David Rosenberg’s 5 reasons Canada’s household debt panic is overblown

Pamela Heaven, the National Post



There’s a lot of horror stories circulating lately around the latest data showing that Canadian household debt to income ratio has hit 165% — not just a record high, but also beating the bubble peaks in the United States.
 

Gluskin Sheff chief economist David Rosenberg, however, has taken a closer look at the figures. Here’s his five reasons why the panic may be a bit overblown.

1) Canadian debt/income ratio isn’t as bad as it looks. Because Canadians pay for their health care through their taxes, their disposable income is distorted relative to the U.S. In terms of personal income, the ratio is actually closer to 118%, rather the scary 165%.

2) Canadian household debt relative to assets (19%) and net worth (24%) is below prior peaks of 20% and 25%, respectively. Rosenberg estimates Canada would need to see a 20% drop in the housing market to get net worth/income ratio down to the U.S. level.

3) Canadians have more equity in their homes — 69% of the value compared with 43% in the U.S. “This equity gap is a prime reason why Canadian household net worth/income ratio (at over 500%) is some 35 percentage points above U.S. levels,” Rosenberg writes.

4) Canadians are better able to service their debts. Canadian wage growth at 4% a year is about double what it is in the U.S. — a rise that pretty much matches the average interest rate they are paying. Meanwhile, debt growth has slowed to its slowest in a decade — showing that balance sheets are improving “without the painful deleveraging that has occurred south of the border.”

“To be sure, if the Bank of Canada feels compelled to raise rates that would be a different matter, but that is a long way off,” he said.

5) The debt-servicing ratio in Canadian households is now just over 7% — a level it has only been below in the past 15% of the time. So even though Canadian interest rates are 75 basis points higher than in U.S, it is not hampering our ability to handle debt.

Pay your Mortgage Like it's 2007. You'll Save a Pile of Money

Rob McLister, CanadianMortgageTrends.com, special to the Globe and Mail


Just 60 short months ago, mortgage rates were double what they are now. That means payments on a 25-year mortgage of equal size were 36 per cent higher than today.

Since then, the amortization gods have slashed mortgage rates and payments. Compared to interest costs in 2007, today’s rates would save you $101,700 if projected out over 25 years on a $200,000 mortgage.

If you look at the payments on a mortgage that size, they’ve tumbled from $1,284 in 2007 to $945 today. (To put that in perspective, the payment at zero per cent interest would be $667.)

It’s clear that the savings potential of today’s rates is phenomenal. The question is: are Canadians taking advantage of these record-low rates?

The answer? Not enough. About 60 per cent of mortgage holders make only their minimum mortgage payment, finds the Canadian Association of Accredited Mortgage Professionals.

But what would happen if people made their payments at the 2007 level?

If applied today, that higher $1,284 payment would knock an extra $21,900 off your principal in five years. You would also save $1,600 in interest and retire your mortgage in two-thirds the time.

Switching to bi-weekly 2007-style payments - $642 every two weeks in this example - means you would pay off that 25-year mortgage in 14.8 years. The five-year interest savings would jump to $2,100.

To replicate interest savings like that, you’d have to chop a quarter per cent off your interest rate. And negotiating another quarter-point reduction on a deep-discount rate can be tougher than sucking sap through a straw.

“Canadians have a legacy of focusing on rates as the primary means to save on the cost of borrowing,” says David Stafford, managing director of real estate secured lending at Scotiabank. “That’s where all of the time and effort is being invested.”

“But the actual cost of a mortgage is based on how much you borrow, at what rate, and for how long,” adds Mr. Stafford, who inspired the calculations above. “And with rates well below recent historical averages, the best way to save money on a mortgage is to use today’s low rates to shorten the amortization.”

Of course, paying extra isn’t easy or everyone would be doing it. Some folks are running too close to the financial edge to bump up payments. Others have more pressing needs for their extra cash. And the rest could pay more if they wanted to, but choose not to.

Looking forward, the leaves in my teacup suggest we won’t see 2007-style rates again for a while, but I can’t definitively predict that. Nor can anyone else.

What we do know is that rates are cyclical. They move like a roller coaster. Right now we’re at the bottom of a valley with an incline off in the distance.

When rates ride the escalator back up, the ascent could theoretically take us back to 2007 levels. So prospective mortgage holders need to ask themselves: Would I buy the same price house if I had to make payments that were 36 per cent higher? Would I get the same size mortgage if rates were double today’s rates?

If the answer is no, they probably shouldn’t be in that mortgage today.

If you’re a mortgage holder with other high-interest debt or higher returning investments, or you have no emergency fund, you may want to divert your cash to those objectives. Otherwise, if you want a respectable low-risk return, increasing your mortgage payments fits the bill.

“An extra dollar paid at the beginning of a mortgage is a dollar you’re not going to pay interest on for the next 20-30 years,” Mr. Stafford says. “And making a payment that’s more reflective of historical rates also has another added benefit – you future-proof yourself from payment shock if rates are back at six per cent five years from now.”


Robert McLister is the editor of CanadianMortgageTrends.com and a mortgage planner at Mortgage Architects. You can also follow him on twitter at @CdnMortgageNews.

Flaherty Eyes Privatization of CMHC

Tera Perkins, The Globe and Mail

When Finance Minister Jim Flaherty took steps to cool the housing market over the past four years, he largely did so via the Canada Mortgage and Housing Corp., the Crown corporation that dominates the mortgage insurance market.

Now he says his interventions in the housing market are at an end – and he would like to see the CMHC privatized in the next five to 10 years.

“We’ve taken four steps over the last four years to reduce the exposure there for taxpayers, so I don’t think there’s a lot more to do with CMHC or mortgage insurance, certainly not in the foreseeable future,” Mr. Flaherty said in an interview.

Mr. Flaherty’s goal has been to steer the market away from the extremes that rocked the U.S. economy, and to keep mortgage debt loads under control despite the lure of low interest rates.

But the Finance Minister has also been aiming to cut the amount of exposure that taxpayers have to the housing market by way of mortgage insurance and CMHC.

‪Privatizing CMHC would be a step in that direction, although some economists raise questions about whether Ottawa should relinquish control of a major lever on the housing market.

‪Ottawa has made a series of quiet changes to bolster the oversight of CMHC in recent years: adding to its board of directors the deputy minister of finance and the deputy minister of human resources and skills development, as well as putting the Crown corporation under the official eye of the country’s banking regulator.

“This is all about financial stability, because [CMHC is] a very important part of the market and of the financial stability picture in Canada, and it’s kind of been off on its own track,” Mr. Flaherty said.

‪Meanwhile, the housing market interventions by Mr. Flaherty that have drawn the most notice restricted the availability of mortgage insurance four separate times, each time by making it a bit harder for Canadians to obtain mortgages. The most recent changes included cutting the maximum length of an insured mortgage from 30 years to 25, a move that industry players say knocked a number of first-time buyers out of the market.

‪Ultimately, he would like to see the government get out of the mortgage insurance business. “The history of CMHC has to do with providing adequate housing for veterans after the Second World War, and it’s become something rather grander,” he said.

‪“I think in the next five or ten years the government needs to look at getting out of some businesses that we’re in that we don’t need to be in.”

‪His comments come at a time when experts are still debating whether the changes that Mr. Flaherty has made to the mortgage insurance rules have been too little, just right, or too much.

‪House sales across the country fell significantly in the period immediately after he made the latest set of changes, which took effect July 9, and a number of people in the real-estate industry argue that he went too far. But some economists fear that the changes will not have enough of a lasting impact, and that as it becomes increasingly likely that interest rates will stay low for even longer than expected, the mortgage debt binge will resume.

‪“My concern is that the changes in the mortgage insurance rules will probably be felt for three to six months and then the market will go back to really just focusing on underlying fundamentals, and one of the things that’s going to be there is extremely low interest rates that will still incent people into real estate,” said Toronto-Dominion Bank economist Craig Alexander. “So I think we may end up in an environment where we might actually need the mortgage insurance rules tightened further.”

