Clay Gillespie, The Globe and Mail
As part of our RRSP coverage, we asked Clay Gillespie, a Vancouver-based certified financial planner and chartered investment manager, to answer selected reader questions.
My wife and I recently withdrew funds from our RRSPs through the federal Home Buyers’ program. When we start to pay back the money we withdrew, how do we differentiate those contributions versus regular contributions? Currently our RRSP contributions are deducted from our paycheques through our employer (direct deposit). – Mark
The Home Buyers’ Plan (HBP) was designed to let first-time home buyers withdraw up to $25,000 from a registered retirement savings plan to buy a principal residence. This withdrawal is not taxed and must be paid back to your RRSP in 15 years.
For example, a $25,000 HBP withdrawal from your RRSP requires a repayment of $1,667 every year for 15 years ($25,000/15 years = $1,667). Any missed repayments are included in your income for that year. You do have some repayment flexibility, however, as you are not required to repay the funds to the same RRSP or institution from which you made your withdrawal.
In your case, you are making RRSP contributions through a work-sponsored plan and will receive an RRSP contribution receipt for deposits made during 2012. If you had withdrawn $25,000 under the HBP, you could use $1,667 of that receipt to repay your HBP requirement and the remainder of the receipt could be applied against your RRSP contribution room.
You will receive a Home Buyers’ Plan statement of account each year with your notice of assessment, allowing you to easily track your RRSP contribution room and the outstanding balance of your HBP withdrawal.
Clay Gillespie, a certified financial planner and chartered investment manager, is a financial adviser and managing director at Rogers Group Financial in Vancouver. The views expressed are those of the author and not necessarily those of Rogers Group Financial, which makes no representations as to their completeness or accuracy.
Wednesday 27 February 2013
What Rates Could Do to Affordability
Rob McLister, CMT, CanadianMortgageTrends.com
When it comes to home values, mortgage payment affordability acts like a giant lever.
A meaningful rise in mortgage payments (relative to income), would bear down on home prices, and vice versa.
Given this relationship and today’s towering home values, mortgage affordability is centre stage. That has inspired a stream of articles about whether swarms of people will default when rates “normalize.”
But how worrisome is that threat really? For insights, we turned to BMO Capital Markets Senior Economist Sal Guatieri.
When it comes to home values, mortgage payment affordability acts like a giant lever.
A meaningful rise in mortgage payments (relative to income), would bear down on home prices, and vice versa.
Given this relationship and today’s towering home values, mortgage affordability is centre stage. That has inspired a stream of articles about whether swarms of people will default when rates “normalize.”
But how worrisome is that threat really? For insights, we turned to BMO Capital Markets Senior Economist Sal Guatieri.
To preface everything, here are some data points to consider...
…On Affordability
What if rates normalize?
The first step is to define “normal.” We can be reasonably confident that the new normal is less than the old normal. Reasons for that include the long-term downtrend in our domestic growth rate (see chart) and proactive inflation control by the Bank of Canada.
To pump life into the economy, the BoC has kept Canada’s overnight rate at just 1.00% for 902 straight days. According to Guatieri, “A normalized overnight rate would be closer to 3.50% given the inflation target of about 2.00%.”
This implies that short-term rates should theoretically jump by about 2.5 percentage points...someday. In turn, long-term rates (such as 5-year fixed rates) should rise less, maybe 200 basis points says Guatieri. That would push 5-year fixed mortgages somewhere near 4.99%.
Other things equal, these new “normalized” rates would drive up mortgage carrying costs (assuming 10% down) from 31.6% of gross income today to 37.2%. That would still fall below BMO’s threshold of unaffordability, which is 39%. But keep in mind, these affordability metrics don’t include other personal debt like car payments and credit cards.
How will borrowers be affected?
RBC Economics writes, “Residential property values are elevated in Canada and, for many households, ownership remains accessible only because of rock-bottom mortgage rates.”
(Higher incomes have also helped affordability, notes BMO.)
But escalating interest rates aren’t necessarily a death knell. Reason being, “the eventual rise in rates will take place at a time when the Canadian economy is on a stronger footing, thereby generating solid household income gains," says RBC. That, in turn, "would provide some offset to any negative effects from rising rates.”
The key word there is “some.” Guatieri estimates that, “To fully (our emphasis) offset a two percentage point increase in rates, household income would need to rise 19%, which could take six years if average income grows at the 3% average pace of the past decade.”
Incidentally, for major affordability damage to be done, we’d need something equivalent to a rate shock and/or serious unemployment. A rate shock is a fairly rapid increase in mortgage rates of “more than two percentage points,” Guatieri explains.
How far off is the threat?
It’s difficult to estimate the probability of a rate shock, Guatieri acknowledges. “The debt market is even pricing in a small probability of a BoC rate cut later this year.”
RBC notes, “We expect the Bank of Canada to leave its overnight rate unchanged at 1% throughout 2013 and raise it only gradually starting in early 2014—a scenario posing little in the way of imminent threat.”
Take that rate forecast for what it's worth, but regardless, “affordability is not a major problem and should not become one even when rates normalize,” Guatieri writes in this report.
That’s true even in three of the fastest growing provinces—Newfoundland, Alberta and Saskatchewan.
The affordability exceptions, not surprisingly, are detached homes in Vancouver, Toronto and Victoria. Not coincidentally, these three markets are among the most prone to the one thing that helps affordability the most: a material price correction.
Footnotes:
1 Based on a 2.99% 5-year fixed rate, property taxes equalling 1% of home value, $150 per month for heating cost, a 25-year amortization, plus fourth-quarter 2012 data provided by BMO, including: Q4 household income estimated at $75,300, an average seasonally adjusted home price of $361,523 and a down payment equalling half of personal income (i.e., $37,600 or ~10%).
2 Same assumptions as above, save for the mortgage rate. BMO uses an interest rate of 4.1% for its analysis. This higher rate makes comparisons easier over the long-run, since discounts were smaller in the past and since discounted rate data from the 1980's is scarce.
…On Affordability
- According to BMO, home ownership is “affordable” (for the median buyer) when mortgage carrying costs—monthly payments, property taxes, heat, etc.—don’t exceed 39% of family income.
- Nationwide, we’re at about 31.6% today.1
- If we look specifically at mortgage payments, BMO says the average-priced house currently consumes 28% of median household income, based on non-discounted mortgage rates.2
- That puts us right at the long-term average (see chart below)
- This 28% falls to 23% for people living outside Vancouver and Toronto.
- Compare these numbers to the peaks of 44% in 1989 and 36% in 2007.
(Click chart to enlarge)
What if rates normalize?
The first step is to define “normal.” We can be reasonably confident that the new normal is less than the old normal. Reasons for that include the long-term downtrend in our domestic growth rate (see chart) and proactive inflation control by the Bank of Canada.
To pump life into the economy, the BoC has kept Canada’s overnight rate at just 1.00% for 902 straight days. According to Guatieri, “A normalized overnight rate would be closer to 3.50% given the inflation target of about 2.00%.”
This implies that short-term rates should theoretically jump by about 2.5 percentage points...someday. In turn, long-term rates (such as 5-year fixed rates) should rise less, maybe 200 basis points says Guatieri. That would push 5-year fixed mortgages somewhere near 4.99%.
Other things equal, these new “normalized” rates would drive up mortgage carrying costs (assuming 10% down) from 31.6% of gross income today to 37.2%. That would still fall below BMO’s threshold of unaffordability, which is 39%. But keep in mind, these affordability metrics don’t include other personal debt like car payments and credit cards.
How will borrowers be affected?
RBC Economics writes, “Residential property values are elevated in Canada and, for many households, ownership remains accessible only because of rock-bottom mortgage rates.”
(Higher incomes have also helped affordability, notes BMO.)
But escalating interest rates aren’t necessarily a death knell. Reason being, “the eventual rise in rates will take place at a time when the Canadian economy is on a stronger footing, thereby generating solid household income gains," says RBC. That, in turn, "would provide some offset to any negative effects from rising rates.”
The key word there is “some.” Guatieri estimates that, “To fully (our emphasis) offset a two percentage point increase in rates, household income would need to rise 19%, which could take six years if average income grows at the 3% average pace of the past decade.”
Incidentally, for major affordability damage to be done, we’d need something equivalent to a rate shock and/or serious unemployment. A rate shock is a fairly rapid increase in mortgage rates of “more than two percentage points,” Guatieri explains.
How far off is the threat?
It’s difficult to estimate the probability of a rate shock, Guatieri acknowledges. “The debt market is even pricing in a small probability of a BoC rate cut later this year.” RBC notes, “We expect the Bank of Canada to leave its overnight rate unchanged at 1% throughout 2013 and raise it only gradually starting in early 2014—a scenario posing little in the way of imminent threat.”
Take that rate forecast for what it's worth, but regardless, “affordability is not a major problem and should not become one even when rates normalize,” Guatieri writes in this report.
That’s true even in three of the fastest growing provinces—Newfoundland, Alberta and Saskatchewan.
The affordability exceptions, not surprisingly, are detached homes in Vancouver, Toronto and Victoria. Not coincidentally, these three markets are among the most prone to the one thing that helps affordability the most: a material price correction.
Footnotes:
1 Based on a 2.99% 5-year fixed rate, property taxes equalling 1% of home value, $150 per month for heating cost, a 25-year amortization, plus fourth-quarter 2012 data provided by BMO, including: Q4 household income estimated at $75,300, an average seasonally adjusted home price of $361,523 and a down payment equalling half of personal income (i.e., $37,600 or ~10%).
2 Same assumptions as above, save for the mortgage rate. BMO uses an interest rate of 4.1% for its analysis. This higher rate makes comparisons easier over the long-run, since discounts were smaller in the past and since discounted rate data from the 1980's is scarce.
Monday 25 February 2013
Low mortgage rates muster slight boost in housing market affordability
Tara Perkins, The Globe and Mail
Owning a house became slightly more affordable in Canada during the second half of 2012, but that’s mostly due to rock-bottom mortgage rates, RBC Economics says in a report to be released Monday.
The sharp drop in house sales that occurred during the final six months of the year led to some small month-over-month declines in house prices in many cities. And, as sales fell, banks made further small cuts to their already-low mortgage rates. Those two factors helped to take a tiny bite out of the cost of home ownership during the final three months of the year, for the second quarter in a row, RBC says.
The report comes as economists debate the health of the housing market and whether the moves that Ottawa made to tighten the market last summer will continue to have an impact this year.
On Friday, BMO Economics said that the latest data suggests falling mortgage rates and rising incomes are offsetting the effects of high house prices in most markets. That report said that affordability is not a “major problem” in most of the country, including Toronto’s much-watched condo market, and that it should not become one even when rates hit more normal levels.
“If interest rates remain low, income continues to rise, and prices stabilize this year – as we anticipate – fears of a deep housing correction should recede,” BMO senior economist Sal Guatieri wrote in that report. But he urged policy makers to “remain vigilant,” pointing to a number of major exceptions, namely the markets for detached homes in Vancouver, Toronto and Victoria, each of which are vulnerable to a significant correction if incomes fall or rates rise.
Finance Minister Jim Flaherty made changes to the mortgage insurance rules in July, after growing concerned that house prices and household debt levels were rising too fast. Those changes, which made it somewhat harder to obtain a mortgage, included cutting the maximum length of an insured mortgage to 25 years from 30 years.
“We expect overall housing market activity to remain subdued this year,” says RBC chief economist Craig Wright. “That said, we believe that there is scope for some mild strengthening from recent activity levels, as the negative effects of the mortgage insurance rule changes, implemented in July, 2012, gradually dissipate.”
While affordability is improving, RBC is warning that many families could be priced out of the market if interest rates were to jump.
“Exceptionally low interest rates have been the key factor keeping home affordability from reaching dangerous levels in recent years,” says Mr. Wright. “Residential property values are elevated in Canada and, for many households, ownership remains accessible only because of rock-bottom mortgage rates.”
BMO’s report suggests that, nationwide, Canada’s housing market is overvalued by about 10 per cent.
RBC’s housing affordability measure calculates the proportion of pre-tax household income that is required to service the costs of a house at current market prices. Both detached bungalows and condos saw the measure fall by 0.2 percentage points (to 42.1 per cent and 28 per cent respectively), while the measure for a two-storey home fell by 0.3 percentage points to 47.8 per cent.
