16 Nov

What you need to know about Canada’s booming housing market

General

Posted by: Mike Hattim

Christine Dobby

With sales of existing homes in Canada rising in October to the highest level since January, the Canadian Real Estate Association boosted its forecast for resale activity for 2011.

The industry group released data on October sales activity as well as a revised forecast for the year on Tuesday.

National sales of existing homes increased 1.2% from the previous month, building on a gain of 2.5% in September. Price gains however cooled to 5.5%, the smallest gains since January.

A total of 397,561 resale units have traded hands so far this year, CREA said, up 1.8% from levels in the first 10 months of 2010.

Here’s what you need to know about the booming Canadian housing market:

Ontario leads the way

Third-quarter sales activity in the province was stronger than forecast, while the rest of the country came in broadly in line with expectations, the CREA said.

It was the strength of activity in Ontario that prompted the CREA to boost its annual forecast for 2011 to 1.4%, up from 0.9%.

The industry group now predicts national sales of 453,300 for the year, compared with 446,915 in 2010.

198,000 of 2011′s residential sales are expected to come from Ontario, with Quebec and British Columbia expected to have sales of 77,000 and 76,600, respectively.

Home prices are still up but showing signs of cooling down

CREA kept its national average home price forecast for the year little changed at $362,700. That’s an annual increase of 7.0% compared with $339,049 in 2010.

Prices are expected to remain flat next year, with the CREA forecasting $362,700 again for 2012.

The industry group pointed to moderating prices in Vancouver in the third quarter compared with the first half of the year, with sales of multi-million dollar properties in that city returning to “more normal levels.”

CREA said the national average price in October rose 5.5% from a year earlier to just under $362,899, the smallest increase since January.

The balance of supply and demand is tight but the market remains on solid footing

October’s monthly rise in sales resulted in a slightly tighter balance of supply and demand, but the national housing market remains “firmly rooted in balanced territory,” the CREA said.

The national sales-to-new listings ratio, a measure of market balance, stood at 53.4% in October, up from 52.8% in September.

Low interest rates continue to bolster the market

CREA also revised its forecast for 2012 upward slightly, predicting a smaller easing than previously expected of 0.5% to 451,200 units.

The uptick is largely due to expectations that Canada’s interest rates will stay low until well into 2012, CREA said.

But domestic and global economic headwinds could put pressure on the sector

“A number of factors will keep Canada’s housing market in check as interest rates remain low,” said Gregory Klump, CREA’s chief economist.

He pointed to tightened mortgage regulations, high household debt and slower economic and job growth as possible headwinds.

However, Mr. Klump noted that persistent news of global economic uncertainty has put only minor dents in consumer confidence to date.

“How confidence evolves depends on how global turmoil plays out over the coming months,” he said.

11 Nov

Variable or fixed? It’s no contest

General

Posted by: Mike Hattim

ROB CARRICK

Variable-rate mortgages are so over.

Go fixed rate if you’re arranging or renewing a mortgage, and think hard about the four-year term. If you take in all the recent developments in the mortgage market, this is the most logical strategy.

Variable-rate mortgages are being sold at the prime rate in many cases right now, which is 3 per cent. The traditional discount off prime? Snuffed out by the banks. They’ve decided they aren’t making enough money from discounted variable-rate mortgages, so goodbye discount for the most part. If you shop around, maybe you’ll get 0.2 of a point off prime.

Now for the fixed-rate alternative. Global economic uncertainty and sluggish growth mean you’ll pay in the area of 3 per cent for a four-year term. This explains why veteran mortgage broker Peter Majthenyi has pretty much given up on variable-rate mortgages.

“For 10 years, I’ve said don’t waste your money on a fixed-rate mortgage,” Mr. Majthenyi said. “Today, I just cannot in good conscience put a borrower into a 3-per-cent variable when for the same rate I can put them in a four-year fixed.”

Mr. Majthenyi calls this a “temporary break” from variable-rate mortgages. He’ll see what happens when today’s four-year terms expire. Meantime, he’s gone from writing about 98-per- cent variable-rate mortgages a year ago to virtually zero now.

Numbers from the Canadian Association of Accredited Mortgage Professionals (mortgage brokers, to put it in English) show that variable-rate mortgages had about one-third of the market as of this past spring, compared to 21 per cent four years ago. Interest in variable-rate mortgages was as strong as ever going into the summer as a result of an uncertain global economic outlook that was expected to keep interest rates low. Variable-rate mortgages could be had back then for 2.25 per cent, which represented a discount off prime of 0.75 of a point. Four- and five-year fixed-rate mortgages would have cost roughly 3 to 3.5 per cent, and that included a strong discount.