‪That’s because with both inflation and U.S. interest rates low, the Bank of Canada is unlikely to raise interest rates much. But if Mr. Flaherty doesn’t want to tighten the housing market further, pressure on central bank Governor Mark Carney could build.

‪Just last week, Statistics Canada said that the country’s household debt was higher than previously thought, as a result of economic revisions. The biggest component of that debt, by far, is mortgages.

“The revisions to the consumer debt numbers are troubling,” Mr. Alexander said. “If we got hit with an unemployment shock or an interest rate shock, the household sector would be quite vulnerable.”

‪And the International Monetary Fund recently urged Mr. Flaherty to be prepared to change the rules again if necessary. The IMF cut its economic forecasts for Canada earlier this month, and said the country’s key priority must be to keep a lid on risks from the housing sector and household debt. It said the changes that Mr. Flaherty has made thus far have been successful in slowing the rise of mortgage debt, but “if household leverage continues to rise, additional measures may need to be considered.”

‪In making his moves, Mr. Flaherty has carefully been weighing the need to get house prices and consumer debt levels under control with the need to keep the economy humming. “We need to be mindful that the housing market, single-family, housing condominium developments, provide a tremendous amount of employment in Canada,” he said.

Five Traps to Avoid When Buying a Condo

Adam Brind, Canadian Real Estate Wealth Magazine, special to The Globe and Mail


With signs of uncertainty in the market, it has never been more important to analyze your next real estate investment. Jumping into the unknown and hoping for the best is risky business. While this tactic may have worked over the past three years during Canada’s lucrative real estate market, it is no longer the case. Real estate has never been a fool’s game’ and now is the time to switch strategies and become diligent for a greater chance of success.

It is also unwise to sit on the sidelines in cash. Downward market shifts are healthy for a number of reasons because it amplifies the good, the bad, and weeds out the average.

Tactical investing is the act of leveraging a strategy behind every decision. All too often, real estate investors make decisions based on past performance or success – the same type of mistakes are found in capital markets. As an investor, it is important to treat every decision independently, and perform the proper due diligence with the right set of tools.

Just because Uncle Joe bought on speculation and got lucky, doesn’t mean that you have a sure bet. The only certainty in real estate is that the market can take it away as fast as it can give it. By taking a few simple steps, you will put yourself in a better position for success and maximize your working capital. Below, we examine some very relevant tools for performing your own due diligence, common traps in the market, some issues that are often overlooked, and some warning signs that the development will fail.

None of these tools are meant to make you invincible, but they will definitely help to put you in a position to take advantage of potential market changes. If you’re an expert already, they are likely to reinforce your current investment strategies.


Five critical test of a good condo investment

These five core filters are the bread and butter of investing in real estate. If your next purchase does not pass at least four of the five filters below, it is likely a good time to reconsider the investment.

1. PricingThe old proverb remains true: you make money in real estate by what you pay for it, not what you sell it for. Pricing is the easiest way to ensure that you are on the right track. If you are buying in a heated market or in a ‘hot’ neighbourhood, it is likely that you’re buying at the fifty two-week high (or three year high in Toronto’s case). Stay away from inflated prices.

2. Developer experienceThe problem with heated markets is that it attracts amateurs that want to get in on the action. But, more often than not, these products lack quality and design. They may look good on paper, but the underlying issues will make you want out faster than the ink can dry. Try to buy from a local developer that has a portfolio of successful products in the neighbourhood.

3. Development logisticsEven if the price is right and the developer is great, you will still need to examine the size of the project, layouts, designer, amenities, etc. If the project is reaching for the stars, you can bet that it will feel less like a community and more like a transient bus station.

4. Location and neighbourhoodCondo investments, resale or new, hinge on their location and the neighbourhood that surrounds them. The neighbourhood makes the condo and not the other way around. This doesn’t mean that the neighbourhood has to be completely gentrified; it just means that it has to have the foundation for resale and rental capacity.

5. Running the numbersEven if you are purely a growth player, the rental numbers still have to make sense for resale value. Long-term value investors will focus directly on the cap rate of the property. Future rental capacity is critical to a strong investment and building a passive portfolio.


Beyond examining the core filters, it is critical to understand common traps in the market. These simple mistakes can mean the difference between a great investor and an average one. Why not learn from others' mistakes?

1. Getting caught in the developer hype.Remember, developers spend thousands of dollars on marketing and promoting the launch of a new product. So, it is incredibly easy to get lost in the vortex of developer greed. Take a step back and think about your next purchase. Don’t be fooled into overpaying for a product because you are getting the ‘friends and family’ discount.

2. Believing you can sell it before it registers (on assignment).If you are not in a position where you can obtain a mortgage when the project registers, stay away from buying new construction. The market is being flooded with condo assignments and many are selling below their original purchase price. This trend is likely to continue as more projects near completion and the supply increases.

3. Buying without motive / not having a plan.Are you a passive investor? Will you manage the property yourself? Do you know about capital gains taxes? Is residential real estate the best approach? Before investing in real estate assets, it is important to hash out a very specific plan; otherwise, you run the risk of losing your capital or worse.

4. Capital appreciation vs. income approach.Everyone can tolerate risk differently, but what is your approach? This goes back to the last point about planning. Real estate is very similar to investing in the equity market. Every investment opportunity is different, and knowing your motives will help you to place your capital in the most appropriate way.

5. Over upgradingOver upgrading is a very common mistake made by amateurs, and one that can be costly. Developers have tried to spearhead this problem by providing palettes , but owners still make this mistake. Over upgrading to your tastes may not be reflected in the market value of the property and likely, do not appeal to the masses. By default, this decreases your buyer pool and demand for the product.


Costly mistakes investors make

Next, we will take a look at some issues that are often overlooked by investors. Failing to consider these issues could be disastrous.

1. Not understanding the tax implications.The whole point of investing is to make money, correct? Before you jump into any investment, you must understand the tax implications of buying, owning and selling that investment. Using an accountant that specializes in real estate will help you understand terms such as Recapture of Capital Cost Allowance.

2. Assuming that it will appreciate.Over the past three years, Canada has seen some explosive growth, especially in the major cities. But appreciation is never guaranteed. Aggressive growth investors looking to buy and sell under three years of ownership could run into problems if they don’t consider this fact.

3. Not double checking surrounding real estate lots.There is nothing worse than buying real estate only to find out that your view and building will be completely obstructed by a new building. Any sign of cranes or even a zoning amendment application can be detrimental to the value of the property. Even if you are surrounded by protected heritage properties, do some research with the city.

4. Not running the numbers.Real estate is a game of numbers. The upside is that these numbers make real estate investments predictable and controllable. Running the numbers before taking the plunge puts you in control of the situation and ensures that you maximize your capital placement.

5. Ignoring the market signs and signals.Ignoring the market signs and signals is an amateur move that can be devastating to your bottom line. Ignore the media, read industry reports and ask the right questions.


Danger! 5 warning signs to beware of
Even after an investment has gone through copious amounts of due diligence, it is still very possible that the project is going to be a dud. Here are some clear warning signs that you should consider:

1. Trouble with the city/planning department.If you find that a developer is having difficulties with the city’s planning department, it is usually for a good reason. Even if they resolve their issues, the project timing would be extended and at the very least, your capital will be tied up and not earning money. On the more aggressive side, you could lose your entire deposit to an unfinished project.

2. Slow sales.Ever wonder why a developer pushes Realtor commission to 5 per cent or offers a Mercedes as an incentive bonus? It is because sales are slow so they do everything in their power to attract buyers and their agents. Unfortunately, sometimes it works. But a project should sell itself. If buyers are currently staying clear, what will happen when it is built?

