Regulator eyes tighter mortgage rules

TARA PERKINS - REAL ESTATE REPORTER

The Globe and Mail

 

 

Canada’s banking regulator has been gathering detailed mortgage information from financial institutions, in what could be a precursor to changes in the rules for home loans.

The Office of the Superintendent of Financial Institutions (OSFI) has spent months considering a tightening of mortgage rules for lenders, a decision that’s being weighed as the housing market begins to pick up after a year-long slump. That slide began when Finance Minister Jim Flaherty tightened the rules for mortgage insurance in July, 2012.

Policy-makers in Ottawa, including OSFI head Julie Dickson, have been concerned consumers are taking on too much debt and that house prices have risen too much. Toronto-Dominion Bank economists estimate that home prices are 8 per cent above what they’re actually worth, nationally. The average selling price of existing homes in July was 8.4 per cent higher than a year earlier, driven by a resurgence in the pricier markets of Vancouver and Toronto.

Years of ultra-low interest rates have spurred consumers to take on more mortgage debt than they might have otherwise. To rein the market in, Ottawa has tightened the rules around mortgage insurance four times since 2008 – Mr. Flaherty’s latest move cut the maximum amortization period for an insured home loan to 25 years from 30. Insurance is mandatory for home buyers who have less than 20 per cent of the purchase price of a house as a down payment.

But banks have continued to sell uninsured 30-year mortgages to consumers who have a down payment of at least 20 per cent. The continued resilience of the housing market has economists wondering if Mr. Flaherty has sufficient ammunition left to cool the market again.

OSFI’s ability to directly regulate bank lending practices is a tool that has not been used to a great degree. The regulator could, for example, tighten the uninsured portion of the mortgage market, a move that The Globe and Mail reported in May it was considering.

Sources within the financial sector say that both the finance department and OSFI have been asking banks a variety of questions in recent months, in an effort to get a handle on the impact of last year’s rule changes. A spokesperson for OSFI said the regulator has not yet reached any decisions about whether it will be altering rules for lenders.

Any changes would come in the form of revisions to OSFI’s guideline B-20, a set of mortgage underwriting principles that the regulator first issued last year. The principles outline, among other things, how much due diligence banks must conduct on potential borrowers, when they should conduct appraisals and what paperwork they should have. It also places limits on the size of home-equity lines of credit.

Ms. Dickson said earlier this year that the regulator welcomed the slowdown in the growth of household credit that ensued after the guidelines were issued and the mortgage insurance rules were tightened.

The Canadian Association of Accredited Mortgage Professionals estimates that mortgage credit growth is now about 5 per cent, having peaked at about 13 per cent at the start of 2008. The association estimates that it will fall to between 2.5 and 3 per cent next year. Still, the group expects the total amount of residential mortgage credit to grow to between $1.24-trillion and $1.25-trillion by the end of 2014, having more than doubled in 10 years.

Mortgage rates, which sank to new lows over the past two years, have been slowly rising this summer, which could restrain the market without the need for further regulatory intervention. As of May, the average mortgage rate that homeowners were paying was 3.52 per cent, but posted rates have increased by more than 60 basis points since then.

For now, sales of existing homes are edging back toward the levels they were at before Mr. Flaherty tightened the mortgage insurance rules last summer, driven by rebounding markets in Vancouver and Toronto. Vancouver saw a 40.4-per-cent year-over-year gain in sales of existing homes over the Multiple Listing Service in July, while Toronto posted a 16 per cent increase.

“That deafening silence you hear is the sound of the Canadian housing bears gone quiet,” Bank of Montreal economist Robert Kavcic wrote in a research note Friday. “Not only has the resale market absorbed last year’s round of mortgage rule tightening, but the supposedly at-risk banks have just recorded a unanimously better-than-expected earnings season, with a handful of dividend increases to boot.”

Getting ready to turn a new financial leaf

Melissa Leong
Financial Post, Personal Finance


When Scott Plaskett sits down with his clients in September, he begins with a simple: “What’s new?”
Usually, a lot. After Labour Day, people have stories, the certified financial planner says. These stories lead to financial conversations.

“January 1 isn’t really the beginning of the year for most families. It tends to be Labour Day because everything starts fresh again,” he says. “September seems to be the reset button for most families. The summer is over. They’ve had time off and now everything gets back to the normal routines.”

September is one of her busiest seasons, says Lise Andreana, a certified financial planner in Burlington, Ont., and author of No More Mac ‘n’ Cheese: The Real World Guide to Managing Your Money for 20-Somethings.

