The Canadian Press
A new poll suggests more Canadians are living debt-free this year compared to 2011.
The annual RBC survey found that 26% of respondents had no personal debt — excluding mortgage debt — in 2012, up from 22% last year.
However, the poll found that on average Canadians are carrying $13,141 in non-mortgage debt, up $84 from last year.
Ontario residents were carrying the heaviest load at $15,361 while Quebecers had the least at $10,171.
Some 40% of those polled said they were comfortable with their current debt level, down from 45% last year.
And one-in-three respondents said their debt levels are a source of anxiety — up slightly from 2011.
Richard Goyder, vice-president of personal lending at RBC, says it’s “encouraging that the results show more Canadians have become debt-free over the past year.”
The poll also found a majority of respondents — 51% — said it’s more important right now to pay down debt rather than save and invest for the future.
And 76% said they’re in better financial shape than their neighbours.
Finance Minister Jim Flaherty and Bank of Canada governor Mark Carney have repeatedly warned Canadians about borrowing too much and identified household debt as a key risk to the economy.
The International Monetary Fund also raised concerns in a report this week about the amount of borrowing in Canada and how it could affect the economy.
Canadian average household debt, which includes mortgage debt, in relation to disposable income rose to a record 152% at the end of 2011.
The online poll of 2,041 Canadian adults was conducted from July 27 to August 2.
The polling industry’s professional body, the Marketing Research and Intelligence Association, says online surveys cannot be assigned a margin of error because they do not randomly sample the population.
Friday, 19 October 2012
Thursday, 18 October 2012
Insured Buyers are the Majority
Rob Mclister - Canadian Mortgage Trends
Mortgage insurance is typically mandatory for homebuyers without 20% equity.
http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2012/10/insured-buyers-are-the-majority.html
Mortgage insurance is typically mandatory for homebuyers without 20% equity.
Putting down 10% on the average $350,152 home, for example, means you’ll cough up a $6,302 insurance premium (given fully documented income and decent credit). Since insurance premiums are tacked on to your mortgage, that adds up to $9,000+ if you amortize it over 25 years.
Of course, you can avoid insurance altogether by plopping down 20% or more. The challenge is, only a minority of buyers have that sort of equity.
According to the latest data from Will Dunning, Chief Economist of CAAMP, less than 4 in 10 buyers have 20% down payments.
For those purchasing from 2010 through spring 2012:
- 41% had less than a 10% down-payment
- 21% had a 10-19.99% down-payment
- Only 39% put down 20% or more.
(This survey included both first-time and repeat buyers. First-time buyers accounted for 56% of the dataset. Totals don’t add up to 100% due to rounding.)
Given the widespread use of mortgage insurance, it’s easy to see how regulator’s insurance rule changes can rapidly alter home buying trends. In another few months, we’ll get a good sense for how the most recent rule tightening has impacted nationwide mortgage volumes.
http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2012/10/insured-buyers-are-the-majority.html
Home sales rise for first time since March, but down 15% year over year
Garry Marr
Sales of existing homes rebounded in September but even the group representing the country’s almost 100,000 real estate agents is finding it hard to muster much enthusiasm for a market many say is slowing fast.
Sales of existing homes rebounded in September but even the group representing the country’s almost 100,000 real estate agents is finding it hard to muster much enthusiasm for a market many say is slowing fast.
But the Ottawa-based Canadian Real Estate Association, which represents about 100 boards across the country, is not predicting the free fall others have been expecting, though it suggested sales in the fourth quarter of 2012 will be off from a year ago — in part because of new mortgage rules which tightened up lending requirements.
CREA stands by its assertion there will not be much of a correction so consumers sitting on the sidelines waiting for a deal are unlikely to find one this year or next.
“Even in Vancouver, you have had some large declines in sales activity and no large declines in prices. In fact, no decline, prices continued to rise,” said Gregory Klump, the chief economist at CREA. “What you really have to do is look at market balance, what happens to supply and demand and the balance between the two.”
His comments came as the group reported sales on a national basis were up 2.5% in September from August on a seasonally adjusted basis. Actual sales were down 15.1% in September compared to a year ago. New listings climbed 6.5% from August to September.
Mr. Klump said any concerns about an oversupply should be tempered because the market will rebalance when people realize that homes are not selling.
“Once sales decline, [new listings] will too but with a lag,” he said. “We are looking at the continuation of a balanced market. Sellers will realistically evaluate ‘what it is I can live with in terms of my asking price” and if offers come in below they will let the listing expire.”
So far, CREA’s forecast for relatively little change in price appears to be accurate.