3. Terrible curb appeal.Selling real estate will never change – some developers get it and some do not. It sounds simple but some developments fail because of the curb appeal.

4. Extenuating circumstancesSome developments just can’t get away from extenuating circumstances , either by design or due to the building code. For instance, one building in Toronto was prohibited from having any operating windows on the north side of the building. This does not hurt the south facing suites, but the building now has a negative reputation. Using common sense is the best way to avoid involvement in a building that has the potential to gain negative publicity.

5. Too good to be true.If you find a building or development that is selling far below the market and neighbourhood value, and it seems like it is too good to be true – it usually is and will likely attract the wrong investors. Every market has these developers and they usually mask their awful products with great marketing. Be cautious of below market prices.


The important point to remember is that investing in real estate can still be very risky. It is a big commitment to understand and find the right opportunities in the market place. The good news is that there are professionals that can help you with this.

Whether you decide to work alone or hire a professional, make sure that you have a solid plan; one that is dynamic and flexible enough to shift with the changing markets. The plan should have a timeline, projections, milestones and goals. It is very similar to crafting a comprehensive business plan with your ultimate goal as the underlying motivator. Your strategy and processes will most likely adapt but your goal should not.

Once the plan is in place, due diligence is only a means to an end. Running the numbers, researching and finding the right opportunity is the best part of the game and it only becomes easier after the first couple of deals are behind you.

Really savvy investors will look at hundreds of deals before they deploy their capital and that is what makes them so successful. It is also their ability to think creatively and act on instincts. This talent is developed with experience, but it is important to note that savvy investors have one distinct advantage: they can think outside the box when it comes to crafting deals.

As soon as you can understand that there are no rules, it will automatically put you at a distinct advantage compared to the general population that believes that buying and selling real estate has boundaries.

From Canadian Real Estate Wealth Magazine, a monthly publication focused on building value through property investment, covering topics such as values and trends, mortgages, investment strategies, surveys of regional markets and general tips for buyers and sellers. Adam Brind is the Principal at Core Assets Inc. and Realtor with Remax Condos Plus Corp., Brokerage in Toronto.

Forty per cent of Canadians fail investment knowledge test: CSA

Barbara Shecter, The Financial Post


Financial literacy remains low in Canada, with 40% of people surveyed failing a general investment knowledge test, according to the Canadian Securities Administrators.

Despite these shortcomings, 57% of those surveyed by the CSA said they are confident when it comes to making investment decisions. When asked what they think the annual rate of return is on the average investment portfolio, however, only 12% gave a realistic estimate.

Our research shows that Canadians continue to be approached with fraudulent investments and aren’t reporting it

“Understanding key investment concepts, such as the relationship between risk and return, can help investors make suitable investment decisions,” said Bill Rice, chair of the CSA, the umbrella group for the country’s provincial and territorial securities regulators.

The survey also revealed that almost 30% of Canadians believe they have been approached with an investment fraud at some point in their lives, though less than a third of them reported the incident to authorities.

“Our research shows that Canadians continue to be approached with fraudulent investments and aren’t reporting it,” said Mr. Rice. “As securities regulators, enforcement is always a top priority for us, and to help us investigate investment fraud, we need to hear from those who have been affected.”

Regulators have attempted to improve mechanisms for reporting incidents of suspected wrongdoing, but some investors complain that the process remains complex and slow.

The CSA’s investor index survey, which followed similar surveys in 2006 and 2009, revealed that social media is emerging as an investment tool but traditional channels still dominate. More than one-third of those surveyed said they have used at least one social media platform as a source of information about investing.

Household debt headlines don't tell the whole story

The Vancouver Sun:


The headlines this week were on the verge of hysteria: Household debt surpasses levels foreshadowing U.S. housing bust. Canadian household debt hits new high. Canadian household debt much higher than believed. Revision raises alarm bells. Household debt hits record. And so on.

The reason for all the fuss was a report from Statistics Canada that said the ratio of credit market household debt to disposable income reached 163.4 per cent in the second quarter, up from 161.8 per cent in the previous quarter.

If those numbers look unfamiliar, it's because the debt to income ratio figures have been amended as part of Statistics Canada's historical revision of the national balance sheet accounts. Last month, the pre-revision debt to income level was 152 per cent. So Canadian households are not significantly more financially vulnerable today than they were in September; the change is largely due to accounting protocols.

That's not to say the level isn't high, it is. But there are mitigating factors that frustrate any attempt to compare Canada with the United States and the United Kingdom, where a ratio of 160 per cent precipitated a housing crash and financial crisis.

For example, the same revision that raised the level of household debt, also increased household net worth to $6.6 trillion from $6.3 trillion in 2011 from 2010. On a per-capita basis, household net worth rose to $190,800 from $182,900 year over year. In the second quarter alone, household net worth increased by 0.9 per cent.

While household debt to income is a popular measure, it graphs what would normally be an income statement entry against a balance sheet item. Why do we chart a single year's income against total debt? Governments don't do that. Canadian government gross debt to revenue would be approximately 288 per cent. Instead, governments worldwide tend to use the lesser market debt to gross domestic product, giving Canada a more palatable 33 per cent.

At the household level, debt to total assets (a consumer version of GDP) in the second quarter was 19.56 per cent. That's up about 0.5 per cent from the same quarter in 2011. Hard to get a gripping headline out of those numbers.

Even if we allow that Canada's household debt level approximates that of the U.S. before the collapse, financial vulnerability is where Canadians and Americans part ways. Because mortgage interest is tax deductible in the U.S., it makes sense (or appeared to before 2008) to carry a large mortgage. There is no tax benefit for Canadians, who prioritize paying off the mortgage. The result is that owner's equity as a percentage of real estate is just under 70 per cent in Canada and little more than half that in the U.S.

Another salient point is that the subprime mortgage market, which many blame for the U.S. housing debacle, accounts for less than three per cent of outstanding mortgages in Canada, compared with roughly 14 per cent in the U.S. before the fall.

A high level of debt increases the risk of default but Canadians aren't there yet. The percentage of loans for which payments are 90 days or more past due stands at a measly 0.4 per cent.

Canada's aging population is likely to have a moderating influence on household debt levels because older households have lower debt than younger ones. A Statistics Canada study found that individuals under the age of 45 represented less than half of the population but 54 per cent of borrowers and held 61 per cent of all household debt. Canadians over the age of 65 have an average of $66,000 in debt compared with $129,200 for those under 45.

Tighter mortgage rules finally seem to be slowing home sales and many analysts predict Canada's frothy housing market will have a soft landing. Homeowners with mortgages may be disappointed that last year's real estate agent's appraisal is old news but that hardly constitutes a national crisis.
Policy-makers have to tread carefully here, as Bank of Canada governor Mark Carney and Finance Minister Jim Flaherty have done, so as not to overreact to headlines that may not tell the whole story.
 

© Copyright (c) The Vancouver Sun

Rates Stay Put as BoC Keeps Rate Hike Bias

Rob McLister, CMT, CanadianMortgageTrends.com


Mortgage holders won’t find much to fret about in today’s statement from the Bank of Canada.
The Bank left its policy rate unchanged, which means that prime rate should exit 2012 at the same level it’s been for 25 months, 3.00%.

Carney & co. said that, “Over time, some modest withdrawal of monetary policy stimulus will likely be required.” That’s vaguer than prior projections but still a signal that the next rate move should be up.
Here’s more from the Bank’s statement this morning:

• “Core inflation has been lower than expected in recent months…”

• “Total CPI inflation has fallen noticeably below the 2 per cent target…and is projected to return to target by the end of 2013, somewhat later than previously anticipated.”
• “Housing activity is expected to decline from historically high levels, while the household debt burden is expected to rise further before stabilizing by the end of the projection horizon.”
• “The timing and degree of any such withdrawal (in rate stimulus) will be weighed carefully against global and domestic developments, including the evolution of imbalances in the household sector.”

