29 Feb

Canada housing prices won’t crash: poll


Posted by: Mike Hattim

By Louise Egan

OTTAWA — Canada’s government will make it tougher for many homebuyers to get mortgages this year as it grapples with an overheated property market, according to analysts in a Reuters poll, who also ruled out the prospect that prices could suddenly crash.

Ten of 14 economists and strategists surveyed last week in Reuters’ first poll on the Canadian housing sector answered “yes” when asked if they thought Ottawa would tighten mortgage rules within the next 12 months.

They expect home prices to climb just 0.1% in the year to December 2012, and the same in 2013. That is down from a 0.9% year-on-year increase in December 2011.

If Finance Minister Jim Flaherty tightens requirements for government-backed insured mortgages it would be his fourth intervention in the real estate market since 2008.

Flaherty could raise the minimum down payment to buy a home from the current 5% or reduce the maximum amortization period from 30 years.

Any move would likely come before the prime spring real estate season, analysts said. “Sometime between now and the next budget,” said Benoit Durocher, senior economist at Desjardins in Montreal, on the timing of such a move.

The budget is expected in late March.

The poll respondents see the housing market as moderately overvalued, particularly in Toronto and Vancouver.

“There is some genuine concern that the housing market and households have been overstretched,” said Mazen Issa, economist at TD Securities.

“But in the absence of several triggers for a housing market decline, which are not likely to be forthcoming until at least the middle of next year, the underlying theme is of gradual moderation,” he said.

Possible triggers would be a rise in mortgage rates or a sharp rise in unemployment.

Canada’s robust housing market helped pull the economy out of the 2008 recession. Prices dipped briefly during the downturn, but quickly resumed the climb that characterized the previous decade.

But that effervescence is now a headache for policymakers, as historically low interest rates tempt more and more people to take out mortgages for increasingly unaffordable homes.

Household debt levels are approaching those in the United States before the 2008-09 housing meltdown there. Canada’s debt-to-income ratio hit a record 153% last year and is expected to rise.

The Bank of Canada, which has fanned the flames by holding its benchmark lending rate at 1% for an unprecedented 17 months, has made it clear that rates are likely to stay unchanged for at least this year. Of the nine forecasters who answered a question on how far prices would fall before stabilizing, the median decline was 5%, with four predicting price stabilizing beyond 2013.

The economists see a moderation in housing starts to 190,000 units in the first quarter of 2012 compared with a seasonally-adjusted annualized rate of 197,900 units in January. Housing starts should ease to 181,000 by the second quarter.

Analysts said housing prices have strayed from fundamentals but not in an extreme way, placing them as a “seven” on a scale of one to 10, with five being fairly valued and 10 being extremely overvalued.

But the national average is skewed by extremes in Toronto and Vancouver, where foreign investment has helped push up prices. Excluding these centers, Durocher rated prices as a “five” on the scale.

Doug Porter, deputy chief economist at BMO Capital Markets, agreed. “I would say aside from those two cities, there’s really little evidence whatsoever that the market has gotten ahead of itself,” Porter said. “Whatever strength we’ve seen in most cities has simply been the flip side of the decline in borrowing costs. Provided we don’t get hit with an interest rate shock, then I think the market can adjust to a moderate back-up in rates over time.”

Vancouver prices have already started sliding. The outlook of the half-dozen analysts who ventured a forecast on that city was for a 3% drop this year and 4.8% fall in 2013.

In Toronto, where the activity ramped up later, prices are seen edging up 0.3% this year before falling 2% next year.

© Thomson Reuters 2012

24 Feb

Why we’re in trouble if housing craters


Posted by: Mike Hattim

By Tim Shufelt

Household debt accumulation
The Canadian household debt burden has climbed ever upward over the last 30 years. That trend generally held globally, amplifying in the years preceding the financial crisis.

Unlike in the United States and the United Kingdom, Canada refrained from the worst of those “excesses,” and thus averted a good amount of the economic carnage that ensued, the report said.

But as households elsewhere in the West now agonize through a period of deleveraging, Canadians have continued borrowing at about the same pace, compelled by income growth, low interest rates and ever rising home equity.

While those debt levels are mostly driven by mortgage borrowing, consumer credit now accounts for about one-third of the household debt burden.

Instruments like home equity lines of credit (HELOCs) have encouraged homeowners to borrow against the equity afforded by rising home prices.

“Financial innovation that made it easier for households to access this type of borrowing” has likely helped facilitate debt accumulation, the report said.

Borrowing and spending
Home-equity extraction, which includes HELOCs and mortgage refinancing, accounted for a large increase in total household debt since 1999, the report said.

Over that period, as a percentage of disposable income, borrowing on equity rose from 2.2% to a peak of 9.0% in 2007.

