The Canadian Press
For most Canadians their home is the biggest investment they'll ever make — but they might be surprised to learn you can use if for more than just sleeping.
People generally don't think of their homes as a potential pile of cash in the bank, but experts say it's something worth pondering now that home prices in Canada may have hit their peak.
In fact, analysts say if finance is the only consideration, conditions now and into next year or so form a seldom seen sweet spot for using home equity as a type of asset for investment.
Why might it be a good time to sell?
At about $370,000 average nationally — and just under $800,000 in Vancouver — home prices are already at record levels. Many observers believe prices are long due for a downward correction of anywhere from 10 per cent to 25 per cent, perhaps more in some of the hottest markets.
“Home prices to income, housing price to rent, all the indicators are setting off warning signals,” said Derek Burleton, a senior economist with TD Bank. “If you are purely in it for reaping profits, now is not a bad time to sell” before prices drop.
The profits from selling a home can be used to build savings, eliminate debt, make traditional investments or, ironically, buy more real estate — albeit in a different market where home prices are lower.
Of course, even if it makes sense financially, selling the family home to rent or move to a less expensive housing market doesn't make lifestyle sense for the vast majority of Canadians.
Mr. Burleton knows how they feel.
“I wouldn't want to sell my home right now even if I wind up taking a hit on the home price, just because I enjoy where I'm living and moving is a pain,” he said.
While there's no guarantee of a correction, observers note there are additional signs that the housing market could cool off in a big way.
With ownership levels near a record 70 per cent, demand is expected to wane, making it a buyers market for the first time in years.
And Bank of Canada governor Mark Carney warned last month he was preparing to hike rates, which along with tighter lending rules being applied by federal authorities could trigger a flight from real estate.
In market terms, selling a home at the peak is a way of “locking in” profits accumulated over the past decade of price appreciation — and tax free if it's the principal home.
Meanwhile, home valuations have been rising far faster than the rent they would fetch since at least 2000. Canada's home price-to-rent ratio is well above historic norms and among the highest in the advanced world.
That is a hard indicator that homes are over-valued, but also that renting is relatively cheap compared to buying.
David Madani of Capital Economics, who anticipates a 25 per cent price crash over the next few years, cautions that like selling stock shares, timing is always tricky.
“We're dealing with irrational exuberance. We've been treating housing like some magical financial asset that is going to solve all our problems because prices are always going up,” he said.
“Of course, when the turn comes, the over-confidence that drove the market up can turn to fear. You are dealing with emotion ... so I don't believe in a soft landing.”
The market is clearly at or near peak, he said, so soon may indeed be the time to act.
But then again he felt that way a year ago, he points out, and if households had acted on his advice they might not have gotten all the value they could from the premature sale.
Tuesday, 15 May 2012
Monday, 14 May 2012
Would you sell your home to lock in profits before real estate prices drop?
Julian Beltrame, The Canadian Press
OTTAWA — For most Canadians their home is the biggest investment they’ll ever make — but they might be surprised to learn you can use if for more than just sleeping.
People generally don’t think of their homes as a potential pile of cash in the bank, but experts say it’s something worth pondering now that home prices in Canada may have hit their peak.
In fact, analysts say if finance is the only consideration, conditions now and into next year or so form a seldom seen sweet spot for using home equity as a type of asset for investment.
Why might it be a good time to sell?
At about $370,000 average nationally — and just under $800,000 in Vancouver — home prices are already at record levels. Many observers believe prices are long due for a downward correction of anywhere from 10 per cent to 25 per cent, perhaps more in some of the hottest markets.
“Home prices to income, housing price to rent, all the indicators are setting off warning signals,” said Derek Burleton, a senior economist with TD Bank.
“If you are purely in it for reaping profits, now is not a bad time to sell” before prices drop.
The profits from selling a home can be used to build savings, eliminate debt, make traditional investments or, ironically, buy more real estate — albeit in a different market where home prices are lower.
Of course, even if it makes sense financially, selling the family home to rent or move to a less expensive housing market doesn’t make lifestyle sense for the vast majority of Canadians.
Burleton knows how they feel.
“I wouldn’t want to sell my home right now even if I wind up taking a hit on the home price, just because I enjoy where I’m living and moving is a pain,” he said.
While there’s no guarantee of a correction, observers note there are additional signs that the housing market could cool off in a big way.
With ownership levels near a record 70 per cent, demand is expected to wane, making it a buyers market for the first time in years.
And Bank of Canada governor Mark Carney warned last month he was preparing to hike rates, which along with tighter lending rules being applied by federal authorities could trigger a flight from real estate.
In market terms, selling a home at the peak is a way of “locking in” profits accumulated over the past decade of price appreciation — and tax free if it’s the principal home.
Meanwhile, home valuations have been rising far faster than the rent they would fetch since at least 2000. Canada’s home price-to-rent ratio is well above historic norms and among the highest in the advanced world.
That is a hard indicator that homes are over-valued, but also that renting is relatively cheap compared to buying.
David Madani of Capital Economics, who anticipates a 25 per cent price crash over the next few years, cautions that like selling stock shares, timing is always tricky.
“We’re dealing with irrational exuberance. We’ve been treating housing like some magical financial asset that is going to solve all our problems because prices are always going up,” he said.
“Of course, when the turn comes, the over-confidence that drove the market up can turn to fear. You are dealing with emotion … so I don’t believe in a soft landing.”
The market is clearly at or near peak, he said, so soon may indeed be the time to act.
But then again he felt that way a year ago, he points out, and if households had acted on his advice they might not have gotten all the value they could from the premature sale.
OTTAWA — For most Canadians their home is the biggest investment they’ll ever make — but they might be surprised to learn you can use if for more than just sleeping.
People generally don’t think of their homes as a potential pile of cash in the bank, but experts say it’s something worth pondering now that home prices in Canada may have hit their peak.
In fact, analysts say if finance is the only consideration, conditions now and into next year or so form a seldom seen sweet spot for using home equity as a type of asset for investment.
Why might it be a good time to sell?