This was an ideal environment for variable-rate mortgages. The prime rate, used by lenders as a reference for many of their loans, was low and expected to stay that way for as long as it took for the global economic mess to resolve itself. The prognosis was for continued savings versus a fixed-rate mortgage.

Then came two developments that led to Mr. Majthenyi’s 180-degree turn against variable-rate mortgages. One, the cost of fixed-rate mortgages fell a little as a result of the stock market uproar in August and September. Here’s how that worked: Money flowed out of stocks and into bonds, which set the trend for mortgage rates. When a bond’s price rises, its yield falls. And so, as bond yields moved lower in the late summer, so did rates on fixed-term mortgages.

The second development was a decision by the big banks to clamp down on discounts given to customers going variable. “Bottom line, the banks have been stuck with too many variable-rate mortgages that are not profitable,” Mr. Majthenyi said. “How do they make them more profitable? They have to increase their profit on each mortgage.”

A few mortgage brokerage firms now advertise variable-rate mortgages at 2.8 per cent, or prime minus 0.2 of a point. But Mr. Majthenyi said many of the big lenders he deals with as a broker are now at prime. Looking ahead, he sees the market settling into prime plus or minus 0.2 for variable-rate mortgages.

You may still be able to save a token amount with a variable-rate mortgage over a fixed-rate mortgage with a term of four or five years. But it’s not hard to imagine the advantage of the variable rate disappearing in a year or so as the economy rallies. Then, you could be looking at a long period of rising rates.

So get over any ideas you have about variable-rate mortgages being cheap enough in the here and now to overlook the risk posed by future rate increases. In today’s market, variable-rate mortgages are yesterday’s news.

Finally, a quick word from Mr. Majthenyi for people who are in the middle of variable-rate mortgages with those juicy discounts of days gone by: Enjoy.

“You should hug and love those mortgages to the last possible moment because you’re probably not going to get them again.”

11 Nov

‘Sizable minority’ of Canadians at risk if mortgage risks rise, report warns

General

Posted by: Mike Hattim

Ryan Wright is trying to do everything right. He puts away money for retirement, he bought a hybrid car to cut down on fuel costs, and he has diligently paid down his mortgage since buying a modestly priced Ottawa townhouse five years ago.

And when it came time to renew his mortgage this year, he locked in with a five-year deal rather than risk the uncertainty of higher interest costs in the next few years.

Mr. Wright’s caution puts him in the minority: A report from the Canadian Association of Accredited Mortgage Professionals released Wednesday suggests a majority of Canadians think they can spend at least $300 more a month on mortgage payments without having to alter their lifestyles.

“Would we have the income available to put up hundreds of dollars more against our mortgage?” Mr. Wright said. “Yes. But we would have to dramatically drop our savings and other ‘luxuries’ like eating out once a month.”

Interest rates have been held at historically low levels since the recession, as central banks attempt to stimulate the economy and keep borrowing costs down. Cheap money has been largely credited for fuelling demand for Canadian housing, and there have been warnings that prices have increased too rapidly as buyers take on more than they could afford in a normal rate environment.

The report found that a “sizable minority” of Canadian mortgage holders would be unable to make their payments if interest rates were to increase by even 1 per cent.

“A vast majority of mortgage holders has considerable capacity to afford rises in mortgage interest rates,” says the trade group’s annual report on the state of the Canadian mortgage industry. It suggests the average mortgage holder could absorb another $750 a month in monthly payments. “There is a sizable minority of about 650,000 [people] who would be challenged by rate rises of less than 1 per cent.”

“Obviously, that average has been pulled higher by some high-income individuals with a lot of spending room,” said Jim Murphy, the association’s president. “The typical family has room for about $300 in extra payments.”

About 75,000 have “limited home equity,” making them even more vulnerable if rates change, the report said.

The report plays down the significance of the numbers, however, saying that most have fixed mortgages and “by the time their mortgages are due for renewal, their financial capacity will have increased and the amount of mortgage debt will be reduced.”

The trade group’s survey, however, paints a fairly rosy picture of the $982-billion Canadian mortgage market. About 5.8 million Canadians hold a mortgage.

“Overall, our survey paints a picture of Canadians generally and homeowners in particular as very focused on finances,” Mr. Murphy said. “Prudent is the word that sums up how Canadians are feeling at this time.”