The average price of a home sold in Canada in September was $355,177, a 1.1% increase from a year ago. Year to date prices are up 1% from a year ago.
Prices are expected to increase 0.6% this year nationally but the figure would be much higher without the 6% decline in prices forecast for British Columbia. In 2013, CREA says prices are expected to decline 0.1% nationally.
The bounce back in sales in September did not do much to temper the view of most economists.
“The Canadian housing market has clearly lost some of its lustre. Sales have fallen from their peaks in most markets across the country with today’s gain only partially offsetting August’s substantial decline,” said Francis Fong, an economist with Toronto-Dominion Bank.
“That being said, with interest rates remaining sufficiently accommodative, we do not anticipate any precipitous decline in housing activity in the near term. Rather, we expect a gradual unwinding of the imbalance in both sales and prices over the next few years.”
Doug Porter, deputy chief economist with Bank of Montreal, said the housing sector is clearly turning into a buyer’s market but he does not see a precipitous decline in prices coming.
“While the 15% drop in year over year sales suggests Canadian housing is making like Felix Baumgartner (falling past the speed of sound) the details are not nearly as weak, and still suggest that the housing market is gliding to a lower altitude,” said Mr. Porter.
Others are not so confident there will not be a major decline, in spite of the strong September numbers.
“The trend has been pretty clear about what has been happening in vulnerable markets like Vancouver and Toronto,” said Dave Madani, an economist with Capital Economic. “I’m even more pessimistic about housing now that we’ve seen the household balance sheet data.”
He’s been calling for a 25% decline in prices and says the new data showing debt-to-income ratio rose to 163.4% in the second quarter does not bode well. “I’m even nervous now about the housing market,” said Mr. Madani.
Tuesday, 16 October 2012
Canada's Big Six Banks still unfazed by consumer debt levels
Tim Kiladze, The Globe and Mail
It’s going to take more than early warnings to get Canada’s big financial institutions to start worrying about sky-high consumer debt levels.
We’ve heard the statistics before. Canadians’ ratio of debt to personal disposable income is north of 150 per cent. On Tuesday, the International Monetary Fund even called out household debt as a particular reason to be a bit wary of the Canadian economy.
But here’s the other side of the coin: the Big Six’s provisions for credit losses have been falling for three years now. Today, they’ve either flat-lined, or better yet, in the case of Royal Bank of Canada, National Bank of Canada and Bank of Nova Scotia, returned to their pre-crisis levels.
National Bank Financial analyst Peter Routledge dug through the banks’ credit card trust portfolios and found that average loss rates on their cards has fallen back down to about 4 per cent, a level not seen since 2008, and the average value of accounts whose payments are 90 days or more delinquent is just 1 per cent of the portfolio.
“The credit card data demonstrates that delinquencies have returned to pre-crisis levels while the loss rate has nearly normalized,” he noted.
While it’s true that consumer credit only makes up about 15 per cent of total household debt in Canada (the rest comes from mortgages or home equity lines), keep in mind that the banks themselves have mortgage insurance to protect themselves from housing losses. Even if the market cools and some households run into trouble, the banks will get paid by mortgage insurance providers like Canada Mortgage and Housing Corp.
This isn’t to say we shouldn’t be worried. We certainly should. If Canadians start defaulting on their mortgages, they’re also likely to have trouble paying off their credit cards. Just because we aren’t seeing any run-off effects on consumer credit just yet, Mr. Routledge noted the residual effect will likely appear in a few quarters – presuming the housing cooling continues.
Still, the low write-off levels help to explain why you don’t see the banks doing much to lend less. With their credit losses in decline, they can lean on their personal and commercial banking arms to drive revenues, helping to offset volatile divisions such as capital markets. Plus, as Mr. Routledge pointed out, the banks can’t rely on more accounting gains achieved from lowering their credit loss provisions every three months. Anything that trickles through to their bottom line now must come from hard-earned growth.
Is this mindset prudent? Probably not in the long run. But the banks are in the same predicament as investors. They can make it harder to borrow, helping Canadians to save more, or they can churn out new credit cards with dazzling frequent flier programs to keep juicing their bottom lines.
Individual investors, on the other hand, could take it upon themselves to borrow less, but if they did and the bank earnings fell, where would they turn for juicy, dependable dividend yields?
Streetwise is Canada’s source for analysis and breaking news on deals and finance. Find it online at tgam.ca/streetwise, or follow it on Twitter via @StreetwiseBlog
We’ve heard the statistics before. Canadians’ ratio of debt to personal disposable income is north of 150 per cent. On Tuesday, the International Monetary Fund even called out household debt as a particular reason to be a bit wary of the Canadian economy.