At about $370,000 average nationally — and just under $800,000 in Vancouver — home prices are already at record levels. Many observers believe prices are long due for a downward correction of anywhere from 10 per cent to 25 per cent, perhaps more in some of the hottest markets.
“Home prices to income, housing price to rent, all the indicators are setting off warning signals,” said Derek Burleton, a senior economist with TD Bank.
“If you are purely in it for reaping profits, now is not a bad time to sell” before prices drop.
The profits from selling a home can be used to build savings, eliminate debt, make traditional investments or, ironically, buy more real estate — albeit in a different market where home prices are lower.
Of course, even if it makes sense financially, selling the family home to rent or move to a less expensive housing market doesn’t make lifestyle sense for the vast majority of Canadians.
Burleton knows how they feel.
“I wouldn’t want to sell my home right now even if I wind up taking a hit on the home price, just because I enjoy where I’m living and moving is a pain,” he said.
While there’s no guarantee of a correction, observers note there are additional signs that the housing market could cool off in a big way.
With ownership levels near a record 70 per cent, demand is expected to wane, making it a buyers market for the first time in years.
And Bank of Canada governor Mark Carney warned last month he was preparing to hike rates, which along with tighter lending rules being applied by federal authorities could trigger a flight from real estate.
In market terms, selling a home at the peak is a way of “locking in” profits accumulated over the past decade of price appreciation — and tax free if it’s the principal home.
Meanwhile, home valuations have been rising far faster than the rent they would fetch since at least 2000. Canada’s home price-to-rent ratio is well above historic norms and among the highest in the advanced world.
That is a hard indicator that homes are over-valued, but also that renting is relatively cheap compared to buying.
David Madani of Capital Economics, who anticipates a 25 per cent price crash over the next few years, cautions that like selling stock shares, timing is always tricky.
“We’re dealing with irrational exuberance. We’ve been treating housing like some magical financial asset that is going to solve all our problems because prices are always going up,” he said.
“Of course, when the turn comes, the over-confidence that drove the market up can turn to fear. You are dealing with emotion … so I don’t believe in a soft landing.”
The market is clearly at or near peak, he said, so soon may indeed be the time to act.
But then again he felt that way a year ago, he points out, and if households had acted on his advice they might not have gotten all the value they could from the premature sale.
Thursday, 10 May 2012
Banks talk down consumer debt hysteria
Garry Marr, Financial Post
The Bank of Canada may be thinking about raising interest rates but there’s apparently no need to because Canadians are hunkering down to cool debt obligations on their own.
“The pace of growth in household credit is no longer a reason for the Bank of Canada to move from the sidelines any time soon,” says Benjamin Tal, deputy chief economist at CIBC World Markets.
He wrote a report released Wednesday that suggests central bank intervention is not needed, especially with consumers already seeing interest payments on debt eating into 7.3% of their disposable income as of the fourth quarter of 2011, even at today’s low rates.
“Why are you raising rates? To slow down credit growth — but it’s already slowing,” Mr. Tal says. “I say let the market slow naturally. We are so concerned about this but it’s moving in the right direction.”
Toronto-Dominion Bank economist Francis Fong also weighed in, suggesting Canadians have begun to get the message about having too much debt, based on the slowdown in consumer credit growth.
Even the chief executive of one of the big five banks joined the discussion, hoping to extinguish some of the panic about Canadian debt.
“When we look at the overall marketplace, there might be pockets of vulnerability but we remain quite comfortable,” said Gord Nixon, chief executive of Royal Bank of Canada “Frankly, I’d like to see the rhetoric come down a little bit.”
None of the talk is doing much to dissuade author Gail Vaz Oxlade from her beliefs that Canadians have far too much debt.
“Yeah, yeah, I have heard it,” Ms. Vaz Oxlade says. “The number don’t lie. If the numbers say we are decreasing and only adding by 0.1%, I’m not going to argue. But the fact is we are already carrying too much debt and it’s still going up.”
She wonders whether Canadians are getting the message, if they are not actually paying down debt. She doesn’t care if more of the debt is going into long-term mortgages: “What’s the difference? That’s just debt we’ll pay three or four times more for.”
The CIBC report does note that as of March 2012, mortgage debt rose by 6.3% on a year-over-year basis, which is below the average rate of growth seen in the past two years of 7.3%.
Mr. Tal says there will be a gradual softening in the housing market with prices falling 10% in the coming year or two. He says tougher rules from regulators on loans will cool the market and notes the banks themselves are questioning values, citing “the increased use of full-scale appraisals as part of the adjudication process.”
Overall, Mr. Tal says that for the first time since 2002 consumer credit is rising more slowly than in the United States.
“Consumer credit [growth] is basically zero,” he says, adding Canadians have been optimizing their credit situation by taking high-interest credit card debt and transferring it to lines of credit.
TD’s Mr. Fong agrees that Canadians are starting to “hunker down” and pay off their debt, but at the same time he suggests a two-percentage-point increase in rates would leave many households at risk.
“It is safe to say that with household debt levels at record highs, a sizeable number of Canadians households are ill-prepared and could lead to difficulty keeping up with higher interest payments,” said Mr. Fong, who added efforts of Canadians to lock in their rates should cushion the coming blow.
Scott Hannah, president and CEO of the Credit Counselling Society, still thinks there is plenty to be worried about. “Things are pretty fragile,” he says. “Debt is still growing and we’ve got to start paying it down. We have to be concerned with the level of debt the average Canadian is carrying.”
The Bank of Canada may be thinking about raising interest rates but there’s apparently no need to because Canadians are hunkering down to cool debt obligations on their own.
“The pace of growth in household credit is no longer a reason for the Bank of Canada to move from the sidelines any time soon,” says Benjamin Tal, deputy chief economist at CIBC World Markets.
He wrote a report released Wednesday that suggests central bank intervention is not needed, especially with consumers already seeing interest payments on debt eating into 7.3% of their disposable income as of the fourth quarter of 2011, even at today’s low rates.
