BoC Decision: Lower for Even Longer

Rob McLister, CMT, CanadianMortgageTrends.com


Canadian macro-economists are mostly in agreement that the overnight rate should go nowhere in the next 9-12+ months. And the Bank of Canada gave no indication today that such projections are off the mark.

The Bank left Canada’s core lending rate unchanged at 1% for the 29th straight month, with no change in sight.

Part of the Bank’s reasoning is reflected in these comments from its statement:

• “Total CPI inflation has been somewhat more subdued than projected in the January MPR as a result of weaker core inflation and lower mortgage interest costs...”
• “The Bank expects…the debt-to-income ratio [to stabilize] near current levels.”
• “…Residential investment is expected to decline further from historically high levels.”
• “With continued slack in the Canadian economy, the muted outlook for inflation, and the more constructive evolution of imbalances in the household sector, the considerable monetary policy stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required, consistent with achieving the 2 per cent inflation target.”

For an excellent deciphering of the Bank’s press release, click here.
Today’s announcement shed little new light on the timing of the next prime rate change. Of course the BoC is still suggesting that the next rate move is up, but others, like David Madani of Capital Economics, aren’t so sure.

On Sunday, Madani said the "inevitable" rate hikes that so many predict could actually be pre-empted by policy loosening. He noted:

“Given the recent spat of weak economic data, below target range inflation and the presumably widening output gap, the market's ruling out of interest rate cuts makes little sense.”

For now, as long as the 5-year bond yield stays under or within the psychological 1.50% to 1.60% range, there’s little danger of any notable rise in rates. After this morning's rate announcement, bond yields remained flat at 1.32%.

Flaherty: Mortgage rates shouldn’t be a ‘race to the bottom’

By Gordon Isfeld, The Financial Post

 

OTTAWA — Finance Minister Jim Flaherty is attempting to stop another mortgage war from escalating, warning Canadian banks not to “race to the bottom” end of lending rates in a competition for customers.

“Our government has taken action several times to make sure the housing market remains sound,” the minister said in statement Monday, after the Bank of Montreal cut its five-year fixed-rate mortgages to a low of 2.99% from 3.09%.

A similar move by BMO early last year sparked a rate war as Canada’s housing market was still heating up.

In July, Mr. Flaherty introduced tougher mortgage rules to cool the market, while avoiding a housing crash.

These measures included shortening mortgage amortization to 25 years — compared to a peak of 40 years at one point during with a peak of the boom.

Mr. Flaherty has said the government will consider other measures if the mortgage environment appears to be threatening households.

“As for decisions by individual banks, as I have said repeatedly before, my expectation is that banks will engage in prudent lending — not the type of ‘race to the bottom’ practices that led to a mortgage crisis in the United States,” Mr. Flaherty said.

Gregory Klump, chief economist with the Canadian Real Estate Association, told the Financial Post that “perhaps there is pressure to lower rates.”

“It remains to be seen how much [the real estate market] is going to slow,” he said.

“The most important thing at this point in the cycle is how confident consumers are of economic prospects going forward.”

Both Mr. Flaherty and Bank of Canada Governor Mark Carney have been warning consumers about loading up on debt at a period of low interest rates, saying lending cost will eventually be going back up and could put a strain on household finances.

The Bank of Canada has kept its trendsetting lending rate at a near-record low of 1% since September 2010, encouraging borrowing by consumers and businesses as Canada was coming out of recession.

Much of the cheap money was poured into the housing market, sending sales and prices soaring. The market has since stabilized under Mr. Flaherty’s new rules.

Last month, Canada Mortgage and Housing Corp. said new housing construction is expected to be lower this year due to moderate economic and employment growth in the second half of 2012. The Teranet-National Bank index of Canadian housing prices in January continued to show the effects of a cooling trend that has hovered over the real estate market for more than a year.

John Aiken, an analyst at Barclays Capital, said that for all the talk of a new mortgage war breaking out, the past shows that it’s more likely to be a stalemate than a war.

“While similar concerns arose last year, we note that it had very little impact on the industry,” he said.

Urban Mortgages on an Extreme Budget

Rob McLister, CMT, CanadianMortgageTrends.com


Ever wondered what kind of mortgage you can get on minimum wage in a big city?

Minimum wage in Canada ranges from $9.75 per hour in Alberta to $11 in Nunavut. In Ontario and B.C., it’s $10.25.

Using standard insured lending guidelines, someone earning even $11 per hour and working 40 hours a week could theoretically qualify for a $118,000 house.¹

Out of curiosity, we searched every MLS listing within Toronto, Montreal and Vancouver city limits for such a property.

We figured it would be a tall order to find properties accessible to a near-minimum wage earner in these cities, and it was. Out of thousands of real estate listings, there wasn’t one home that was cheap enough for an $11-an-hour employee to get a typical high-ratio mortgage on.

