Of course, if you need to increase your mortgage in the future and have less than 20 per cent equity, you’d be limited to a 25-year amortization. People should keep that in mind if they’re buying with a 30-year amortization today and thinking of upgrading their property down the road.

19. Changes for Self-employed:

Banks who still have flexible business-for-self (BFS) underwriting policies today (there aren’t many left), probably won’t for long. OSFI has put more pressure on lenders to obtain “reasonable…income verification” from self-employed borrowers, such as an NOA and business formation documentation. Banks have been checking those docs very closely for income reasonability.

Mainstream lenders may stiffen BFS qualifications in other ways as well. As a result, many self-employed borrowers who tax-manage their earnings (i.e., don’t pay themselves enough salaries or dividends) will find mainstream stated income programs ineffective. That’ll force some otherwise-qualified borrowers into the arms of alternative lenders with much higher interest rates.

Some critics might ask, "Why should the government take risk for self-employed borrowers?" To that, one could argue, why should the government take risk for any mortgage borrower?

The answer is beyond the scope of this article (which is long enough already), but in a nutshell: There are substantial economic and social benefits to making home ownership accessible to low-default-risk borrowers who contribute to job growth and pay a profitable insurance premium to the taxpayers of this country. Default risk is not linked to one-factor (income). It's determined by a borrower's total credit profile (assets, debts, cashflow, income stability, equity, beacon score, and so on).

20. Interest Savings:

The DoF’s press release heralded the “$150,000” that “typical” families could save in interest, thanks to it winding amortizations back to 25 years. That’s great, but this is no consolation for qualified borrowers who are forced to allocate cash flow towards a mortgage instead of better uses.

The fact that shorter amortizations save interest is simple mathematics. But that doesn't make a 25-year amz the optimal strategy (or lower risk) for all.

Many qualified borrowers are better off with a long amortization and lower payments. They can then budget that money towards a higher-returning use, which might include education, retirement investing, a small business or a contingency fund.

Flaherty says that "most Canadians” borrow responsibly. Unfortunately, those responsible people will be restricted by these rules nonetheless.

Ottawa could have made borrowers qualify at a 25-year amortization, and leave the option of 30-year amortizations for payment flexibility. Like it sometimes does, however, the government took an easy shotgun approach to regulation with few provisions for exception cases. But it wasn't really about that. The real aim behind the amortization change was to slow the market, plain and simple. Policymakers probably barely considered the micro-economic repercussions for individual borrowers.

*******

Despite the short-term pain and any critical comments above, it is clear that housing volatility will be reduced by these moves, over the long term. And that’s a positive...if you look far enough out.

The questions are, how long is long-term, how unpleasant are the side effects, and could those side effects have be minimized by a more incremental implementation?

Whatever the case, credit is due to the DoF, OSFI and Bank of Canada on two fronts: #1) They want to do the right thing, and #2) they are by no means intellectually challenged. All three consulted with some of the top minds in the country before making these decisions.

Their analysis has led them to conclude that deflating the housing market is appropriate at this uncertain juncture. Hopefully, their decision to substitute mortgage regulations for monetary policy works out. As Flaherty told reporters Thursday, it all comes down to a “judgment call.”

Ottawa tightens mortgage rules to avert household debt crisis

Jason Fekete, Postmedia News

OTTAWA — The federal government is moving once again to tighten mortgage-lending rules amid lingering concerns about an overheated housing market and rising household debt levels.

In a decision called for by some of the big banks — and one that’s expected to soften housing prices — Finance Minister Jim Flaherty announced Thursday the federal government is reducing the maximum amortization period for a government-insured mortgage to 25 years from 30 years.
It’s the third time the Harper government has reduced the maximum amortization period in the last four years, after it initially increased the lengths of mortgage terms to make it easier for Canadians to purchase homes.

The government has since ratcheted it back from 40 years to 35 in 2008, and then further reduced it to 30 years in 2011.

Banks will still be allowed to offer 30-year amortization periods on low-ratio mortgages that include a downpayment of 20% or more.

The changes will see the government lower the maximum Canadians can borrow against their home to 80% of its value, from 85%, in an effort to encourage them to keep more equity in their homes.

As well, under the new rules, to qualify for a mortgage loan Canadians can spend a maximum of 39% of their gross household income on home expenses such as mortgage, property taxes and heating, and a maximum 44 per cent of income on housing expenses and all other debt.

Flaherty also announced Ottawa will limit government-backed insured mortgages to home purchases of less than $1-million.

A downpayment of at least 20% will be required on mortgage loans for homes priced at or above $1-million.

Reducing the amortization period will increase monthly payments, but reduce the amount of total interest paid on a mortgage. Ottawa expects the change from a 30-year to 25-year amortization will, on a $350,000 mortgage loan at four per cent, increase the monthly payment $177 but reduce total interest costs by nearly $47,000.

The government believes less than five per cent of home buyers will be affected by the clampdown.
The new rules take effect July 9, 2012.

“We watch carefully, we monitor the market carefully. I remain concerned about parts of the Canadian residential real estate market, particularly in Toronto, but not only in Toronto, so that is why we are intervening once again,” Flaherty told reporters in Ottawa.