“After a full summer of binging on BBQ, beer and Canada’s Wonderland, it’s time for them to weigh in,” she says. “Their expenditures and wants have exceeded their needs. They recognize that they may have gone overboard. Even if they haven’t, it’s a time of sobering up for clients in September.”

After the summer, the most frequent calls that Ms. Andreana fields are about RESPs and concerns regarding investment returns.

“The summer returns are typically lower than the fall to spring. There’s even a saying, ‘sell in May and go away’,” she says. “They’ll see that their statements are not as productive. They’re going to be calling us about their statement that they’ve received in July. This opens the doors for the conversation that we want to have about looking at their asset allocation, how much risk they’re taking versus the return and is that suitable to that particular client.”

The Post spoke to financial planners about people’s biggest money concerns in September and how to start anew with finances.

How am I going to get myself organized?

The vacation is over. You’ve spread out your bank statements, your investment reports and a financial spreadsheet and unless you’re an accountant or Russell Crowe’s numerically inclined character in A Beautiful Mind — it might be intimidating. And if you’re parents to young kids, you’re being tugged in so many different directions (literally and figuratively): Should the money go to RESPs, RRSPs, mortgage payments, credit card debt, child care, new clothes for school, etc.

“There are only two ways of getting out of the mindset [of being overwhelmed]. One is ignoring it and hoping that la-dee-dah things will be fine. For a lot of people, they just muddle through,” Sandi Martin, a fee-only financial planner, says. “Then there’s the other kind of person who does a lot of homework. They feel like they have it under control.”

Take control by figuring out where you stand. “Go through your bank statements with a fine-tooth comb. Just see where your money has been going and ask how far off am I?” Ms. Andreana says.

Did you put the trip to Disneyland on your credit card? If so, you have to get your consumer debt down. “The debt on my card shouldn’t last any longer than the consumable product,” she says. “A coffee shouldn’t go on a credit card ever.”

Create a budget for the month or year. How much can you spend on back-to-school items, for example? Those with children in Kindergarten to Grade 12 in the U.S. anticipate spending an average of $428 on back-to-school items, according to a Deloitte survey.

TIP: Figure out what your clothing budget is (in an average Canadian household, 6.5% of all household spending was on clothing). Consider portioning out a chunk and giving it to the kids to shop. “It was a tool to teach them how to spend their money wisely: ‘This is it. It’s up to you to budget’,” Ms. Andreana says. “It also helps parents because it stops them from giving in to every request for something new.”

How am I going to pay for my kid’s post-secondary education?

Your little ones may just be returning to grade school. But in the future, you could be standing on the lawn, waving at your son as he leaves for university with tears in your eyes. Let those tears be from joy, rather than from stress at being financially pinched.
To figure out how much you’ll need to save, ask yourself, what are your goals?

“Do they want to pay for 100% of the child’s post-secondary education?” Mr. Plaskett says. “Do they want to pay for half? Do they want to have 100% but not let the child know that so the child can work and contribute?”

The best plan to start with is the RESP, he adds.

The government will give you a Canada Education Savings Grant equal to 20% of the first $2,500 you contribute annually to an RESP to save for your child’s post-secondary education, up to a maximum of $7,200.

“The money accumulates on a tax sheltered basis and it gets topped up. When the child goes to school and the money is pulled out, any of the growth is taxed in the child’s hand … and chances are, their tax bracket is quite low,” Mr. Plaskett says.

“The con would be if your child doesn’t go to a qualified post-secondary school. If they decide to become an entrepreneur and skip the schooling process, then they would have to pay back the grant money on … their redemption.”

If a family contributes $50 a month from the time the child is born to when she’s ready to attend university, they will have almost $24,000 with the government’s savings grant and assuming a 5% rate of return, Ms. Andreana says.

TIP: Take the monthly $100 from your Universal Child Care Benefit (for each child under 6) and put it into your RESP. “Take government money to earn some more government money,” Ms. Martin says.

Am I prepared for the unexpected?

Fifty-one per cent of Canadians have three-months worth of expenses set aside for unforeseen costs such as car repairs and job loss, says a recent BMO report. But setting it aside doesn’t mean hiding it under the mattress or leaving it in a savings account.

“I make a clear distinction between having access and having that liquid sitting in a savings account,” says Al Nagy, a certified financial planner and regional director at Investors Group. “I hate money sitting there doing nothing. People deserve to have their money working for them by investing it…I often recommend establishing a line of credit.”

Over the summer, clients have often spent time with friends and family and may be thinking of better caring for their own dependents or they’ve experienced loved ones becoming ill, Mr. Plaskett says.