Interestingly, Toronto had numerous condos that met the price criteria (some as low as $80,000). But the condo fees in each case lifted the gross debt service (GDS) ratio of our hypothetical applicant well above the 39% government-set limit. That would immediately dash the mortgage approval hopes of any such borrower.

We also found a nice mobile home in West Vancouver, B.C. of all places—one of the most affluent locales in the country. But despite an $89,000 price tag, the obligatory monthly “pad rental” fee would jack up a minimum wage applicant’s GDS ratio and thwart approval.

In experiments like this, it quickly becomes apparent that employees at a subsistence-level income can’t go it alone when buying in our major cities.

For most near-minimum wage earners who don’t have down payment help, finding a co-applicant is often the only hope they have of buying in Canada's biggest cities.²

---

Footnotes:
¹ Assumes good credit, 5% down, no other debt and a lender that’s comfortable with the borrower’s employment stability.
² Down payment help can sometimes come from things like a family gift/loan or municipal housing programs.

The top 25 grants and rebates for home buyers and owners

HOME BUYERS' PLAN

1 Qualifying home buyers can withdraw up to $25,000 (couples can withdraw up to $50,000) from their RRSPs for a down payment. Home buyers who have repaid their RRSP may be eligible to use the program a second time.

Canada Revenue Agency www.cra.gc.ca Enter 'Home Buyers' Plan' in the search box. 1.800.959.8287

 

2 GST REBATE ON NEW HOMES

New home buyers can apply for a rebate of the federal portion of the HST (the 5% GST) if the purchase price is $350,000 or less. The rebate is equal to 36% of the GST to a maximum rebate of $6,300. There is a proportional GST rebate for new homes costing between $350,000 and $450,000. At $450,000 and above the rebate is nil.

Canada Revenue Agency www.cra.gc.ca Enter 'RC4028' in the search box. 1.800.959.8287
 

3 BC NEW HOUSING REBATE (HST)

Buyers of new or substantially renovated homes priced up to $850,000 are eligible for a provincial enhanced New Housing Rebate of 71.43% of the provincial portion (7%) of the 12% HST paid to a maximum rebate of $42,500. Homes priced at $850,000+ are eligible for a flat rebate of $42,500. NOTE: this program expires March 31, 2013.

www.hstinbc.ca 1.800.959.8287

 

4 BC NEW HOUSING REBATE (HST) FOR SECONDARY VACATION OR RECREATIONAL HOMES

Buyers of new or substantially renovated secondary or recreational homes outside the Greater Vancouver and Capital Regional Districts priced up to $850,000 are eligible for a provincial enhanced New Housing Rebate of 71.43% of the provincial portion (7%) of the 12% HST paid to a maximum rebate of $42,500. Homes priced at $850,000+ are eligible for a flat rebate of $42,500. NOTE: this program expires March 31, 2013.

www.hstinbc.ca 1.800.959.8287

 

5 BC NEW RENTAL HOUSING REBATE (HST)

Landlords buying new or substantially renovated homes to rent are eligible for a rebate of 71.43% of the provincial portion (7%) of the 12% HST paid to a maximum rebate of $42,500. NOTE: this program expires March 31, 2013.

www.hstinbc.ca 1.800.959.8287
 

6 BC FIRST-TIME NEW HOME BUYERS' BONUS

First-time new home buyers may be eligible for a one-time grant equal to 5% of the purchase price of the home up to $10,000. Or if you are building a home, 5% of the land and construction costs, up to $10,000. The bonus is based on the net income of the home buyer. NOTE: this program expires March 31, 2013.

www.sbr.gov.bc.ca/documents_ library/notices/FTHB_Bonus.pdf 1.877.387.3332
 

7 BC PROPERTY TRANSFER TAX (PTT) FIRST-TIME HOME BUYERS' PROGRAM

Qualifying first-time buyers may be exempt from paying the PTT of 1% on the first $200,000 and 2% on the remainder of the purchase price of a home priced up to $425,000. There is a proportional exemption for homes priced up to $450,000. At $450,000 and above the rebate is nil.

BC Ministry of Small Business and Revenue www.sbr.gov.bc.ca/ business/Property_Taxes/Property_ Transfer_Tax/ptt.htm 250.387.0604
 

8 FIRST-TIME HOME BUYERS' TAX CREDIT (HBTC)

This federal non-refundable income tax credit is for qualifying buyers of detached, attached, apartment condominiums, mobile homes or shares in a cooperative housing corporation. The calculation: multiply the lowest personal income tax rate for the year (15% in 2011) x $5,000. For the 2012 tax year, the maximum credit is $750.