“It’s our job to try to be ahead of things and act in a measured way, listening to the market. And I have been listening to the market, and quite frankly, I don’t like what I hear, particularly in the condo market.”
Flaherty said the government’s moves are part of an effort to “moderate behaviour” among Canadian homeowners and make them reflect before jumping into the housing market at the high end.

Canada’s largest city is seeing continuous home building because of persistent demand, he noted, which is accelerating prices and eroding affordability.

“This concerns me because it’s distorting the market, quite frankly,” the minister added. “My judgment is that we need to calm particularly the condo market in a few Canadian cities.”

Statistics Canada reported last week that the ratio of Canadian household debt-to-income continued increasing in the first quarter, to 152 per cent from 150.6 per cent in the fourth quarter of 2011. That came on the heels of a warning from the Bank of Canada that high household debt levels remain the most important domestic risk to financial stability.

Opposition parties said Thursday the Harper government, with its changes to mortgage rules, is simply retreating from its own decision to ramp up the amortization to 40 years after taking power in 2006.

“This is Mr. Flaherty versus Mr. Flaherty. He has done all of this. He’s the guy who has let it go up and is now bringing it dramatically down again. We are now at the same situation we were — what do you know, 2006 — where we had 25-year mortgages,” said interim Liberal leader Bob Rae.
“There’s going to be a real issue as to exactly what message this is sending to markets and what impacts it will have.”

Flaherty and some of the country’s leading economists have for months been warning that they remain worried about Canada’s housing market and rising household debt.

In March, prior to delivering the federal budget, Flaherty met with 13 private-sector economists for his traditional pre-budget consultation to get their assessment of the Canadian economy.

Some of the big banks suggested at the time the federal government consider implementing “measured actions,” such as reducing the maximum amortization period for government-insured mortgages back to the traditional 25 years.

On Thursday, the banks largely welcomed the measures.

“Overall we see (Thursday’s) announcement as a much better substitute to interest rate hikes since the moves are aimed with almost surgical precision at the margins of the mortgage market,” Benjamin Tal with CIBC World Markets said in a research note.

“The combined impact of the four changes will not be large enough to derail the housing market, but are clearly significant enough to soften activity, and at the margin will act as a negative for house prices —mainly at the mid-range segment of the market.”

Frank Techar, president of personal and commercial banking at BMO Financial Group, called the changes “prudent, measured, responsible, timely.”

“Minister Flaherty has tapped the brakes at precisely the right time and his actions should help ensure Canada’s housing market experiences a soft landing,” Techar said in a statement.

You still don’t need a lot of cash to buy a house, unless you’re rich

Garry Marr 

You still don’t need much cash to buy a home in this country — unless you are rich.

A fourth-round of mortgage rules unveiled by Jim Flaherty, the finance minister, didn’t touch the one issue the real estate industry is most scared of — increasing the minimum down payment for loans covered by mortgage default insurance which is backed by the federal government. The rule is still that you need just a 5% down payment in Canada to buy a home. It’s actually less when you consider you can add the cost of your mortgage default insurance onto your mortgage taking you up to 97%-98% of the value of your home.

“They just keep going around this. What is the goal here? Not to have a crashing housing market. To protect banks from having huge losses or to protect people from losing their house,” said Ted Rechtshaffen, president of TriDelta Financial. “The elephant in the room is why they didn’t increase the down payment.”

Most of the real estate industry has been loathe to see that down payment level increase and some banks will actually help you get that 5% with what is called a cash back. You get 5% of the value of your mortgage up front in exchange for a higher mortgage rate over the life of the contract. But the statistics are out there that an increase in the down payment would have had a dramatic effect, far more than the 5% of the market Mr. Flaherty suggested would be impacted by his latest changes. A study this month from the Canadian Association of Accredited Mortgage Professionals estimated half a million sales since 2007 would have been lost if the minimum down payment level was doubled. CAAMP asked respondents what would happen if they were asked for a 10% down payment. Of those who purchased since 2007, 45% say it would take them out of market and another 14% were not sure — about 100,000 lost deals a year.

‘Do you really want people using their homes like an ATM?’

One group of people who will have to come up with more cash are the rich, though they are not really that wealthy by today’s housing standards. There will be no more government-backed insurance on homes worth more than $1-million.

“You have the guy with $2-million home who might not want $400,000 tied up [in equity],” said Mr. Rechtshaffen. “You might be a doctor, 30, making $300,000 who doesn’t want to start with a crappy house who wants to buy a house that will be good for 10 years.”

The government is going to force you to pay down your mortgage at a faster pace, reducing the maximum amortization to 25 years which is where it was when this housing boom began. It had ballooned to 40 years at one point. The impact will be that consumers will qualify for less mortgage because of a larger monthly payment, but save thousands in interest.

The banks had already been encouraging consumers to amortize over 25 years by enticing them with low rates, with Bank of Montreal leading the charge with a 2.99% mortgage earlier this year for a five-year term as long you took the shorter length. Vince Gaetano, a principal at Monster Mortgage, applauded the new rules and expects it will cut back on bidding wars on the high end because people who go over $1-million will not be able to get insurance. He added that new rules on the maximum gross debt service ratio to be set at 39% will hamper how large a mortgage a consumer can get. It was 44%.