“Why are you raising rates? To slow down credit growth — but it’s already slowing,” Mr. Tal says. “I say let the market slow naturally. We are so concerned about this but it’s moving in the right direction.”
Toronto-Dominion Bank economist Francis Fong also weighed in, suggesting Canadians have begun to get the message about having too much debt, based on the slowdown in consumer credit growth.
Even the chief executive of one of the big five banks joined the discussion, hoping to extinguish some of the panic about Canadian debt.
“When we look at the overall marketplace, there might be pockets of vulnerability but we remain quite comfortable,” said Gord Nixon, chief executive of Royal Bank of Canada “Frankly, I’d like to see the rhetoric come down a little bit.”
None of the talk is doing much to dissuade author Gail Vaz Oxlade from her beliefs that Canadians have far too much debt.
“Yeah, yeah, I have heard it,” Ms. Vaz Oxlade says. “The number don’t lie. If the numbers say we are decreasing and only adding by 0.1%, I’m not going to argue. But the fact is we are already carrying too much debt and it’s still going up.”
She wonders whether Canadians are getting the message, if they are not actually paying down debt. She doesn’t care if more of the debt is going into long-term mortgages: “What’s the difference? That’s just debt we’ll pay three or four times more for.”
The CIBC report does note that as of March 2012, mortgage debt rose by 6.3% on a year-over-year basis, which is below the average rate of growth seen in the past two years of 7.3%.
Mr. Tal says there will be a gradual softening in the housing market with prices falling 10% in the coming year or two. He says tougher rules from regulators on loans will cool the market and notes the banks themselves are questioning values, citing “the increased use of full-scale appraisals as part of the adjudication process.”
Overall, Mr. Tal says that for the first time since 2002 consumer credit is rising more slowly than in the United States.
“Consumer credit [growth] is basically zero,” he says, adding Canadians have been optimizing their credit situation by taking high-interest credit card debt and transferring it to lines of credit.
TD’s Mr. Fong agrees that Canadians are starting to “hunker down” and pay off their debt, but at the same time he suggests a two-percentage-point increase in rates would leave many households at risk.
“It is safe to say that with household debt levels at record highs, a sizeable number of Canadians households are ill-prepared and could lead to difficulty keeping up with higher interest payments,” said Mr. Fong, who added efforts of Canadians to lock in their rates should cushion the coming blow.
Scott Hannah, president and CEO of the Credit Counselling Society, still thinks there is plenty to be worried about. “Things are pretty fragile,” he says. “Debt is still growing and we’ve got to start paying it down. We have to be concerned with the level of debt the average Canadian is carrying.”
Wednesday, 9 May 2012
RBC’s Gordon Nixon weighs in on housing bubble furor
Andrew Mayeda and Chris Fournier, Bloomberg News
The head of Canada’s biggest bank and one of the country’s leading developers said the housing market is not in a bubble, even as one economist said Toronto is caught in a “condo craze.”
Canadian housing starts rose to the highest since September 2007 last month, led by multiple-unit projects, Canada Mortgage & Housing Corp. said Tuesday. The annual pace of home starts rose 14% to 244,900, Ottawa-based CMHC said.
Participants at Bloomberg’s Canada Economic Summit in Toronto said talk of a housing bubble is overblown.
‘I’d like to see the rhetoric come down a little bit’
“When we look at the overall marketplace, there might be pockets of vulnerability but we remain quite comfortable,” said Gordon Nixon, chief executive officer of Royal Bank of Canada “Frankly, I’d like to see the rhetoric come down a little bit.”
A residential real-estate boom in the world’s 10th-largest economy has prompted senior policy makers such as Bank of Canada Governor Mark Carney and Finance Minister Jim Flaherty to warn that Canadians may be taking on too much debt.
Mr. Carney told lawmakers April 24 that high levels of household debt remain the greatest domestic risk to Canada’s economy. In an appearance before a parliamentary committee, he reiterated that a rate increase “may become appropriate,” and warned Canadian families to exercise “caution” with their debt levels.
Mr. Carney has kept his key lending rate unchanged at 1% since September 2010 in the longest pause since the 1950s.
10% overvalued
Housing prices in Canada are probably about 10% overvalued, economist Paul Fenton said at the Bloomberg summit.
There doesn’t seem to be a sense that there’s been overbuilding, and housing doesn’t pose a systemic threat to the function of the nation’s financial system, said Mr. Fenton, senior vice-president and chief economist at Caisse de Depot et Placement du Quebec.
The 244,900 housing starts last month released Tuesday beat economists’ expectations. The highest forecast in a Bloomberg economist survey with 21 responses was a 222,600 rate.
“Wow. This report reflects unbelievable strength in Canadian housing starts, and all of the gain was in multiples again which reflect the ongoing condo craze,” Scotia Capital economist Derek Holt said in a research note.
Sales of new condominiums in Toronto reached 6,070 units in the first three months of the year, a record for the first quarter, market research firm Urbanation Inc. reported May 7. As many as 40 new projects with more than 11,000 units could come on the market in the second quarter, a trend that may cause inventory of unsold units to approach a record set in 2008, Urbanation said.
Risk Averse
Condo builders “tend to be risk averse,” insisting that 70% of a project is presold and buyers put down at least a 20% deposit, according to Jim Ritchie, senior vice president of sales and marketing at Tridel, a Toronto-based real estate developer.
Concerns about foreign buyers are overdone, given about 95% of purchasers are ‘locals’
“It’s all about managing risk,” Mr. Ritchie said. There’s a market for condos because average house prices in Toronto’s 416 area code are about $830,000, compared with $400,000 for a new condo, he said.
Almost 60% of people buying condos in that area are either single or couples without children, said Mr. Ritchie, who said concerns about foreign buyers are overdone, given about 95% of purchasers are “locals who have social insurance numbers and local addresses.”
RBC’s exposure to the condo markets in Toronto and Vancouver isn’t “significant,” Mr. Nixon said. “Part of the reasons for that is firstly a lot of the condo buyers in those markets are cash buyers. At the margin there’s certainly a significant foreign component to them, and I think to some degree the banks are a bit slightly more cautious,” he said.