Canada Revenue Agency www.cra. gc.ca. Enter 'First-Time Home Buyers' Tax Credit' in the search box. 1.800.959.8281
B C HOME OWNER GRANT
 

9 Reduces property taxes for home owners with an assessed value of up to $1,295,000. The basic grant gives home owners:

. a maximum reduction of $570 in property taxes on principal residences in the Capital, Greater Vancouver and Fraser Valley regional districts;
. an additional grant of $200 to rural homeowners elsewhere in the province; and
. an additional grant of $275 to seniors aged 65+, those who are permanently disabled and war veterans of certain wars.
BC Ministry of Small Business and Revenue www.rev.gov.bc.ca/hog or contact your municipal tax office.

 

10 BC PROPERTY TAX DEFERMENT PROGRAMS

Property Tax Deferment Program for Seniors. Qualifying home owners aged 55+ may be eligible to defer property taxes.

Financial Hardship Property Tax Deferment Program. Qualifying low-income home owners may be eligible to defer property taxes.
Property Tax Deferment Program for Families with Children. Qualifying low-income home owners who financially support children under age 18 may be eligible to defer property taxes.
BC Ministry of Small Business and Revenue www.sbr.gov.bc.ca/ individuals/Property_Taxes/ Property_Tax_Deferment/ptd.htm

 

11 CANADA MORTGAGE AND HOUSING RESIDENTIAL REHABILITATION ASSISTANCE PROGRAM GRANTS

This federal program provides financial aid to qualifying low-income home owners to repair substandard housing. Eligible repairs include heating, structural, electrical, plumbing and fire safety. Grants are available for seniors, persons with disabilities, owners of rental properties and owners creating secondary and garden suites.

www.cmhc-schl.gc.ca/en/co/ prfinas/prfinas_001.cfm 1.800.668.2642 604.873.7408

 

12 (HAFI) HOME ADAPTATIONS FOR INDEPENDENCE

A program jointly sponsored by the provincial and federal governments provides up to $20,000 to help eligible low-income seniors and disabled home owners and landlords to finance modifications to their homes to make them accessible and safer.

BC Housing www.bchousing.org/ Options/Home_Renovations 604.646.7055 1.800.407.7757 extension 7055

 

13 CMHC MORTGAGE LOAN INSURANCE PREMIUM REFUND

Provides home buyers with CMHC mortgage insurance, a 10% premium refund and possible extended amortization without surcharge when buyers purchase an energy efficient home or make energy saving renovations.

www.cmhc.ca/en/co/moloin/ moloin_008.cfm 604.731.5733

 

14 ENERGY SAVING MORTGAGES

Financial institutions offer a range of mortgages to home buyers and owners who make their homes more energy efficient. For example, home owners who have a home energy audit within 90 days of receiving an RBC Energy SaverT Mortgage, may qualify for a rebate of $300 to their RBC account.

www.rbcroyalbank.com/ products/mortgages/energysaver-mortgage.html 1.800.769.2511

 

15 LOW INTEREST RENOVATION LOANS

Financial institutions offer 'green' loans for home owners making energy efficient upgrades. Vancity's Bright Ideas personal loan offers home owners up to $20,000 at prime + 1% for up to 10 years for 'green' renovations. RBC's Energy Saver loan offers 1% off the interest rate for a fixed rate installment loan over $5,000 or a $100 rebate on a home energy audit on a fixed rate installment loan over $5,000.

For information visit your financial institution. www.vancity.com/Loans/ TypesOfLoans/BrightIdeas and www.rbcroyalbank.com/products/ personalloans/energy-saver-loan.html www.rbcroyalbank.com/personalloans/energy-saver-loan.html

 

16 LIVESMART BC: EFFICIENCY INCENTIVE PROGRAM

Home owners improving the energy efficiency of their homes may qualify for cash incentives through this provincial program provided in partnership with FortisBC and BC Hydro. Rebates are for energy efficient products which replace gas and oil furnaces, pumps, water heaters, wood stoves, insulation, windows, doors, skylights and more. The LiveSmart BC program also covers $150 of the cost of a home energy assessment, directly to the service provider. NOTE: this program expires March 31, 2013.

www.livesmartbc.ca/incentives/ 1.866.430.8765
 

17 BC RESIDENTIAL ENERGY CREDIT

Home owners and residential landlords buying heating fuel receive a BC government point-of-sale rebate on utility bills equal to the provincial component of the HST.

www.sbr.gov.bc.ca/business/ consumer_taxes/residential_energy/ residential_energy.htm 1.877.388.4440
 

18 BC HYDRO APPLIANCE REBATES

Mail-in rebates for purchasers of ENERGY STAR clothes washers, refrigerators, dishwashers or freezers.

www.bchydro.com/rebates-savings. html 1.800.224.9376

 