“What does it mean in real dollars? If I had a client with $100,000 household income, I can no longer use 44%, that’s five grand. In mortgage amount, based on 3.19%, that’s about $90,000 less mortgage they can get,” said Mr. Gaetano. He added that reducing the percentage level for refinancing from 85% to 80% will further impact that market. “When they reduced from 90% to 85% [last year] it killed the market,” said Mr. Gaetano. “But do you really want people using their homes like an ATM?”

Flaherty clamps down on mortgage rules to cool overheating market

Bill Curry and Grant Robertson  / Ottawa — The Globe and Mail
Published Thursday, Jun. 21 2012, 8:21 AM EDT

Acknowledging his concern that Canada’s housing market is overheating, Finance Minister Jim Flaherty is clamping down with four changes to mortgage insurance rules.

At a news conference in Ottawa, Mr. Flaherty confirmed that Ottawa will reduce the maximum amortization period to 25 years from 30 years. Secondly, the maximum amount of equity homeowners can take out of their homes in a refinancing is being reduced to 80 per cent from 85 per cent.

In an effort to ensure taxpayer-backed mortgages are not going to wealthy Canadians, the availability of insured mortgages will be limited to homes with a purchase price of less than $1-million.

And lastly, there will also be a new rule aimed at ensuring the size of a loan is not too big in comparison to household income. The maximum gross debt service ratio will be fixed at 39 per cent and the maximum total debt service ratio at 44 per cent.

The changes will take effect on July 9, 2012.

“We want people to make sure that when they purchase the most important purchase they’ll probably ever make in their life, that they do so in a prudent way. And some calming of the market is desirable,” said Mr. Flaherty.

The minister said his department has conducted an analysis of the expected impact the changes will have on the Canadian economy, but he only provided some of that detail.

He said Ottawa expects that less than 5 per cent of new home purchasers will be affected by the changes. That means some people will choose not to buy a home.

“It will also mean that some people will buy less into the market, so they’ll buy a less expensive home or a less expensive condominium. Good. I consider that desirable,” he said. “So if it has that kind of a cooling effect, that to me is a good thing.”

Though Canada's big banks were caught off guard by the mortgage changes when word of the adjustments emerged late Wednesday, some lenders said Thursday they support the changes.

"Canadian household debt levels have reached levels that raise concern,” Tim Hockey, head of retail banking at Toronto-Dominion Bank said.
The government's moves "take direct aim at the issue and they should have a substantial moderating effect on the growth of Canadians' debt levels," Mr. Hockey said.


Bank of Montreal called the changes prudent and responsible.

"The new measures will support the long-term stability of the Canadian housing market," said Frank Techar, head of personal and commercial banking at BMO.

"Minister Flaherty has tapped the brakes at precisely the right time and his actions should help ensure Canada's housing market experiences a soft landing."

One of the issues driving Mr. Flaherty's concern is the continued construction of condos in larger cities and the fact that prices continue to rise in spite of this added supply. He said this is a particular concern in Toronto, but he also mentioned Vancouver, Montreal and Quebec City.

While Mr. Flaherty would not comment directly on expectations that the Bank of Canada will keep interest rates low for some time, he did note that the U.S. Federal Reserve is not expected to raise interest rates as it tries to stimulate the U.S. economy.

That leaves changes to mortgage policy as one of the available tools for Ottawa to use in order to dissuade Canadians for taking too much advantage of ultra low rates and piling on debt that could become unaffordable at higher interest rates.

“It’s just a question of trying to moderate behaviour and I hope that Canadians will reflect before they jump into a market at the high end,” said Mr. Flaherty.

Several Canadian banks had been urging Ottawa to tighten mortgage rules and the minister had previously stated that there was nothing stopping the private sector lenders from tightening the rules themselves.

Banks go on appraisal alert in a volatile housing market

TARA PERKINS and GRANT ROBERTSON

The Globe and Mail

Several Canadian banks have been quietly re-evaluating their appraisal strategies amid increased worries about the accuracy of property values in a market deemed at risk of overheating.

Lenders use a variety of techniques, including full appraisals, so-called “drive-by” appraisals based on the exterior of the home, and databases of market prices, to evaluate homes. The values they arrive at help determine how much money they should lend to mortgage borrowers. They are also key for measures such as the loan-to-value ratio that are used to track the health of loan portfolios and borrowers’ debt loads.

Banks are emphasizing on-site visits to value properties, especially those above a certain price or in rural areas. They are also paying closer attention to who does the appraisal. The higher level of diligence aims to get more accurate values amid fears of an overheated housing market. If standards tighten or appraisals become more conservative, it could result in a decrease of the amount of mortgages that banks lend.

Appraisal values become most important to banks when a borrower defaults, and the bank has to sell the property to recoup money. Their accuracy is especially important in the current environment, in which home prices are believed to be inflated and borrowers are taking on record debt levels, increasing the risk of defaults.

There has been no suggestion of widespread or serious problems in Canada’s appraisal system, and bankers say they are comfortable with the values on their books. But lenders and regulators have recently been scrutinizing appraisal systems in an effort to ensure that these values are as accurate as possible.