No Bubble
The increase in housing prices in Canada is unsustainable, said Finn Poschmann, vice president of research at the Toronto- based C.D. Howe Institute. It’s difficult for market participants to tell a bubble has formed before it has deflated, he said.
“The big question people ask is, is Canada’s housing market in a bubble. Our answer to that is no,” said Jim Murphy, chief executive officer of the Canadian Association of Accredited Mortgage Professionals. The association’s research suggests growth in mortgage credit is below average, he said.
Canada’s housing agency said Tuesday there is no compelling evidence of a price bubble based on factors such as household income and interest rates.
“Clear evidence of a bubble is lacking,” Canada Mortgage & Housing Corp. said in its annual report. “CMHC continues to monitor very closely housing prices and underlying factors such as demographic and economic fundamentals and financial conditions across all major urban centers, including condominium markets.”
The head of Canada’s biggest bank and one of the country’s leading developers said the housing market is not in a bubble, even as one economist said Toronto is caught in a “condo craze.”
Canadian housing starts rose to the highest since September 2007 last month, led by multiple-unit projects, Canada Mortgage & Housing Corp. said Tuesday. The annual pace of home starts rose 14% to 244,900, Ottawa-based CMHC said.
Participants at Bloomberg’s Canada Economic Summit in Toronto said talk of a housing bubble is overblown.
‘I’d like to see the rhetoric come down a little bit’
“When we look at the overall marketplace, there might be pockets of vulnerability but we remain quite comfortable,” said Gordon Nixon, chief executive officer of Royal Bank of Canada “Frankly, I’d like to see the rhetoric come down a little bit.”
A residential real-estate boom in the world’s 10th-largest economy has prompted senior policy makers such as Bank of Canada Governor Mark Carney and Finance Minister Jim Flaherty to warn that Canadians may be taking on too much debt.
Mr. Carney told lawmakers April 24 that high levels of household debt remain the greatest domestic risk to Canada’s economy. In an appearance before a parliamentary committee, he reiterated that a rate increase “may become appropriate,” and warned Canadian families to exercise “caution” with their debt levels.
Mr. Carney has kept his key lending rate unchanged at 1% since September 2010 in the longest pause since the 1950s.
10% overvalued
Housing prices in Canada are probably about 10% overvalued, economist Paul Fenton said at the Bloomberg summit.
There doesn’t seem to be a sense that there’s been overbuilding, and housing doesn’t pose a systemic threat to the function of the nation’s financial system, said Mr. Fenton, senior vice-president and chief economist at Caisse de Depot et Placement du Quebec.
The 244,900 housing starts last month released Tuesday beat economists’ expectations. The highest forecast in a Bloomberg economist survey with 21 responses was a 222,600 rate.
“Wow. This report reflects unbelievable strength in Canadian housing starts, and all of the gain was in multiples again which reflect the ongoing condo craze,” Scotia Capital economist Derek Holt said in a research note.
Sales of new condominiums in Toronto reached 6,070 units in the first three months of the year, a record for the first quarter, market research firm Urbanation Inc. reported May 7. As many as 40 new projects with more than 11,000 units could come on the market in the second quarter, a trend that may cause inventory of unsold units to approach a record set in 2008, Urbanation said.
Risk Averse
Condo builders “tend to be risk averse,” insisting that 70% of a project is presold and buyers put down at least a 20% deposit, according to Jim Ritchie, senior vice president of sales and marketing at Tridel, a Toronto-based real estate developer.
Concerns about foreign buyers are overdone, given about 95% of purchasers are ‘locals’
“It’s all about managing risk,” Mr. Ritchie said. There’s a market for condos because average house prices in Toronto’s 416 area code are about $830,000, compared with $400,000 for a new condo, he said.
Almost 60% of people buying condos in that area are either single or couples without children, said Mr. Ritchie, who said concerns about foreign buyers are overdone, given about 95% of purchasers are “locals who have social insurance numbers and local addresses.”
RBC’s exposure to the condo markets in Toronto and Vancouver isn’t “significant,” Mr. Nixon said. “Part of the reasons for that is firstly a lot of the condo buyers in those markets are cash buyers. At the margin there’s certainly a significant foreign component to them, and I think to some degree the banks are a bit slightly more cautious,” he said.
No Bubble
The increase in housing prices in Canada is unsustainable, said Finn Poschmann, vice president of research at the Toronto- based C.D. Howe Institute. It’s difficult for market participants to tell a bubble has formed before it has deflated, he said.
“The big question people ask is, is Canada’s housing market in a bubble. Our answer to that is no,” said Jim Murphy, chief executive officer of the Canadian Association of Accredited Mortgage Professionals. The association’s research suggests growth in mortgage credit is below average, he said.
Canada’s housing agency said Tuesday there is no compelling evidence of a price bubble based on factors such as household income and interest rates.
“Clear evidence of a bubble is lacking,” Canada Mortgage & Housing Corp. said in its annual report. “CMHC continues to monitor very closely housing prices and underlying factors such as demographic and economic fundamentals and financial conditions across all major urban centers, including condominium markets.”
Tuesday, 8 May 2012
B.C. housing starts rise 6.3 per cent in April: CMHC
National numbers surge in spring
By Derek Abma
OTTAWA — Housing construction starts blew past expectations in April, according to data released Tuesday.
Canada Mortgage and Housing Corp. said there was a seasonally adjusted annual rate of 244,900 housing starts last month. That was up 14 per cent from the previous month, and well ahead of what the 204,000 economists polled by Bloomberg had been predicting.
"While unseasonably warm weather has been helping starts in recent months, April's return to more normal seasonal temperatures still saw home building soar," CIBC World Markets economist Emanuella Enenajor said in a research note.
"That's even with data on building permits pointing to some moderation in home-building intentions. That suggests that low (interest) rates remain the principal catalyst for continued robust construction activity in Canada."
Urban starts were up 18 per cent to an annual rate of 226,200, while the estimate on rural starts were down 19 per cent to 18,700.