But here’s the other side of the coin: the Big Six’s provisions for credit losses have been falling for three years now. Today, they’ve either flat-lined, or better yet, in the case of Royal Bank of Canada, National Bank of Canada and Bank of Nova Scotia, returned to their pre-crisis levels.
National Bank Financial analyst Peter Routledge dug through the banks’ credit card trust portfolios and found that average loss rates on their cards has fallen back down to about 4 per cent, a level not seen since 2008, and the average value of accounts whose payments are 90 days or more delinquent is just 1 per cent of the portfolio.
“The credit card data demonstrates that delinquencies have returned to pre-crisis levels while the loss rate has nearly normalized,” he noted.
While it’s true that consumer credit only makes up about 15 per cent of total household debt in Canada (the rest comes from mortgages or home equity lines), keep in mind that the banks themselves have mortgage insurance to protect themselves from housing losses. Even if the market cools and some households run into trouble, the banks will get paid by mortgage insurance providers like Canada Mortgage and Housing Corp.
This isn’t to say we shouldn’t be worried. We certainly should. If Canadians start defaulting on their mortgages, they’re also likely to have trouble paying off their credit cards. Just because we aren’t seeing any run-off effects on consumer credit just yet, Mr. Routledge noted the residual effect will likely appear in a few quarters – presuming the housing cooling continues.
Still, the low write-off levels help to explain why you don’t see the banks doing much to lend less. With their credit losses in decline, they can lean on their personal and commercial banking arms to drive revenues, helping to offset volatile divisions such as capital markets. Plus, as Mr. Routledge pointed out, the banks can’t rely on more accounting gains achieved from lowering their credit loss provisions every three months. Anything that trickles through to their bottom line now must come from hard-earned growth.
Is this mindset prudent? Probably not in the long run. But the banks are in the same predicament as investors. They can make it harder to borrow, helping Canadians to save more, or they can churn out new credit cards with dazzling frequent flier programs to keep juicing their bottom lines.
Individual investors, on the other hand, could take it upon themselves to borrow less, but if they did and the bank earnings fell, where would they turn for juicy, dependable dividend yields?
Streetwise is Canada’s source for analysis and breaking news on deals and finance. Find it online at tgam.ca/streetwise, or follow it on Twitter via @StreetwiseBlog
Monday, 15 October 2012
To Pay Or Not To Pay A Mortgage Off Early Is Still Buyers' Big Question
Jill Krasny, Business Insider
A blog post on the Financial Security Project at Boston College argues that paying off your mortgage faster is a dumb idea given how mortgage rates are scraping the bottom of the barrel these days.
In their mind, there's not much incentive to pay off a mortgage sooner when the money could easily be put toward other expenses like saving up for retirement or scaling back debt.
It's the classic fork in the road that first-time homebuyers seem to come to when they've amassed enough money to catch up with their budget. So does the blog make a valid point?
Well, the answer is yes ... and no.
"Most people are pre-programmed into thinking if I have extra money, I'll put it in my house," Robert Stammers, director of investor education at the CFA Institute, told BI in August. "That was OK in the past because the interest rates were high, but these days it just doesn't make sense. People need to think of the best place to put that money."
In the blog's defense, there are plenty of reasons not to pay down your mortgage right this second. If clearing away debt isn't an issue, and there's money left over to burn, socking some of that cold, hard cash away in an interest bearing account for retirement is clearly the smarter way to play it.
And as we've written before, there's a psychological benefit to paying off the bill. Those nearing retirement—or drowning with an underwater mortgage—would be wise to clear up their balance sheet as soon as possible, since they don't want those bills interfering with large expenditures like health care or supporting children after college.
That said, the blog should have bolstered its point by outlining the three reasons it's a dumb idea to pay off your mortgage early. They are: not being diversified, or tying up all your income in a home; being deep in debt (see everyone living paycheck to paycheck); and shocker of shockers, just being young.
The latter is key as your 20s and 30s are the prime time to build up your nest egg as much as you can. This goes back to the virtue of compound interest, meaning that money will quickly accrue over time the longer it sits in the bank—a win for retirement savings.
Having the luxury of time also means being able to spread mortgage payments out while paying off other expenditures like student loan debt. If a homebuyer isn't quite set in her career—and really, who is these days?—then it's worth it to shore up an emergency fund just in case the bottom falls out.