Through the recession and its aftermath, Canadians appeared to compensate for declines in income by resorting to credit secured by their homes. In 2009, HELOCs drove one-quarter of the increase in average household debt.

A significant share of those borrowed funds — about 40% — were used to finance consumption and home renovations.

Canadians invested about 35% of those proceeds and used 25% to repay other debt. A portion of the debt in that final category, however, would be consumer debt, understating the extent to which Canadians increasingly finance their consumption through home-equity extraction.

Given the recent emphasis of borrowing in household expenditures, “this suggests that household spending on consumption and home renovation can become vulnerable to house price shocks, since lower house prices would reduce the value of housing collateral,” the report said.

Housing prices
An indebted household, particularly one that has borrowed against home equity, is one that is vulnerable to the forces of depreciation.

The behaviour of the Canadian housing market over the past several years alone has some convinced of an impending correction. On average, real house prices in Canada increased by 88% since 1980. Since 2000, prices rose nationally almost without interruption.

Over the long term, housing prices are a function of income and population — factors that fall short in explaining medium-term price fluctuations.

With housing, supply is slow to respond to demand, leaving movements in prices to correct the imbalance in the interim.

Additionally, interest rates and credit conditions skew the forces of demand and supply of housing.

One model described in the report attributes 60% of the rise in Canadian home prices from 2001 to 2010 to population and income growth.

Other possible factors explain the remainder, including: declining mortgage rates, changes in expectations of future price growth and changing liquidity measures in the housing market, like vacancy rates, the time it takes a house to sell and volume of houses listed for sale, the report explained.

Much is at work in the housing market and it’s risky to count on a steady upward march of prices.

The rate of insolvency, which includes both bankruptcies and debt restructurings, has been on the rise in recent years in Canada.

Approximately 100,000 Canadians file for insolvency each year — triple the rate of the 1980s. The average debt of those declaring bankruptcy amounts to about $92,000, rising to $115,000 for those applying to restructure their debts.

Considering the rising levels of average household debt, “the number of households that may be vulnerable to a negative economic shock is rising as well,” the report said.

The main domestic sources of risk to financial stability, as identified by the central bank, include that vulnerability and the deterioration of the credit quality of household loans.

“Fragility in the household sector can have substantial adverse spillovers to the financial system and the entire economy,” the report said.

That phenomenon was illustrated most starkly in the recent experience of the United States.

23 Feb

Paying off your mortgage early can cost you


Posted by: Mike Hattim

By Peggy Mackenzie

Paying off your mortgage early seems like great financial planning since you’re freeing up money that can be put towards savings.

But discharging a mortgage early can mean a prepayment penalty because the bank loses money. If you had a two-year term and paid the mortgage in full after 16 months, the bank is out eight months of interest. They charge the difference so they don’t lose out. The closer you are to the end of the mortgage, the smaller the penalty but it’s money out of your pocket.

For those lucky enough to be near the end of their mortgages and ready to hold a mortgage burning party, they need to keep an eye on the mortgage statement that shows the principal/interest mix if they want to avoid penalties. This is particularly true for those with a variable rate.

People with variable mortgages pay fixed amounts, but the amount going towards principal and interest fluctuates depending on prime. If the prime rate decreases, more of the payment goes to the principal and less to interest. While decreasing principal is great, you’ll be hit with a penalty if the mortgage ends before the term does because the bank loses interest payments.

There’s not as much worry for those paying fixed rates; just skip double-up-payments unless the bank agrees that you can retire the mortgage early.

If you’re close to the end of your mortgage, but don’t have enough cash on hand to retire it outright at the end of the mortgage term, you’ll need to renew for a short period. Here are a several options that will not incur prepayment penalties:

–  Take out a short-term variable-rate-mortgage and keep monthly payments the same. Pay any leftover amount at the end to retire the mortgage. You’ll need modest extra savings for this plan but make sure that if prime drops, you aren’t in jeopardy of paying it off early.

– Take out a short-term fixed-rate-mortgage and increase monthly payments so that the principal will be paid in full at the conclusion of the term.

– Increase the mortgage term and decrease payments. This will add to the length of time that you pay off your mortgage, but will help if finances are tight. Again, for those paying a variable rate, religiously check your balance in the last three months to ensure you don’t inadvertently pay the mortgage in full ahead of time.

21 Feb

Mortgage fraud on the rise


Posted by: Mike Hattim

Nicolas Van Praet

MONTREAL — Consumer credit company Equifax uncovered roughly $400-million worth of mortgage fraud in Canada last year, an “eyeopening” number industry experts estimate represents only a fraction of the cheating taking place in the country’s real estate market.

Atlanta-based Equifax says many financial institutions are tightening lending and, as a result, deceit in the property market is rising. A report the company released Tuesday says two-thirds of all the fraud it sniffed out last year was related to real estate.