All of the measures remain slightly higher than their historical averages, but the national figures are being propped up by “extremely poor affordability conditions” in the Vancouver area, RBC says.
Roughly 82.2 per cent of pre-tax income was required to service the cost of a detached bungalow in Vancouver during the final quarter of 2012, down 2.6 percentage points from the prior quarter, RBC says. Toronto’s measure was 52.8 per cent, down 0.4 percentage points; Montreal was 39.3 per cent, down 0.9 percentage points; Ottawa 38.8 per cent, down 0.5 percentage points; and Edmonton 30.7 per cent, down 0.1 percentage points. In Calgary, where the market is on an upswing, the measure was 38.1 per cent, up 0.2 percentage points.
Thursday 21 February 2013
Can this family afford a home of their own?
Andrew Allentuck, The Financial Post
In Alberta, a couple we’ll call Harry, 31, and Roberta, 29, recently had a baby boy. Though they have a handful of university degrees, they have chosen to live simply. Harry supervises production in a canning plant, earning a $62,496 a year before tax. Roberta, with a background in linguistics, does occasional freelance editing for scholarly journals while being a stay-at-home mom. To save money on their $4,125 combined monthly take-home pay, they live rent-free with Harry’s parents. One day, they will buy a house, then, perhaps, have a few more children. Their problem is trying to build a middle-class life on what may always be a modest income.
The first question is whether they can afford to buy a house. On the plus side is their frugal nature. They use cloth diapers and get lots of hand-me-down clothing from Roberta’s large family. Both supported themselves in university, paid their own tuition, and graduated with no student debt.
Family Finance asked Graeme Egan, a portfolio manager and financial planner at KCM Wealth Management Inc. in Vancouver, to work with the couple. His view is that they can attain the goal of home ownership based on Harry’s cash flow and their relatively substantial net worth for their ages, $108,700.
Building up savings
If they continue to live with Harry’s parents, their monthly expenses, just $1,105, will allow them to generate $3,020 a month of savings. Harry puts $156 a month into his company’s defined-contribution pension plan and the company doubles it, adding $312 a month, for total contributions of $468. If non-RRSP savings continue to grow at the present rate, Harry and Roberta can add $36,240 a year to their savings. They already have the money for a 25% down payment on a $300,000 house, so additional savings will just make it easier to support mortgage payments and buy furnishings. A 25-year mortgage at 3.0% would cost the couple $1,064 a month.
Their son’s post-secondary education is already being financed. His parents have put $500 into the account, on top of which gifts and Canada Education Savings Grants based on the parents’ income level pushed the balance up to $1,500. But as Harry’s salary grows, the government supplements will end. The most they can expect from the Canada Education Savings Grant in the future is the lesser of $500 or 20% of contributions a year.
If they contribute $2,500 for the next 17 years and each year receive $500 from the CESG, with a 4% rate of return after 2% inflation, the RESP would have about $74,000 when Fred is ready for university. He could cover additional costs, as his parents did, with part-time and summer jobs.
Retirement planning
Even though Harry and Roberta have moderate incomes, with three decades or more to go to their retirements, they have a good chance of building up substantial retirement assets. For now, Harry has decided to allocate 40% of his RRSP portfolio to global stocks, 30% to U.S. stocks and the balance to Canadian equities.
If Harry continues to add $5,616 a year to his pension or RRSP accounts, in 36 years, when he is eligible to receive Old Age Security at age 67, his RRSPs, with a present balance of $21,000, growing at an assumed rate of 4% per year over inflation, would have a total balance of $539,400. Those funds would support payouts at the same rate indefinitely at $21,576 a year without infringing on capital. The couple would have one Old Age Security payment of $6,553 a year and at least one CPP benefit of $12,150 a year for total retirement income of about $40,300 before tax. Two years later, when Roberta is 67, another OAS benefit of $6,553 would push income up to about $46,830 before tax in 2013 dollars.
Getting from the present, when Harry and Roberta are just beginning to have children, to retirement will take them from a time of high financial exposure to misfortune such as the premature death of the income-earning parent to a time of reduced risk in retirement. Harry should buy $375,000 of private term life coverage on top his company-paid term-life policy with a $125,000 death benefit for total death benefits of $500,000, the planner suggests. It would be inexpensive with premiums as low as a few hundred dollars a year.
“Time is on their side,” Mr. Egan says. “The power of investment compounding in their investment accounts and in Harry’s defined-contribution pension plan will play out nicely for them if they maintain their disciplined savings strategy after they buy a house. This analysis shows that it is discipline and focus as much as how much money you earn that can make a financial outlook happy or sad.”
Need help getting out of a financial fix? Email andrewallentuck@mts.net for a free Family Finance analysis.
In Alberta, a couple we’ll call Harry, 31, and Roberta, 29, recently had a baby boy. Though they have a handful of university degrees, they have chosen to live simply. Harry supervises production in a canning plant, earning a $62,496 a year before tax. Roberta, with a background in linguistics, does occasional freelance editing for scholarly journals while being a stay-at-home mom. To save money on their $4,125 combined monthly take-home pay, they live rent-free with Harry’s parents. One day, they will buy a house, then, perhaps, have a few more children. Their problem is trying to build a middle-class life on what may always be a modest income.
The first question is whether they can afford to buy a house. On the plus side is their frugal nature. They use cloth diapers and get lots of hand-me-down clothing from Roberta’s large family. Both supported themselves in university, paid their own tuition, and graduated with no student debt.
Family Finance asked Graeme Egan, a portfolio manager and financial planner at KCM Wealth Management Inc. in Vancouver, to work with the couple. His view is that they can attain the goal of home ownership based on Harry’s cash flow and their relatively substantial net worth for their ages, $108,700.
Building up savings
If they continue to live with Harry’s parents, their monthly expenses, just $1,105, will allow them to generate $3,020 a month of savings. Harry puts $156 a month into his company’s defined-contribution pension plan and the company doubles it, adding $312 a month, for total contributions of $468. If non-RRSP savings continue to grow at the present rate, Harry and Roberta can add $36,240 a year to their savings. They already have the money for a 25% down payment on a $300,000 house, so additional savings will just make it easier to support mortgage payments and buy furnishings. A 25-year mortgage at 3.0% would cost the couple $1,064 a month.
Their son’s post-secondary education is already being financed. His parents have put $500 into the account, on top of which gifts and Canada Education Savings Grants based on the parents’ income level pushed the balance up to $1,500. But as Harry’s salary grows, the government supplements will end. The most they can expect from the Canada Education Savings Grant in the future is the lesser of $500 or 20% of contributions a year.
If they contribute $2,500 for the next 17 years and each year receive $500 from the CESG, with a 4% rate of return after 2% inflation, the RESP would have about $74,000 when Fred is ready for university. He could cover additional costs, as his parents did, with part-time and summer jobs.
Retirement planning
Even though Harry and Roberta have moderate incomes, with three decades or more to go to their retirements, they have a good chance of building up substantial retirement assets. For now, Harry has decided to allocate 40% of his RRSP portfolio to global stocks, 30% to U.S. stocks and the balance to Canadian equities.
If Harry continues to add $5,616 a year to his pension or RRSP accounts, in 36 years, when he is eligible to receive Old Age Security at age 67, his RRSPs, with a present balance of $21,000, growing at an assumed rate of 4% per year over inflation, would have a total balance of $539,400. Those funds would support payouts at the same rate indefinitely at $21,576 a year without infringing on capital. The couple would have one Old Age Security payment of $6,553 a year and at least one CPP benefit of $12,150 a year for total retirement income of about $40,300 before tax. Two years later, when Roberta is 67, another OAS benefit of $6,553 would push income up to about $46,830 before tax in 2013 dollars.
It is discipline and focus as much as how much money you earn that can make a financial outlook happy or sadIf they maintain TFSA contributions to their accounts with a present balance of $48,000, with $11,000 contributed each year and 4% annual growth after inflation, they would have a balance in 36 years of about $1,084,700. Their ability to maintain this stream of contributions is doubtful once they have a mortgage and more children. However, that balance would generate pre-tax income of $43,388 a year, giving them a final, pre-tax income of approximately $90,220 a year. After splitting pension income and paying 20% average tax, they would have $6,015 a month to spend in 2013 dollars.
Getting from the present, when Harry and Roberta are just beginning to have children, to retirement will take them from a time of high financial exposure to misfortune such as the premature death of the income-earning parent to a time of reduced risk in retirement. Harry should buy $375,000 of private term life coverage on top his company-paid term-life policy with a $125,000 death benefit for total death benefits of $500,000, the planner suggests. It would be inexpensive with premiums as low as a few hundred dollars a year.
“Time is on their side,” Mr. Egan says. “The power of investment compounding in their investment accounts and in Harry’s defined-contribution pension plan will play out nicely for them if they maintain their disciplined savings strategy after they buy a house. This analysis shows that it is discipline and focus as much as how much money you earn that can make a financial outlook happy or sad.”
Need help getting out of a financial fix? Email andrewallentuck@mts.net for a free Family Finance analysis.
Mixed messages from media – it’s the norm
TMG The Mortgage Group
Despite recent media attention to a slowing housing market as well as reporting on job losses, and an underperforming economy, as usual, things are not as bad as they seem. Really! Let’s first take a look at what’s happening in the U.S.
That country’s export market expanded in the fourth quarter of 2012, which means that factories are increasing their output and products are being sold. This is a good omen for the manufacturing sector there and it points to an increase in trade with other countries.
There are positive signs in the retail sector and in the consumer credit market – people are starting to spend more, albeit it’s slow, but still a good sign.
While average home prices in the U.S. are still about 30 per cent lower than their 2005 peak, the long road to recovery has begun. Real home prices in the third quarter of 2012 were 5% higher than a year ago.
In Canada, we need to accept the market for what it is – balanced – which, actually means normal. A hot real estate market is not the norm, yet people think that anything less than boom times is doom and gloom. Hot markets can’t be sustained. It’s great when we’re in it – all sectors benefit – but eventually, the market returns to normal.
According to a report by Benjamin Tal, Deputy Chief Economist for CIBC, the Canadian economy is making sense again. Both the labour market and housing starts, although weaker than what we’ve been experiencing, he says, are in line with what we should be seeing at this point.
The big picture is that the Canadian economy will probably grow by 1.7%-2.0% in 2013 and that’s normal.
Once again, we are getting
mixed messages from the media. Headlines warn that house prices are easing, yet
on further reading, we find that only a few major centres are feeling the pinch.
In local markets, prices have stabilized and even increased slightly.
For example, in Vancouver, prices fell 0.81 per cent in January from December, and were down 2.54 per cent from a year earlier. Prices in Calgary slipped 0.1 per cent on the month, but rose 4.29 per cent on the year. And Toronto saw prices dip 0.37 per cent between December and January, but register a gain of 5.31 per cent from a year earlier.
While prices may be stabilizing, sales are lower than a year earlier. Information from The Canadian Real Estate Association (CREA) showed the number of sales had not changed much month-to-month since September, 2012. That just changed with CREA’s latest report released on February 15 stating that national home sales activity edged up on a month-over-month basis in January 2013.
Yes, the housing market has cooled since January 2012 but signs point to a fairly healthy spring market.
For example, in Vancouver, prices fell 0.81 per cent in January from December, and were down 2.54 per cent from a year earlier. Prices in Calgary slipped 0.1 per cent on the month, but rose 4.29 per cent on the year. And Toronto saw prices dip 0.37 per cent between December and January, but register a gain of 5.31 per cent from a year earlier.
While prices may be stabilizing, sales are lower than a year earlier. Information from The Canadian Real Estate Association (CREA) showed the number of sales had not changed much month-to-month since September, 2012. That just changed with CREA’s latest report released on February 15 stating that national home sales activity edged up on a month-over-month basis in January 2013.
Yes, the housing market has cooled since January 2012 but signs point to a fairly healthy spring market.
Despite recent media attention to a slowing housing market as well as reporting on job losses, and an underperforming economy, as usual, things are not as bad as they seem. Really! Let’s first take a look at what’s happening in the U.S.
That country’s export market expanded in the fourth quarter of 2012, which means that factories are increasing their output and products are being sold. This is a good omen for the manufacturing sector there and it points to an increase in trade with other countries.