That last line is new. The Bank’s recent statements haven’t suggested such a close link between household debt and rate increases. But it’s an implied warning that does little to convince anyone that rate hikes are looming.

Are we worrying ourselves into a housing crash?

Garry Marr, The Financial Post

 

Maybe this is telling us you shouldn’t buy the biggest house

Just sit back and do nothing. It doesn’t sound like the most proactive advice when it comes to the housing market, but it might just be what everybody needs to hear.

Panic is the worst thing that could happen because when that mentality sets in and people become irrational, it’s hard to forecast how low prices will go, says Benjamin Tal, deputy chief economist at Canadian Imperial Bank of Commerce. He is among the many who predict that prices will fall but by a moderate level that does not resemble the U.S. crash.

Considering where the house fits into our personal balance sheet, Canadians have good reason to fear a decline in prices and the impact on their wealth

“There is nothing to fear but fear itself,” says Mr. Tal, paraphrasing the famous quote from U.S. president Franklin D. Roosevelt before his election. The economist’s worry, and that of others, is that we are now talking ourselves into a housing crash by creating a scenario in which every new statistic is interpreted in the most negative way with an eye on trying to constantly compare the Canadian housing market with what our neighbours to the south experienced just before their housing prices plummeted by as much as 50% in some markets.

A study this summer by Environics Analytics WealthScapes found the average net worth of a Canadian was $363,519, with $269,024 of that figure the net equity in real estate.

When you see headlines screaming that Canadian household debt has reached a record level, an eerily similar spot to where Americans were before the market crashed there, it adds to concern. But the similarity ends with the headline-grabbing number, Mr. Tal says.

The distraction of [hearing about these debt levels] is more of a concern than the debt

In the second quarter of this year, the debt-to-income ratio rose to 163.4% from 161.8% in the previous quarter. The previous quarter had been revised from 152% using a new measurement.

“The quality of the debt is much different here,” says Mr. Tal, who is the process of writing a report that will put that thesis to the test. He maintains the people who have taken on more debt have a much higher credit score than the Americans who did the same prior to their market crash.

Collapse is too strong a word when it comes to housing prices. You can’t talk yourself into that but you can talk yourself into a slowdown or a delay

Another key factor that is ignored in the discussion is how much of that debt is locked in for longer terms and not subject to the vagaries of rising rates. Mr. Tal says 70% to 80% of Americans were in variable products at the peak while the Canadian figure is 29%, according to the latest survey from the Canadian Association of Mortgage Professionals.

Still, he worries the wrong message is getting out. “The distraction of [hearing about these debt levels] is more of a concern than the debt,” he says.

But could people actually talk themselves into a housing correction? Moshe Milevsky, a finance professor at the Schulich School of Business at York University, doesn’t rule out that scenario.

“Collapse is too strong a word when it comes to housing prices. You can’t talk yourself into that but you can talk yourself into a slowdown or a delay. It is one of the things behavioural economists are starting to appreciate that classical folks didn’t,” Prof. Milevsky says. “Attitudes matter. It used to be that just facts matter, but sentiment is going to be just as important. If people start to believe real estate prices are slowing down, they’ll slow down their purchases.”

It doesn’t help with confidence when the federal minister of finance says he has his own worries about the housing market and then imposes a set of new rules to make it more difficult to borrow.

“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,” Finance Minister Jim Flaherty said before imposing his latest changes on consumers, which included a lowering of amortization lengths to 25 years from 30 years.

Prof. Milevsky says the government calling the market overheated could be having as big an effect as the rule changes themselves.

It’s almost as if you have to sit back and watch this unfold

“The rule changes only affect people actually going out and getting a house but Flaherty saying prices [might be] inflated affects anybody who hears it,” he says.

So what can you really do about to deal with your worries? Not much.

“It’s almost as if you have to sit back and watch this unfold and say, ‘Gee, I wish I could capitalize on it,’ ” says Prof. Milevsky, adding you could potentially short some real estate stocks and indexes. “But they are so broadly based and illiquid. The bid and ask on them is wide.”

The issue might be a little more simple for people who don’t have a house and are waiting and contemplating whether it’s time to buy one, or considering whether to buy a big or small house.

“The conventional wisdom was to buy the biggest house you can afford because you are going to make a lot of money. But maybe this is telling us you shouldn’t buy the biggest house,” Prof. Milvesky says.

Everybody believes something might be happening but so far it has not affected their conduct

But Gerald Soloway, chief executive of Home Capital Group Inc., says the rules really haven’t changed much for buying a house: Don’t time the market and buy what you can afford, he says.

But he acknowledges there seems to be an insatiable appetite for all information about the sector. Mr. Soloway says he’s become the most popular guy at cocktail parties.

“Constantly, I’m always asked,” he says about people wanting to know his opinion about where the market will go next. “This has been going on the last four or five years, everybody believes something might be happening but so far it has not affected their conduct.”

His own data show the fears appear overblown and he agrees with CIBC’s Mr. Tal that the credit quality of Canadians is better than Americans. “You look at our portfolio, half is insured [and backed by the government] and half is uninsured and people are paying their bills. Year over year, our arrears are down slightly and not dramatically,” Mr. Soloway says. “They were not very big to begin with.”

Mr. Soloway just doesn’t believe negative talk is enough to derail the housing market, just as negative sentiment is enough to drive us into recession.

“It can move the market but it’s not enough to change the fundamentals,” he says.

Like others, he thinks we might see a 5% to 10% easing in prices across the market but he believes builders can still make strong profits at that level. It’s also no reason to sell, especially when you factor in transaction costs that can be as much as 10% in some cities.

Besides, are you really going to pack up your home, move your kids and start renting as you try to ride out a potential downturn in the market?

Phil Soper, chief executive of Royal LePage Real Estate Services, says there is little benefit to timing the market.

“Potentially in some markets you could save a few bucks moving into a rental situation but it’s not as easy as you think,” he says. “If you live in a single-family home, the inventory of properties can be limited if you want your kids to stay in the same school or area. If you live in a condo in a large city, sure you can move into renting that same condo.”

Mr. Soper sticks by the notion that, over the long run, house prices rise and he thinks the consumer will stick it out and ignore the negative news. “People pay more attention to the reality of low interest rates than the hyperbole that finds its way into the discourse about housing,” he says. “There has been so much see-sawing in the economy that people are immune to whipsaw reactions now.”


gmarr@nationalpost.com

Mortgage Rules, Margins & Risk

Mortgage Broker News, CanadianMortgageTrends.com

Regulatory changes are keeping RBC’s Canadian banking head, David McKay, up at night.
And funny enough, his competitor, TD, has been one of the parties lobbying for regulatory changes—so says McKay’s TD counterpart, Tim Hockey.

These were among the facts shared by the two executives at a recent Barclays investor conference.
Below we summarize some of their other insights into mortgage rules, mortgage pricing and housing risk (our comments in italics)…

Here are comment highlights from David McKay, Group Head, Canadian Banking, RBC:

On mortgage rules…

• “…Regulatory changes certainly are top of my list when I think about what keeps me up at night.”
• “The B-20 rules on the Canadian mortgage industry will slow (mortgage) growth.”
• “…Having an amortization no greater than 25 years will cause first-time homebuyers to delay purchases. It will suppress some of the bidding intensity out there as it requires more cash flow to service that new home.”
• “Much of this (regulatory tightening) is coming at us because we remain in a stimulative monetary environment with the inability to raise rates to slow the growth in consumer debt.”
  
  (Many quarters from now, the question will shift to whether regulators are willing to loosen the noose on mortgage underwriting if rates rise and/or housing demand fizzles more than expected.)
• “…We're seeing some prudential regulation…that could become permanent regulation in the form of these B-20 rules or whatever other rules we're forced to look at…What will be the long-term drag on the business is unknown.”