“We have tightened our process, and make sure that we are getting an accurate read,” David McKay, the head of Canadian banking at Royal Bank of Canada, the country’s largest mortgage lender, told analysts on a recent conference call. “When you think you have an 80 per cent loan-to-value ratio, you want to make sure you have an 80 per cent loan-to-value ratio.”

Mark Chauvin, Toronto-Dominion Bank’s chief risk officer, told analysts that in some of the hotter markets such as Vancouver and Toronto, appraisal values are coming in slightly above purchase prices.

“We’re really not seeing a lot of it,” he said. “But we feel our existing policies will protect us against that.”

TD lends 80 per cent loan-to-value up to $900,000, but after that only lends 50 per cent, to protect itself against inflated values on expensive homes. “So if you take a $2-million house, you get a loan-to-value of 56 per cent under the sliding scale,” he said.

Some banks began to focus more on this last year, after an American insurance company reported a significant charge in connection with insurance it was selling to them. That insurance was covering risks associated with the possibility that appraisal values were off.

California-based First American Financial Corp. had been selling Canadian banks a “guaranteed valuation” product that guaranteed the valuation of a property was accurate on the day a mortgage was issued. If it turned out later that it wasn’t, the bank could make a claim.

But First American posted a first-quarter loss in 2011 as it took a $45-million reserve strengthening charge relating to this obscure Canadian product.

Policies that were experiencing claims had been written mostly in 2007 and 2008. Sources say the issue stemmed mainly from Alberta, where the housing market underwent a correction starting in 2007, and problems became apparent as default rates increased, leading banks to seize more homes as collateral.

“This is just a case where we mispriced the risk,” First American CEO Dennis Gilmore told analysts. (The firm declined to comment).

The company is no longer offering that insurance in the same form, bankers said. “It’s a big change in the industry; we’ve all kind of morphed our property valuation strategies as a result of this occurring,” said a senior banker.

Spokespeople at Bank of Montreal and Bank of Nova Scotia said Monday that their institutions were already focused on in-person appraisals.

The Office of the Superintendent of Financial Institutions is ushering in new mortgage underwriting rules that require banks to have clear policies outlining how they value properties. It is urging them to use a combination of tools, and to include a comprehensive on-site appraisal unless there’s an appropriate reason to use an alternative method.

Banks “should not use title insurance or valuation insurance as a substitute for a sound appraisal or valuation process,” OSFI stated.

Recreational property sales higher in majority of markets, RE/MAX says

By The Canadian Press

MISSISSAUGA, Ont. - Lower prices, increased selection and a rebound in consumer confidence have helped drive sales of recreational properties higher in a majority of communities reviewed across the country, real estate firm RE/MAX says.

RE/MAX said of the 33 markets included in its report, sales were ahead of last year's mark in 70 per cent of the communities, while six per cent were in line with a year ago.

Starting prices were down in 49 per cent of the markets, while 33 per cent were unchanged.
The remaining saw an increase.

"Recovery is still in its early stages, but there are subtle differences on the recreational property front this year," said Michael Polzler, RE/MAX's executive vice-president for the Ontario-Atlantic region.
"The gains are more widespread, affecting more markets and regions. Affordability has provided some serious stimulus, but renewed consumer confidence is the true driver.

"Buyers will simply not move forward if any doubts exist — economic or otherwise."

RE/MAX noted that sales among baby boomers have softened, compared with previous years as low prices in the southern U.S. have drawn away some buyers.

However, the firm noted that younger families and first-time buyers have stepped in to fill the void in most markets.

Housing bubble fears a boon for alternative lenders

Barbara Shecter, Financial Post

Pressure on Canada’s big banks from Ottawa and the Bank of Canada to tighten mortgage lending practices is benefiting the country’s alternative lenders.

One of those, Equitable Trust, has even been able to realize its goal of coast-to-coast mortgage lending. On Thursday, Equitable ventured into Nova Scotia with plans to provide single-family residential mortgages.

“They are filling the void left by the Big Six banks,” said Shubha Khan, an analyst at National Bank Financial. He said the country’s largest lenders have “reduced lending to self-employed borrowers and lending through the mortgage broker channel due to reduced availability of mortgage insurance from CMHC and increased regulatory scrutiny from OSFI, among other things.”

Ottawa has taken a number of steps this year to slow what it believes is an overheated housing market. In April, the federal government made the Canada Mortgage and Housing Corp., a key component of Canada’s mortgage market, subject to direct regulatory oversight by the Office of the Superintendent of Financial Institutions.

OSFI itself proposed major changes to the way banks handle mortgages and other real estate debt to reduce the fallout of what some fear is a looming housing bubble. Following consultation with the industry, OSFI softened some of those proposals.

On Thursday, the Bank of Canada warned that the country’s heavily indebted households are at risk of “shocks” from the growing economic crisis in Europe.

In its semi-annual review, Canada’s central bank said the two biggest domestic risks are the housing market and high household debt loads.

Alternative lenders such as Equitable and Home Capital Group are poised to continue to benefit as the banks tighten underwriting rules at the behest of policy-makers and regulators, said Stephen Boland, an analyst at GMP Securities.

Tightening of income and credit screening at the big banks will mean more business for the alternative lenders, he said.