There are positive signs in the retail sector and in the consumer credit market – people are starting to spend more, albeit it’s slow, but still a good sign.
While average home prices in the U.S. are still about 30 per cent lower than their 2005 peak, the long road to recovery has begun. Real home prices in the third quarter of 2012 were 5% higher than a year ago.
In Canada, we need to accept the market for what it is – balanced – which, actually means normal. A hot real estate market is not the norm, yet people think that anything less than boom times is doom and gloom. Hot markets can’t be sustained. It’s great when we’re in it – all sectors benefit – but eventually, the market returns to normal.
According to a report by Benjamin Tal, Deputy Chief Economist for CIBC, the Canadian economy is making sense again. Both the labour market and housing starts, although weaker than what we’ve been experiencing, he says, are in line with what we should be seeing at this point.
The big picture is that the Canadian economy will probably grow by 1.7%-2.0% in 2013 and that’s normal.
Tuesday 19 February 2013
Scotia Ups the Ante on 10-year Mortgages
Rob McLister, CMT, CanadianMortgageTrends.com
Despite record-low 10-year fixed rates, one could argue that the odds still favour shorter terms—at least for financially secure borrowers.
The historical advantage of shorter terms and the lower probability of dramatic rate increases are two common arguments against 10-year mortgages.
But last week, Scotiabank weakened these arguments by launching a record-low 10-year fixed rate of 3.69%. In doing so, it made it a little harder to dismiss decade-long terms.
Despite record-low 10-year fixed rates, one could argue that the odds still favour shorter terms—at least for financially secure borrowers.
The historical advantage of shorter terms and the lower probability of dramatic rate increases are two common arguments against 10-year mortgages.
But last week, Scotiabank weakened these arguments by launching a record-low 10-year fixed rate of 3.69%. In doing so, it made it a little harder to dismiss decade-long terms.
When it comes to term selection, there is a fixation on rate, notes David Stafford, Managing Director at Scotiabank, Real Estate Secured Lending. “We've seen customers moving to shorter terms for marginal savings when we think the best advice in this market is to lock in longer and put these rates to work for you.”
“We don't predict the future, but there are a lot of economic indicators that things are improving - especially south of the border,” Stafford says. “…If we think rates are likely—at some point in the not too distant future—to move back into a more normal range, those taking [shorter] terms now may well look back on this as a missed opportunity.”
At the moment, 10-year rates are far below average. Before the credit crisis in 2007, they were more than two points higher than now.
Stafford maintains that folks who take 10-year terms today should consider making payments “like it’s 2007.” That means making the same payments you would have made if 2007 rates were still in effect. (See: Pay Like the…Olden Days) Doing so partly mitigates the rate differential between 5- and 10-year terms.
5 vs. 10
At the moment, you can get a full-featured 5-year fixed for 2.99% or less. Break-even analysis shows that for a 10-year fixed to be cheaper than a 5-year fixed, 5-year rates must rise over 1.70% in the next 60 months.
Put another way, if you got a 2.99% five-year fixed today and renewed into a 4.70%+ five-year fixed in 2018, you would have been better off taking a 10-year fixed.
Note, however, that statement is based solely on a comparison of regular mortgage interest. There are numerous other considerations with term selection, not the least of which are early breakage penalties. For more, see: Nickel or Dime)
Stafford says Scotiabank is “trying to draw people's attention to the opportunity in longer terms.” At 3.69%, it’s doing a good job of that, and Scotia’s 10-year volumes should surge as a result.
“We don't predict the future, but there are a lot of economic indicators that things are improving - especially south of the border,” Stafford says. “…If we think rates are likely—at some point in the not too distant future—to move back into a more normal range, those taking [shorter] terms now may well look back on this as a missed opportunity.”
At the moment, 10-year rates are far below average. Before the credit crisis in 2007, they were more than two points higher than now.
Stafford maintains that folks who take 10-year terms today should consider making payments “like it’s 2007.” That means making the same payments you would have made if 2007 rates were still in effect. (See: Pay Like the…Olden Days) Doing so partly mitigates the rate differential between 5- and 10-year terms.
5 vs. 10
At the moment, you can get a full-featured 5-year fixed for 2.99% or less. Break-even analysis shows that for a 10-year fixed to be cheaper than a 5-year fixed, 5-year rates must rise over 1.70% in the next 60 months.
Put another way, if you got a 2.99% five-year fixed today and renewed into a 4.70%+ five-year fixed in 2018, you would have been better off taking a 10-year fixed.
Note, however, that statement is based solely on a comparison of regular mortgage interest. There are numerous other considerations with term selection, not the least of which are early breakage penalties. For more, see: Nickel or Dime)
Stafford says Scotiabank is “trying to draw people's attention to the opportunity in longer terms.” At 3.69%, it’s doing a good job of that, and Scotia’s 10-year volumes should surge as a result.
Monday 18 February 2013
GTA sees 'good start' for 2013 existing home sales
Tara Perkins, The Globe and Mail
The number of existing homes that sold in the Greater Toronto Area in January was down only slightly from a year ago, a development that the realtors’ association says suggests that buyers are returning to the market.
There were 4,375 sales over the Multiple Listing Service during the month, compared to 4,432 in January of 2012. There had been 3,690 sales in December, down from 4,585 sales in December of 2011, as the market saw a sharp decline in year-over-year sales each month during the latter part of the year.
“The January sales figures represent a good start to 2013,” Ann Hannah, the president of the Toronto Real Estate Board, stated in a press release Tuesday. “While the number of transactions was down slightly compared to last year, the rate of decline was much less than what was experienced in the second half of 2012. This suggests that some buyers, who put their decision to purchase on hold last year due to stricter mortgage lending guidelines, are once again becoming active in the market.”
Finance Minister Jim Flaherty tightened up the rules for mortgage insurance in July by, among other things, cutting the maximum length of an insured mortgage from 30 years to 25. Realtors blamed the drop in sales on the new rules, saying that the changes knocked a number of first-time buyers out of the market.
Mr. Flaherty had been worried that consumers were taking on too much mortgage debt and that the price of homes were rising too quickly. Toronto’s condo market had been a particular worry for him.
The figures released Tuesday show that there were 730 sales of existing (as opposed to newly constructed) condos in Toronto’s downtown area covered by the 416 area code during January, down 4.5 per cent from a year ago. In comparison 680 condos sold during December, down 26.9 per cent from a year earlier.
The average selling price during January of all home types in the Greater Toronto Area was $482,648, up 4.3 per cent from $462,655 a year ago. The MLS Home Price Index Composite Benchmark price was up 3.8 per cent from the same period.
On Monday the Real Estate Board of Greater Vancouver said that there were 1,351 resales in January, down 14.3 per cent from a year ago but up 18.3 per cent from the prior month. Experts point to Vancouver as the Canadian market that was most overheated, and the slowdown began earlier there than elsewhere in the country. The real estate board says prices have come down by about 6 per cent since last spring. January’s sales level was the second lowest that Vancouver has recorded for that month since 2001, and potential sellers are increasingly taking their homes off the market.
The decline in new listings in Vancouver could ultimately temper the price declines, BMO Nesbitt Burns economist Robert Kavcic noted Tuesday.
Calgary continues to be an outlier, with January’s sales up more than 15 per cent from a year earlier.
There were 4,375 sales over the Multiple Listing Service during the month, compared to 4,432 in January of 2012. There had been 3,690 sales in December, down from 4,585 sales in December of 2011, as the market saw a sharp decline in year-over-year sales each month during the latter part of the year.
“The January sales figures represent a good start to 2013,” Ann Hannah, the president of the Toronto Real Estate Board, stated in a press release Tuesday. “While the number of transactions was down slightly compared to last year, the rate of decline was much less than what was experienced in the second half of 2012. This suggests that some buyers, who put their decision to purchase on hold last year due to stricter mortgage lending guidelines, are once again becoming active in the market.”
Finance Minister Jim Flaherty tightened up the rules for mortgage insurance in July by, among other things, cutting the maximum length of an insured mortgage from 30 years to 25. Realtors blamed the drop in sales on the new rules, saying that the changes knocked a number of first-time buyers out of the market.
Mr. Flaherty had been worried that consumers were taking on too much mortgage debt and that the price of homes were rising too quickly. Toronto’s condo market had been a particular worry for him.
The figures released Tuesday show that there were 730 sales of existing (as opposed to newly constructed) condos in Toronto’s downtown area covered by the 416 area code during January, down 4.5 per cent from a year ago. In comparison 680 condos sold during December, down 26.9 per cent from a year earlier.
The average selling price during January of all home types in the Greater Toronto Area was $482,648, up 4.3 per cent from $462,655 a year ago. The MLS Home Price Index Composite Benchmark price was up 3.8 per cent from the same period.
On Monday the Real Estate Board of Greater Vancouver said that there were 1,351 resales in January, down 14.3 per cent from a year ago but up 18.3 per cent from the prior month. Experts point to Vancouver as the Canadian market that was most overheated, and the slowdown began earlier there than elsewhere in the country. The real estate board says prices have come down by about 6 per cent since last spring. January’s sales level was the second lowest that Vancouver has recorded for that month since 2001, and potential sellers are increasingly taking their homes off the market.
The decline in new listings in Vancouver could ultimately temper the price declines, BMO Nesbitt Burns economist Robert Kavcic noted Tuesday.
Calgary continues to be an outlier, with January’s sales up more than 15 per cent from a year earlier.
Tighter mortgage rules might be ‘insufficient’ to curb household debt
By Erica Alini, MacLeans.ca
Targeted rules are often a better way to deal with a buildup of risk in the economy than monetary policy, BoC Deputy Governor Timothy Lane said in his prepared remarks for a speech he gave today at Harvard University. So, for example, if households have gone on a borrowing binge and house prices are inflated, you’d be better off tightening mortgage regulations than raising interest rates. Tougher mortgage rules target the housing market specifically; an interest rate hike would also hit exporters by causing your home currency to appreciate—unless other countries rein in their monetary policy as well (which ain’t happening any time soon in the real world).
This is a well-known policy stance of the BoC. Governor Mark Carney just told all this once again to British MPs last week: Canada is better off curing its household debt problem with a healthy dose of mortgage-rule tightening rather than an rate raise, which would come with serious side effects.
And yet, if the more sophisticated, light-touch treatment doesn’t do the trick, the BoC might have to use its rougher, heavier medicine, Lane told his distinguished Harvard audience today:
“If such targeted prudential measures turned out to be insufficient, monetary policy could also be used, within a flexible inflation-targeting framework, as a complementary instrument to address financial imbalances.“
Canadians have slowed down the pace at which they’re taking on new debt and there’s plenty of evidence the residential real estate market is cooling. But, Lane noted, that could still turn out to be a temporary improvement:
“it is possible … that household spending could regain momentum”
After all, if interest rates stay at rock bottom, borrowing will stay cheap.
Thursday 14 February 2013
Momentum continues in Calgary luxury home market
MLS sales in January just shy of all-time record for the month
By Mario Toneguzzi, Calgary Herald
By Mario Toneguzzi, Calgary Herald
CALGARY — Calgary’s housing market experienced a record year for luxury home sales in 2012 and the pace of transactions in January 2013 suggests the market is not slowing down.
According to the Calgary Real Estate Board, there were 34 MLS sales in Calgary of properties over $1 million in January — just shy of the January record of 36 luxury sales in 2007.
Calgary finished 2012 with an all-time record of 544 luxury home sales, eclipsing the previous mark of 458 in 2007.
The luxury home market in the city has rebounded following the recession dip of a couple of years ago.
Don Campbell, senior analyst and founding partner of the Real Estate Investment Network, said that during market corrections luxury homes are the first to drop off, after recreational properties, and the first to come back unlike recreational which is always last to recover.
“In Calgary, within the business world, confidence in business has come roaring back,” he said. “This has led those with capital and strong businesses to take the leap into the market.
“In a higher than average percentage, due to their more business orientation, those buying luxury homes have their finger on the pulse of economic direction and therefore with the resurgence of the Calgary economy over the last 14 months, they are identifying the fact that the luxury homes they want are not going to get any cheaper than they are now. They are seeing the underlying economic strength of the city and want to get into the market before it is reflected in the housing market. That is why you saw so much activity in 2012.”