Read more: http://www.businessinsider.com/mortgage-prepayment-debate-strikes-again-2012-9#ixzz29QpP0ici
A blog post on the Financial Security Project at Boston College argues that paying off your mortgage faster is a dumb idea given how mortgage rates are scraping the bottom of the barrel these days.
In their mind, there's not much incentive to pay off a mortgage sooner when the money could easily be put toward other expenses like saving up for retirement or scaling back debt.
It's the classic fork in the road that first-time homebuyers seem to come to when they've amassed enough money to catch up with their budget. So does the blog make a valid point?
Well, the answer is yes ... and no.
"Most people are pre-programmed into thinking if I have extra money, I'll put it in my house," Robert Stammers, director of investor education at the CFA Institute, told BI in August. "That was OK in the past because the interest rates were high, but these days it just doesn't make sense. People need to think of the best place to put that money."
In the blog's defense, there are plenty of reasons not to pay down your mortgage right this second. If clearing away debt isn't an issue, and there's money left over to burn, socking some of that cold, hard cash away in an interest bearing account for retirement is clearly the smarter way to play it.
And as we've written before, there's a psychological benefit to paying off the bill. Those nearing retirement—or drowning with an underwater mortgage—would be wise to clear up their balance sheet as soon as possible, since they don't want those bills interfering with large expenditures like health care or supporting children after college.
That said, the blog should have bolstered its point by outlining the three reasons it's a dumb idea to pay off your mortgage early. They are: not being diversified, or tying up all your income in a home; being deep in debt (see everyone living paycheck to paycheck); and shocker of shockers, just being young.
The latter is key as your 20s and 30s are the prime time to build up your nest egg as much as you can. This goes back to the virtue of compound interest, meaning that money will quickly accrue over time the longer it sits in the bank—a win for retirement savings.
Having the luxury of time also means being able to spread mortgage payments out while paying off other expenditures like student loan debt. If a homebuyer isn't quite set in her career—and really, who is these days?—then it's worth it to shore up an emergency fund just in case the bottom falls out.
Read more: http://www.businessinsider.com/mortgage-prepayment-debate-strikes-again-2012-9#ixzz29QpP0ici
How to view an open house like a real estate pro
Jill Krasny, Business Insider
As the housing market slowly improves, more consumers are finding themselves in the market for a new home, or at least one worth dreaming about.
One place they start their search is an open house tour, though they can forget these are helpful for more than just checking out the kitchen’s color scheme.
Open houses are a smart way to gauge whether a listing’s catching heat and if it’s worth seeing again in a private showing.
“If you’re just getting started with the process, an open house tour is like a get-out-of-jail-free card,” says Zillow.com real estate expert Brendon DeSimone. “It’s free, you can go because there aren’t restrictions and it’s a great way to learn the market.”
To his mind, the primary thing home shoppers overlook tends to be the most obvious: the crowd. Observing other shoppers is key, he says, as that’s the best way to gauge the market’s response to the home.
“If you like the house, watch the people. Is it packed? Are they hovering around the agent?,” he says. If so and if they’re asking pointed questions as well, you can bet that there’s serious interest and the listing is going to go fast.Another strategy is to observe the agent, he adds.
“If you go to a house and you like it but no one’s there, maybe there are issues there,” says DeSimone. “You should watch the listing agent’s reactions because he wants to see the response to the house and how crowded it is.”
But don’t miss the opportunity to make small talk with the seller.
“You should ask why he’s selling, nothing rude, just what’s the story,” DeSimone says. “What’s their motivation to sell?” That should give you a feel for the pricing and whether the listing is gathering dust.
Questions like, how many days has the home been on the market?, or Have you lived here for a long time? should get the conversation going. Perhaps there’s a looming job transfer, or the seller is just moving down the street.
“If they’re not motivated you won’t want to waste your time,” says DeSimone. But at least you’ll know where they stand.
As the housing market slowly improves, more consumers are finding themselves in the market for a new home, or at least one worth dreaming about.
One place they start their search is an open house tour, though they can forget these are helpful for more than just checking out the kitchen’s color scheme.
Open houses are a smart way to gauge whether a listing’s catching heat and if it’s worth seeing again in a private showing.
“If you’re just getting started with the process, an open house tour is like a get-out-of-jail-free card,” says Zillow.com real estate expert Brendon DeSimone. “It’s free, you can go because there aren’t restrictions and it’s a great way to learn the market.”
To his mind, the primary thing home shoppers overlook tends to be the most obvious: the crowd. Observing other shoppers is key, he says, as that’s the best way to gauge the market’s response to the home.