19 BC HYDRO FRIDGE BUY-BACK PROGRAM

This ongoing program rebates BC Hydro customers $30 to turn in spare fridges in working condition.

www.bchydro.com/rebates_savings/ fridge_buy_back.html 604.881.4357
 

20 BC HYDRO WINDOWS REBATE PROGRAM

Receive rebates or tax savings when you buy ENERGY STAR high-performance windows.

https: //www.bchydro.com/rebates_ savings/windows_offers/current_ offers.htm

21 FORTISBC REBATE PROGRAM

A range of rebates for home owners include a $75 rebate for upgrading to an ENERGY STAR clothes washer, a $300 fireplace rebate, $500 off water heaters and $1,000 for switching to natural gas..

www.fortisbc.com/Naturalgas/ homes/offers/pages/default.aspx ; 1.888.224.2710
 

22 FORTISBC REBATE PROGRAM FOR BUSINESSES

For commercial buildings, provides a rebate of up to $60,000 for the purchase of an energy efficient boiler, up to $15,000 for the purchase of a high-efficiency water heater and recieve funding towards a new construction energy study.

www.fortisbc.com/NaturalGas/ Business/Offers/Pages/default.aspx 1.888.477.0777
 

23 CITY OF VANCOUVER RAIN BARREL AND COMPOST BIN SUBSIDY PROGRAM

The City of Vancouver provides a subsidy of 50% of the cost of a rain barrel for Vancouver residents. With the subsidy the barrel costs $75. There is also a backyard composter for $25.

Barrel: https: //vancouver.ca/homeproperty-development/rain-barrels. aspx.
Composter: http: //vancouver.ca/ home-property-development/rainbarrels.aspx
 

24 LOCAL GOVERNMENT WATER CONSERVATION INCENTIVES

Your municipality may provide grants and incentives to residents to help save water. For example, the City of Coquitlam offers residents a $100 rebate and the City of North Vancouver, District of North Vancouver, and District of West Vancouver offer a $50 rebate when residents install a low-flush toilet. Visit your municipality's website and enter 'toilet rebate' to see if there is a program.

 

25 LOCAL GOVERNMENT WATER METER PROGRAMS

Your municipality may provide a program for voluntary water metering, so that you pay only for the amount of water that you use. Delta, Richmond and Surrey have programs and other municipalities may soon follow. Visit your municipality's website and enter 'water meter' to find out if there is a program.

 

Article contributed by the Real Estate Board of Greater Vancouver.

© Copyright (c) The Vancouver Sun

Drop in new listings points to gradual recovery in Vancouver housing

Brent Jang, Vancouver - The Globe and Mail

A reduction in fresh listings should set the stage for a gradual recovery in Greater Vancouver’s housing market, says the chief economist at the B.C. Real Estate Association.

In January, the number of new residential listings in Greater Vancouver fell 10.9 per cent from the same month in 2012, marking the eighth consecutive month of year-over-year declines. But there remains a backlog of active listings that will take some time to clear before the region’s real estate market regains its balance, Cameron Muir said in an interview Monday.

“Sales levels in 2012 were quite low from a historical perspective,” Mr. Muir said, noting that the number of homes changing hands in Greater Vancouver began tailing off in early 2012 and started to slump further in August, after Ottawa tightened mortgage borrowing rules in July.

“The evidence that we see is that Greater Vancouver home prices have edged down 2 to 3 per cent over the past year. Some potential buyers are taking a wait-and-see approach in anticipation of a deflationary spiral, but I don’t believe that a substantial price correction is going to happen,” he said.

The Real Estate Board of Greater Vancouver’s January home index price, which strips out the most expensive properties, was $588,100 for single-detached homes, condos and townhouses – a decrease of 2.8 per cent from the same month in 2012.

Real estate prices in Greater Vancouver and the Fraser Valley, which includes the sprawling and less-expensive Vancouver suburb of Surrey, have fallen only a relatively small amount, considering the sharp drop in sales, Mr. Muir said. In January on the multiple listing service, sales decreased 14.3 per cent to 1,351 in Greater Vancouver, while sales declined 23 per cent to 617 in the Fraser Valley.

“Once consumers in this spring’s market realize that prices have not dropped substantially, they will likely get into the market and get on with their lives. Buying a principal residence is just as much a lifestyle decision as it is a financial decision,” he said.

Mr. Muir forecasts that 2013 will be a period of transition in British Columbia, saying he expects a soft landing with slightly lower prices on average this year, before prices climb modestly in 2014.

Across British Columbia, the total volume of resale homes that sold last year fell 11.8 per cent from 2011, but the B.C. Real Estate Association predicts that provincial sales will rise 5.6 per cent to 71,450 units this year and increase another 6.1 per cent to 75,830 in 2014. That would be an improvement, but still down from the 10-year average of 86,800 units sold annually in the province.