Canada’s housing market stronger than forecast

The Canadian Press

TORONTO — The Canadian Real Estate Association said Friday that the national home price and sales activity this year will be higher than previously forecast, following a strong spring.

It now forecasts 475,800 homes will be sold in 2012, up 3.8% from 2011, compared with earlier expectations of a gain of 0.3%.

The average home price is forecast to rise by 2.2% to $370,700 in 2012 compared with an earlier expectation that it would fall 1.1%.

“National activity over spring months was stronger than anticipated,” CREA president Wayne Moen said in a statement.

“This shows clearly how the continuation of low interest rates is keeping homeownership affordable and within reach.”

CREA had previously forecast 2012 and 2013 sales volume would be on par with the 10-year average, but it now expects them to be slightly above that.

CREA expects 470,200 sales in 2013, down 1.1% from this year, compared with the earlier forecast of 457,200.

The increased outlook for the year came as CREA reported homes sales last month fell 3.1% compared with April, but remained up from a year ago.

The group said sales volume rose 9% from May 2011, while the Canadian average price slipped marginally to $375,605, down 0.3%.

Continued overall strength in the housing market, largely due to the staying power of low interest rates, has led some economists to warn the market is overvalued.

That could make homeowners vulnerable to a downturn, especially those who have used low interest rates to borrow more than they could otherwise afford.

The Bank of Canada and federal Finance Minister Jim Flaherty have cautioned Canadians repeatedly to moderate borrowing on real estate, declaring household debt to be the domestic economy’s number one enemy.

The bank noted certain segments of the housing market that have a persistent oversupply — such as condos in Toronto — face a higher risk of a price correction.

A report released this week by TD Bank projected Vancouver and Toronto home prices will probably experience a downturn of about 15% in two to three years, but not the dramatic drop that hit the United States a few years ago.

Regulator dials down proposed mortgage rule changes

Tara Perkins, Jacqueline Nelson

The Globe and Mail

Canada’s banking regulator is taking a softer stand on new mortgage underwriting rules than expected, a move that should lessen banks’ and mortgage brokers’ fears of a new, tougher regime.

But that relief may be short-lived: Some industry watchers speculate that the Office of the Superintendent of Financial Institutions will implement firmer rules in other areas when it releases its final guidelines around the end of the month.

The changes by OSFI are part of a larger, international effort to try to prevent another housing crisis like the subprime mortgage disaster. The new guidelines may help cool the country’s overheated housing market by tightening the rules around consumer lending.

OSFI has yet to issue its final rules, but on Wednesday it sent a letter to banks briefly updating them on some of its decisions so far.

In one of the most significant changes from the proposals it originally issued in March, it has backed off a rule that would have forced banks to insist borrowers re-qualify when their mortgages come up for renewal.

Mortgage brokers had feared such a rule would cause many people to lose their homes. Banks tend to focus on a borrower’s payment history, as opposed to rechecking income levels or property values, when mortgages come up for renewal. Lenders were worried that renewals would be denied if either of those elements had deteriorated since the consumer took out their mortgage, said Jim Murphy, head of the Canadian Association of Accredited Mortgage Professionals.

He said he’s pleased with OSFI’s decision.

The Canadian Bankers Association has also expressed its approval of the update.

“Less than half of 1 per cent of all mortgage holders with the country’s largest banks have gone more than three months without making a payment,” said Terry Campbell, president of the CBA, in a statement. “This number has been stable for more than two decades, in times of high and low unemployment, high and low interest rates, and a strong or weak Canadian dollar,” he noted.

Another change from the original proposal is that banks will not have to amortize home-equity lines of credit. As a result, HELOCs can continue to revolve, as opposed to forcing consumers to pay them back within a shorter time frame.

But there are still unanswered questions when it comes to these loans.

“We’re still waiting to see if people can get a mortgage portion in addition to that HELOC line of credit, which is possible now,” said Robert McLister, editor of Canadian Mortgage Trends. He is optimistic this condition will be preserved, based on discussions with OSFI.

Many people use these products for leveraged investments and interest-only borrowing. “If they had required an amortization rule with HELOCs then it would have made things much more difficult from a tax perspective,” Mr. McLister said.

A third significant change is that all the new rules, once they come into effect, will apply mainly to the banks’ Canadian operations. This will be important to those that have large foreign consumer lending businesses, such as Bank of Nova Scotia, which has retail businesses in numerous countries.

The final point in the update zeroes in on property assessments, taking the position that financial institutions should generally not rely on any single method. Banks often use automated appraisals rather than human appraisers because software is cheaper and can be turned around quickly. “It looks like the regulators are going to be keeping a closer eye on automated appraisals,” Mr. McLister said.

He also said that lenders are protecting themselves by increasingly ordering human appraisals. “It’s happening more and more. There’s a definite risk of overvaluation when you use an automated appraisal and you see that even more when the market has fallen,” he said.

Canada’s housing market still outshines rest of world: Scotia

Sunny Freeman, The Canadian Press 

TORONTO — Canadian housing market conditions have cooled slightly, with prices down nearly 2% in the first-quarter, but the country continues to outperform other developed nations, according to a new Scotiabank real estate report.

The latest Scotiabank Global Real Estate Trends report released Wednesday found that the inflation-adjusted national average home price fell by 1.6% in the first quarter of 2012 compared to the same period of 2011.