On mortgage growth…

• “I would expect to see (annual industry-wide) mortgage growth come off at least a hundred or maybe a couple hundred points to a mean of 3% to 5%...”
• “…The HELOC side will probably look like 6% next year…or around there, versus 7% or 8% this year.”
  
  (With the new 65% LTV limits and stricter qualification rates, 6% HELOC growth projections seem somewhat aggressive.)

On online banking…

• “Unfortunately, we're not yet in the world where you can have a virtual presence and grow. It still requires a physical presence.”
  
  (Small competitors of RBC seem to have far more confidence in the viability of the online direct-to-consumer channel.)

On debt-to-income…

• The national debt-to-income ratio (which was near 150% at the time of this interview, but has since been restated to 163.4%) is “a mean, and it's very misleading.”
• It “is not really indicative of who's borrowing and what their (debt) service capability is.”
• “All it says is, (it takes) one and a half years (of income) to pay off your debt, on average, in Canada—well, no one has to pay off their debt in one and a half years.”
• “You have to dig into the distribution, and you have to dig into total debt service, which is how we make decisions on consumers—on TDS, total debt service.”

On debt servicing…

• “…Our policy and most banks' policy cuts off (mortgage applicants) at 40% total debt service.”
• “If you have more than a 40% debt service ratio, that's usually a decline, unless there's an exception.”
• “But it's not sufficient just to say 40%. Where the tail has an exponential default probability increase is when a household or a customer makes less than $60,000 and has a debt service above 40%. That's when you start to see exponential default, where there's not enough cash flow absorption capability from a stress event.”

On stress events and defaults…

• “…The stress events that create consumer default are three, really.
  • Number one, first and foremost, is unemployment. You lose your job. Your cash flow stops. You default.
  • The number two, a close second, is divorce. Now, that ratio has been stable. And that is a very severe cash flow stress and life stress event.
  • And the third one is illness.”
• So, when you have lower income and you have high debt service, you have no ability to absorb those three stress events.”
  
  (We’ve never seen lenders be so conservative with debt service ratios as they are today.)
• “Where you get into trouble and where the U.S. got into trouble is they blew out the tail. Through option ARMs and not checking income, they actually created a very large, high-probability tail distribution that had only one way to correct. And, in Canada, if you look at the stability of the tail, it has not grown as a proportion of our book.”
• “…The systemic correction that would have to happen is so far out in the tail that the probabilities just don't justify [insuring our conventional mortgages].”
  
  (Many of RBC’s competitors have no choice but to insure their low-ratio mortgages, in order to securitize those mortgages and manage their capital.)
• Canada “doesn't exhibit any of the characteristics that the US market exhibited—you don't have this speculative overbuild. You don't have the deductibility of interest driving demand and price increases. You've got a balanced supply/demand condition. You've got affordability, for the most part, across almost all markets, with the exception maybe of mainland Vancouver.”

On pricing…

• “We compete on advice and convenience and value…For so many of our customers, we don't even get to the price discussion. It doesn't become meaningful if you do a very good job on advice and bringing advice to customers.”
  
  (Big banks like to think their advice is better than the competition’s. As a general statement, it’s usually not. No one has a monopoly on great advice and advice cannot easily be quantified in the minds of consumers. More and more, mortgage shoppers will get their own advice and place greater emphasis on rate, mortgage features and conditions. RBC, like all banks, will find itself increasingly engaged in the “price discussions” McKay brushes off. Canadians can now access market intelligence on mortgage rates at the click of a mouse. The days of consistently selling mortgages at 15-20+ basis points above the market are coming to an end.)

On mortgage margins…

• Renewals and refinances are pulling down margins at the major banks.
• “Spreads were very high in 2009. Our yield on mortgages was probably 200 basis points higher, at least 150 basis points higher, than the…spread on five-year mortgages [being sold] at 3.09% or 2.99% today…”
• Today’s mortgage spreads are “well below the historic average. So you're looking at 150 points of compression on those term loans that are being refi'd.”
• “Only half our book are term mortgages, fixed-rate mortgages.”
• “The other half are variable-rate mortgages…(and) the spread we earn is a prime-BA spread. And that spread is…well above the long-term average. Prime-BA spreads in Canada have averaged about 162 to 165 basis points, (but have been) running at about 175 basis points for the last five or six quarters…”
• “There's a risk…that (the prime-BA spread) corrects in a rising rate environment…but, right now…our variable book is enjoying healthy margins…That's offset some of the spread compression we've seen coming out of the mortgage book.”

*******

What follows are statements from Tim Hockey – TD’s Group Head, Canadian Banking, Auto Finance and Credit Cards & President and CEO, TD Canada Trust:
On housing risk…

• “We actually did quite a bit of work and some lobbying efforts [to say] that the best way to handle this as a country is actually to take a little bit of the heat off the boil, if you will.”
• “So our Finance Minister over the course of about four years, pretty much on schedule once a year, implements a number of changes that are absolutely taking effect. It might not seem like it when you still see some of the pricing increases that you have year over year, but when we model out the alternative of not having had these [rule changes], then you would have had a much higher debt-to-income ratio (and) much higher housing costs.”

On mortgage growth…

• “…When you project forward all of the…years of (mortgage rule) changes, our belief is that (the recent amortization reduction on high-ratio mortgages) will have probably the most curtailing effect, which is why we are all expecting to have lower loan growth going forward.”

On OSFI’s B-20 mortgage guidelines…

• OSFI’s B-20 policies are a “stringent set of guidelines…”
• Banks now have to implement things like changes to “exception management practices” and changes to “equity lending.”
  
  (We all know that the banks have emasculated their equity lending programs. Therefore, “Exception management” is the more interesting point here. OSFI’s B-20 guidelines require “Limits on any exceptions to residential mortgages underwritten and/or acquired.” Federally regulated lenders, and those who receive funding from federally regulated lenders, will most certainly ration fewer exceptions going forward. Mortgage applicants will find it noticeably tougher to get fringe deals approved at the banks.)

---

Quote source: Barclays 2012 Global Financial Services Conference – September 11, 2012. RBC Presentation, TD Presentation

Tips & Facts on Non-prime Mortgages

Rob McLister, CanadianMortgageTrends.com


For hopeful homeowners with severely damaged credit, there’s a long road to travel to become “bankable” once again.

Thankfully, time heals all - even credit catastrophes. Those in "credit rehab" may find their mortgage options to be limited in the early days (typically because they don’t have a big enough down payment for a lender to take a chance on them). But there is light at the end of the tunnel.

The post that follows examines non-prime mortgage tactics and other "B" lending issues. We talked with Fred Testa and Greg Domville. Both are well-known brokers specializing in alternative lending (a.k.a. non-prime or subprime lending). They were kind enough to answer every question we threw their way.

This discussion focuses on people who have reached the end of their line with credit. That means they’ve declared bankruptcy (BK) or filed a consumer proposal (CP). A consumer proposal is a deal with creditors to pay less than what you owe. For all intents and purposes, lenders treat folks with consumer proposals like bankrupt clients—at least from a credit risk standpoint.

Q&A on subprime lending…

What’s the maximum available loan-to-value (LTV) right after I discharge a bankruptcy or consumer proposal (BK/CP)? Domville says it can go as high as 75%, but it's generally more like 65%. Expect a 1%+ lender fee, and sometimes additional broker fees. (Most non-prime mortgages are arranged by brokers, who sometimes don’t get compensated for their effort unless they charge a broker fee.)

Is it possible to get a mortgage before your BK/CP is discharged? Yes, says Domville, but it generally requires a private lender. Rates can be 8-9% or higher for a first mortgage, and 12%+ for a second mortgage. Private lender fees vary drastically but are 1.5% to 3.0% on average, he says.