There were 5,128 new listings in Greater Vancouver in January, down 10.9 per cent from 5,756 in the same month of 2012, while the total number of active listings climbed 5.6 per cent to 13,246. With the U.S. economy on the mend, that will translate into better times in British Columbia, including job growth, Mr. Muir said. Population growth in Greater Vancouver will combine with low interest rates to keep the housing market in a healthy condition, he added.

On Vancouver’s closely watched west side, the home index price for single-family detached homes dropped to $1.99-million in January, down 7.5 per cent from the same month of 2012. Mr. Muir said residential prices had surged on Vancouver’s west side in 2011, so that neighbourhood has fallen the hardest.

A measurement known as the sales-to-active-listings ratio was 10.2 per cent in January. B.C. real estate agents consider it a balanced market when the ratio ranges from 15 to 20 per cent. It is deemed a buyer’s market below 15 per cent and a seller’s market above 20 per cent in the Vancouver region.

Housing Prices to continue climbing, CMHC says

Michael Babad, The Globe and Mail


Housing starts to sink

Canada’s cooling real estate market is taking its toll on home building, and the increase in home values.

Canada Housing and Mortgage Corp. said today it expects housing starts to sink in the early part of this year, before picking up later in 2013 and moving “slightly higher” next year.

Residential construction starts are expected to come in between 178,600 and 202,000 this year, and 171,200 to 217,000 in 2014.

It projected sales of existing homes between 418,200 and 484,000 this year, and 439,600 next.
Where prices are concerned, the national agency expects an average $356,500 to $378,500 this year, and $363,800 and $390,800 in 2014.

Based on the “point forecast,” that would be a gain of 1 per cent this year and 2.7 per cent next year.
“CMHC expects housing construction activity will trend lower in the first half of 2013, before gaining more momentum by the end of the year as economic and employment growth remain supportive of the Canadian housing market,” said Mathieu Laberge, CMHC's deputy chief economist.

“In 2014, improving economic conditions may be partially offset by a slight moderation in the number of first-time homebuyers, and potential small and steady increases in mortgage interest rates.”

Follow Michael Babad and the Globe’s top business stories on Twitter.


If Canadian Homes are overpriced by 10%, what happens next?

IMF on housing

The International Monetary Fund has added its calculations to those of others who have been measuring the over-valuation in Canada’s housing market, coming to the conclusion that the level is about 10 per cent.

The question then becomes: What happens next? According to the IMF and others, possibly not much.

As The Globe and Mail’s Barrie McKenna reports, the IMF warned late yesterday to expect an “adjustment” in the residential real estate market, given the Washington-based group’s estimate that homes are overpriced by an average 10 per cent in Canada.

That’s based on studying rental rates and household income, an analysis that’s used by others, as well.

But Roberto Cardarelli, the group’s mission chief for Canada, believes, as do others, that the scenario is one of a “soft landing."

The country could, he said, absorb a price drop of 10 per cent over five years providing the economy doesn’t stall and the labour market continues to grow.

The real estate market has been slowing since Finance Minister Jim Flaherty moved to cool things off with his latest round of mortgage restrictions last summer.

But based on early reports from some local real estate boards, January wasn’t as bad, and bolsters the soft-landing view.

As The Globe and Mail's Tara Perkins reports today, home sales in Canada inched up 1.3 per cent in January from December, though were down about 5 per cent from a year earlier. The MLS home price index was up just 3.1 per cent, marking the slowest increase since the spring of 2011.

The pause in the market isn’t particularly unusual given Mr. Flaherty’s rules changes, the latest in a series.

Since peaking in June, BMO Nesbitt Burns notes, the MLS home price index has declined by about 1.5 per cent. But, says BMO’s Robert Kavcic, its previous, steady climb was not “without interruption,” having been bumped around by previous restrictions in the morning market.

“In each case, underlying fundamentals like a falling jobless rate and low mortgage rates ultimately saved the day, and there’s little to suggest that those fundamentals won’t be in pace this time around, as well,” the economist said.

“It also stands to reason that a one-time change to mortgage rules (lower amortization period, for example) would cause a one-time level shift in prices, after which time underlying fundamentals (income, joblessness, mortgage rates, etc.) take over in setting the path.”

Mr. Kavcic has found that the average time of “adjustment” to the previous rule changes – there were three before those in the summer – was in the area of seven months. And, he pointed out, the market is now seven months on from Mr. Flaherty’s latest move, though it was tougher than those of the past.
“The spring selling season
 will be a telling one, and with sub-3 per cent five-year fixed rates, don’t be shocked if prices find a floor again.”