Campbell said the large number of luxury home sales will push average sale prices up more than it is really being felt at the mid-market level.
“This will create un-supported expectations of mid-market sellers. Also, there are only so many luxury market homes in any given market and they are often the first to move,” said Campbell. “What we often see is a slowdown in these sales after 18 to 24 months and when this occurs it slows down the average sale price increase to lower than is being felt on the street.
“The other anomaly we are seeing in Calgary in the luxury market is the profile of the buyer. Compared to Toronto and Vancouver, whose luxury homebuyer demographic is made up of a large percentage of foreign/offshore buyers, Calgary’s luxury homebuyer profile is very local. People here in business have high paying jobs in Alberta. This is a much more stable cohort than the often fickle offshore buyer.”
Last year in January there were 16 luxury home sales in Calgary. After hitting a high in 2007, the market dipped to only six sales in January 2009.
“We have seen a 20 per cent increase in luxury sales in Calgary in 2012 over 2011 and are seeing tremendous momentum building already in 2013 this past month,” said Rachelle Starnes, realtor with Royal LePage Foothills in Calgary. “We have seen 10 sales over $1 million in Rocky View County in the past month, up 67 per cent over the same period last year. The Springbank area continues to be the busiest being one of the wealthiest areas in the country.
According to the Calgary Real Estate Board, there were 34 MLS sales in Calgary of properties over $1 million in January — just shy of the January record of 36 luxury sales in 2007.
Calgary finished 2012 with an all-time record of 544 luxury home sales, eclipsing the previous mark of 458 in 2007.
The luxury home market in the city has rebounded following the recession dip of a couple of years ago.
Don Campbell, senior analyst and founding partner of the Real Estate Investment Network, said that during market corrections luxury homes are the first to drop off, after recreational properties, and the first to come back unlike recreational which is always last to recover.
“In Calgary, within the business world, confidence in business has come roaring back,” he said. “This has led those with capital and strong businesses to take the leap into the market.
“In a higher than average percentage, due to their more business orientation, those buying luxury homes have their finger on the pulse of economic direction and therefore with the resurgence of the Calgary economy over the last 14 months, they are identifying the fact that the luxury homes they want are not going to get any cheaper than they are now. They are seeing the underlying economic strength of the city and want to get into the market before it is reflected in the housing market. That is why you saw so much activity in 2012.”
Campbell said the large number of luxury home sales will push average sale prices up more than it is really being felt at the mid-market level.
“This will create un-supported expectations of mid-market sellers. Also, there are only so many luxury market homes in any given market and they are often the first to move,” said Campbell. “What we often see is a slowdown in these sales after 18 to 24 months and when this occurs it slows down the average sale price increase to lower than is being felt on the street.
“The other anomaly we are seeing in Calgary in the luxury market is the profile of the buyer. Compared to Toronto and Vancouver, whose luxury homebuyer demographic is made up of a large percentage of foreign/offshore buyers, Calgary’s luxury homebuyer profile is very local. People here in business have high paying jobs in Alberta. This is a much more stable cohort than the often fickle offshore buyer.”
Last year in January there were 16 luxury home sales in Calgary. After hitting a high in 2007, the market dipped to only six sales in January 2009.
“We have seen a 20 per cent increase in luxury sales in Calgary in 2012 over 2011 and are seeing tremendous momentum building already in 2013 this past month,” said Rachelle Starnes, realtor with Royal LePage Foothills in Calgary. “We have seen 10 sales over $1 million in Rocky View County in the past month, up 67 per cent over the same period last year. The Springbank area continues to be the busiest being one of the wealthiest areas in the country.
“Prices have dropped in the higher-end to reasonable levels, there is a dwindling supply and buyers have been out shopping the market for months. They have done their research and are ready to buy the minute the ‘perfect’ home hits the market. Calgary continues to be the ‘City of Choice’ for corporations moving West and the high salaries from the oil and gas market sectors allow for lots of ‘move-up’ buyers.”
The following are the annual sales in Calgary for homes priced at more than $1 million, according to the Calgary Real Estate Board:
2012 — 544
2011 — 446
2010 — 365
2009 — 337
2008 — 369
2007 — 458
2006 — 334
2005 — 138
2004 — 44
2003 — 36
2002 — 21
2001 — 14
2000 — 14
mtoneguzzi@calgaryherald.com
The following are the annual sales in Calgary for homes priced at more than $1 million, according to the Calgary Real Estate Board:
2012 — 544
2011 — 446
2010 — 365
2009 — 337
2008 — 369
2007 — 458
2006 — 334
2005 — 138
2004 — 44
2003 — 36
2002 — 21
2001 — 14
2000 — 14
mtoneguzzi@calgaryherald.com
Wednesday 13 February 2013
Bank Mortgages: Disclosure and Suitability
Rob McLister, CMT, CanadianMortgageTrends.com
There are so many things the Average Joe doesn’t know about the mortgage business.
One is that bank mortgage reps often get paid more for selling higher rates—as do many brokers.
Another is that banks sometimes direct borrowers to outside lenders that the bank has financial relationships with. This happens when the bank chooses not to service the applicant directly (due to qualification issues or an inability to meet the customer’s expectations).
Both of these issues entail potential conflicts and disclosure problems, but banking regulators don’t monitor these matters as closely as you’d think. That was the topic in this week’s Globe column: That story (shown below)
Such articles will undoubtedly annoy certain stakeholders, but the conflicts they expose rarely apply to bank reps and brokers who take their fiduciary obligations seriously. Those are individuals who never fear an informed consumer.
Your Bank Mortgage: Is it fair and does it suit your needs?
Robert McLister, Special to The Globe and Mail
Banks operate under the scrutiny of government watchdogs. But when it comes to mortgages, those watchdogs don’t watch everything they could.
“Individual (bank) mortgage reps operate outside of regulatory boundaries which commonly govern licensed professionals,” says Samantha Gale, a former mortgage regulator with B.C.’s Financial Institutions Commission and chief executive officer of the Mortgage Brokers Association of British Columbia. Rules pertaining to mortgage rep competency, the suitability of mortgage recommendations and compensation disclosure are largely left to the banks themselves.
That raises certain questions, like the procedure banks use when sending a mortgage applicant to another lender.
At Royal Bank of Canada (RBC), for example, mortgage reps route applicants that don’t meet normal guidelines to their Alternate Mortgage Solutions (AMS) team. RBC’s AMS employees then farm those customers out to other lenders and the bank’s mortgage rep gets paid when the mortgages close.
Some might easily mistake this practice for “dealing in mortgages,” an activity that normally requires a brokering license. But, because bank employees are the ones recommending the alternative lenders, and because banks are federally regulated, they aren’t bound by tough provincial rules that make it an offence to broker without a licence.
Consumer protections differ in bank and broker circles. In Ontario, for example, provincial penalties apply whenever a broker:
With bank mortgage reps, there is no independent government watchdog that directly sets specific suitability and compensation disclosure rules, audits and monitors individual reps, and publicizes it when a bank rep breaks the rules. The banks themselves are responsible for “developing the policies and procedures to be followed” by their mortgage reps, says Rachel Swiednicki of the Canadian Bankers Association (CBA).
Many assume the Office of the Superintendent of Financial Institutions (OSFI), the primary bank regulator, supervises bank rep conduct. In fact, OSFI’s main role is to “monitor and examine institutions for solvency, liquidity, safety and soundness,” says a spokesperson. “OSFI does not have the authority to intervene in the day-to-day operations of the institutions it regulates for individual consumer-protection purposes.”
That’s actually the job of the Financial Consumer Agency of Canada (FCAC). It is tasked with ensuring that bankers comply with federal consumer protection rules.
FCAC is a fantastic mortgage educator and regulator when it comes to high-profile problems like mortgage penalty disclosure or failure to provide cost of credit disclosure. But “FCAC appears to regulate systemic institutional compliance problems only,” says Ms. Gale.
Julie Hauser, FCAC’s spokesperson, explains that “FCAC supervises federally regulated financial institutions, not individual employees.” Unlike provincial broker regulators, FCAC generally does not:
· Have its own set of rules, prohibitions and competency requirements to promote suitable mortgage recommendations (e.g., federal rules don’t deal with specifics about what constitutes a suitable alternative lender for a declined borrower, or when a secured line of credit, 1-year term or fully-closed mortgage are appropriate for a borrower)
· Impose specific educational standards and licensing for bank reps
· Pro-actively audit or monitor individual bank mortgage rep conduct
· Post online when a bank rep wrongs a mortgage customer (like this.)
That means it’s up to a bank to set and enforce its own specific competency, suitability and market conduct policies within general federal guidelines. In many ways, this makes banks their own overseer.
So, why aren’t the feds watching mortgage rep activity more closely? Apparently it’s a low priority issue for Ottawa. “We need the political will of regulators to get together and sort this problem out,” Ms. Gale adds. “There is real risk here for consumers.”
Ms. Gale says that mortgage brokers have a fiduciary-like relationship with customers – to recommend a suitable lender with suitable terms. But with banks, a similar fiduciary relationship doesn’t exist because they primarily push their own brand.
“Banks are kind of like a mortgage shop,” she says. “And when they pass you off to another lender, and you don’t know who you’re dealing with and why, that’s a consumer risk.” (Banks always get a customer’s consent to work with another lender, but a bank’s true reasons for choosing another lender are not always disclosed.)
Some banks refer customers that they can’t service to lenders or brokerages that the bank has a monetary interest with. “They’re not necessarily working for you to get you the best deal,” Ms. Gale says.
Rodney Mendes, a broker and former TD Canada Trust mortgage specialist of 15 years, says banks’ internal guidelines are “just as stringent” as provincial broker regulators.’ RBC, for example, states it has a “strict code of conduct,” “comprehensive training” and “pro-active monitoring and auditing practices for its entire mortgage business.”
That’s all good, but bank mortgage reps “don’t report to any governmental authority unless there is a complaint,” Mr. Mendes says. “Bank mortgage specialists report to their own internal compliance department” so it’s often up to management to discipline a mortgage rep. And, in a small number of cases, it’s possible that management “may not want to lose volume on their books” by coming down too hard on a big producer.
Banks have a “strong culture of compliance,” counters the CBA’s Maura Drew-Lytle. Banks make mortgage specialists attest to their compliance obligations and subject them to annual training and testing. Mortgage reps can also be fired, which is less of a threat for mortgage brokers. Ms. Drew-Lytle also notes that banks address most consumer complaints internally, using well-established complaint processes with a third-party ombudsman as an arbiter.
All of that is true. But when it comes specifically to suitability and compensation conflicts, the goal should be to fully disclose and avoid them, not address them when there’s a complaint.
As a side note, not all mortgage brokers have clean hands just because they’re monitored more directly by provincial regulators. Like the large majority of bankers, most brokers are honourable professionals who care about their clients. Yet, as a broker, I regularly witness biases, conflicts and competency issues in our industry. I’ll reveal examples in my next column.
That said, the takeaway here is that Canadians are forced to rely heavily on banks to police their own mortgage sales forces. There is no impartial government watchdog pro-actively targeting bank reps who make unsuitable mortgage recommendations or fail to disclose compensation-related conflicts. With more direction and better funding, the FCAC could assume that role.
Robert McLister is the editor of CanadianMortgageTrends.com and a mortgage planner at VERICO intelliMortgage, a mortgage brokerage. You can also follow him on twitter at @CdnMortgageNews.
There are so many things the Average Joe doesn’t know about the mortgage business.
One is that bank mortgage reps often get paid more for selling higher rates—as do many brokers.
Another is that banks sometimes direct borrowers to outside lenders that the bank has financial relationships with. This happens when the bank chooses not to service the applicant directly (due to qualification issues or an inability to meet the customer’s expectations).
Both of these issues entail potential conflicts and disclosure problems, but banking regulators don’t monitor these matters as closely as you’d think. That was the topic in this week’s Globe column: That story (shown below)
Sidebar:
The article linked to above examines concerns in the banks’ retail mortgage channels. On February 25, we’ll take an honest look at conflicts in the broker market.Such articles will undoubtedly annoy certain stakeholders, but the conflicts they expose rarely apply to bank reps and brokers who take their fiduciary obligations seriously. Those are individuals who never fear an informed consumer.
Your Bank Mortgage: Is it fair and does it suit your needs?