Does the story matter? If a client has a good story behind his/her bad credit (e.g., catastrophic medical issues) there is not a huge difference in rate, says Testa. “It’ll maybe save them 1/4 point or so. What it does do is give the lender a comfort level to do the deal. The lender is still going to price to risk, however, and that is based more on the loan-to-value than anything else.”

What’s the best game plan for an applicant who was recently discharged from BK/CP and wants to buy? “I find the best scenario for a recently discharged client is to obtain an approval to 65% (from an institutional lender) and then top-up the required LTV with a private second mortgage,” says Domville. “This will generally yield a lower weighted average rate and payment than going all private on a first mortgage.” That said, the mortgage “must be well within the applicant’s budget,” he adds.

When is re-established credit required? Prime lenders—the ones with the best rates—want at least two years of re-established credit after a discharged BK/CP.  But Domville says, “Lenders granting approvals within the 2 years of discharge don’t generally have re-established credit criteria. Having said that, having some sort of re-established credit will permit a higher LTV and better rates.” Lenders also heavily weight derogatory credit and large debt loads if they occur after discharge. Note: Maxing out your credit cards after a bankruptcy looks almost as bad to a lender as missing a payment.

How important are home aesthetics to your lender? Marketability of a property is vital to non-prime lenders. Make sure the property looks decent for the appraiser. (All subprime approvals require an appraisal.) “Lenders consider pride of ownership,” says Domville, so ensure the dwelling is clean, carpets are vacuumed or shampooed, broken trim and holes in the wall are fixed, clutter is removed, landscaping is maintained, etc.

Will lenders know if you missed a mortgage payment? Most lenders still don’t report mortgages to the credit bureaus. However, “Many alternative lenders do condition for previous mortgage history,” he says. Missed payments after a BK/CP will result in a declined application or a dramatically reduced LTV and increased rate. If you find a lender willing to overlook a missed payment after discharge, expect the “best case” maximum LTV to be 75%, Domville says.

Can you refinance a past due mortgage? Yes, “but certainly only in the private sector, where 1st mortgage rates are 8%-plus on average,” states Domvile. “Maximum LTV is 65%. Exceptions occur with higher LTVs, but don’t bank on it.”

Non-prime Hits Prime Time…

The old days are the new days: "Brokering is going back to what it used to be," says Testa. “In many ways, brokering in the late 80s and early 90s was the same as it is today. Amortizations were a maximum of 25 years and lenders would only go to 75% (loan to value), not 80%. Everything was being done with a first mortgage to 75% and if people wanted additional funds, they would need a second mortgage to 80% or 85%. We're going back to the past. A lot of the young brokers haven’t been through those times.”

Coming Trends in subprime: Testa says we’ll see more and more MICs going mainstream. MICs will make a “big time” dent in the market because “they’re not federally regulated.” That makes them more flexible with lending guidelines.

2nds growing in popularity: Testa is seeing “quite a bit more interest” in second mortgages now, even compared with a few years ago. But there’s only “a fraction” of the institutional lenders doing 2nds today, versus pre-credit crisis. MICs will increasingly be motivated to fill in the gap, he says. They’ll do 2nds to 80%, or even 85% LTV.

So are VTBs: Testa also sees a movement towards vendor takeback mortgages (VTBs). With institutional lenders tightening credit, “More people will find it harder to get financing, and motivated sellers will take back mortgages to move their properties,” he says.

---

About the commentators: Fred Testa is a subprime expert with Mortgage Intelligence and a 38-year industry veteran. He was this year’s CMP Alternative Lending Broker of the Year.
Greg Domville is President of Plan B Mortgage Services. There he runs a centralized underwriting centre that focuses only on non-prime business for Dominion Lending Centres’ 2,000+ agents.

How to Buy a House when your Credit Rating's been trashed

Rob McLister, The Globe and Mail


More than one in eight adult Canadians will declare bankruptcy or negotiate a debt settlement - consumer proposal - with creditors. That’s a lot of people with devastated credit.

The majority of those people will want a mortgage at some point, but they’ll find their options are limited. Following the credit crisis, funding shrank for high-risk mortgages, causing more than a dozen subprime lenders to close their doors in Canada.

Nowadays, riskier home buyers with subprime (aka. non-prime) credit make up less than 5 per cent of borrowers. And with a shaky housing landscape and nervous regulators, lenders are more careful than ever.

For credit-challenged home buyers, getting the best mortgage isn’t easy – it requires discipline and planning. If you’ve recently gone through a bankruptcy or consumer proposal, a deal with creditors to pay less than you owe, here’s what you need to know:

The Waiting Game

Mainstream lenders won’t even consider you until you’ve been discharged from bankruptcy or a consumer proposal for at least two years. With that, you’ll need stable employment and fully provable income.

If you can’t wait those two years, your options shrink considerably but you can still get a mortgage - sometimes just days after discharge. Instead of putting down only 5 per cent with a “prime” lender, however, you’ll need an uninsured lender like Equitable Trust or Home Trust, and maybe even a private lender. Most of them require ex-bankrupts to put down at least 25 per cent.

If you’re exceptionally anxious to buy and have a large down payment, some private lenders will even grant mortgage approvals without you being discharged, but you’ll pay a tidy sum.

The Rate Premium

Lenders price mortgages based on risk. Someone wanting a mortgage soon after insolvency will pay a premium, in addition to lender/broker fees of 1-2 per cent or more.

“Non-prime rates would be in the mid 4’s to high 5’s,” says Fred Testa, a 38-year industry veteran and alternative lending expert with Invis. “It depends on the stability of income, equity, property and the story behind the poor or bruised credit.”

Non-prime rates can be at least ¼-point better if there’s a reasonable explanation for your bad credit. For example, lenders have far more sympathy for a bankruptcy caused by a medical crisis, than one caused by a spendaholic who simply dodged his or her debts.

Rates and lender fees may also be lower if you show six-to-12 months of perfect repayment of your cell phone, utilities and/or rent.

Credit Purgatory

A bankruptcy or consumer proposal requires that you atone for your credit sins by earning back a lenders’ trust. One way to do that is by re-establishing your credit.

“Re-established credit means having at least two credit accounts, each with a two-year track record,” says Mr. Testa. “They can be major credit cards, instalment loans, a car payment, and so on.” The key: You need at least a $1,000 to $2,000 credit limit on each account for lenders to take them seriously.

Getting a non-prime mortgage is one way to re-establish credit but the most popular way is with a secured credit card. These cards require a security deposit and offer almost guaranteed approval. Just be sure to pick a secured card provider that gives back your deposit after you prove creditworthiness. You can do that by paying on time for 12 to 24 months, always making more than the minimum payment and not spending over 60 per cent of the limit.

A few banks, like TD, offer secured cards with no annual fees, rebate rewards and interest on your security deposit. Other providers, like Capital One, will even consider a higher credit limit than your deposit. My advice: Pick the right card the first time because cancelling a credit card can hurt your credit score.

The Term: Shorter is Better

Mortgage advisers usually recommend a one- to two-year term for non-prime borrowers. That gives people enough time to recover from credit woes and helps them avoid paying high rates longer than necessary. Experienced mortgage brokers can then coach borrowers on how to rebuild their credit and refinance sooner with a low-cost conventional lender.

Approval Constraints

If you want a subprime mortgage, the following may boost your rate or fees…or disqualify you altogether:

· Unmarketable Property: Non-prime lenders want easy-to-sell properties in case you default and they have to foreclose. It’s much tougher to get the best rates and terms when you live in a small or rural community, or have an unusual property.

· High loan-to-values: In general, the less money you put down, the higher your rate.

· High debt after insolvency: Racking up debt after a bankruptcy or consumer proposal is a waving red flag for lenders.

· Questionable employment: Income stability matters. If you just got hired three weeks ago or can’t document all your income, that’s a big strike against you.

· Lender type: If you need a private lender, prepare to pay rates that are 2-4 per cent greater than a regular subprime lender. Rates are even higher if you need a second mortgage.