Use your head when looking for an investment property, HGTV's McGillivray says

Creating money makers

By Anita Murray, Ottawa Citizen

Scott McGillivray felt something was missing. The host of HGTV's popular Income Property started doing the show because he wanted to teach people about what he did for a living: buying real estate, becoming a landlord and renovating.

Until now, the series has done a good job of showing how owners can make the most of their home, transforming a portion of it into an income suite to generate extra income. But a lot of questions go unanswered in the half-hour format so McGillivray, who is also an executive producer of the show, proposed expanding it to an hour and incorporating how to find investment properties.

"It's one of those shows where people still have a lot of questions because unlike a lot of shows that maybe just renovate and then walk away, we're really helping people start a bit of a business," McGillivray, 34, says by phone while travelling back from filming an episode in Alliston, Ont., about an hour north of Toronto.

"If I can get to you before you've bought the house, I can help you tremendously, because a lot of people just buy something they feel emotionally attached to rather than examining the fundamentals. So the first half of the show will be all about looking for that right property ... It's kind of like a home inspection, a real estate agent, a contractor and a financial adviser all in one coming shopping with you."

McGillivray brings more than a decade of experience doing all that for himself to the show. He started as a university student (he has a degree in commerce), pooling his student loan money with a friend to buy a home that they then shared with other students to cover the mortgage. A year later he purchased his first home outright after figuring he could renovate the basement to live in while renting the upstairs to cover the mortgage.

He would live there for eight years, not moving until he got married and Income Property had just begun to air in 2008. In between, he amassed more and more properties. Today, he figures he owns about 100 properties, half in the United States, and is landlord to about 500 tenants.

And, yes, he's had to evict tenants, but surprisingly few. Of the roughly 15,000 tenants he's had in the past 10 years, he's had to remove maybe three. He's never had to follow through with an actual eviction notice, only getting to the point where he had to sit down and discuss an arrangement for them to leave.

"I've just worked it out, been on top of it right away ... and I usually help them find a new place that's within their price range and that usually helps move things along."

While he acknowledges the struggles, he's says being a landlord can be very rewarding.

"In the long term you'll do well if you make the right choices," says McGillivray, father to daughter Myah, who had her first birthday this week. "I used to say real estate investing is for everyone, but I now know it's not ... It takes the right type of person and the right type of attitude."

Anyone wanting to get into real estate investing needs to understand the fundamentals of home ownership, he says, and by that he means developing a business sense and looking at it by the numbers.

You need to ask: how does this house work for me? What's the price point? What's the mortgage going to be? What are the additional expenses of living in this area? How much will it cost to renovate or build an income suite or turn this house into a multi-unit property? How much rent will I collect?

"Unfortunately, a lot of the fundamentals, the necessities, (are) the boring part that people don't want to do," says the Toronto native. "You need to be realistic about how to make money in real estate. It doesn't happen instantly ... Real estate is about delayed gratification."

He believes most people are interested in owning one to three properties, have realistic expectations and figure owning a few properties can help them in their retirement. "Those are the people that I can help the most."

The main thing is having a willingness to follow through. Everybody, he says, has a "woulda, coulda, shoulda real estate story."

Even him? "Absolutely," he admits with a laugh. Sometimes he looks back and thinks he should have bought more than he did in the early years and offers up the example of a hotel he "got scared" from buying about six years ago. "But no regrets; just learn from that and move forward."

Season 7 of Income Property premieres Thursday at 9 p.m. on HGTV.

BEFORE YOU INVEST

Understand your finances. Can you afford a down payment on a property? What are your projections? What are your goals? "Do a little financial analysis of yourself," McGillivray says. "You've got to know where you are to know where you're going."

Research and education. "Don't just jump into it blind." You can read books, attend free events, watch Income Property, he says with a chuckle.

Fundamentals. Start looking at properties and analyzing them from a numbers point of view.

Follow through. "The No. 1 thing that stops people from getting into real estate investing is starting," he says.

"Most people will invest time and energy and research and then they get a little gun shy ... You need to continue your momentum and follow through. If you do all that, you should be in good shape."

© Copyright (c) The Ottawa Citizen

Read more: http://www.ottawacitizen.com/business/your+head+when+looking+investment+property+HGTV+McGillivray+says/7898768/story.html#ixzz2MJmvmqiM - See more at: http://www.calgaryherald.com/business/your+head+when+looking+investment+property+HGTV+McGillivray/7898768/story.html#sthash.HiuB3oQK.dpuf

A quick guide to using your RRSP to buy a house

Clay Gillespie, The Globe and Mail

As part of our RRSP coverage, we asked Clay Gillespie, a Vancouver-based certified financial planner and chartered investment manager, to answer selected reader questions.