Robert McLister, Special to The Globe and Mail
Banks operate under the scrutiny of government watchdogs. But when it comes to mortgages, those watchdogs don’t watch everything they could.
“Individual (bank) mortgage reps operate outside of regulatory boundaries which commonly govern licensed professionals,” says Samantha Gale, a former mortgage regulator with B.C.’s Financial Institutions Commission and chief executive officer of the Mortgage Brokers Association of British Columbia. Rules pertaining to mortgage rep competency, the suitability of mortgage recommendations and compensation disclosure are largely left to the banks themselves.
That raises certain questions, like the procedure banks use when sending a mortgage applicant to another lender.
At Royal Bank of Canada (RBC), for example, mortgage reps route applicants that don’t meet normal guidelines to their Alternate Mortgage Solutions (AMS) team. RBC’s AMS employees then farm those customers out to other lenders and the bank’s mortgage rep gets paid when the mortgages close.
Some might easily mistake this practice for “dealing in mortgages,” an activity that normally requires a brokering license. But, because bank employees are the ones recommending the alternative lenders, and because banks are federally regulated, they aren’t bound by tough provincial rules that make it an offence to broker without a licence.
Consumer protections differ in bank and broker circles. In Ontario, for example, provincial penalties apply whenever a broker:
- Suggests an unsuitable lender or mortgage – Ontario requires brokers to “take reasonable steps” to ensure that any mortgage presented to a borrower is suitable. Not only must the borrower be properly qualified, but recommendations should attempt to minimize the borrower’s current and future borrowing costs and provide the right mortgage flexibility given the customer’s needs. By contrast, while bank regulations encourage banks to “Know Your Client,” they don’t contain specific guidelines on ensuring suitability – apart from confirming the borrower is properly qualified.
- Sells a higher mortgage rate to get paid more – Brokers must disclose this conflict of interest. Federal disclosure rules don’t hold banks to the same standard, even though many bank reps – like many brokers – get paid sales incentives and earn more for selling a higher interest rate.
With bank mortgage reps, there is no independent government watchdog that directly sets specific suitability and compensation disclosure rules, audits and monitors individual reps, and publicizes it when a bank rep breaks the rules. The banks themselves are responsible for “developing the policies and procedures to be followed” by their mortgage reps, says Rachel Swiednicki of the Canadian Bankers Association (CBA).
Many assume the Office of the Superintendent of Financial Institutions (OSFI), the primary bank regulator, supervises bank rep conduct. In fact, OSFI’s main role is to “monitor and examine institutions for solvency, liquidity, safety and soundness,” says a spokesperson. “OSFI does not have the authority to intervene in the day-to-day operations of the institutions it regulates for individual consumer-protection purposes.”
That’s actually the job of the Financial Consumer Agency of Canada (FCAC). It is tasked with ensuring that bankers comply with federal consumer protection rules.
FCAC is a fantastic mortgage educator and regulator when it comes to high-profile problems like mortgage penalty disclosure or failure to provide cost of credit disclosure. But “FCAC appears to regulate systemic institutional compliance problems only,” says Ms. Gale.
Julie Hauser, FCAC’s spokesperson, explains that “FCAC supervises federally regulated financial institutions, not individual employees.” Unlike provincial broker regulators, FCAC generally does not:
· Have its own set of rules, prohibitions and competency requirements to promote suitable mortgage recommendations (e.g., federal rules don’t deal with specifics about what constitutes a suitable alternative lender for a declined borrower, or when a secured line of credit, 1-year term or fully-closed mortgage are appropriate for a borrower)
· Impose specific educational standards and licensing for bank reps
· Pro-actively audit or monitor individual bank mortgage rep conduct
· Post online when a bank rep wrongs a mortgage customer (like this.)
That means it’s up to a bank to set and enforce its own specific competency, suitability and market conduct policies within general federal guidelines. In many ways, this makes banks their own overseer.
So, why aren’t the feds watching mortgage rep activity more closely? Apparently it’s a low priority issue for Ottawa. “We need the political will of regulators to get together and sort this problem out,” Ms. Gale adds. “There is real risk here for consumers.”
Ms. Gale says that mortgage brokers have a fiduciary-like relationship with customers – to recommend a suitable lender with suitable terms. But with banks, a similar fiduciary relationship doesn’t exist because they primarily push their own brand.
“Banks are kind of like a mortgage shop,” she says. “And when they pass you off to another lender, and you don’t know who you’re dealing with and why, that’s a consumer risk.” (Banks always get a customer’s consent to work with another lender, but a bank’s true reasons for choosing another lender are not always disclosed.)
Some banks refer customers that they can’t service to lenders or brokerages that the bank has a monetary interest with. “They’re not necessarily working for you to get you the best deal,” Ms. Gale says.
Rodney Mendes, a broker and former TD Canada Trust mortgage specialist of 15 years, says banks’ internal guidelines are “just as stringent” as provincial broker regulators.’ RBC, for example, states it has a “strict code of conduct,” “comprehensive training” and “pro-active monitoring and auditing practices for its entire mortgage business.”
That’s all good, but bank mortgage reps “don’t report to any governmental authority unless there is a complaint,” Mr. Mendes says. “Bank mortgage specialists report to their own internal compliance department” so it’s often up to management to discipline a mortgage rep. And, in a small number of cases, it’s possible that management “may not want to lose volume on their books” by coming down too hard on a big producer.
Banks have a “strong culture of compliance,” counters the CBA’s Maura Drew-Lytle. Banks make mortgage specialists attest to their compliance obligations and subject them to annual training and testing. Mortgage reps can also be fired, which is less of a threat for mortgage brokers. Ms. Drew-Lytle also notes that banks address most consumer complaints internally, using well-established complaint processes with a third-party ombudsman as an arbiter.
All of that is true. But when it comes specifically to suitability and compensation conflicts, the goal should be to fully disclose and avoid them, not address them when there’s a complaint.
As a side note, not all mortgage brokers have clean hands just because they’re monitored more directly by provincial regulators. Like the large majority of bankers, most brokers are honourable professionals who care about their clients. Yet, as a broker, I regularly witness biases, conflicts and competency issues in our industry. I’ll reveal examples in my next column.
That said, the takeaway here is that Canadians are forced to rely heavily on banks to police their own mortgage sales forces. There is no impartial government watchdog pro-actively targeting bank reps who make unsuitable mortgage recommendations or fail to disclose compensation-related conflicts. With more direction and better funding, the FCAC could assume that role.
Robert McLister is the editor of CanadianMortgageTrends.com and a mortgage planner at VERICO intelliMortgage, a mortgage brokerage. You can also follow him on twitter at @CdnMortgageNews.
Tuesday 12 February 2013
Soft Canadian Economy cause for concern, not alarm
Michael Babad, The Globe and Mail
Canada pulls back
Three key reports today help paint a picture of a softer Canadian economy, but one that's more cause for concern than alarm, as BMO Nesbitt Burns puts it.
"To some extent, the drop in jobs appears to be a payback for the surprising strength in the second half of last year, and would normally be little cause for concern," he said in a research note.
"However, with housing softening notably, and consumers and governments not in much mood (or ability) to spend, the economy will need a major helping hand from a stronger U.S. performance in the year ahead to help generate renewed job gains."
Mr. Porter added in an interview that the overall showing is not "cause for alarm, but it is cause for concern."
Canada sheds jobs
A pullback in the public sector led to the loss of 22,000 jobs in Canada last month, while the unemployment rate dipped to 7 per cent as more people stopped looking for work.
Some 27,000 jobs in the public sector disappeared in January, Statistics Canada said today, while private employers held the line and the ranks of the self employed grew slightly.
Today’s numbers come after a couple of months of particularly strong hiring, As The Globe and Mail’s Tavia Grant reports.
Compared to a year ago, private sector employment has climbed 1.9 per cent, while government jobs have held the line.
January’s losses came in the 25-54 age group, and largely among men, a pullback from the past several months.
Unemployment among Canada’s young people, the 15-24 age group, fell 0.6 of a percentage point, but still remains high at 13.5 per cent.
"It was about time that the [labour force survey] corrects to reflect the realities of stagnant economic growth," said senior economist Krishen Rangasamy of National Bank of Canada.
"We could have had an even worse number were it not for the 17,000 increase in the construction sector, which looks suspicious in a month that saw a collapse in housing starts," he added.
Housing starts slow
Housing construction slowed markedly in January, coming in below a key measure for the second month running.
Housing starts slipped last month to just 160,577 units, measured at an annual pace, compared to 197,118 in December, Canada Mortgage and Housing Corp. said today.
Urban construction starts plunged 22.3 per cent.
The drop comes amid a rapidly cooling housing market in Canada, though most observers still see a soft landing.
“The trend in total housing starts has been moderating since September 2012 and in existing home sales since May 2012,” said Mathieu Laberge, the agency’s deputy chief economist.
“Trends in the two market segments typically follow a similar pattern with the new home market lagging behind the existing home market by a few months. The current trend is also in line with CMHC’s housing market outlook, which calls for moderation in housing starts activity in 2013.”
Like building permits, these numbers can be volatile, but today’s reading was still deemed troublesome.
“While the series can be volatile during the winter months, particularly as December’s reading may have been supported by warmer-than-normal temperatures, the sheer scale of the drop points to an acute weakening in the homebuilding sector, consistent with the slowing trend in residential building permits seen in recent reports,” said economist Emanuella Enenajor of CIBC World Markets, noting that condo construction drove the decline.
“Today’s data suggest homebuilding is set to swing from an economic positive in 2012 to a drag in 2013.”
Canada pulls back
Three key reports today help paint a picture of a softer Canadian economy, but one that's more cause for concern than alarm, as BMO Nesbitt Burns puts it.
- Canada lost 22,000 jobs in January, though the jobless rate dipped, following an exceptional showing late last year.
- The pace of new homebuilding slowed rapidly amid a cooling housing market.
- Canada's trade deficit narrowed, but it's still a deficit, and the dip is because imports fell more than exports.
"To some extent, the drop in jobs appears to be a payback for the surprising strength in the second half of last year, and would normally be little cause for concern," he said in a research note.
"However, with housing softening notably, and consumers and governments not in much mood (or ability) to spend, the economy will need a major helping hand from a stronger U.S. performance in the year ahead to help generate renewed job gains."
Mr. Porter added in an interview that the overall showing is not "cause for alarm, but it is cause for concern."
Canada sheds jobs
A pullback in the public sector led to the loss of 22,000 jobs in Canada last month, while the unemployment rate dipped to 7 per cent as more people stopped looking for work.
Some 27,000 jobs in the public sector disappeared in January, Statistics Canada said today, while private employers held the line and the ranks of the self employed grew slightly.
Today’s numbers come after a couple of months of particularly strong hiring, As The Globe and Mail’s Tavia Grant reports.
Compared to a year ago, private sector employment has climbed 1.9 per cent, while government jobs have held the line.
January’s losses came in the 25-54 age group, and largely among men, a pullback from the past several months.
Unemployment among Canada’s young people, the 15-24 age group, fell 0.6 of a percentage point, but still remains high at 13.5 per cent.
"It was about time that the [labour force survey] corrects to reflect the realities of stagnant economic growth," said senior economist Krishen Rangasamy of National Bank of Canada.
"We could have had an even worse number were it not for the 17,000 increase in the construction sector, which looks suspicious in a month that saw a collapse in housing starts," he added.
Housing starts slow
Housing construction slowed markedly in January, coming in below a key measure for the second month running.
Housing starts slipped last month to just 160,577 units, measured at an annual pace, compared to 197,118 in December, Canada Mortgage and Housing Corp. said today.
Urban construction starts plunged 22.3 per cent.
The drop comes amid a rapidly cooling housing market in Canada, though most observers still see a soft landing.
“The trend in total housing starts has been moderating since September 2012 and in existing home sales since May 2012,” said Mathieu Laberge, the agency’s deputy chief economist.
“Trends in the two market segments typically follow a similar pattern with the new home market lagging behind the existing home market by a few months. The current trend is also in line with CMHC’s housing market outlook, which calls for moderation in housing starts activity in 2013.”
Like building permits, these numbers can be volatile, but today’s reading was still deemed troublesome.