“If you like the house, watch the people. Is it packed? Are they hovering around the agent?,” he says. If so and if they’re asking pointed questions as well, you can bet that there’s serious interest and the listing is going to go fast.Another strategy is to observe the agent, he adds.
“If you go to a house and you like it but no one’s there, maybe there are issues there,” says DeSimone. “You should watch the listing agent’s reactions because he wants to see the response to the house and how crowded it is.”
But don’t miss the opportunity to make small talk with the seller.
“You should ask why he’s selling, nothing rude, just what’s the story,” DeSimone says. “What’s their motivation to sell?” That should give you a feel for the pricing and whether the listing is gathering dust.
Questions like, how many days has the home been on the market?, or Have you lived here for a long time? should get the conversation going. Perhaps there’s a looming job transfer, or the seller is just moving down the street.
“If they’re not motivated you won’t want to waste your time,” says DeSimone. But at least you’ll know where they stand.
Saturday, 13 October 2012
CMHC’s emili Under Fire
Rob McLister, CMT, CanadianMortgageTrends.com
The Globe and Mail’s top story on Wednesday suggested that CMHC is overvaluing the homes it uses as mortgage collateral.
It insinuated that the automated valuation model (AVM) built into CMHC’s “emili” underwriting system routinely overestimates property values. The implication is that taxpayers are at risk if mortgage defaults spike and CMHC cannot liquidate properties at their anticipated prices.
The story is portrayed like a scandal, which will likely undermine confidence in our housing market a bit more. Unfortunately, it’s yet another mortgage-related media story that is long on speculation and short on substance.
The Globe and Mail’s top story on Wednesday suggested that CMHC is overvaluing the homes it uses as mortgage collateral.
It insinuated that the automated valuation model (AVM) built into CMHC’s “emili” underwriting system routinely overestimates property values. The implication is that taxpayers are at risk if mortgage defaults spike and CMHC cannot liquidate properties at their anticipated prices.
The story is portrayed like a scandal, which will likely undermine confidence in our housing market a bit more. Unfortunately, it’s yet another mortgage-related media story that is long on speculation and short on substance.
Before we begin, it’s worth noting that CMHC says emili (which has been around for 16 years) is not technically an AVM. Its main function is to assess overall borrower risk and not to determine a specific property value. We therefore use the term “AVM” loosely when referring to it.
AVMs exist for a reason and they’re used in dozens of countries. Their purpose is to generate objective and accurate valuations with less cost for the consumer, less managing of appraisers by lenders and much faster credit decisions. (CMHC often confirms property values in 7 seconds or less. That compares to 2-3+ days if a traditional appraisal is required.)
Now then, here is something that shouldn’t come as a shock: CMHC’s emili system, at times, overvalues properties. We all know that. It also undervalues properties (but that sort of thing doesn’t make for scintillating headlines).
emili’s job is not to pinpoint home values with 100% accuracy. No model can do that (nor can any appraiser for that matter). As such, over- or undervaluation alone is not the issue. What matters is the variance from true values. In other words, how much and how often is emili deviating from market value? If it’s 1% on average, that’s one thing. If it’s 10%, that’s another.
This data is unfortunately not publicly available. But you can be sure that regulators have it (or will soon). Anecdotally, we’ve heard that the percentage of properties valued more than 5-10% above actual appraised value is quite small, but there is no data to confirm it.
Of course, physical appraisals aren’t perfect either. On purchases, it is “extremely rare” for human appraisals to come in less than the purchase price, according U.S. research. (There are very few Canadian studies on this topic.)
On refinances, evidence suggests that appraisers may undervalue properties more than AVMs. That can reduce lender/insurer risk but it also has obvious downsides for refinancers (who may be unreasonably declined based on a bad valuation).
The tradeoffs between AVMs and human appraisals have been well-known for years. AVMs cannot easily evaluate factors like upkeep, view, property flaws, sun exposure, finish quality and other things that could add or detract from value. AVMs are most vulnerable in predicting values for remote, new or unique properties. That’s why insurers and lenders send out appraisers for properties that are more difficult to assess.
AVMs are also arguably less effective than appraisers for fraud prevention (assuming the appraiser is not involved in the fraud). The research differs on this point, however.
On the other hand, AVMs benefit from being emotionless machines. According to a U.S. National Appraisal Survey in 2007, over 90% of appraisers admit they’ve felt pressure to return a specific property value. By contrast, AVMs are completely uninfluenced by bias or pressures that afflict human appraisers.