· Recent insolvency: The longer it’s been since you declared bankruptcy, the more options you have as a borrower.

· Repeat bankruptcies: “Double bankruptcies will dramatically raise your required down payment and interest rate,” Mr. Testa says. It eliminates all prime lenders and most alternative lenders as options, leaving you with mostly high-cost private lenders.

· Missed payments: Even one late payment after insolvency can ruin your chances with lenders. “Don’t allow anything to go into collections that reports to the credit bureaus,” says Greg Domville, President of Plan B Mortgage Services. “That includes parking tickets, cell phone bills, gym memberships, etc.” Missing a mortgage payment after bankruptcy is the worst sin of all and gets you immediately declined if a lender finds out.

There’s No Rush

Owning a home involves greater responsibility and expense than renting. When recovering from a credit nightmare, reject the urgency to buy. Focus first on rebuilding your credit and stashing away an emergency fund.

There are exceptions, of course. One example where it makes sense to buy sooner is when you absolutely need to move, you have 25 per cent down and your new mortgage payments are affordable and comparable to your current rent.

Either way, your goal during credit rehab should be to get your credit score back to a satisfactory number (650 to 680+) and make yourself appealing to ordinary lenders. Doing that will save you thousands in interest.


Robert McListeris the editor of CanadianMortgageTrends.com and a mortgage planner at Mortgage Architects. You can follow him on twitter at @CdnMortgageNews.

Taking your debt temperature

The Canadian Press


A new poll suggests more Canadians are living debt-free this year compared to 2011.

The annual RBC survey found that 26% of respondents had no personal debt — excluding mortgage debt — in 2012, up from 22% last year.

However, the poll found that on average Canadians are carrying $13,141 in non-mortgage debt, up $84 from last year.

Ontario residents were carrying the heaviest load at $15,361 while Quebecers had the least at $10,171.

Some 40% of those polled said they were comfortable with their current debt level, down from 45% last year.

And one-in-three respondents said their debt levels are a source of anxiety — up slightly from 2011.

Richard Goyder, vice-president of personal lending at RBC, says it’s “encouraging that the results show more Canadians have become debt-free over the past year.”

The poll also found a majority of respondents — 51% — said it’s more important right now to pay down debt rather than save and invest for the future.

And 76% said they’re in better financial shape than their neighbours.

Finance Minister Jim Flaherty and Bank of Canada governor Mark Carney have repeatedly warned Canadians about borrowing too much and identified household debt as a key risk to the economy.

The International Monetary Fund also raised concerns in a report this week about the amount of borrowing in Canada and how it could affect the economy.

Canadian average household debt, which includes mortgage debt, in relation to disposable income rose to a record 152% at the end of 2011.

The online poll of 2,041 Canadian adults was conducted from July 27 to August 2.

The polling industry’s professional body, the Marketing Research and Intelligence Association, says online surveys cannot be assigned a margin of error because they do not randomly sample the population.

Insured Buyers are the Majority

Rob Mclister - Canadian Mortgage Trends
Mortgage insurance is typically mandatory for homebuyers without 20% equity.

Putting down 10% on the average $350,152 home, for example, means you’ll cough up a $6,302 insurance premium (given fully documented income and decent credit). Since insurance premiums are tacked on to your mortgage, that adds up to $9,000+ if you amortize it over 25 years.

Of course, you can avoid insurance altogether by plopping down 20% or more. The challenge is, only a minority of buyers have that sort of equity.

According to the latest data from Will Dunning, Chief Economist of CAAMP, less than 4 in 10 buyers have 20% down payments.

For those purchasing from 2010 through spring 2012:

• 41% had less than a 10% down-payment
• 21% had a 10-19.99% down-payment
• Only 39% put down 20% or more.

(This survey included both first-time and repeat buyers. First-time buyers accounted for 56% of the dataset. Totals don’t add up to 100% due to rounding.)

Given the widespread use of mortgage insurance, it’s easy to see how regulator’s insurance rule changes can rapidly alter home buying trends. In another few months, we’ll get a good sense for how the most recent rule tightening has impacted nationwide mortgage volumes.

http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2012/10/insured-buyers-are-the-majority.html

Why you should ask a Mortgage Broker to assist you with your mortgage

 Mortgage Market Updates and News

Buying a home is one of the biggest financial and lifestyle decisions you will make, so it pays to make an informed decision by first looking at the main disadvantages and advantages of Home ownership. A TMG Mortgage Professional will assist you with the entire home buying decision and process - right from the moment you decide to buy your home to the moment the movers carry the first box through the front door!

Let us walk you through the important highlights you will encounter through the step by step process. Knowledge of what happens when including the costs involved will ease any unexpected pressures.

You can expect professional step by step guidance through the home buying process including the following:

     Understanding the Mortgage Products available on the marketplace and what product would best suit your family's financial circumstances?
     Knowing what documentation must be provided to obtain a mortgage approval.
     Customize Your Mortgage - Making sure your mortgage works for you.
     What costs exist over and above my down payment?

Organize your home buying team of professions to assist you with the process. Your home buying team includes your TMG Mortgage Professional, the Realtor, the Home Inspector, the Lawyer or Notary and the Insurance Agent!

Below are some key points to consider;

Knowing what you can afford
Expect better service from your Realtor
Rate guarantee up to 4 months
Ensure all credit approval documentation is in place sooner than later
No cost with no risk and obligation
Open vs. closed mortgage
Fixed rate vs. variable rate mortgage
Length of repayment (amortization) - up to 35 yrs
Term of mortgage
Conventional vs. high-ratio mortgage
Assumability and Portability
What documentation is required for different income types i.e. salaried vs. self-employed
Verification of down payment including the amount, history and source
Lowest rate or cash back
Fixed rate vs. variable rate (or both)
Term from 6 months to 25 years
Payment frequency
Pre-payment privileges and penalties
A detailed breakdown of costs will be provided so you have NO surprises
Other costs include: Legal fees, land transfer tax, survey, title insurance, fire insurance, home inspection and HST

Home sales rise for first time since March, but down 15% year over year

Garry Marr

Sales of existing homes rebounded in September but even the group representing the country’s almost 100,000 real estate agents is finding it hard to muster much enthusiasm for a market many say is slowing fast.
 

But the Ottawa-based Canadian Real Estate Association, which represents about 100 boards across the country, is not predicting the free fall others have been expecting, though it suggested sales in the fourth quarter of 2012 will be off from a year ago — in part because of new mortgage rules which tightened up lending requirements.

CREA stands by its assertion there will not be much of a correction so consumers sitting on the sidelines waiting for a deal are unlikely to find one this year or next.

“Even in Vancouver, you have had some large declines in sales activity and no large declines in prices. In fact, no decline, prices continued to rise,” said Gregory Klump, the chief economist at CREA. “What you really have to do is look at market balance, what happens to supply and demand and the balance between the two.”

His comments came as the group reported sales on a national basis were up 2.5% in September from August on a seasonally adjusted basis. Actual sales were down 15.1% in September compared to a year ago. New listings climbed 6.5% from August to September.

Mr. Klump said any concerns about an oversupply should be tempered because the market will rebalance when people realize that homes are not selling.

“Once sales decline, [new listings] will too but with a lag,” he said. “We are looking at the continuation of a balanced market. Sellers will realistically evaluate ‘what it is I can live with in terms of my asking price” and if offers come in below they will let the listing expire.”

So far, CREA’s forecast for relatively little change in price appears to be accurate.

The average price of a home sold in Canada in September was $355,177, a 1.1% increase from a year ago. Year to date prices are up 1% from a year ago.

Prices are expected to increase 0.6% this year nationally but the figure would be much higher without the 6% decline in prices forecast for British Columbia. In 2013, CREA says prices are expected to decline 0.1% nationally.