“It gives us an opportunity to revisit that part of their financial plan: Let’s have a conversation about what would happen to you?” he says. “It’s not a great conversation to have; but it’s one that has to be had.”

You might want to consider death insurance benefits (life insurance) to care for your loved ones and living insurance benefits (disability, critical illness and long-term care) to protect yourself and the family if you cannot work.

TIP: “[People] say, ‘I’ve got coverage through my employer.’ Have you looked at the booklet to see what type? It’s typically not enough. Let’s determine if you might want to top it up,” Mr. Nagy says. “Ask about the definition of disability in your work policy, the limitations and exclusions, and the waiting period before your benefits kick in.”

Will I have enough to retire on?

There’s no magic number to retire on. It will vary depending on your lifestyle. Do you think you’re going to be spending your time reading on the porch and bike riding into town for groceries in retirement? Or will you be traveling the world and sailing on a yacht in the Mediterranean?

“People ask, ‘Is there an actual number that I should be shooting for?’ That number is about how much you’ll spend,” Ms. Martin says. “The only way to rationalize what you will spend in retirement is to look at what you spend now. How much of it is absolute necessary living expenses? Is your mortgage going to be paid off? Are your kids going to be out of your house? Are you going to downsize your home?”

Remember to take into account how long you think you’ll live. Also, will you be getting income from other sources such as an employee’s pension plan or the Canada Pension Plan and Old Age Security?

TIP: Don’t wait. Start early. Time is a huge advantage. If you begin saving at 25, putting $2,000 away a year ($166 a month) until you’re 65, you’ll have $560,000, assuming an 8% annual rate of return, according to Bankrate.com.

Financial Post • Email: mleong@nationalpost.com

No ugly downturn for condo market, even in Toronto: report

TARA PERKINS - REAL ESTATE REPORTER

The Globe and Mail

 

 

A new report from the Conference Board of Canada predicts that the much-watched condo sector will avoid an ugly downturn, even in Toronto.

Economists and policy-makers are keeping a close eye on condos, especially in the country’s most populous city, where cranes dot the sky. A number of economists say that too many units are being built, a development that would put pressure on prices. The Bank of Canada has highlighted the risks that this market could pose to the economy.

Condo sales plunged in most Canadian cities last year, and are expected to be down again this year.
But Wednesday’s report, which was done for mortgage insurer Genworth Canada, argues that the market will not sink too low, and will be propped up in part by population growth and modest employment gains.

While the report does say that higher mortgage rates could cool things off later this year or early next year, it adds that “a flood of foreclosures, and subsequent sharp supply increases, is simply not in the cards.”

Homeowners are taking advantage of low interest rates to pay down their mortgages, offering a cushion when it comes time for them to renew, it says.

“Markets in Toronto and Montreal are cooling, but we think they will avoid major downturns, partly because, on the demand side, demographic requirements remain decent,” the report says. “Also, the banks will continue to require builders to have healthy pre-sale levels before advancing construction financing, keeping supply somewhat in check.”

Vancouver’s condo market, it notes, is already well into a slowdown.

“While regional markets clearly vary in strength, all will benefit from an expanding population and a rising share of condominium-loving empty-nesters aged 55 or more,” the report adds.

It also says that “weak pricing will help affordability.” It predicts that principal and interest payments will drop in at least five major cities this year, led by a 2.5 per cent decline in Victoria.

While payments are expected to rise in Alberta, the report says that Calgary and Edmonton are still the most affordable condo markets when local incomes are taken into account, with mortgage payments taking only about 9 per cent of household income. “By contrast, we expect payments to eat up roughly 20 per cent of Vancouver incomes,” it says.

The report forecasts a 0.5 per cent drop in Vancouver resale condo prices this year, to $364,593. Victoria and Montreal are also expected to record price declines, with Montreal’s average resale price dropping 0.7 per cent to $265,344. Toronto is forecast to see its average price remain flat this year, at $305,239.

The report predicts that all cities will see some price growth, ranging from 1.4 to 3.6 per cent, in 2014.

The Longevity Conundrum: Could Your Retirement Savings Last You to 120?

WalletPop Editor
http://www.walletpop.ca/blog/bloggers/walletpop-editor/
By Matt Brownell


Medical science hasn't conquered death, but it's making some progress.

The number of centenarians has increased by 66 percent in the last 30 years. The Census Bureau projects that 400,000 Americans will be over the age of 100 by 2050. And advances in medical science mean that lifespans of 120 -- and beyond -- are within reach.