While AVMs sometimes misjudge individual home values, there is ample evidence that they effectively value properties on a portfolio (i.e., overall) basis.
emili has evaluated millions of properties since its inception. CMHC says the system logic is based on:
CMHC calls its database “the most comprehensive…in Canada.” It includes property information on approximately eight million homes.
Despite what detractors believe, this isn’t a game for lenders and insurers. Erroneous property valuations are clearly linked to higher default losses. That’s why some lenders have reportedly increased usage of human appraisals to reduce their risk—even on insured applications.
Unfortunately, we have yet to find Canadian data that quantifies the difference between human appraisers and automated valuation systems (AVMs). There is plenty of research from the U.S., however.
Some studies have found that certain AVMs overvalue properties over specific timeframes. The median overvaluation in one study we saw was 4%. In addition, independent rating agencies like Fitch see it fit to deduct 5% from property values when those values are arrived at without full appraisals.
On the other hand, there are U.S. studies like this suggesting AVMs overvalue properties less than human appraisers—even in falling markets.
Either way, you can bet that insurers who rely on these models know the risks and adjust for them to the best of their ability. That may be why the ratio of auto-approvals at CMHC is down as of late.
Despite all of this, every lender executive we’ve talked with asserts unmitigated confidence in CMHC’s emili system. Indeed, some lenders we spoke with today questioned the very basis for the Globe’s story—which seems to be based on a few comments submitted last spring to OSFI. Those commentators were unnamed and their motivations are unknown.
Many also question the timing of this story since OSFI already addressed AVMs months ago in its B-20 guidelines.
In the coming days we’ll undoubtedly hear housing finance critics cite the Globe’s article as “proof” that CMHC’s valuation mechanism is reckless. But those charges are completely unsubstantiated based on the available evidence.
If proof ever materializes that CMHC is consistently and materially overvaluing properties, we’ll be among the first to report it. But we highly doubt that to be the case—in part because we routinely see more undervaluation than overvaluation (with our own clients).
We’ll be investigating this story further in coming weeks. But for now, it seems irresponsible to publicly discredit CMHC’s valuation model without clear data to back it up.
AVMs exist for a reason and they’re used in dozens of countries. Their purpose is to generate objective and accurate valuations with less cost for the consumer, less managing of appraisers by lenders and much faster credit decisions. (CMHC often confirms property values in 7 seconds or less. That compares to 2-3+ days if a traditional appraisal is required.)
Now then, here is something that shouldn’t come as a shock: CMHC’s emili system, at times, overvalues properties. We all know that. It also undervalues properties (but that sort of thing doesn’t make for scintillating headlines).
emili’s job is not to pinpoint home values with 100% accuracy. No model can do that (nor can any appraiser for that matter). As such, over- or undervaluation alone is not the issue. What matters is the variance from true values. In other words, how much and how often is emili deviating from market value? If it’s 1% on average, that’s one thing. If it’s 10%, that’s another.
This data is unfortunately not publicly available. But you can be sure that regulators have it (or will soon). Anecdotally, we’ve heard that the percentage of properties valued more than 5-10% above actual appraised value is quite small, but there is no data to confirm it.
Of course, physical appraisals aren’t perfect either. On purchases, it is “extremely rare” for human appraisals to come in less than the purchase price, according U.S. research. (There are very few Canadian studies on this topic.)
On refinances, evidence suggests that appraisers may undervalue properties more than AVMs. That can reduce lender/insurer risk but it also has obvious downsides for refinancers (who may be unreasonably declined based on a bad valuation).
The tradeoffs between AVMs and human appraisals have been well-known for years. AVMs cannot easily evaluate factors like upkeep, view, property flaws, sun exposure, finish quality and other things that could add or detract from value. AVMs are most vulnerable in predicting values for remote, new or unique properties. That’s why insurers and lenders send out appraisers for properties that are more difficult to assess.
AVMs are also arguably less effective than appraisers for fraud prevention (assuming the appraiser is not involved in the fraud). The research differs on this point, however.
On the other hand, AVMs benefit from being emotionless machines. According to a U.S. National Appraisal Survey in 2007, over 90% of appraisers admit they’ve felt pressure to return a specific property value. By contrast, AVMs are completely uninfluenced by bias or pressures that afflict human appraisers.
While AVMs sometimes misjudge individual home values, there is ample evidence that they effectively value properties on a portfolio (i.e., overall) basis.
emili has evaluated millions of properties since its inception. CMHC says the system logic is based on:
“physical characteristics of the property, the municipal property tax assessment, historical and current sales activity, and prior sales activity of the property being assessed, when available.”