The bounce back in sales in September did not do much to temper the view of most economists.

“The Canadian housing market has clearly lost some of its lustre. Sales have fallen from their peaks in most markets across the country with today’s gain only partially offsetting August’s substantial decline,” said Francis Fong, an economist with Toronto-Dominion Bank.

“That being said, with interest rates remaining sufficiently accommodative, we do not anticipate any precipitous decline in housing activity in the near term. Rather, we expect a gradual unwinding of the imbalance in both sales and prices over the next few years.”

Doug Porter, deputy chief economist with Bank of Montreal, said the housing sector is clearly turning into a buyer’s market but he does not see a precipitous decline in prices coming.

“While the 15% drop in year over year sales suggests Canadian housing is making like Felix Baumgartner (falling past the speed of sound) the details are not nearly as weak, and still suggest that the housing market is gliding to a lower altitude,” said Mr. Porter.

Others are not so confident there will not be a major decline, in spite of the strong September numbers.

“The trend has been pretty clear about what has been happening in vulnerable markets like Vancouver and Toronto,” said Dave Madani, an economist with Capital Economic. “I’m even more pessimistic about housing now that we’ve seen the household balance sheet data.”

He’s been calling for a 25% decline in prices and says the new data showing debt-to-income ratio rose to 163.4% in the second quarter does not bode well. “I’m even nervous now about the housing market,” said Mr. Madani.

Canada's Big Six Banks still unfazed by consumer debt levels

Tim Kiladze, The Globe and Mail

It’s going to take more than early warnings to get Canada’s big financial institutions to start worrying about sky-high consumer debt levels.

We’ve heard the statistics before. Canadians’ ratio of debt to personal disposable income is north of 150 per cent. On Tuesday, the International Monetary Fund even called out household debt as a particular reason to be a bit wary of the Canadian economy.

But here’s the other side of the coin: the Big Six’s provisions for credit losses have been falling for three years now. Today, they’ve either flat-lined, or better yet, in the case of Royal Bank of Canada, National Bank of Canada and Bank of Nova Scotia, returned to their pre-crisis levels.

National Bank Financial analyst Peter Routledge dug through the banks’ credit card trust portfolios and found that average loss rates on their cards has fallen back down to about 4 per cent, a level not seen since 2008, and the average value of accounts whose payments are 90 days or more delinquent is just 1 per cent of the portfolio.

“The credit card data demonstrates that delinquencies have returned to pre-crisis levels while the loss rate has nearly normalized,” he noted.

While it’s true that consumer credit only makes up about 15 per cent of total household debt in Canada (the rest comes from mortgages or home equity lines), keep in mind that the banks themselves have mortgage insurance to protect themselves from housing losses. Even if the market cools and some households run into trouble, the banks will get paid by mortgage insurance providers like Canada Mortgage and Housing Corp.

This isn’t to say we shouldn’t be worried. We certainly should. If Canadians start defaulting on their mortgages, they’re also likely to have trouble paying off their credit cards. Just because we aren’t seeing any run-off effects on consumer credit just yet, Mr. Routledge noted the residual effect will likely appear in a few quarters – presuming the housing cooling continues.

Still, the low write-off levels help to explain why you don’t see the banks doing much to lend less. With their credit losses in decline, they can lean on their personal and commercial banking arms to drive revenues, helping to offset volatile divisions such as capital markets. Plus, as Mr. Routledge pointed out, the banks can’t rely on more accounting gains achieved from lowering their credit loss provisions every three months. Anything that trickles through to their bottom line now must come from hard-earned growth.

Is this mindset prudent? Probably not in the long run. But the banks are in the same predicament as investors. They can make it harder to borrow, helping Canadians to save more, or they can churn out new credit cards with dazzling frequent flier programs to keep juicing their bottom lines.

Individual investors, on the other hand, could take it upon themselves to borrow less, but if they did and the bank earnings fell, where would they turn for juicy, dependable dividend yields?

Streetwise is Canada’s source for analysis and breaking news on deals and finance. Find it online at tgam.ca/streetwise, or follow it on Twitter via @StreetwiseBlog

To Pay Or Not To Pay A Mortgage Off Early Is Still Buyers' Big Question

Jill Krasny, Business Insider


A blog post on the Financial Security Project at Boston College argues that paying off your mortgage faster is a dumb idea given how mortgage rates are scraping the bottom of the barrel these days.

In their mind, there's not much incentive to pay off a mortgage sooner when the money could easily be put toward other expenses like saving up for retirement or scaling back debt.

It's the classic fork in the road that first-time homebuyers seem to come to when they've amassed enough money to catch up with their budget. So does the blog make a valid point?
Well, the answer is yes ... and no.

"Most people are pre-programmed into thinking if I have extra money, I'll put it in my house," Robert Stammers, director of investor education at the CFA Institute, told BI in August. "That was OK in the past because the interest rates were high, but these days it just doesn't make sense. People need to think of the best place to put that money."

In the blog's defense, there are plenty of reasons not to pay down your mortgage right this second. If clearing away debt isn't an issue, and there's money left over to burn, socking some of that cold, hard cash away in an interest bearing account for retirement is clearly the smarter way to play it.

And as we've written before, there's a psychological benefit to paying off the bill. Those nearing retirement—or drowning with an underwater mortgage—would be wise to clear up their balance sheet as soon as possible, since they don't want those bills interfering with large expenditures like health care or supporting children after college.

That said, the blog should have bolstered its point by outlining the three reasons it's a dumb idea to pay off your mortgage early. They are: not being diversified, or tying up all your income in a home; being deep in debt (see everyone living paycheck to paycheck); and shocker of shockers, just being young.

The latter is key as your 20s and 30s are the prime time to build up your nest egg as much as you can. This goes back to the virtue of compound interest, meaning that money will quickly accrue over time the longer it sits in the bank—a win for retirement savings.

Having the luxury of time also means being able to spread mortgage payments out while paying off other expenditures like student loan debt. If a homebuyer isn't quite set in her career—and really, who is these days?—then it's worth it to shore up an emergency fund just in case the bottom falls out.


Read more: http://www.businessinsider.com/mortgage-prepayment-debate-strikes-again-2012-9#ixzz29QpP0ici

How to view an open house like a real estate pro

Jill Krasny, Business Insider


As the housing market slowly improves, more consumers are finding themselves in the market for a new home, or at least one worth dreaming about.

One place they start their search is an open house tour, though they can forget these are helpful for more than just checking out the kitchen’s color scheme.

Open houses are a smart way to gauge whether a listing’s catching heat and if it’s worth seeing again in a private showing.

“If you’re just getting started with the process, an open house tour is like a get-out-of-jail-free card,” says Zillow.com real estate expert Brendon DeSimone. “It’s free, you can go because there aren’t restrictions and it’s a great way to learn the market.”

To his mind, the primary thing home shoppers overlook tends to be the most obvious: the crowd. Observing other shoppers is key, he says, as that’s the best way to gauge the market’s response to the home.

“If you like the house, watch the people. Is it packed? Are they hovering around the agent?,” he says. If so and if they’re asking pointed questions as well, you can bet that there’s serious interest and the listing is going to go fast.Another strategy is to observe the agent, he adds.

“If you go to a house and you like it but no one’s there, maybe there are issues there,” says DeSimone. “You should watch the listing agent’s reactions because he wants to see the response to the house and how crowded it is.”

But don’t miss the opportunity to make small talk with the seller.

“You should ask why he’s selling, nothing rude, just what’s the story,” DeSimone says. “What’s their motivation to sell?” That should give you a feel for the pricing and whether the listing is gathering dust.

Questions like, how many days has the home been on the market?, or Have you lived here for a long time? should get the conversation going. Perhaps there’s a looming job transfer, or the seller is just moving down the street.

“If they’re not motivated you won’t want to waste your time,” says DeSimone. But at least you’ll know where they stand.