Amid warnings from the Bank of Canada and political leaders about increasing consumer debt loads, the report said only 10 per cent of homeowners took out home equity loans. And while 46 per cent of Canadians feel that the average family is carrying too much debt, almost 80 per cent indicated that they “personally have acted responsibly.”

The Bank of Canada recently warned that household debt loads remain too high and could translate into lower spending on consumer goods – bad news for the economy. More ominously, the bank noted that a “sudden” weakening in the housing market could have “sizable spillover effects” elsewhere in the economy.

—————–

By the numbers:

3.92% Average interest rate on a Canadian mortgage over the past year, down from 4.22 per cent a year earlier.

23% Estimated portion of mortgage holders who refinanced in the past year; they saw their rates drop by about 1.2 per cent.

60% Portion of mortgages issued in past year that were fixed-rate mortgages (locked in for a specific time period).

40% Decrease in number of mortgage-holders who tapped into their home’s equity in the past year, compared with previous year.

68% Portion of Canadians who say they can afford to pay at least $300 more per month on their mortgage.

3% Portion who say they can’t afford any increase to their mortgage.

9 Nov

Small rate move would spell mortgage trouble for some Canadians

General

Posted by: Mike Hattim

A “sizeable minority” of Canadian mortgage holders would be unable to make their payments if interest rates were to increase as little as 1 per cent, according to a survey by the Canadian Association of Accredited Mortgage Professionals.

In its annual report on the state of the Canadian mortgage industry, the trade group said that the majority of Canadians could pay more on their mortgages if necessary. But there are some who would run into trouble with even a small move in rates.

“A vast majority of mortgage holders has considerable capacity to afford rises in mortgage interest rates,” the report stated, suggesting the average mortgage holder could absorb another $750 a month in monthly payments. “There is a sizable minority of about 650,000 [people] who would be challenged by rate rises of less than 1 per cent.”

Of those mortgage holders, 75,000 have “limited home equity,” making them even more susceptible to rate changes. The report downplays the significance of the numbers, saying that most have fixed mortgages and “by the time their mortgages are due for renewal, their financial capacity will have increased and the amount of mortgage debt will be reduced.”

Amid warnings from the Bank of Canada and the country’s top politicians, an annual survey by the Canadian Association of Accredited Mortgage Professionals shows that only 10 per cent of homeowners took out money against their homes.

And while 46 per cent of Canadians felt that the average family was carrying too much debt, almost 80 per cent indicated they themselves “personally have acted responsibly.”

In a recent update, the Bank of Canada warned that household debt remained too high and could translate into lower spending on consumer goods – bad news for the economy. More ominous, the central bank reminded that a “sudden” weakening in the housing market could have “sizable spillover effects” elsewhere in the Canadian economy.

The survey, however, paints a fairly rosy picture of the $982-billion Canadian mortgage market. About 5.8-million Canadians hold a mortgage.

“Overall, our survey paints a picture of Canadians generally and homeowners in particular as very focused on finances,” said Jim Murphy, the association’s president. “Prudent is the word that sums up how Canadians are feeling at this time.”

The association represents mortgage brokers. It said the average interest rate on a Canadian mortgage over the last year was 3.92 per cent, compared to 4.22 per cent a year earlier. Anyone who refinanced in the last year – an estimated 23 per cent of all mortgage holders – saw their rates lowered by about 1.2 per cent.

Fixed rate mortgages – which are locked in for a specific time period and are generally seen as a more conservative to variable rates which could rapidly increase – accounted for 60 per cent of the mortgages written by the association’s lenders in the last year.

Meanwhile, Canadians resisted the urge to use their homes as bank machines in the last year, as the number of homeowners tapping into their equity dropped by 40 per cent.

The average amount taken out was $49,000. That amounted to about $28-billion, and it is estimated $11-billion of this went to “debt consolidation and repayment.”

From the report – How much more can Canadians afford?

· The average amount of room is $750 per month on top of their current costs.

· Just 3 per cent indicated they have no room (the affordable increase is $0).

· A further 3 per cent indicated their room is $1 to $49, and 2 per cent indicated $50 to $99 per month.

· In combination, 8 per cent indicate they cannot afford an increase of $100 per month or more.

· Eight per cent indicated their room is $100 to $199.

· Sixteen per cent reported room in the range of $200 to $299.

· This leaves 68 per cent whose capacity is $300 per month or more.

· Even for those who originated the mortgage within the past year, the distribution of answers is essentially the same: The average room is about $900 per month and just 5 per cent say they cannot afford an increase of $100 or more.