That compared with a 1.3 inflation-adjusted year-over-year gain in the fourth quarter of 2011.
Canada’s housing market remains an outperformer among developed nations, but conditions have cooled here as well, according to Scotiabank economist Adrienne Warren.

“Price trends are relatively steady in the majority of local markets, though a few, notably Toronto, continue to report strong appreciation,” Warren writes in the report, released Wednesday.

Demand has cooled due to moderate income growth and tighter mortgage insurance rules. In addition, there are more houses up for sale in most parts of the country.

Scotiabank said it expects the number of sales and average prices will be flat in the latter half of 2012.

By comparison, it found global property markets remain under stress, especially in recession-plagued European countries. Ireland saw prices fall a whopping 18.9% and prices in Spain, which has experienced a housing crash, fell 9.1% year-over-year.

Over the weekend, eurozone finance ministers offered to make $100 billion available to Spain to revive banks crushed by bad real estate loans. However, market reaction suggests many observers didn’t feel the relief was enough.

Most countries covered by the Scotiabank report saw prices decline during the quarter.

“The intensifying eurozone debt crisis, increasing financial market strains and moderating global growth suggests there is more downside risk to property prices in the near-term,” Warren said.
“Eventually, however, improved housing affordability and pent-up demand will put many of these markets on a firmer footing.”

Scotiabank projects that the era of ultra-low borrowing costs will continue in most developed economies, while many developing economies are moving to reverse prior hikes.

The latest figures on Canada’s housing market from the Canadian Real Estate Association are due Friday, measuring the strength of sales and prices in May.

In April, the average home price in Canada was up 0.9% from a year ago at $375,810, while sales on a year-over-year basis were 49,480, up 11.5% from 44,370 a year ago, CREA said.

Continued strength in the housing market, largely due to the staying power of low interest rates, has led some economists to warn the market is overvalued. That could make homeowners vulnerable to a downturn, especially those who have used low interest rates to borrow more than they could otherwise afford.

A report released earlier this week by the Toronto-Dominion banking group projected Vancouver and Toronto home prices will probably experience a downturn of about 15% in two to three years, but not the dramatic drop that hit the United States a few years ago.

The Bank of Canada and federal Finance Minister Jim Flaherty recently stepped up their warnings to Canadians to moderate borrowing on real estate, declaring household debt to be the domestic economy’s number one enemy.

How much do you think you’ll get back for that reno?

Shelley White
The Globe and Mail

Ah, the sweet sounds of summer: hammering, sawing, digging, demolition. Well, they’re not sweet exactly, but certainly familiar to anyone who lives in one of Canada’s larger cities. With real estate prices in a state of flux, it seems everyone is eager to spruce up what they’ve got and hopefully be rewarded with an increase in property value. However, as we know, not all renovations are created equal. Just because you’re sinking the money into your home doesn’t mean you’ll see a return on your investment. And just about everyone has an opinion on what you should and shouldn’t be tearing out.

I came across a handy-dandyonline tool offered by theAppraisal Institute of Canada, which can help you determine how much of a return you can expect to get out of your home renovation. (The AIC is a self-regulating professional association and the largest property valuation organization in Canada, with 4,800 members in Canada and around the world.)

Choose a reno, plug in your expected cost, and it will tell you how much of your investment you can expect to get back. For example, if you spend $25,000 on a kitchen reno you are likely to get 75 to 100 per cent of that investment back when you sell, or $18,800 to $25,000.

Clearly, these are general guidelines, not hard and fast rules, and how much you spend will affect how much you get back. If you blow $70,000 on a fabulous bathroom job in a house that’s only worth double that, you’re unlikely to ever see a dime of that money again. In addition, choosing a renovation should be about more than just return on investment – it is your home, after all, and any work you do should also be for your enjoyment. But if you’re mulling over one job versus another and you’re looking to sell soon, it might be prudent to go for the basement reno over the swimming pool (see below).

Some of the big winners are obvious (bathroom and kitchen renovations appear to give the biggest bang for your buck), but there were others that were more surprising to me (only 25 to 50 per cent return on landscaping? Say it ain’t so).

Here’s a look at the return on investment you can expect from 25 of the most popular home renovations, according to the Appraisal Institute of Canada:

Bathroom and kitchen renovations are the real winners, providing a return on investment of about 75 to100 per cent, followed closely by exterior or interior painting at 50 to 100 per cent.

Other safe bets include basement renovation, garage construction, window/door replacement, rec room additions and fireplace installation, which return about 50 to 75 per cent, as do exterior siding and upgrades to flooring or furnace/heating systems.

You can expect a slightly lower return on investment (25 to 75 per cent) with concrete paving and roof shingle replacement, as well as installing central air conditioning or building a deck.

The lowest return on investment comes from landscaping, asphalt paving, building a fence or interlocking brick walkways, or even installing a home theatre room, which all return about 25 to 50 per cent. The home renovations that are least likely to increase property value are skylights, whirlpool tubs and swimming pools, which return between 0 and 25 per cent.