Construction on multiple-housing units in urban areas drove the overall gains. They were up 27.4 per cent to a rate of 158,500. Urban singles saw a gain of 0.6 per cent to 67,700.
Regionally, there was a surge of 56.5 per cent in urban housing starts in Quebec. They were up 12.2 per cent in Ontario, 6.3 per cent in the Prairies and British Columbia, and 2.6 per cent in Atlantic Canada.
By Derek Abma
OTTAWA — Housing construction starts blew past expectations in April, according to data released Tuesday.
Canada Mortgage and Housing Corp. said there was a seasonally adjusted annual rate of 244,900 housing starts last month. That was up 14 per cent from the previous month, and well ahead of what the 204,000 economists polled by Bloomberg had been predicting.
"While unseasonably warm weather has been helping starts in recent months, April's return to more normal seasonal temperatures still saw home building soar," CIBC World Markets economist Emanuella Enenajor said in a research note.
"That's even with data on building permits pointing to some moderation in home-building intentions. That suggests that low (interest) rates remain the principal catalyst for continued robust construction activity in Canada."
Urban starts were up 18 per cent to an annual rate of 226,200, while the estimate on rural starts were down 19 per cent to 18,700.
Construction on multiple-housing units in urban areas drove the overall gains. They were up 27.4 per cent to a rate of 158,500. Urban singles saw a gain of 0.6 per cent to 67,700.
Regionally, there was a surge of 56.5 per cent in urban housing starts in Quebec. They were up 12.2 per cent in Ontario, 6.3 per cent in the Prairies and British Columbia, and 2.6 per cent in Atlantic Canada.
Monday, 7 May 2012
OSFI
Article written by Boris Bozic
I suspect everyone in our industry is familiar or has some basic understanding of OSFI’s responsibilities. The Office of the Superintendent of Financial Institutions is an independent agency of the Government of Canada, and the agency reports directly to the Minister of Finance. OSFI’S mandate? Simply stated OSFI’S role is to ensure that Canadians have confidence in the financial system. Given what’s transpired in the rest of the word since 2008, I suspect Canadian confidence in our financial system has not waned, at all. Yet most Canadians wouldn’t know who or what OSFI is. Maybe that’s not a bad thing. Regulators in the US have come under heavy criticism for their role or lack thereof leading to the financial crisis of 2008. The criticism that regulators in the US have received over the last four years contributes to the erosion of consumer confidence. When regulators make headlines you know change is coming. Consumer confidence is the underpinning of any established economy. If consumers are concerned about their jobs, they don’t spend. If Canadians ever questioned the stability of our banking system, well, the net result could be cataclysmic.
So what exactly is the responsibility of this shadowy agency that so few Canadian know about or even know of their existence?
1. Supervise institutions and pension plans whether they are in sound financial condition
2. To ensure that financial institutions are complying to law and supervisory requirement
3. To advise institutions of material deficiencies, and to require management and boards of said institutions to implement corrective measures
4. Create policy and procedures designed to mitigate risk
5. Monitor and evaluate system-wide or sectoral issues that may impact institutions negatively
We’re getting firsthand experience as it relates to the fifth mandate. OSFI has significant concerns about the state of lending in this country and the risk posed to financial intuitions if current lending practices continued. Lending practices are being questioned and change is coming. What’s unknown is the degree of change. OFSI requested for CAAMP to respond to their draft guideline – B-20 Residential Mortgage Underwriting Practices and Procedures. CAAMP was grateful for the opportunity to respond to OSFI and once again it demonstrates that CAAAMP has become the guardian of our industry. CAAMP’s response was well measured and focused.
As a teaser, CAAMP’s response focused on the following lending practices and procedures;
1. Loan Documentation
2. Debt Service Change –Additional Assessment Criteria
3. Loan to Value Ratio
4. Down Payment
5. Home Equity Lines of Credit
It is clear that OSFI is reviewing every aspect of lending and specifically the fundamentals of credit decisions. As an industry it would be naïve to believe that change would have no impact on our business. Change is coming and one has to hope that change is measured and based on facts. Over reaching changes to lending policies poses a risk. Confidence in the financial system is critical. However, if Canadians don’t believe that banks want to lend prudently, they’ll respond accordingly. There are different ways for Canadians to lose confidence in the banking system. It’s not just about writing bad loans…it’s also about writing no loans.
I suspect everyone in our industry is familiar or has some basic understanding of OSFI’s responsibilities. The Office of the Superintendent of Financial Institutions is an independent agency of the Government of Canada, and the agency reports directly to the Minister of Finance. OSFI’S mandate? Simply stated OSFI’S role is to ensure that Canadians have confidence in the financial system. Given what’s transpired in the rest of the word since 2008, I suspect Canadian confidence in our financial system has not waned, at all. Yet most Canadians wouldn’t know who or what OSFI is. Maybe that’s not a bad thing. Regulators in the US have come under heavy criticism for their role or lack thereof leading to the financial crisis of 2008. The criticism that regulators in the US have received over the last four years contributes to the erosion of consumer confidence. When regulators make headlines you know change is coming. Consumer confidence is the underpinning of any established economy. If consumers are concerned about their jobs, they don’t spend. If Canadians ever questioned the stability of our banking system, well, the net result could be cataclysmic.
So what exactly is the responsibility of this shadowy agency that so few Canadian know about or even know of their existence?
1. Supervise institutions and pension plans whether they are in sound financial condition
2. To ensure that financial institutions are complying to law and supervisory requirement
3. To advise institutions of material deficiencies, and to require management and boards of said institutions to implement corrective measures
4. Create policy and procedures designed to mitigate risk
5. Monitor and evaluate system-wide or sectoral issues that may impact institutions negatively
We’re getting firsthand experience as it relates to the fifth mandate. OSFI has significant concerns about the state of lending in this country and the risk posed to financial intuitions if current lending practices continued. Lending practices are being questioned and change is coming. What’s unknown is the degree of change. OFSI requested for CAAMP to respond to their draft guideline – B-20 Residential Mortgage Underwriting Practices and Procedures. CAAMP was grateful for the opportunity to respond to OSFI and once again it demonstrates that CAAAMP has become the guardian of our industry. CAAMP’s response was well measured and focused.