“While the series can be volatile during the winter months, particularly as December’s reading may have been supported by warmer-than-normal temperatures, the sheer scale of the drop points to an acute weakening in the homebuilding sector, consistent with the slowing trend in residential building permits seen in recent reports,” said economist Emanuella Enenajor of CIBC World Markets, noting that condo construction drove the decline.
“Today’s data suggest homebuilding is set to swing from an economic positive in 2012 to a drag in 2013.”
Bad News is Good News for VRMs
By Rob McLister, CMT, CanadianMortgageTrends.com
Hundreds of thousands of borrowers with variable-rate mortgages (VRMs) are rooting for prime rate to stay low.
For those people, this past week’s dreary economic data had a silver lining. Mortgage rates generally move with economic growth expectations, and those expectations dimmed this week. That led more economists to push back their forecasts for the next rate hike (yes, again) to 2014.
And it is because of headlines like these:
What's It All Mean
The above sort of talk is usually associated more with rate cuts than rate hikes. But the truth is, no one knows how consumer psychology and external events will shape Canadian inflation and mortgage rates through year-end.
Our best hope for comprehending the infinite factors guiding mortgage rates is to observe the bond market. A yield chart (like the one below) shows how investors have been betting their billions.
For the last few months, the trend in long-term rates has been modestly up. There is, however, little chance of a meaningful jump in fixed mortgage rates until 5-year yields push above 1.55-1.60%—and stay there a while. (Current Quote)
And even if yields do break above that level, few expect enough inflation risk to justify a substantial upward follow-through—at least not in the next quarter or two. For that reason, existing VRM holders have no reason for anxiety just yet.
(5-year yield chart — Click to enlarge)
The Long-term Relevance, or Lack Of
Any rate analysis is largely speculation. Given the near-random walk of the rate market, rate predictions are mostly irrelevant to a long-term mortgage strategy.
But there is one exception where all this econo-talk and yield discussion proves useful, and that is short-term timing. If you’re timing when to submit a mortgage application (e.g., deciding if you should wait until you qualify for a “quick close” special before applying) monitoring yields can help. But it’s not a perfect science.
If you do make an educated gamble that rates won't increase before you submit your application, do it with the guidance of a professional, make it a short-term bet, and have your application finished ahead of time. That way, your mortgage advisor can click <Submit> at a moment’s notice if rates turn upwards.
For mortgage closings that are more than ~45 days out, always secure a normal rate hold that's long enough to minimize your risk.
Rob McLister, CMT
Hundreds of thousands of borrowers with variable-rate mortgages (VRMs) are rooting for prime rate to stay low.
For those people, this past week’s dreary economic data had a silver lining. Mortgage rates generally move with economic growth expectations, and those expectations dimmed this week. That led more economists to push back their forecasts for the next rate hike (yes, again) to 2014.
And it is because of headlines like these:
- Thousands of Jobs Eliminated: The mother of Canadian economic reports is the Labour Force Survey. On Friday, it revealed that 22,000 jobs disappeared in January. The market was expecting 5,000 net new jobs. “Were it not for the increase in the ranks of the ‘self-employeds’ (+24K), the overall tally could have been much worse,” National Bank Financial (NBF) said Friday.
- Permits Dive off a Cliff: Building permits posted their biggest 2-month drop “since the data series started in 1989,” says Reuters, that attributes it largely to mortgage rule tightening.
- Housing Starts Stumble: January housing starts plunged to 160,577, their lowest since 2009 and way below forecast. Construction is “moving back in line with the pace of household formation,” says TD Economics. And NBF notes: “The tighter mortgage rules and the soft economy are having a negative impact on demand and home prices and there are fewer incentives for builders to continue the building spree.”
“The employment picture has started to deteriorate, in line with other real activity data such as GDP, housing starts, lower capacity utilization and a persistent trade deficit. Tighter fiscal policy in the U.S., a slowing housing market and increasing U.S. oil production should continue to be a drag on Canadian growth in the near term.”Add to that a Canadian consumer who seemingly gets more leveraged every quarter, and it sounds like a recipe for weak demand and low long-term rates.
What's It All Mean
The above sort of talk is usually associated more with rate cuts than rate hikes. But the truth is, no one knows how consumer psychology and external events will shape Canadian inflation and mortgage rates through year-end.
Our best hope for comprehending the infinite factors guiding mortgage rates is to observe the bond market. A yield chart (like the one below) shows how investors have been betting their billions.
For the last few months, the trend in long-term rates has been modestly up. There is, however, little chance of a meaningful jump in fixed mortgage rates until 5-year yields push above 1.55-1.60%—and stay there a while. (Current Quote)
And even if yields do break above that level, few expect enough inflation risk to justify a substantial upward follow-through—at least not in the next quarter or two. For that reason, existing VRM holders have no reason for anxiety just yet.
(5-year yield chart — Click to enlarge)The Long-term Relevance, or Lack Of
Any rate analysis is largely speculation. Given the near-random walk of the rate market, rate predictions are mostly irrelevant to a long-term mortgage strategy.
But there is one exception where all this econo-talk and yield discussion proves useful, and that is short-term timing. If you’re timing when to submit a mortgage application (e.g., deciding if you should wait until you qualify for a “quick close” special before applying) monitoring yields can help. But it’s not a perfect science.
If you do make an educated gamble that rates won't increase before you submit your application, do it with the guidance of a professional, make it a short-term bet, and have your application finished ahead of time. That way, your mortgage advisor can click <Submit> at a moment’s notice if rates turn upwards.
For mortgage closings that are more than ~45 days out, always secure a normal rate hold that's long enough to minimize your risk.
Rob McLister, CMT
Friday 8 February 2013
Is There a Prime-Rate Cut in Our Future?
Dave Larock in Mortgages and Finance, Home Buying, Toronto Real Estate News
Last week was filled with good news for variable-rate mortgage borrowers.
The Bank of Canada (BoC) met last Wednesday and, as expected, left its target overnight rate unchanged. More surprisingly though, the Bank also eliminated its oft-repeated warning about near-term rate increases. Here is the exact wording from the announcement:
While some modest withdrawal of monetary policy stimulus will likely be required over time, consistent with achieving a 2 percent inflation target, the more muted inflation outlook and the beginnings of a more constructive evolution of the imbalances in the housing sector suggest that the timing of any such withdrawal is less imminent than previously anticipated.
The first notable wording change was the BoC’s “more muted inflation outlook”, which was supported by the December Consumer Price Index (CPI), released by Statistics Canada last Friday. The report showed overall inflation of only 0.80% over the most recent twelve months, along with core inflation of 1.10% over the same period. (Reminder: core inflation strips out the more volatile inputs to the CPI like food and energy prices.)
Our inflation rates have fallen steadily over the past year and a half and are among the lowest in the world. If they remain at current levels, the BoC will have to think seriously about lowering its overnight rate, not raising it, to achieve a two percent inflation target over the medium term.
Sound crazy? Let’s look at the other key wording change in the BoC’s latest statement – the “more constructive evolution of the imbalances in the housing sector”.
Our borrowing has slowed sharply of late and household credit is now expanding at a rate of only 3%, the lowest level seen since 1999. If household credit growth, which BoC Governor Mark Carney has repeatedly called the “greatest threat to our domestic economy”, continues to stabilize, the BoC’s interest-rate policy should align more closely with the actual economic data going forward.
Government of Canada (GoC) five-year bond yields were one basis point lower for the week, closing at 1.46% on Friday. Five-year GoC bonds remain locked in a range between 1.35% and 1.50%, with market five-year fixed rates fluctuating between 2.99% and 3.04%. As always, borrowers who know where to look can find mortgage planners offering anywhere from five to ten basis points off of those rates, depending on the terms and conditions (some of which are quite important).
Variable-rate discounts are available in the prime minus 0.40% range (which works out to 2.60% using today’s prime rate). While five-year variable rates only offer a small saving over their equivalent five-year fixed rates, last week’s BoC announcements provided further reassurance that this saving should remain in place for the foreseeable future.
The bottom line: I have long argued that the BoC’s warnings about near-term higher rates would not come to fruition and the Bank’s latest revisions to its interest-rate guidance confirm this view. With that question now put to rest I don’t think it’s crazy to wonder whether the next move in the overnight rate, when it eventually does come, has as much chance being a decrease as an increase. (And that’s especially true if the BoC’s latest international GDP growth forecasts are on the money.)
David Larock is an independent mortgage planner and industry insider specializing in helping clients purchase, refinance or renew their mortgages. David's posts appear weekly on this blog (movesmartly.com) and on his own blog integratedmortgageplanners.com/blog). Email Dave
Last week was filled with good news for variable-rate mortgage borrowers.
The Bank of Canada (BoC) met last Wednesday and, as expected, left its target overnight rate unchanged. More surprisingly though, the Bank also eliminated its oft-repeated warning about near-term rate increases. Here is the exact wording from the announcement:
While some modest withdrawal of monetary policy stimulus will likely be required over time, consistent with achieving a 2 percent inflation target, the more muted inflation outlook and the beginnings of a more constructive evolution of the imbalances in the housing sector suggest that the timing of any such withdrawal is less imminent than previously anticipated.
The first notable wording change was the BoC’s “more muted inflation outlook”, which was supported by the December Consumer Price Index (CPI), released by Statistics Canada last Friday. The report showed overall inflation of only 0.80% over the most recent twelve months, along with core inflation of 1.10% over the same period. (Reminder: core inflation strips out the more volatile inputs to the CPI like food and energy prices.)
Our inflation rates have fallen steadily over the past year and a half and are among the lowest in the world. If they remain at current levels, the BoC will have to think seriously about lowering its overnight rate, not raising it, to achieve a two percent inflation target over the medium term.
Sound crazy? Let’s look at the other key wording change in the BoC’s latest statement – the “more constructive evolution of the imbalances in the housing sector”.
Our borrowing has slowed sharply of late and household credit is now expanding at a rate of only 3%, the lowest level seen since 1999. If household credit growth, which BoC Governor Mark Carney has repeatedly called the “greatest threat to our domestic economy”, continues to stabilize, the BoC’s interest-rate policy should align more closely with the actual economic data going forward.
I say this because I have long maintained that the Bank’s repeated warnings to Canadians about imminent rate increases have not actually been supported by economic data, domestic or otherwise, for some time. In fact, many analysts have long speculated that the BoC was using its higher-rate warning as a kind of moral suasion to persuade Canadians to slow their borrowing (a tactic that I would argue had little meaningful impact).
Even if you look at the BoC’s own economic forecasts, which were just updated in the latest Monetary Policy Report (MPR) that was released last week, there is plenty to suggest that the next move in the overnight rate could just as easily be down as up:
- The BoC cut its forecast for Canadian GDP growth from 2.40% to 2.00% in 2013. (Note: the Bank upgraded our GDP growth forecast for 2014 from 2.40% to 2.70% but didn’t support this optimistic revision with a detailed explanation. And it doesn’t jibe with any of the Bank’s projections for other countries in 2014, as you will see below). The Bank now also expects our output gap (the gap between our actual output and our maximum potential output) to disappear in the second half of 2014, instead of by the end of 2013, as forecasted in the October MPR.
- The BoC cut its forecast for U.S. GDP growth from 2.30% to 2.10% in 2013 and from 3.20% to 3.10% in 2014. The Bank now estimates that “fiscal consolidation will exert a significant drag on U.S. economic growth … [and this] will subtract roughly 1.5 percentage points from growth in both 2013 and 2014.”
- The BoC cut its euro-zone GDP growth forecast from 0.40% to -0.30% in 2013 and from 1.00% to 0.80% in 2014. The Bank now believes that “the economic recovery will be slower than originally thought, in part because fiscal austerity measures and tight credit conditions are taking a greater-than-expected toll on economic activity”.
- The BoC takes note of China’s recent economic rebound but also points out that “other economic activity has slowed further in other major emerging economies.”
- On an overall basis, the report states that while “global tail risks have diminished [meaning the risk of a systemic shock to the global financial system that could be caused by an event like a sovereign debt default], the global outlook is slightly weaker than projected in October”. In other words, the global economic momentum arrow is pointing down across the board.
Government of Canada (GoC) five-year bond yields were one basis point lower for the week, closing at 1.46% on Friday. Five-year GoC bonds remain locked in a range between 1.35% and 1.50%, with market five-year fixed rates fluctuating between 2.99% and 3.04%. As always, borrowers who know where to look can find mortgage planners offering anywhere from five to ten basis points off of those rates, depending on the terms and conditions (some of which are quite important).