“(emili) does not use property value averages, but uses the specific characteristics of the property being assessed. The database and models are continually updated and independently reviewed by a third party.”
CMHC calls its database “the most comprehensive…in Canada.” It includes property information on approximately eight million homes.
*******
With its reputation and profitability hanging in the balance, and with regulators keeping it under a microscope, we’re quite certain the country’s biggest mortgage insurer is not about to take shortcuts—not with hundreds of billions of dollars in real estate on the line. If anything, it will be overly conservative on values going forward, especially now that prices are softening.
Unfortunately, we have yet to find Canadian data that quantifies the difference between human appraisers and automated valuation systems (AVMs). There is plenty of research from the U.S., however.
Some studies have found that certain AVMs overvalue properties over specific timeframes. The median overvaluation in one study we saw was 4%. In addition, independent rating agencies like Fitch see it fit to deduct 5% from property values when those values are arrived at without full appraisals.
On the other hand, there are U.S. studies like this suggesting AVMs overvalue properties less than human appraisers—even in falling markets.
Either way, you can bet that insurers who rely on these models know the risks and adjust for them to the best of their ability. That may be why the ratio of auto-approvals at CMHC is down as of late.
Despite all of this, every lender executive we’ve talked with asserts unmitigated confidence in CMHC’s emili system. Indeed, some lenders we spoke with today questioned the very basis for the Globe’s story—which seems to be based on a few comments submitted last spring to OSFI. Those commentators were unnamed and their motivations are unknown.
Many also question the timing of this story since OSFI already addressed AVMs months ago in its B-20 guidelines.
In the coming days we’ll undoubtedly hear housing finance critics cite the Globe’s article as “proof” that CMHC’s valuation mechanism is reckless. But those charges are completely unsubstantiated based on the available evidence.
If proof ever materializes that CMHC is consistently and materially overvaluing properties, we’ll be among the first to report it. But we highly doubt that to be the case—in part because we routinely see more undervaluation than overvaluation (with our own clients).
We’ll be investigating this story further in coming weeks. But for now, it seems irresponsible to publicly discredit CMHC’s valuation model without clear data to back it up.
Thursday, 11 October 2012
Mortgage-Related Trends on Google
Rob McLister, CMT, CanadianMortgageTrends.com
Almost one-third of Canadians do all of their mortgage research online, according to CMHC. That indicates how important Google has become to consumers, lenders and mortgage brokers.
To get a better sense of mortgage trends on the world's biggest search engine, we spoke recently with David Resnick. Resnick is Head of Industry - Financial Services at Google and he offered up some intriguing insights into Google’s mortgage-related searches.
It turns out that mortgages are a red hot topic on Google. “Mortgages are the fastest growing (search) sector in financial services by far,” says Resnick. “The number of Canadian queries related to mortgage products and services is up 60% year-to-date.”
Almost one-third of Canadians do all of their mortgage research online, according to CMHC. That indicates how important Google has become to consumers, lenders and mortgage brokers.
To get a better sense of mortgage trends on the world's biggest search engine, we spoke recently with David Resnick. Resnick is Head of Industry - Financial Services at Google and he offered up some intriguing insights into Google’s mortgage-related searches.
It turns out that mortgages are a red hot topic on Google. “Mortgages are the fastest growing (search) sector in financial services by far,” says Resnick. “The number of Canadian queries related to mortgage products and services is up 60% year-to-date.”
We asked Resnick for his thoughts on a range of topics, including:
Are High-Ranking Brokers Better?
Are High-Ranking Brokers Better?
- Does a high ranking in Google mean a broker is reputable and well qualified? Resnick says, “Those who have got to the top of Google probably take their line of business quite seriously. But that’s not to say they’re the best mortgage broker out there.”
- He added: “They’re probably very dedicated to online marketing. I wouldn’t necessarily place more weight on them as a consumer.”
- These are mortgage terms that were heavily-searched in 2012:
- “Mortgage calculator” (This one overtook the search term “Lady Gaga” earlier this year.)
- “Mortgage rates”
- “First-time home buyer”
- “New mortgage rules” (one of the fastest growing terms this year)
- The term “BMO 2.99%” saw a major volume spike in January 2012. That coincided with BMO’s headline-making 2.99% mortgage special. Its heavy search volume persisted until March/April, when the promo ended.
Wednesday, 10 October 2012
Home Prices rise in third quarter, but slowdown seen coming
Tara Perkins, Real Estate Reporter, The Globe and Mail
The average price of a two-storey home in Canada was 4 per cent higher than a year ago in the third-quarter, at $403,747, while condos saw prices rise 1.8 per cent to $243,607, according to Royal LePage’s house price survey.