As a teaser, CAAMP’s response focused on the following lending practices and procedures;
1. Loan Documentation
2. Debt Service Change –Additional Assessment Criteria
3. Loan to Value Ratio
4. Down Payment
5. Home Equity Lines of Credit
It is clear that OSFI is reviewing every aspect of lending and specifically the fundamentals of credit decisions. As an industry it would be naïve to believe that change would have no impact on our business. Change is coming and one has to hope that change is measured and based on facts. Over reaching changes to lending policies poses a risk. Confidence in the financial system is critical. However, if Canadians don’t believe that banks want to lend prudently, they’ll respond accordingly. There are different ways for Canadians to lose confidence in the banking system. It’s not just about writing bad loans…it’s also about writing no loans.
Friday, 4 May 2012
Thursday, 3 May 2012
Jim Flaherty: Fix your own mess
Special to Financial Post
Why Canada will not provide IMF funds for eurozone
By Jim Flaherty
At the meeting of the International Monetary Fund recently, Canada decided against contributing more resources to support the eurozone. We also argued that all countries borrowing from the IMF should be treated equally. We took these positions because we believe they are in the best interests of the eurozone, of the IMF, and of the international community.
We have always supported the IMF’s important systemic role in promoting economic stability by providing loans to countries that have exhausted their domestic options, and placing these countries on a path to sustainability through time-limited interventions. But it is not the IMF’s role to substitute for national governments.
In order for any IMF action in Europe to be successful, a sense of direction and a comprehensive blueprint to return to sustainability are necessary. The question of sustainability cannot be separated from that of the future of the European monetary union. As such, its members should take the lead in defining a comprehensive and credible blueprint. This requires more than incrementalism and wishful thinking. Europe has taken important steps in this direction with the fiscal compact, with economic and fiscal reforms in Italy and Spain, with an enhanced firewall, and with the recent actions of the European Central Bank to provide liquidity support. However, more is needed to return the eurozone to sustainability and to address the systemic internal imbalances that threaten the monetary union.
Since 2008, and throughout the European debt crisis, I have been telling my international counterparts that it is important to overwhelm the problem and get ahead of the markets. This is what the United States did in 2008, and it is what Canada did in 2009 by deploying a fiscal stimulus of roughly 4% of GDP over two years in response to a crisis originating outside our borders. These bold actions paid off. Rating agencies have reaffirmed Canada’s strong AAA credit rating, and we are now on track to return to balanced budgets over the medium term. By contrast, actions taken by the eurozone have fallen short of overwhelming the problem. The “muddle through” approach has led to an erosion of confidence in public leadership and too many missed opportunities.
Ultimately, the adequacy of the actions taken will be judged by the markets. Repeated expressions of confidence by politicians are futile if the markets continue to cast their vote of non-confidence. The markets’ confidence in political leadership will only be restored when it is clear that politicians are willing to see the full scope of the problem, to focus on the key issues instead of pursuing sideshows such as the financial transactions tax, and to set out and implement a plan for tackling these issues.
The European debt crisis also raises a question of resources. The eurozone has sufficient resources to tackle its sovereign debt crisis, but there is an unwillingness to commit them to tackle the problem. In these circumstances, IMF loans are not an adequate substitute for a serious commitment by eurozone countries to resolve this crisis. We cannot avoid the question of fairness. Eurozone members benefit from increased exports and price stability. Spreading the risks of the eurozone around the world, while its benefits accrue primarily to its members, is not the way to resolve this crisis. We cannot expect non-European countries, whose citizens in many cases have a much lower standard of living, to save the eurozone. Further, the IMF, with roughly $400-billion, already has adequate resources to deal with imminent needs.
The manner in which the IMF provides support must also be fair. It has been very successful at resolving crises using its trusted model of time-limited lending agreements, with strict conditions imposed on the borrowing country. This is why I believe that all countries borrowing from the IMF should be treated the same. Canada’s position is that conditionality should be determined exclusively by the IMF, and not by the “Troika” of the IMF plus the European Central Bank and the European Commission.
If the eurozone is seeking assistance, it should not be setting the terms under which this assistance is provided. Further, Europe controls 34% of votes at the IMF. In that context, the simple majority required for the fund to make an investment is a relatively low threshold. Emerging markets play an increasingly important role in global economic issues. Canada has been a leader in recognizing changing international dynamics and advocating greater representation of emerging markets at the IMF. In this context, we believe that measures should be taken to ensure that major decisions about resources dedicated to Europe require more than a simple majority.
Canada believes in the eurozone’s ability to solve this crisis. We also believe in a strong and fair IMF where emerging economies can take their appropriate seat at the table. This is why we have decided not to provide additional resources to the IMF for the eurozone.
Financial Post
Jim Flaherty is Minister of Finance and the longest-serving finance minister in the G7. This article is also appearing in The Daily Telegraph, London.
Why Canada will not provide IMF funds for eurozone
By Jim Flaherty
At the meeting of the International Monetary Fund recently, Canada decided against contributing more resources to support the eurozone. We also argued that all countries borrowing from the IMF should be treated equally. We took these positions because we believe they are in the best interests of the eurozone, of the IMF, and of the international community.
We have always supported the IMF’s important systemic role in promoting economic stability by providing loans to countries that have exhausted their domestic options, and placing these countries on a path to sustainability through time-limited interventions. But it is not the IMF’s role to substitute for national governments.
In order for any IMF action in Europe to be successful, a sense of direction and a comprehensive blueprint to return to sustainability are necessary. The question of sustainability cannot be separated from that of the future of the European monetary union. As such, its members should take the lead in defining a comprehensive and credible blueprint. This requires more than incrementalism and wishful thinking. Europe has taken important steps in this direction with the fiscal compact, with economic and fiscal reforms in Italy and Spain, with an enhanced firewall, and with the recent actions of the European Central Bank to provide liquidity support. However, more is needed to return the eurozone to sustainability and to address the systemic internal imbalances that threaten the monetary union.