My wife and I recently withdrew funds from our RRSPs through the federal Home Buyers’ program. When we start to pay back the money we withdrew, how do we differentiate those contributions versus regular contributions? Currently our RRSP contributions are deducted from our paycheques through our employer (direct deposit). – Mark

The Home Buyers’ Plan (HBP) was designed to let first-time home buyers withdraw up to $25,000 from a registered retirement savings plan to buy a principal residence. This withdrawal is not taxed and must be paid back to your RRSP in 15 years.

For example, a $25,000 HBP withdrawal from your RRSP requires a repayment of $1,667 every year for 15 years ($25,000/15 years = $1,667). Any missed repayments are included in your income for that year. You do have some repayment flexibility, however, as you are not required to repay the funds to the same RRSP or institution from which you made your withdrawal.

In your case, you are making RRSP contributions through a work-sponsored plan and will receive an RRSP contribution receipt for deposits made during 2012. If you had withdrawn $25,000 under the HBP, you could use $1,667 of that receipt to repay your HBP requirement and the remainder of the receipt could be applied against your RRSP contribution room.

You will receive a Home Buyers’ Plan statement of account each year with your notice of assessment, allowing you to easily track your RRSP contribution room and the outstanding balance of your HBP withdrawal.
Clay Gillespie, a certified financial planner and chartered investment manager, is a financial adviser and managing director at Rogers Group Financial in Vancouver. Do you have a question for Clay? Send it in to dawebb@globeandmail.com.
Clay Gillespie, a certified financial planner and chartered investment manager, is a financial adviser and managing director at Rogers Group Financial in Vancouver. The views expressed are those of the author and not necessarily those of Rogers Group Financial, which makes no representations as to their completeness or accuracy.

What Rates Could Do to Affordability

Rob McLister, CMT, CanadianMortgageTrends.com


When it comes to home values, mortgage payment affordability acts like a giant lever.

A meaningful rise in mortgage payments (relative to income), would bear down on home prices, and vice versa.

Given this relationship and today’s towering home values, mortgage affordability is centre stage. That has inspired a stream of articles about whether swarms of people will default when rates “normalize.”

But how worrisome is that threat really? For insights, we turned to BMO Capital Markets Senior Economist Sal Guatieri.

To preface everything, here are some data points to consider...

…On Affordability

• According to BMO, home ownership is “affordable” (for the median buyer) when mortgage carrying costs—monthly payments, property taxes, heat, etc.—don’t exceed 39% of family income.
• Nationwide, we’re at about 31.6% today.¹

…On Mortgage Payments

• If we look specifically at mortgage payments, BMO says the average-priced house currently consumes 28% of median household income, based on non-discounted mortgage rates.²
• That puts us right at the long-term average (see chart below)
• This 28% falls to 23% for people living outside Vancouver and Toronto.
• Compare these numbers to the peaks of 44% in 1989 and 36% in 2007.

(Click chart to enlarge)

What if rates normalize?

The first step is to define “normal.” We can be reasonably confident that the new normal is less than the old normal. Reasons for that include the long-term downtrend in our domestic growth rate (see chart) and proactive inflation control by the Bank of Canada.



To pump life into the economy, the BoC has kept Canada’s overnight rate at just 1.00% for 902 straight days. According to Guatieri, “A normalized overnight rate would be closer to 3.50% given the inflation target of about 2.00%.”

This implies that short-term rates should theoretically jump by about 2.5 percentage points...someday. In turn, long-term rates (such as 5-year fixed rates) should rise less, maybe 200 basis points says Guatieri. That would push 5-year fixed mortgages somewhere near 4.99%.

Other things equal, these new “normalized” rates would drive up mortgage carrying costs (assuming 10% down) from 31.6% of gross income today to 37.2%. That would still fall below BMO’s threshold of unaffordability, which is 39%. But keep in mind, these affordability metrics don’t include other personal debt like car payments and credit cards.

How will borrowers be affected?

RBC Economics writes, “Residential property values are elevated in Canada and, for many households, ownership remains accessible only because of rock-bottom mortgage rates.”
(Higher incomes have also helped affordability, notes BMO.)

But escalating interest rates aren’t necessarily a death knell. Reason being, “the eventual rise in rates will take place at a time when the Canadian economy is on a stronger footing, thereby generating solid household income gains," says RBC. That, in turn, "would provide some offset to any negative effects from rising rates.”

The key word there is “some.” Guatieri estimates that, “To fully (our emphasis) offset a two percentage point increase in rates, household income would need to rise 19%, which could take six years if average income grows at the 3% average pace of the past decade.”

Incidentally, for major affordability damage to be done, we’d need something equivalent to a rate shock and/or serious unemployment. A rate shock is a fairly rapid increase in mortgage rates of “more than two percentage points,” Guatieri explains.

How far off is the threat?