Bank of Canada interest rate decision: What you need to know

Eric Lam

Mark Carney, governor of the Bank of Canada, again held interest rates at 1% in June, but warned of deteriorating global conditions and continued domestic pressure from housing and household debt

Once again the Bank of Canada maintained interest rates at 1% Tuesday, staying the course despite confirming global financial turbulence is creeping ever closer to our shores, while housing and household debt remain domestic risks.

The Bank of Canada has now held rates at a stimulus-level 1% since September 2010.

“Beneath the calm exterior, the tone of today’s press statement took only a moderate shift,” Doug Porter, deputy chief economist with BMO Capital Markets, said in an analysis Tuesday morning.

Here’s a few of the key points from the governor’s June rate decision statement, and what they mean:

Global problems are not going away

The outlook for global economic growth has weakened in recent weeks. Some of the risks around the European crisis are materializing and risks remain skewed to the downside. This is leading to a sharp deterioration in global financial conditions.

These are some of the strongest comments from the Bank on the re-escalating eurozone financial crisis yet, in line with the escalating rhetoric both within the region and abroad.

“The Bank of Canada is in a holding pattern, waiting for the weather to clear over the rate-hike runway,” Mr. Porter said. “Given the sudden re-accumulation of heavy European clouds, we suspect it could be a long wait.”
About those interest rates …

To the extent that the economic expansion continues and the current excess supply in the economy is gradually absorbed, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate.

While the second part of this line has been present for a while, fuelling speculation of a possible rate hike after it popped up in April, the first phrase is new.

“Adding this language to already soft words like ‘may’ demonstrates a further lack of conviction toward the outlook than even the rest of the statement implies,” Derek Holt and Dov Zigler, economists with Scotia Capital, said in a report. “That’s fair game given the significant binary event risk that lies ahead.”

And there’s certainly nary a hint of the possibility of a rate cut at this point, even as some analysts have speculated based on bond rates.

“Today’s statement struck a very prudent balance, acknowledging the weaker global economic outlook, but also reminding markets (who had priced in a chance of a rate cut by year end) that barring a global catastrophe the next interest rate move will be up, not down,” Leslie Preston, economist with TD Economics, said in a note.

Commodity weakness bad news for Canada

While the U.S. economy continues to expand at a modest pace, economic activity in emerging-market economies is slowing a bit faster and a bit more broadly than had been expected. More modest global momentum and heightened financial risk aversion have reduced commodity prices.

This is troubling on two levels. First, with both Europe and the United States mired in middling to flat growth, many economists have come to depend on emerging markets to drive global growth. However, with many of these markets now also struggling, especially China, the prospects for a global slowdown increase.

Meanwhile, with emerging market economies driving much of the demand for commodities over the past few years, a continued slowdown in those countries also means further downside for commodity prices — bad news for Canada and the many resources stocks on the Toronto Stock Exchange.

Housing, household debt still a concern

Housing activity has been stronger than expected, and households continue to add to their debt burden in an environment of modest income growth.

Mr. Carney remains ever-vigilant about the housing market in Canada, and the continued accumulation of household debt, as he has been for much of the past few years.

“In my opinion, this nevertheless ignores the marked slowdown in the pace of growth in household debt and the lagged effects of numerous forms of regulatory tightening that should be encouraging to the BoC assuming the policy goal here isn’t total flatness in household lending,” Mr. Holt said.

BC MORTGAGE BROKERS ENDORSE OFSI’S DECISION TO LEAVE REQUALIFYING RULES ALONE

VANCOUVER – Homeowners facing mortgage renewals can breathe easier now that the Office
of the Superintendent of Financial Institutions (OSFI) has reversed its proposed amendment to
require borrowers to re-qualify for their mortgages at renewal. This decision is heartily supported
by The Mortgage Brokers Association of BC (MBABC).

“We are immensely pleased that OSFI has responded so quickly to industry concerns”, says
Jared Dreyer, MBABC President. “This announcement is very welcome news for current
Canadian mortgagors as the renewal process will continue unchanged. The requirement for
borrowers to re-qualify their mortgages at renewal, even if they remained with their same lender,
could have resulted in severe financial hardship for some homeowners.”

OSFI did, however, call on banks to periodically review a client’s current credit situation,
although not necessarily at renewal, to effectively evaluate their credit risk. OSFI guidelines on
other mortgage underwriting changes will be forthcoming within the next couple of months.

With the complexities of the mortgage market, making an uninformed mortgage choice can
easily cost consumers thousands of dollars. Borrowers and current mortgage holders need to
ensure their buying or refinancing decisions are educated ones by using the services of a
mortgage professional.

For more information www.mbabc.ca.

Bank regulator to watch over CMHC

Scrutiny on mortgage insurer ensures stronger system: minister

By Gordon Isfeld, Financial Post

The federal government is putting Canada's housing agency under tighter scrutiny amid concerns over a red-hot housing market and rising consumer debt.

Finance Minister Jim Flaherty announced Thursday responsibility for Canada Mortgage and Housing Corp. will be handed over to the country's banking regulator, the Office of the Superintendent of Financial Institutions.

The measure, contained in new legislation tabled Thursday, will "enhance the oversight framework for CMHC to ensure its commercial activities, particularly its mortgage insurance and securitization programs, play an important role in the housing market and the financial system," Flaherty said.