Since 2008, and throughout the European debt crisis, I have been telling my international counterparts that it is important to overwhelm the problem and get ahead of the markets. This is what the United States did in 2008, and it is what Canada did in 2009 by deploying a fiscal stimulus of roughly 4% of GDP over two years in response to a crisis originating outside our borders. These bold actions paid off. Rating agencies have reaffirmed Canada’s strong AAA credit rating, and we are now on track to return to balanced budgets over the medium term. By contrast, actions taken by the eurozone have fallen short of overwhelming the problem. The “muddle through” approach has led to an erosion of confidence in public leadership and too many missed opportunities.
Ultimately, the adequacy of the actions taken will be judged by the markets. Repeated expressions of confidence by politicians are futile if the markets continue to cast their vote of non-confidence. The markets’ confidence in political leadership will only be restored when it is clear that politicians are willing to see the full scope of the problem, to focus on the key issues instead of pursuing sideshows such as the financial transactions tax, and to set out and implement a plan for tackling these issues.
The European debt crisis also raises a question of resources. The eurozone has sufficient resources to tackle its sovereign debt crisis, but there is an unwillingness to commit them to tackle the problem. In these circumstances, IMF loans are not an adequate substitute for a serious commitment by eurozone countries to resolve this crisis. We cannot avoid the question of fairness. Eurozone members benefit from increased exports and price stability. Spreading the risks of the eurozone around the world, while its benefits accrue primarily to its members, is not the way to resolve this crisis. We cannot expect non-European countries, whose citizens in many cases have a much lower standard of living, to save the eurozone. Further, the IMF, with roughly $400-billion, already has adequate resources to deal with imminent needs.
The manner in which the IMF provides support must also be fair. It has been very successful at resolving crises using its trusted model of time-limited lending agreements, with strict conditions imposed on the borrowing country. This is why I believe that all countries borrowing from the IMF should be treated the same. Canada’s position is that conditionality should be determined exclusively by the IMF, and not by the “Troika” of the IMF plus the European Central Bank and the European Commission.
If the eurozone is seeking assistance, it should not be setting the terms under which this assistance is provided. Further, Europe controls 34% of votes at the IMF. In that context, the simple majority required for the fund to make an investment is a relatively low threshold. Emerging markets play an increasingly important role in global economic issues. Canada has been a leader in recognizing changing international dynamics and advocating greater representation of emerging markets at the IMF. In this context, we believe that measures should be taken to ensure that major decisions about resources dedicated to Europe require more than a simple majority.
Canada believes in the eurozone’s ability to solve this crisis. We also believe in a strong and fair IMF where emerging economies can take their appropriate seat at the table. This is why we have decided not to provide additional resources to the IMF for the eurozone.
Financial Post
Jim Flaherty is Minister of Finance and the longest-serving finance minister in the G7. This article is also appearing in The Daily Telegraph, London.
Wednesday, 2 May 2012
Why smaller down payments can lead to better mortgage rates
Garry Marr
It doesn’t make much sense, but a skimpy down payment on a home might actually get you a better mortgage rate in today’s market.
Blame the government subsidy known as mortgage default insurance, which ultimately makes it less risky to lend money to someone who has only 5% down compared to someone with 20%.
Consumers with less than 20% down must get mortgage default insurance in Canada if they are borrowing from a federally regulated bank. The cost is up to 2.75% of the mortgage amount upfront on a 25-year amortization but that fee comes with 100% backing from the federal government if the insurance is provided by Crown corporationCanada Mortgage and Housing Corp.
“It’s already happening,” says Rob McLister, editor of Canadian Mortgage Trends, who says secondary lenders are now offering rates that are 10 to 15 basis points higher for a closed five-year mortgage for uninsured consumers.
The crackdown on mortgage insurance announced by Jim Flaherty, the federal Finance Minister, could exacerbate the situation. Mr. Flaherty, who mused to theFinancial Post editorial board last week about getting CMHC out of the mortgage insurance business, has placed the agency under the authority of the country’s banking regulator, the Office of the Superintendent of Financial Institutions.
Mr. Flaherty also put in new rules on bulk or portfolio insurance. The banks had been paying the insurance premium on low-ratio mortgages — loans with more than 20% down — because it was easier to securitize them.
However, Mr. Flaherty says those loans will no longer be allowed in the government’s covered bond program.
“Long story short, it is going to tick up rates to some degree,” Mr. McLister says. “You are seeing an interesting phenomenon where if you go to get a mortgage today, you are oftentimes quoted a higher rate on a conventional mortgage. Presumably you have less risk because you have more equity.”
It all depends on the lender. For now, the Big Six banks have kept consistent pricing between low-ratio and high-ratio mortgages.
“There is a question on whether they will continue doing that or raise rates overall to compensate for higher conventional mortgage costs,” Mr. McLister says.
Farhaneh Haque, director of mortgage advice and real estate-secured lending at Toronto-Dominion Bank, says competition among the Big Six banks is keeping rates down and stopping any of them from raising rates for conventional mortgages.
“When we can’t securitize a deal, there is a different cost of funds but the bank continues to offer the same rate,” said Ms. Haque, adding her bank did charge a premium for stated income deals, which usually means self-employed people, but removed the difference last week. The premium was 20 basis points.
“Looking at the competitive landscape, it was a disadvantage,” she says. “We were aiming to target pricing that was specific and for the risk appetite for that deal itself. We didn’t want one [deal] compensating for the other.”
But the banks have bigger fish to fry than just your mortgage. Those with the larger equity position in their homes may be a costlier mortgage to fund, but they also could be a future line-of-credit customers. There’s also the potential for other business such as RRSPs and TFSA, so losing a few basis points might make more sense in the long run.
Peter Routledge, an analyst at National Bank Financial, says he wouldn’t want to be an investor in a bank that approached its business any other way, though he did acknowledge there is a cost to keeping those conventional mortgages. “It’s in effect a subsidy,” Mr. Routledge says.