Variable-rate discounts are available in the prime minus 0.40% range (which works out to 2.60% using today’s prime rate). While five-year variable rates only offer a small saving over their equivalent five-year fixed rates, last week’s BoC announcements provided further reassurance that this saving should remain in place for the foreseeable future.
The bottom line: I have long argued that the BoC’s warnings about near-term higher rates would not come to fruition and the Bank’s latest revisions to its interest-rate guidance confirm this view. With that question now put to rest I don’t think it’s crazy to wonder whether the next move in the overnight rate, when it eventually does come, has as much chance being a decrease as an increase. (And that’s especially true if the BoC’s latest international GDP growth forecasts are on the money.)
David Larock is an independent mortgage planner and industry insider specializing in helping clients purchase, refinance or renew their mortgages. David's posts appear weekly on this blog (movesmartly.com) and on his own blog integratedmortgageplanners.com/blog). Email Dave
Thursday 7 February 2013
B.C. Real Estate Association takes optimistic view of home-sales levels
By Tracy Sherlock, Vancouver Sun
Home sales are forecast to increase this year and next, with average prices dropping slightly in 2013 and crawling higher in 2014, the British Columbia Real Estate Association said Wednesday.
The association’s latest forecast calls for a 5.6-per-cent increase in the number of sales in 2013 and a further 6.1-per-cent increase in 2014, after the number of sales fell 11.8 per cent in 2012. In Metro Vancouver, the number of sales in Vancouver fell nearly 23 per cent in 2012, but the BCREA expects they will pick up over the next two years.
“I think 2013 is going to be a transition year into 2014 and 2015 when we are finally going to see the global economy start to post more regular performance,” said Cameron Muir, BCREA chief economist.
The economic fundamentals in B.C., such as low interest rates and growth in both employment and immigration, predict a much higher level of sales than are now occurring, Muir said.
“Tighter credit conditions introduced last year have had some impact, but a much larger impact is consumer psychology, where we’ve seen many consumers deciding to take a wait-and-see attitude in 2012. I think many of them will enter into the market in 2013.”
The forecast calls for 75,830 units to be sold in 2014 in B.C., while the five-year average is 74,600 and the 10-year average is 86,800 units, BCREA said.
“Sales, particularly in the fourth quarter of 2012 have certainly moderated, and Vancouver sales are likely going to be low again in January,” Muir said. “This forecast represents stronger activity happening in the second half of 2013.”
The average residential price is forecast to drop one per cent in the province to $510,000 in 2013, and edge up 0.6 per cent in 2014 to $513,500, BCREA said. In Vancouver, the forecast calls for average prices to drop 3.3 per cent in 2013 and a further 0.6 per cent in 2014.
“I don’t expect to see prices going anywhere fast, any time soon,” Muir said. “I expect to see prices remain quite flat over the next few years, and they would even likely decline in real terms if you put inflation into the picture.”
Most forecasts are inaccurate because conditions change over time, said Tsur Somerville, director of the centre for urban economics and real estate, Sauder School of Business at the University of B.C. “In general, BCREA is going to tend to be more optimistic than perhaps one of the banks might be.”
Somerville expects Metro Vancouver’s real estate market to remain slow for a while.
“Prices are more likely to decline over the next year than they are to to go up. I would be surprised if the declines are anything other than very moderate,” Somerville said.
Muir said average wages have been growing about two per cent each year, so condominiums and townhouses are becoming relatively more affordable.
“The benchmark price of condos and townhomes has been quite flat for the past three years, and if you discount that for inflation or wage growth, in a very real sense, real prices for apartments and townhouses are down about six per cent over (the) last three years.”
The association’s latest forecast calls for a 5.6-per-cent increase in the number of sales in 2013 and a further 6.1-per-cent increase in 2014, after the number of sales fell 11.8 per cent in 2012. In Metro Vancouver, the number of sales in Vancouver fell nearly 23 per cent in 2012, but the BCREA expects they will pick up over the next two years.
“I think 2013 is going to be a transition year into 2014 and 2015 when we are finally going to see the global economy start to post more regular performance,” said Cameron Muir, BCREA chief economist.
The economic fundamentals in B.C., such as low interest rates and growth in both employment and immigration, predict a much higher level of sales than are now occurring, Muir said.
“Tighter credit conditions introduced last year have had some impact, but a much larger impact is consumer psychology, where we’ve seen many consumers deciding to take a wait-and-see attitude in 2012. I think many of them will enter into the market in 2013.”
The forecast calls for 75,830 units to be sold in 2014 in B.C., while the five-year average is 74,600 and the 10-year average is 86,800 units, BCREA said.
“Sales, particularly in the fourth quarter of 2012 have certainly moderated, and Vancouver sales are likely going to be low again in January,” Muir said. “This forecast represents stronger activity happening in the second half of 2013.”
The average residential price is forecast to drop one per cent in the province to $510,000 in 2013, and edge up 0.6 per cent in 2014 to $513,500, BCREA said. In Vancouver, the forecast calls for average prices to drop 3.3 per cent in 2013 and a further 0.6 per cent in 2014.
“I don’t expect to see prices going anywhere fast, any time soon,” Muir said. “I expect to see prices remain quite flat over the next few years, and they would even likely decline in real terms if you put inflation into the picture.”
Most forecasts are inaccurate because conditions change over time, said Tsur Somerville, director of the centre for urban economics and real estate, Sauder School of Business at the University of B.C. “In general, BCREA is going to tend to be more optimistic than perhaps one of the banks might be.”
Somerville expects Metro Vancouver’s real estate market to remain slow for a while.
“Prices are more likely to decline over the next year than they are to to go up. I would be surprised if the declines are anything other than very moderate,” Somerville said.
Muir said average wages have been growing about two per cent each year, so condominiums and townhouses are becoming relatively more affordable.
“The benchmark price of condos and townhomes has been quite flat for the past three years, and if you discount that for inflation or wage growth, in a very real sense, real prices for apartments and townhouses are down about six per cent over (the) last three years.”
Muir expects an increase in immigration and solid employment will keep the market stable.
“We’re seeing part-time jobs being rolled over into full-time jobs, which points to a more solid underpinning for the economy and the housing market,” Muir said, adding that as the U.S. and the global economies recover, Canada will benefit.
Housing starts in the province will fall 3.5 per cent to 26,500 units in 2013, and go up 1.5 per cent to 26,900 units in 2014, the forecast said. The transition from the harmonized sales tax to the provincial sales tax may add a short-term boost to new homes sales this spring, the forecast said.
tsherlock@vancouversun.com
“We’re seeing part-time jobs being rolled over into full-time jobs, which points to a more solid underpinning for the economy and the housing market,” Muir said, adding that as the U.S. and the global economies recover, Canada will benefit.
Housing starts in the province will fall 3.5 per cent to 26,500 units in 2013, and go up 1.5 per cent to 26,900 units in 2014, the forecast said. The transition from the harmonized sales tax to the provincial sales tax may add a short-term boost to new homes sales this spring, the forecast said.
tsherlock@vancouversun.com
Housing Affordability
Article written by Boris Bozic on the 07 Feb 2013 in Business,Canada,Economy,Mortgage
Much has been written and said about mortgage debt and affordability recently. No point in belaboring what has and has not been done to address this issue. I’m sure there will be plenty of that in the future, as well ample hang ringing about the so-called condo bubble, specifically in Vancouver and Toronto.
The so-called “condo crisis” (oh, how the mere thought of it makes the press salivate) in Vancouver and Toronto came to mind after I read an article in the Wall Street Journal. The article focused on the cost of condos in Manhattan. The current median price of a condo in Manhattan is the lowest it’s has been since 2004. Could Manhattan’s experience be a harbinger of what’s to come for Vancouver and Toronto? If it is then maybe the 36 people in Toronto who don’t own a condo already should go and get one.
According to the Canadian Real Estate Association, the average home price for the month of December in Toronto was $501,361, and in Vancouver it was $730, 912. Remember this includes dirt to go along with the walls. In Manhattan the average condo price in 2012 was $835,000. However, adjusted for inflation it was the lowest since 2004. Can you imagine the headlines if Toronto was similar to Manhattan’s reality? The median price in Manhattan for a 2 bedroom condo was $1.26 million, 3 bedroom was $2.37 million and a 4 bedroom was $4.75 million. Adjusted for inflation these are the lowest prices since 2004. According to the Wall Street Journal article there’s a disconnect between buyers and investment indicators. Buyers are saying there’s not enough affordable housing and yet when you take inflation into account prices have actually declined. So is it a good time to buy a condo in Manhattan? I’m not familiar with the Manhattan’s housing cycle so I’m not sure, but what I can say is this: at an average price of $2.37 million for a 3 bedroom condo in Manhattan, I think Toronto is a good buy.
Some might be aghast that I would compare Manhattan to Toronto. Well, Toronto is the 4th largest market between the US and Canada. Therefore, I think it’s valid to look at values on a comparative basis. That’s exactly what foreign investors did when buying property in Vancouver and Toronto. As absurd as we think our prices may be, the investor from Hong Kong looks at our market and thinks of great value. As we all know value is driven in large part by consumer perception. The perception of Vancouver and Toronto is that consumers buying condos are doing so at their own peril. Yet in Manhattan, home buyers lament the high cost and scarcity, all the while being told now is a good time to buy. It’s interesting how some things never change. Here’s a headline that helped shape New Yorkers perception of their condo market, “Great Scarcity in Apartments…Never before has there been such scarcity of apartments on Manhattan Island.” That headline came from the New York Times, in 1916!
The so-called “condo crisis” (oh, how the mere thought of it makes the press salivate) in Vancouver and Toronto came to mind after I read an article in the Wall Street Journal. The article focused on the cost of condos in Manhattan. The current median price of a condo in Manhattan is the lowest it’s has been since 2004. Could Manhattan’s experience be a harbinger of what’s to come for Vancouver and Toronto? If it is then maybe the 36 people in Toronto who don’t own a condo already should go and get one.
According to the Canadian Real Estate Association, the average home price for the month of December in Toronto was $501,361, and in Vancouver it was $730, 912. Remember this includes dirt to go along with the walls. In Manhattan the average condo price in 2012 was $835,000. However, adjusted for inflation it was the lowest since 2004. Can you imagine the headlines if Toronto was similar to Manhattan’s reality? The median price in Manhattan for a 2 bedroom condo was $1.26 million, 3 bedroom was $2.37 million and a 4 bedroom was $4.75 million. Adjusted for inflation these are the lowest prices since 2004. According to the Wall Street Journal article there’s a disconnect between buyers and investment indicators. Buyers are saying there’s not enough affordable housing and yet when you take inflation into account prices have actually declined. So is it a good time to buy a condo in Manhattan? I’m not familiar with the Manhattan’s housing cycle so I’m not sure, but what I can say is this: at an average price of $2.37 million for a 3 bedroom condo in Manhattan, I think Toronto is a good buy.
Some might be aghast that I would compare Manhattan to Toronto. Well, Toronto is the 4th largest market between the US and Canada. Therefore, I think it’s valid to look at values on a comparative basis. That’s exactly what foreign investors did when buying property in Vancouver and Toronto. As absurd as we think our prices may be, the investor from Hong Kong looks at our market and thinks of great value. As we all know value is driven in large part by consumer perception. The perception of Vancouver and Toronto is that consumers buying condos are doing so at their own peril. Yet in Manhattan, home buyers lament the high cost and scarcity, all the while being told now is a good time to buy. It’s interesting how some things never change. Here’s a headline that helped shape New Yorkers perception of their condo market, “Great Scarcity in Apartments…Never before has there been such scarcity of apartments on Manhattan Island.” That headline came from the New York Times, in 1916!
Flaherty promises ‘fiscal sustainability’ to keep Canada’s economy on track
Gordon Isfeld, Financial Post
OTTAWA — Finance Minister Jim Flaherty is sticking to his timetable for balancing the federal budget, even though lower prices for Canadian oil is “obviously a concern” for spending plans in the coming year.
Mr. Flaherty acknowledged on Wednesday that the “very substantial discount to international markets” is having an impact on government revenues.
“It is obviously a concern, not only in Alberta, but in our government about commodities prices, the price of oil,” he told reporters following a speech to the Economic Club in Ottawa.