It’s difficult to estimate the probability of a rate shock, Guatieri acknowledges. “The debt market is even pricing in a small probability of a BoC rate cut later this year.”

RBC notes, “We expect the Bank of Canada to leave its overnight rate unchanged at 1% throughout 2013 and raise it only gradually starting in early 2014—a scenario posing little in the way of imminent threat.”

Take that rate forecast for what it's worth, but regardless, “affordability is not a major problem and should not become one even when rates normalize,” Guatieri writes in this report.

That’s true even in three of the fastest growing provinces—Newfoundland, Alberta and Saskatchewan.

The affordability exceptions, not surprisingly, are detached homes in Vancouver, Toronto and Victoria. Not coincidentally, these three markets are among the most prone to the one thing that helps affordability the most: a material price correction.

---

Footnotes:
¹ Based on a 2.99% 5-year fixed rate, property taxes equalling 1% of home value, $150 per month for heating cost, a 25-year amortization, plus fourth-quarter 2012 data provided by BMO, including: Q4 household income estimated at $75,300, an average seasonally adjusted home price of $361,523 and a down payment equalling half of personal income (i.e., $37,600 or ~10%).
² Same assumptions as above, save for the mortgage rate. BMO uses an interest rate of 4.1% for its analysis. This higher rate makes comparisons easier over the long-run, since discounts were smaller in the past and since discounted rate data from the 1980's is scarce.

Low mortgage rates muster slight boost in housing market affordability

Tara Perkins, The Globe and Mail

 

Owning a house became slightly more affordable in Canada during the second half of 2012, but that’s mostly due to rock-bottom mortgage rates, RBC Economics says in a report to be released Monday.

 

The sharp drop in house sales that occurred during the final six months of the year led to some small month-over-month declines in house prices in many cities. And, as sales fell, banks made further small cuts to their already-low mortgage rates. Those two factors helped to take a tiny bite out of the cost of home ownership during the final three months of the year, for the second quarter in a row, RBC says.

 

The report comes as economists debate the health of the housing market and whether the moves that Ottawa made to tighten the market last summer will continue to have an impact this year.

 

On Friday, BMO Economics said that the latest data suggests falling mortgage rates and rising incomes are offsetting the effects of high house prices in most markets. That report said that affordability is not a “major problem” in most of the country, including Toronto’s much-watched condo market, and that it should not become one even when rates hit more normal levels.

 

“If interest rates remain low, income continues to rise, and prices stabilize this year – as we anticipate – fears of a deep housing correction should recede,” BMO senior economist Sal Guatieri wrote in that report. But he urged policy makers to “remain vigilant,” pointing to a number of major exceptions, namely the markets for detached homes in Vancouver, Toronto and Victoria, each of which are vulnerable to a significant correction if incomes fall or rates rise.

 

Finance Minister Jim Flaherty made changes to the mortgage insurance rules in July, after growing concerned that house prices and household debt levels were rising too fast. Those changes, which made it somewhat harder to obtain a mortgage, included cutting the maximum length of an insured mortgage to 25 years from 30 years.

 

“We expect overall housing market activity to remain subdued this year,” says RBC chief economist Craig Wright. “That said, we believe that there is scope for some mild strengthening from recent activity levels, as the negative effects of the mortgage insurance rule changes, implemented in July, 2012, gradually dissipate.”

 

While affordability is improving, RBC is warning that many families could be priced out of the market if interest rates were to jump.

 

“Exceptionally low interest rates have been the key factor keeping home affordability from reaching dangerous levels in recent years,” says Mr. Wright. “Residential property values are elevated in Canada and, for many households, ownership remains accessible only because of rock-bottom mortgage rates.”

 

BMO’s report suggests that, nationwide, Canada’s housing market is overvalued by about 10 per cent.

 

RBC’s housing affordability measure calculates the proportion of pre-tax household income that is required to service the costs of a house at current market prices. Both detached bungalows and condos saw the measure fall by 0.2 percentage points (to 42.1 per cent and 28 per cent respectively), while the measure for a two-storey home fell by 0.3 percentage points to 47.8 per cent.

 

All of the measures remain slightly higher than their historical averages, but the national figures are being propped up by “extremely poor affordability conditions” in the Vancouver area, RBC says.

 

Roughly 82.2 per cent of pre-tax income was required to service the cost of a detached bungalow in Vancouver during the final quarter of 2012, down 2.6 percentage points from the prior quarter, RBC says. Toronto’s measure was 52.8 per cent, down 0.4 percentage points; Montreal was 39.3 per cent, down 0.9 percentage points; Ottawa 38.8 per cent, down 0.5 percentage points; and Edmonton 30.7 per cent, down 0.1 percentage points. In Calgary, where the market is on an upswing, the measure was 38.1 per cent, up 0.2 percentage points.