“Mortgages are the biggest bang for the buck,” said John Russo, vice-president and legal counsel for Equifax Canada Inc. “So when credit gets tougher to get, that leads to more people falsifying documents, giving false pay stubs, inflating their income, kind of fudging things to get a home.”

The $400-million in mortgage fraud represents only a sliver of the roughly $1-trillion in total residential mortgage credit outstanding at the moment in Canada. But it rose sharply in 2011 from 2010 in dollar terms, increasing 150%, Equifax data suggest.

The figure is “eye-opening,” Mr. Russo says, because that’s just the amount Equifax flushed out on its own for its clients. “There’s a lot more out there that just goes under the radar and is not seen and not caught.”

Often tracking strong housing markets, mortgage fraud occurs nationally but is more concentrated in large urban areas in Quebec, Ontario, Albert and B.C., says the Criminal Intelligence Service Canada, a federal agency that shares intelligence between police forces. Numerous criminal groups across Canada are involved in a wide range of mortgage frauds at varying levels, the CISC says, sometimes with the help of industry insiders such as property agents, mortgage brokers and lawyers.

One growing trend is people setting up fictitious identities, building up credit for those fake people and then using the credit to borrow. Equifax says five years ago it had identified 300 such fictitious identities in its national database. Now there are more than 2,500.

Using mortgage fraud to further other criminal activity is also common. Criminals are buying properties to open marijuana growing operations, to trade drugs and to launder money.

An increasing number are getting caught and there’s been a dramatic increase in criminal and civil forfeiture cases as a result, said Andrew Bury, a lawyer specializing in loan security enforcement at Gowling Lafleur Henderson LLP in Vancouver.

“They’re grabbing these properties left, right and centre. And over and over again they’re crashing into the mortgage companies, the banks, [which are saying] ‘Wait a second, we have a mortgage on that property.’ “

Lenders are losing big sums while governments reap the re-wards of the seizures, Mr. Bury said.

But the bulk of mortgage swindling still involves ordinary people lying to obtain mortgages larger than their income can support, Equifax said. They’re living in homes that are simply too rich for them. Says Mr. Russo: “No matter how small or big the lie, it’s still mortgage fraud.”

It sometimes takes years for fraud to come to light, notes Toronto forensic accountant Al Rosen. He believes controls in the banking system remain inadequate.

“I see all sorts of situations where the appraised value of [properties] is just laughable. And some of these are not checked out very well,” he says. “Because the only thing that really counts is: What can you sell that property for?”

Canada’s highest-profile mortgage fraud to date is perhaps the case of Martin Wirick, a Vancouver lawyer sentenced to seven years in prison in 2009 for fraud and forgery in an elaborate scheme covering 107 separate real estate transactions conducted on behalf of his client, real estate developer Tarsem Singh Gill.

The scheme was so huge that the Law Society of B.C. raised special contributions from its lawyer members to compensate the victims. As of 2009, it had paid out $38.4-million for the Wirick fraud alone. Over a 40-year period before that, the society’s compensation fund disbursed a total of $52-million for all cases of lawyer misappropriation.

21 Feb

Housing crutch abandoning banks


Posted by: Mike Hattim

John Greenwood

The numbers are staggering.

At the end of last year the Canadian banks had $494.4-billion of insured mortgages on their books, guaranteed by the Canada Mortgage and Housing Corp.

Another piece of telling data: As of the end of September the CMHC had guarantees on $541-billion of outstanding home loans — roughly equivalent to the Canadian federal debt and just shy of its government mandated $600-billion cap.

The sudden jump in demand for so-called “bulk insurance” on securitized home loans took even the CMHC by surprise. It acknowledged last last month that due to “an unexpected level of requests” it is establishing “an allocation process” (aka: sharp reduction) for big lenders so it can keep doling out insurance to average Canadians.

Meanwhile, the government led by Stephen Harper, which is deeply worried about runaway consumer debt, is said to also be leaning on the CMHC to curtail bulk insurance.

“There has been increasing speculation that upcoming legislation will not permit the use of CMHC insured mortgages as collateral,” said BMO Capital Markets analyst George Lazarevski.

Whether such a move will have the desired impact remains to be seen but it’s further evidence of the dilemma the government finds itself in as it struggles to rein in consumer borrowing without destabilizing an already frothy housing market.

The good news is that the Canadian real estate prices appear to have stabilized, according to the Canadian Real Estate Association.

In a report released on Wednesday, CREA said average prices in January were up less than 2% over the same period last year, with sales down 4.5% compared to December, the biggest monthly decline in 18 months. The findings suggest that the market may be headed for a soft landing, though experts say it’s still too early to say.

Home buyers who can’t put up at least 20% of the cost of the house are required to take out insurance. Banks can also take out bulk insurance on mortgage pools, a key step before packaging up the loans into securities for sale to investors.