While banks may be eating some of the costs for people who are not eligible for a subsidy, if they continue down that road they might not be able to match the rates some of the secondary lenders are able to offer with insured mortgages.
It doesn’t sound like much, but the difference between, say, 3.14% and 3.29% on a $500,000 mortgage amortized over 25 years would be about $3,500 extra in interest on a five-year term.
It’s true that those people getting the better rate pay a hefty fee up front in insurance premiums, but they also represent a greater risk to the taxpayer. Do they deserve a better rate?
It doesn’t make much sense, but a skimpy down payment on a home might actually get you a better mortgage rate in today’s market.
Blame the government subsidy known as mortgage default insurance, which ultimately makes it less risky to lend money to someone who has only 5% down compared to someone with 20%.
Consumers with less than 20% down must get mortgage default insurance in Canada if they are borrowing from a federally regulated bank. The cost is up to 2.75% of the mortgage amount upfront on a 25-year amortization but that fee comes with 100% backing from the federal government if the insurance is provided by Crown corporationCanada Mortgage and Housing Corp.
“It’s already happening,” says Rob McLister, editor of Canadian Mortgage Trends, who says secondary lenders are now offering rates that are 10 to 15 basis points higher for a closed five-year mortgage for uninsured consumers.
The crackdown on mortgage insurance announced by Jim Flaherty, the federal Finance Minister, could exacerbate the situation. Mr. Flaherty, who mused to theFinancial Post editorial board last week about getting CMHC out of the mortgage insurance business, has placed the agency under the authority of the country’s banking regulator, the Office of the Superintendent of Financial Institutions.
Mr. Flaherty also put in new rules on bulk or portfolio insurance. The banks had been paying the insurance premium on low-ratio mortgages — loans with more than 20% down — because it was easier to securitize them.
However, Mr. Flaherty says those loans will no longer be allowed in the government’s covered bond program.
“Long story short, it is going to tick up rates to some degree,” Mr. McLister says. “You are seeing an interesting phenomenon where if you go to get a mortgage today, you are oftentimes quoted a higher rate on a conventional mortgage. Presumably you have less risk because you have more equity.”
It all depends on the lender. For now, the Big Six banks have kept consistent pricing between low-ratio and high-ratio mortgages.
“There is a question on whether they will continue doing that or raise rates overall to compensate for higher conventional mortgage costs,” Mr. McLister says.
Farhaneh Haque, director of mortgage advice and real estate-secured lending at Toronto-Dominion Bank, says competition among the Big Six banks is keeping rates down and stopping any of them from raising rates for conventional mortgages.
“When we can’t securitize a deal, there is a different cost of funds but the bank continues to offer the same rate,” said Ms. Haque, adding her bank did charge a premium for stated income deals, which usually means self-employed people, but removed the difference last week. The premium was 20 basis points.
“Looking at the competitive landscape, it was a disadvantage,” she says. “We were aiming to target pricing that was specific and for the risk appetite for that deal itself. We didn’t want one [deal] compensating for the other.”
But the banks have bigger fish to fry than just your mortgage. Those with the larger equity position in their homes may be a costlier mortgage to fund, but they also could be a future line-of-credit customers. There’s also the potential for other business such as RRSPs and TFSA, so losing a few basis points might make more sense in the long run.
Peter Routledge, an analyst at National Bank Financial, says he wouldn’t want to be an investor in a bank that approached its business any other way, though he did acknowledge there is a cost to keeping those conventional mortgages. “It’s in effect a subsidy,” Mr. Routledge says.
While banks may be eating some of the costs for people who are not eligible for a subsidy, if they continue down that road they might not be able to match the rates some of the secondary lenders are able to offer with insured mortgages.
It doesn’t sound like much, but the difference between, say, 3.14% and 3.29% on a $500,000 mortgage amortized over 25 years would be about $3,500 extra in interest on a five-year term.
It’s true that those people getting the better rate pay a hefty fee up front in insurance premiums, but they also represent a greater risk to the taxpayer. Do they deserve a better rate?
Tuesday, 1 May 2012
Rate hike will be gradual
On Tuesday April 17, the Bank of Canada (BOC) left its key interest rate untouched - it has remained steady at 1% since 2010. However, the BOC's Governor Mark Carney hinted at rate increases starting as early as this summer. If that happens, the cost for consumer loans, lines of credit and variable rate mortgages will increase. The key rate is the interest rate at which major financial institutions borrow and lend one-day funds among themselves.
Carney's decision to increase rates will depend on a number of variables being played out right now. Last July, Carney sent a strong signal that higher rates were coming, only to reverse that stance in September. His challenge now is to ensure inflation stays under control as the economy strengthens, but without dampening consumer spending and/or curtailing business investment that will be crucial to the country's growth over the next couple of years.
The BOC clearly laid out its case for raising rates. The bank boosted its 2012 growth forecast for Canada to 2.4%, from 2 % in January. While it cut its 2013 forecast to 2.4 per cent from 2.8 per cent, policy makers said the economy will be back at full tilt in the first half of 2013, instead of in the third quarter of that year.
But a few days ago, Statistics Canada reported the inflation rate had dipped to 1.9% in March -- the first time since September 2010 that the rate has fallen below the Bank of Canada's target of 2%. And since Carney's interest rate announcement, a few other factors have come into play.
The U.S. Federal Reserve Board is sticking with its near-zero rate until 2014, putting pressure on Canada to keep its current rate as is. The rebound in the United States, Canada's chief export market, is not as robust as analysts would have liked suggesting the U.S economy is still vulnerable. Considering this is an election year, it's likely to stay that way until the election is over.
The euro crisis is still making headlines, which is worrisome; and at the mere hint of an interest rate hike, the loonie shot up more than a full cent against the U.S. dollar, which is not good for many of our business sectors.
In his April 17 announcement, Carney did say the "timing and degree" of interest rate moves would depend on developments in the coming weeks. Those developments are already here. And while he has hinted at a summer hike, well, without a crystal ball, it's still too early to call.
One thing we can be sure of is that when the hikes do come, they will be gradual.
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