"These proposed changes are part of the government's continuous efforts to strengthen the housing finance system," he told reporters.

"They will contribute to the stability of the housing market and benefit all Canadians."

Flaherty said OSFI would now be responsible for reviewing and monitoring CMHC's commercial activities. Until now, the agency was overseen by Human Resources Minister Diane Finley. "I've been concerned about the CMHC for some time in the sense that it's become an important financial institution in Canada, and it was not subject to the same supervision by the Office of the Superintendent of Financial Institutions," he said. "So I think this is an important step forward."

The government has tightened mortgage-lending rules three times in the past four years as the housing market heated up, and Flaherty said he will again "take action as necessary."

"We watch the market closely, and I particularly watch the condo market in Vancouver, Toronto and to some extent in Montreal."

CMHC's function is to insure consumer mortgages and guarantee mortgage-backed securities issued by banks. The Crown corporation currently has a $600-billion loan limit, which the government increased three years ago from $450 billion. Ottawa guarantees the full value of mortgages insured by CMHC and 90 per cent of loans insured by private firms.

The changes were alluded to in the government's March 29 budget.

On Wednesday, Flaherty said "the issue that pushes them near their lending limit is the desire of some of the financial institutions to purchase portfolio insurance for their low-ratio mortgages," adding "that's not the way most people usually think of CMHC."

Queen's University finance professor Louis Gagnon said he has also "been concerned about the CMHC for a long time."

"I believe that the federal government's plan to bring CMHC under the direct supervision of the Office of the Superintendent of Financial Institutions is long overdue," said Gagnon, who specializes in debt and risk management.

"In fact, the previous oversight arrangement was ill-suited for this important task and I never did understand why the CMHC had been placed under the jurisdiction of the minister responsible for Human Resources and Skills Development. This was a recipe for a disaster."

Canada's hot housing market has long been a concern for the government and the Bank of Canada, which has kept its key interest rate at a near-record low of one per cent since September 2010.

Mortgage rates also hit new lows as commercial banks competed for consumers who are continuing to buy into the housing market even as prices rise.

Canadians taking extra steps to tackle debt load

TORONTO — The Canadian Press

The majority of Canadians are in debt but nearly half of them are trying to pay off their dues ahead of schedule, according to a survey conducted for a major bank.

The study, commissioned by CIBC, found that 72 per cent of respondents said they held some form of debt such as a mortgage, student loan or credit card.

However, about 49 per cent of those responding to a phone survey conducted for CIBC said they’ve made an extra lump sum payment in the last year to try and bring down what they owed.

“Debt management is top of mind for Canadians, and these poll results show that many Canadians are taking steps towards reducing their debt,” said Christina Kramer, CIBC executive vice-president of retail distribution.

The bank said the results show that Canadians are focused on reducing their debts amid warnings about rising household debt.

The Bank of Canada and some economists have warned that Canadians are piling on too much debt while interest rates are low, and some may no longer be able to afford their homes when interest rates rise.

CIBC said that while the findings show many Canadians are conscious of debt management, past research has suggested that most are likely to seek out advice about retirement planning before they pursue financial guidance on their debts.

The phone survey was conducted by Harris-Decima from a poll of 2,003 Canadians between March 22 and April 2.

The do's and don'ts of a home renovation

LUCY WARWICK-CHING

Financial Times

In an inflated property market, many homeowners may choose to undertake renovations rather than move in order to get more out of their home and limit any potential fall in value in the event the market turns around.

But some improvements may cost more than the value they add to a property, experts say, so it’s important to consider what kind of work to have done. Here are five points to consider when contemplating a home reno:

Be objective

This might sound obvious, but you will only be able to convert your investment into a return if you are able to sell your home at a good price. This means ensuring the improvements you make have a broad appeal. Designer features, such as standalone baths in the middle of a bedroom, will only ever appeal to a small section of the market, especially if they come at the expense of valuable living space.

Extend/Convert

The two main factors that determine a property’s price are size and location. The latter isn’t something you can change but adding space can be an effective way to add value. However, spending $100,000 rearranging the layout of your property doesn’t mean you will add $100,000 in value. Why? Because you haven’t added a single extra square foot of floor space. Attic conversions or basement finishing are two of the most cost effective ways to add value to your property, with a rear extension adding slightly less.

Local research

It is vital to research your local area and market, because there will be a maximum price that a house in a certain neighbourhood can be valued at, regardless of the improvements you make. Consider the value of the work you are doing in relation to the maximum sale value of similar properties in your area, and keep in mind that going over this figure is risky.

Improve energy efficiency

With fuel costs expected to have nowhere to go but up, having an energy-efficient home is a big selling point for many prospective buyers who are becoming increasingly conscious of a home’s running costs and environmental issues. Getting a professional energy audit and addressing problems, some of which can be very simple to rectify, can boost a home’s energy-efficiency considerably.

Layout

It is important when considering the layout of your property to try and avoid losing rooms. If you expand a room’s size at the expense of another’s and in the process go from a three- to a two-bedroom property, it is extremely likely you will be reducing the value of your home. Also, try to keep layouts flexible – if you go to an open-concept ground floor, consider installing dividing doors or make it easy to reinstate stud walls so potential purchasers understand they can change the layout to meet their needs.