But sales are slowing and prices are likely to follow suit, Royal LePage CEO Phil Soper suggested, while adding that because of low interest rates the downward pressure on prices should be “minimal.”
“A drop in the number of homes trading hands typically precedes a period of softening house prices,” he said in a press release. “During the third quarter, unit home sales were positive in July, fell 9 per cent year-over-year in August and we are expecting September to show a decline as well.”
He added that the changes that Finance Minister Jim Flaherty made to the mortgage insurance rules effective July 9, including cutting the maximum length of insured mortgages to 25 years from 30 years, have accelerated the correction.
First-time buyers have been affected the most. “They may remain renters for some time as they save; some will opt for less desirable neighbourhoods and some will purchase smaller homes,” Mr. Soper said. “In the meanwhile, we will feel their absence in national sales statistics.”
Behind the national averages there were wide disparities in how different regions of the country are faring. Vancouver saw price declines in the third quarter (1.5 per cent for two-storey homes and 3 per cent for condos), while St. John’s saw large increases (8.2 per cent and 9.2 per cent).
Royal LePage is hoping that September’s increase in consumer confidence will lend a hand to sales this fall.
Meanwhile, sales of existing homes in the Greater Toronto Area were down 21 per cent from a year ago in September, while prices were up 8.5 per cent, the Toronto Real Estate Board said in a separate report.
Stricter mortgage insurance rules have dented sales, but the board also emphasized that there were fewer working days this September than last September and suggested that adjusting for that factor the decline in sales would have been smaller.
Sales of detached homes in the downtown Toronto area covered by the 416 area code fell 27 per cent from a year earlier, while prices were up 10 per cent. Sales of condos in the same area were down 29 per cent, while prices were up 8 per cent.
The board’s data is based on transactions over the MLS system, and therefore captures mostly resales of existing properties as opposed to sales of newly-built condos or houses.
Across all housing types, the average selling price was $503,662, up more than 8.5 per cent.
Toronto Real Estate Board manager of market analysis Jason Mercer is expecting prices to continue to rise through 2013, driven by low-rise homes, unless there is a major change to the economic outlook.
The average resale price of a detached home in downtown Toronto is now up to $781,826, while the average resale condo cost $377,422 in September.
But sales are slowing and prices are likely to follow suit, Royal LePage CEO Phil Soper suggested, while adding that because of low interest rates the downward pressure on prices should be “minimal.”
“A drop in the number of homes trading hands typically precedes a period of softening house prices,” he said in a press release. “During the third quarter, unit home sales were positive in July, fell 9 per cent year-over-year in August and we are expecting September to show a decline as well.”
He added that the changes that Finance Minister Jim Flaherty made to the mortgage insurance rules effective July 9, including cutting the maximum length of insured mortgages to 25 years from 30 years, have accelerated the correction.
First-time buyers have been affected the most. “They may remain renters for some time as they save; some will opt for less desirable neighbourhoods and some will purchase smaller homes,” Mr. Soper said. “In the meanwhile, we will feel their absence in national sales statistics.”
Behind the national averages there were wide disparities in how different regions of the country are faring. Vancouver saw price declines in the third quarter (1.5 per cent for two-storey homes and 3 per cent for condos), while St. John’s saw large increases (8.2 per cent and 9.2 per cent).
Royal LePage is hoping that September’s increase in consumer confidence will lend a hand to sales this fall.
Meanwhile, sales of existing homes in the Greater Toronto Area were down 21 per cent from a year ago in September, while prices were up 8.5 per cent, the Toronto Real Estate Board said in a separate report.
Stricter mortgage insurance rules have dented sales, but the board also emphasized that there were fewer working days this September than last September and suggested that adjusting for that factor the decline in sales would have been smaller.
Sales of detached homes in the downtown Toronto area covered by the 416 area code fell 27 per cent from a year earlier, while prices were up 10 per cent. Sales of condos in the same area were down 29 per cent, while prices were up 8 per cent.
The board’s data is based on transactions over the MLS system, and therefore captures mostly resales of existing properties as opposed to sales of newly-built condos or houses.
Across all housing types, the average selling price was $503,662, up more than 8.5 per cent.
Toronto Real Estate Board manager of market analysis Jason Mercer is expecting prices to continue to rise through 2013, driven by low-rise homes, unless there is a major change to the economic outlook.
The average resale price of a detached home in downtown Toronto is now up to $781,826, while the average resale condo cost $377,422 in September.
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