For most of the mortgage borrowers who are potentially at-risk, CAAMP suggests there are mitigating factors:

· Most of them have substantial amounts of housing equity: 88 per cent have 10 per cent or more equity, and have potential to call on their equity, either by selling or by refinancing.

· An estimated 12 per cent (about 75,000) less than 10-per-cent equity in their home.

· For many others, time will be a mitigating factor, as about three-quarters of them have either fixed rate or combination mortgages: Any changes in interest rates will not affect them until their renewal dates. By the time their mortgages come due for renewal, they will have seen some income growth and the amount of mortgage principal will have been reduced, and the future impact of interest rate increases will be less than it might be today.

8 Nov

Canadian home value has doubled since 2000: report

General

Posted by: Mike Hattim

KELOWNA, B.C.— The Canadian Press

Re/Max says since 2000, the average value of a Canadian home has doubled, rising from $163,951 to $339,030 in 2010.

A report from the real estate organization says that billions spent in new construction, renovation and renewal have pushed up the average residential price in the country’s major centres.

Re/Max also says condominiums also have changed the urban landscape over the past decade, especially in British Columbia and Alberta, where they comprise 25 to 50 per cent of residential sales.

The real estate group says the value of residential building permits issued nationally between 2000 and 2010 was $340-billion and an estimated $450-billion was spent on renovations.

Re/Max says the impact of this has fuelled the Canadian residential real estate market — as well as the construction industry — for more than a decade.

Canada’s population growth also has been a key factor in the growth of the housing market with Re/Max saying since 2000, Canada’s population has experienced double-digit growth of 11 per cent.

4 Nov

House prices to hold next year: CMHC

General

Posted by: Mike Hattim

The housing market may be a boring place for the next year, according to CMHC, as the number of starts remains near current levels and resale prices hold steady.

In its fourth quarter market update, Canada Mortgage and Housing Corp. said mortgage rates would likely remain at historically low levels at least until the last half of 2012. The housing market’s fate is largely tied to rates, the agency said.

Economists and market watchers have predicted a variety of scenarios for house prices in the next year, with some suggesting prices could drop as much as 10 per cent by the end of 2012. Capital Economics goes a step further, having predicted a drop of 25 per cent in the next several years as demand weakens amid higher mortgage rates.

“Should rates move lower than projected, housing starts and MLS sales could be higher than expected and house prices could grow at a faster pace than forecast,” the report stated. “Alternatively, should financial market expectations improve and interest rates move higher than projected, housing starts and MLS sales could be lower than expected and house prices could grow at a slower pace than forecast.”

CMHC said there could be as many as 470,100 resales in Canada this year, and expects that number to rise to 485,500 in 2012.

“We expect balanced market conditions to prevail and the average MLS price to remain fairly flat to the end of 2012,” the report stated.

CMHC said 186,750 new homes would be built in 2012, compared to 191,000 for 2011. Analysts generally agree that at least 175,000 new homes are needed each year to meet demand from new families and immigration.

“Ontario, Saskatchewan and Nova Scotia’s growth will be the strongest, while Prince Edward Island and British Columbia are forecast to see modest growth,” CMHC said. “The other provinces, on the other hand, are expected to see decreases. In 2012, housing starts are forecast to increase in British Columbia, Alberta and Manitoba.”

Other highlights from the report:

· Posted mortgage rates will remain relatively flat until late 2012. For 2012, the one-year posted mortgage rate is expected to be in the 3.4 to 3.8 per cent range, while the five-year posted mortgage rate is forecast to be within 5.2 to 5.7 per cent.

· Single starts have rebounded coming out of the recession. After an increase in the third quarter of this year, they are expected to moderate before rising later in 2012.

· Since the beginning of 2011, new listings steadily outpaced existing home sales. As a consequence, the resale market has moved from sellers’ to balanced market conditions.

The agency said the economic outlook for the country was uncertain, making it difficult to forecast growth in the housing market.

“Sustained financial market uncertainty has heightened risks but, there are both upside and downside risks to the outlook,” the agency stated.

The positive: “Some upsides include the potential that the U.S. could recover stronger than is forecast, thus increasing U.S. employment and economic growth. This could, in turn, boost employment growth in Canada and lead to stronger than anticipated housing demand.”

The negative: “Some downsides include a slower than expected recovery for the U.S., reduced economic growth in emerging economies and a downturn in parts of Europe. Such events could result in slower employment growth in Canada, which could lead to lower demand for housing.”