We remain on track to balance the balance during this current [session of] parliament
The discount between Canadian and world oil prices ballooned to about $40 a barrel, although that gap has recently narrowed.
“Yes, it affects our budgeting because it affects commodities prices, obviously, which affect the level of nominal GDP, which affects the level of revenues. So that all follows,” he said.
“Having said that, we’ve taken substantial steps to reduce our own government spending [and] our own program spending.”
Mr. Flaherty reiterated the deficit build up during the 2008-09 recession will be eliminated by 2015, when the next election is expected to be called.
“We remain on track to balance the balance during this current [session of] parliament.” In his speech, Mr. Flaherty promised to continue the “fiscal sustainability” that kept Canada from the worst impact of the recession.
Reflecting on the Conservative government’s first budget in 2006, he said that document included cuts to the goods and services tax, provided universal child care benefits and paid down debt, “which put us in good stead when the bad times come.”
He said the focus is now on infrastructure spending, skills training and expanding trade agreements globally.
The budget will come “not too long from now,” he said, without providing a date, although it is widely expected to be tabled in late February or mid-March.
Wednesday’s marked Mr. Flaherty’s first public address since announcing last week that he has been taking medication for a “serious dermatological condition,” which has affected his appearance and speech.
Since then, the minister has taken a low profile as he deals with the skin conditions known as bullous pemphigoid, described by Mr. Flaherty’s office as serious but non-life threatening.
That condition has led to renewed speculation that he may be stepping down soon.
Mr. Flaherty, 63, has maintained he is not going anywhere and still plans to navigate the economy back to a balanced but before the next federal election, expected in 2015.
But there has also been speculation that Mr. Flaherty’s next budget might be his last.
On Wednesday, he told reporters that “in terms of my future, it’s always subject to the . . . direction of the prime minister. But, as I’ve said before, I’d like to see it through to a balanced budget.”
He added: “In terms of my capacity, I don’t have a challenge doing my job.
“I know how to do [budgets]. I know what’s involved, and we’re doing fine in terms of our tracking,” he said.
Monday 4 February 2013
Should you sell your house before you buy a new one?
Garry Marr, The Financial Post
It’s the first choice you have to make when you decide to move and one that just might define the state of the housing market.
Do you start the process by selling or buying? Buy something and the clock starts ticking on selling your current home because you likely need that money to close the house you just purchased. In markets where sales are plummeting that could be a scary proposition.
So you sell first. But what do you do if you can’t find something you like in the neighbourhood you want. Remember, your kids need to go to that local school and be in the district. Are you prepared to rent for awhile?
People in the industry say the tradition historically has been to sell your home and then start shopping for the new one. But in this housing market, with multiple offers the norm and time on the market dropping in many cities, the process reversed and people starting buying, knowing their home would sell with ease.
Could the tide be turning in another sign of a slowdown for housing?
There are drawbacks to both selling first or buying first but the decision is very much based on your view of the market.
Contractor Paul Donadio, own of Terracon Inc., is facing that decision and the 37-year-old married Toronto homeowner has some trepidation about the market in Canada’s largest city.
“I’m going to sell my house first,” says Mr. Donadio. “What if I don’t hit my numbers? I could be stuck with two houses and how do you pay for it all?”
One option is to demand a closing date on your purchase a little further out, increasing your odds of selling. At the end of the day, you might need an escape clause and Mr. Donadio has one in his income property he’s prepared to move into should he have trouble buying. Renting is an option, but that market can be tight too.
“You have to live somewhere,” says Mr. Donadio. “You don’t want to end up buying the wrong house. I want to buy a house that I can fix up. Selling is more stressful than buying.”
His real estate agent David Batori says he’s telling his clients to sell first because he believes more listings will come to market in the spring. But he points out that, for a young family, selling first comes with the risk of not finding something in the right neighborhood.
“If you are too picky, you’re in trouble,” said Mr. Batori, who adds if you can carry two properties you should buy the home that is perfect for you with that long closing date.
You are going to need a lot of capital to pull that off because bridge financing at the banks is difficult to obtain without a buyer commitment for your existing home. The banks will provide bridge financing about two percentage points above prime if the closing date for the sale of your home comes after your purchase date, but you have to have a committed buyer.
Ultimately, if you buy first you can reduce the price of the home you are selling to move it.
Forget about trying to walk away from your purchase though, you’ve made a commitment to buy and left a deposit. “You can’t just walk away, you’ll be sued, you are in breach of contract,” says Mr. Batori, adding he has only seen someone try to walk away because of a death.
You can try to buy a home with a condition that says the purchase is subject to the sale of your existing home but you are going up against people with no conditions.
“Sellers will laugh at you, “ says Mr. Batori, adding before anybody agrees to that type of offer they’ll have an escape clause in case a firm bid comes in. That clause might give you a right of first refusal but you’ll have to come back with a clean offer with no conditions.
Farhaneh Haque, director of mortgage advice and real estate-secured lending at Toronto-Dominion Bank, cautions against buying without having a firm seller for your existing home.
“You can have the equity for two properties but you also need to have the income to carry both properties,” said Ms. Haque, adding the bank probably won’t extend credit to you for two homes without a high enough income. “It would put you in a situation that is uncomfortable and maybe not even affordable. Do you want to sell a property because you are desperate?”
Doug Porter, chief economist at BMO Capital Markets, said any shift in the trend to buy or sell first will depend on the city because some cities are still sellers’ markets.
“In a sellers’ market you can [buy first],” said Mr. Porter. “In most major cities, we are shifting. Personally, I would sell first.”
Ultimately, it comes down to your view of the market. You want to buy first, you have to be pretty confident you can sell. Are you?
Pay your mortgage and save too? Here's a formula to build your wealth
Rob Carrick, The Globe and Mail
As false assurances go, there’s nothing like your bank telling you the house you’ve got your eye on is affordable.
Maybe the mortgage you need will truly fit your budget. But you won’t know for sure until you try my new measure of how balanced you are in terms of what you’re saving and borrowing.
It’s called the Total Debt Service + Savings Ratio and it was introduced in a column last month on how smart management of big costs such as home buying is a better way to find money for saving than obsessing over little things like lattes.
The TDSS ratio is a guide to balancing debts, saving for things like retirement and spending on essentials and luxuries. If you can keep your TDSS in the right zone, you can do it all.
Think of the TDSS as a riff on the Total Debt Service Ratio, which all lenders use to qualify mortgage customers.
The Total Debt Service Ratio is a comparison of your monthly mortgage, property tax and heating costs plus other debt payments against your monthly gross household income.
There is but one purpose to this ratio: Determining whether you will be able to repay what you borrow.
In no way does it indicate whether you’ll be able to balance debt repayment, saving through registered retirement savings plans or tax-free savings accounts, and spending on non-essentials.
The TDSS does exactly that by adding the cost of saving to the analysis of what’s affordable. Now, you’re measuring all your housing and debt costs plus a monthly savings commitment of 10 per cent of your paycheque. If you can keep your TDSS in line, you’re good to spend what’s left.
Here’s why lenders don’t automatically do this kind of number crunching: Mortgage lending is an important generator of revenues and they won’t do anything to prejudice a deal.
Tell a young couple they can’t afford a home and still manage a 10-per-cent savings plan? Won’t happen.
Banks could actually benefit by using the TDSS to sell their investing products, however.
The conversation might go something along the lines of, “Here’s how much of a mortgage you can afford and still contribute 10 per cent of your pay to an RRSP or TFSA. And, by the way, here are the investment options we offer.”
But banks evolve the way the Toronto Maple Leafs improve – so slowly that you doubt it’s even happening.
It’s up to you, then, to see whether you’ll be able to save and carry a mortgage.
To get you started, we’ve created an online TDSS spreadsheet. Just plug in your numbers and let the spreadsheet calculate your TDSS. (Click here to download it.)
What you need to get started:
If you can keep your TDSS ratio in that same zone or lower, you’re doing well. Because you’ve left room for savings as well as repayment of your mortgage and other debts, there’s room in your finances for extras like lattes, and also for extra savings.
If your TDSS is in the 40- to 50-per-cent range, affording the home you’re looking at will be tougher.
You can do it, but your ability to spend on luxuries without incurring more debt will be at least somewhat compromised.
TDSS scores that are even higher suggest you need to keep building your down payment before buying a house.
One last thing: It’s a good idea to lock in your 10-per-cent savings commitment by arranging automatic electronic transfers to a savings or investment account every time you get paid.
Lenders ensure they get paid by deducting money directly from your account. Give your savings the same courtesy.
For more personal finance coverage, follow me on Twitter (@rcarrick) and Facebook (robcarrickfinance)
As false assurances go, there’s nothing like your bank telling you the house you’ve got your eye on is affordable.
Maybe the mortgage you need will truly fit your budget. But you won’t know for sure until you try my new measure of how balanced you are in terms of what you’re saving and borrowing.
It’s called the Total Debt Service + Savings Ratio and it was introduced in a column last month on how smart management of big costs such as home buying is a better way to find money for saving than obsessing over little things like lattes.
The TDSS ratio is a guide to balancing debts, saving for things like retirement and spending on essentials and luxuries. If you can keep your TDSS in the right zone, you can do it all.
Think of the TDSS as a riff on the Total Debt Service Ratio, which all lenders use to qualify mortgage customers.
The Total Debt Service Ratio is a comparison of your monthly mortgage, property tax and heating costs plus other debt payments against your monthly gross household income.
There is but one purpose to this ratio: Determining whether you will be able to repay what you borrow.
In no way does it indicate whether you’ll be able to balance debt repayment, saving through registered retirement savings plans or tax-free savings accounts, and spending on non-essentials.
The TDSS does exactly that by adding the cost of saving to the analysis of what’s affordable. Now, you’re measuring all your housing and debt costs plus a monthly savings commitment of 10 per cent of your paycheque. If you can keep your TDSS in line, you’re good to spend what’s left.
Here’s why lenders don’t automatically do this kind of number crunching: Mortgage lending is an important generator of revenues and they won’t do anything to prejudice a deal.
Tell a young couple they can’t afford a home and still manage a 10-per-cent savings plan? Won’t happen.
Banks could actually benefit by using the TDSS to sell their investing products, however.
The conversation might go something along the lines of, “Here’s how much of a mortgage you can afford and still contribute 10 per cent of your pay to an RRSP or TFSA. And, by the way, here are the investment options we offer.”
But banks evolve the way the Toronto Maple Leafs improve – so slowly that you doubt it’s even happening.
It’s up to you, then, to see whether you’ll be able to save and carry a mortgage.
To get you started, we’ve created an online TDSS spreadsheet. Just plug in your numbers and let the spreadsheet calculate your TDSS. (Click here to download it.)
What you need to get started:
- Gross monthly household income: Simply divide the combined annual pre-tax salaries for you and your partner, if applicable, by 12.
- Your projected monthly mortgage payment: If you plan to pay biweekly, multiply your estimated payments by 26 and divide by 12 to get a monthly amount.
- Monthly property tax cost: Get the most recent annual property tax bill for the home you’re considering, increase it by the inflation rate and then divide by 12.
- Heating: Find out what the monthly heating bill is for the home you’re looking at, or ask your real estate agent what a typical cost is.
- Other monthly debt payments: Add your car loan or lease payment and whatever else is applicable.
- Savings: Block out an amount equal to 10 per cent of your monthly take-home pay for contributions to RRSPs, TFSAs or emergency fund savings accounts.
If you can keep your TDSS ratio in that same zone or lower, you’re doing well. Because you’ve left room for savings as well as repayment of your mortgage and other debts, there’s room in your finances for extras like lattes, and also for extra savings.
If your TDSS is in the 40- to 50-per-cent range, affording the home you’re looking at will be tougher.
You can do it, but your ability to spend on luxuries without incurring more debt will be at least somewhat compromised.
TDSS scores that are even higher suggest you need to keep building your down payment before buying a house.
One last thing: It’s a good idea to lock in your 10-per-cent savings commitment by arranging automatic electronic transfers to a savings or investment account every time you get paid.
Lenders ensure they get paid by deducting money directly from your account. Give your savings the same courtesy.
For more personal finance coverage, follow me on Twitter (@rcarrick) and Facebook (robcarrickfinance)
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