But not everyone is thrilled with our increased longevity. A recent survey by Pew Research found that 83 percent of Americans put their "ideal lifespan" at 100 years or less, and just 4 percent said they'd actually want to live to 120. It's possible to live longer and longer, but so far, the vast majority of Americans just aren't that interested in sticking around more than a century.

While much of that has to do with concerns over the quality of life beyond 100, there are also real financial concerns at play: No one wants to outlive their money, and living forever loses its luster when you realize that you're going to be spending the last years of your life struggling to make ends meet.

"Parents have a real desire to leave a nest egg to their children when they pass," says Christopher Hickey, a financial planner for Merrill Lynch. "But if I live to 100, someone's taking me in."

In other words, the difference between living to 85 and living to 105 may be the difference between leaving your kids a nice inheritance and becoming a burden on them. So as medical advances extend the human lifespan ever longer, we have to ask: How do you plan for a retirement that could last as long or longer than you spent working?



Less Saving, More Living

It's a question that many financial planners are taking seriously.

A recent ad campaign by Prudential looked at some of the challenges posed by longer lifespans, with one billboard that read, "The first person to live to 150 is alive today." And concerns over longer lifespans are compounded by the fact that we have less retirement savings to rely upon.

"Look at what's going on with the traditional three-legged stool -- Social Security, pension plans and personal savings," says Prudential vice president Robert Fishbein. Social Security, he says, is due for adjustments that will likely decrease benefits to retirees.

Personal savings rates aren't what they used to be. And far fewer people have pensions these days, as companies have moved from defined benefit plans to 401(k)s.

"And then you throw in the fact we're living longer, and you see why this is the central dilemma," he adds.

Michael Tucker, a professor of finance at Fairfield University who has studied optimal retirement strategies, says that living into your 100s simply requires more retirement savings than most people have.

"If you're going to retire at 65 and live to 120, you need a lot of money," he says. "It's really not feasible to live in retirement for 50 years unless you have $5 million."

Changing Strategies

So if you don't have $5 million at retirement, how can you prepare for an extended lifespan? There are a few solutions, but fair warning: None of them are particularly good.

One is to simply put off retirement. It stands to reason that if we're able to live longer, we'll also be able to work longer. That probably doesn't mean working full time into your 80s, but it might mean working part time or doing consultant work to supplement your retirement income.

Another strategy is one that might give pause to older Americans, considering that it runs counter to the decades-old accepted wisdom -- continuing to grow your nest egg by staying heavily invested in the stock market even into your golden years.

That's a controversial notion. It's generally accepted that you want to transition your portfolio away from equities as you approach retirement age. The idea is that the closer you are to retirement, the less time you have to recover from a market downturn. Most advisers will suggest that you get less into stocks and more into bonds at that point. But that simple calculus goes out the window if you think there's a real possibility of outliving your money.

"You have to take higher risks," says Tucker. "60/40 is the rule, typically -- 60 percent stocks, 40 percent bonds. But if you're going to live that much longer, you'll run out of money." He suggest a portfolio closer to 80/20 or even 90/10.

Of course, there isn't a one-size-fits-all approach when it comes to determining your asset allocation, and leaving 80 percent of your nest egg in the stock market during retirement is something that most advisers will counsel you to avoid at all costs.

"An individual's pension and Social Security benefit will definitely affect what portions of their monies get allocated to equities," says Hickey. "When I'm planning for someone, I want to make sure we have all the bare necessities covered by a guaranteed income."

(Hickey also worries about how stressful it would be to have so much of your money in the stock market when you're retired. "Grandma doesn't get any sleep and dies of a heart attack because she watches CNBC," he quips. "Nobody wants that.")

Indeed, maintaining a riskier portfolio is far from a perfect solution: If you have a 40-year-long retirement, it's inevitable that you'll see your portfolio get burned by at least one downturn. But if living past 100 becomes the norm, you might not have a choice.

So here's the plan for beating the longevity curse: Save more. Spend less. Retire later. Plan for the worst. And most of all, accept that you have to take risks with your retirement money if you want it to last.

But that's not a foolproof strategy, and it's one that a lot of retirees won't follow, anyway. So in the not-so-distant future, we could see a lot of centenarians bemoaning their "good luck" as they watch their retirement savings dwindle with each passing year.

Tucker makes a blunt prediction: "Suicide will be very popular."

Matt Brownell is the consumer and retail reporter for DailyFinance. You can reach him at Matt.Brownell@teamaol.com, and follow him on Twitter at @Brownellorama.