Though there are a handful of private sector insurers, the CMHC is by far the dominant player. It also backstops 90% of the private sector guarantees.

As a Crown corp., the CMHC is an arm of the federal government, which is why bonds backed by CMHC insured mortgages can carry a higher credit rating than the institution that issued them.

This means banks are able to raise funding almost as cheaply as the federal government — an enormous competitive advantage at a time of rock bottom interest rates, when many foreign lenders are virtually shut out of funding markets.

Not surprisingly, Canadian banks are big fans of bonds backed by insured mortgages, selling a record $24.7-billion of covered bonds in 2011, up from $17.3-billion in 2010 and $2.8-billion in 2007, the year prior to the financial crisis.

Ottawa increased the mortgage insurance cap to $300-billion from $250-billion in 2004. It was boosted again in 2007 to $350-billion, and then to $450-billion in 2008. In 2009 it was pushed up to its current limit of $600-billion.

Part of the reason Ottawa has been raising the cap was to enable players to access funding in the wake of the financial crisis that began in 2008. While that storm is long over, the banks’ appetite has been undiminished.

Some critics worry that lenders are more focused on creating and selling covered bonds than on the ability of borrowers to meet their obligations on the underlying mortgages.

Industry insiders speculate that the government may respond by prohibiting the used of CMHC-insured mortgages as collateral for covered bonds, according to Mr. Lazarevski.

Even if Ottawa takes that step it still doesn’t solve the bigger problem with consumer debt.

The root of the issue is that banks are public companies — with demanding shareholders — designed to pursue profit, and that’s exactly what they’re doing.

“As long as you’ve got a free, open economy, there’s really not much the government can do,” said Lawrence Booth, a professor at the University of Toronto’s Rotman School of Management.

The government has tightened mortgage rules several times, but when interest rates across much of the developed world are close to zero such strategies will only go so far.

“The fact is, what can you do with the banks?” asked Mr. Booth. “The banks are in business to make money. The Bank of Montreal  lowered their five-year rate [a while back]. All the banks had to respond otherwise they lose business. On the one hand this is good to help the economy. On the other hand [Bank of Canada Governor] Mark Carney is dead worried about the increase in household indebtedness.”

Canadian household debt to income is already sitting at a record 153%, greater in Canada than in the U.S. or Britain.

Finance Minister Jim Flaherty has tightened mortgage lending rules in several ways, but with limited effect as consumer debt held by the banks continues to grow at around 6%, well ahead of GDP.

The worry is that a spike in unemployment or interest rates could trigger a wave of defaults that would ripple through the broader economy. In a worst-case scenario, a major real estate correction could overwhelm the CMHC, leaving taxpayers on the hook.

“Of course taxpayers should be concerned,” said Finn Poschmann, vice president of the C.D. Howe Institute, a Toronto-based think tank. “You’ve got a situation where a big portion of the assets held by the banks are comprised of loans guaranteed by the federal government, which enables the banks to raise extraordinarily low cost capital. All the incentives line up.”

John Reucasse, who covers banks for BMO Capital markets, pointed out in a note to clients last month that the sector’s reliance on CMHC insurance has “increased significantly” and he warns that “should the CMHC ever require capital from the federal government… we expect banks could face higher taxes and higher premiums to fund losses.”

Outstanding mortgage debt stood at a record $1.1-trillion at the end of 2011, nearly triple what it was a decade ago, with most of the growth taking place since 2007.

About 50% of mortgage loans held by the banks are covered by the CMHC, representing about 22% of the Canadian dollar assets, according to the C.D. Howe Institute.

“The system is working the way it’s supposed to,” said another analyst. “These are public policies designed to support the financial system.”

The result is we have strong, profitable banks that are widely held.

“People have got to start thinking about their own ownership stake in the banks,” he said. “Look at any equity mutual fund, banks all in there, Canadian consumers have got to recognize they are all owners.”

21 Feb

Housing presses pause


Posted by: Mike Hattim

Garry Marr

Sales of existing homes kicked off the year with the largest decline in almost 18 months, something the real estate industry says is to be expected as the market moderates.

The Canadian Real Estate Association said January sales dropped by 4.5% from December on a seasonally adjusted basis, the first monthly decline since August 2011 and the largest monthly decline since July 2010.

Price increases are also beginning to shrink with the average Canadian home selling for $348,178 in January, a 1.2% increase from a year ago.

“The national housing market is stabilizing and remains well balanced,” said Gary Morse, president of CREA. “That said, forecasts for economic and job growth going forward vary widely for different parts of the country, suggesting a possible continuation of a softening trend in some markets, as well as the potential that demand will pick up based on strong fundamentals in others.”

Gregory Klump, chief economist with CREA, warned that year over year price comparisons could become negative as they are impacted by what happened in the Vancouver market in the first half of 2011. “At the time, high-end home sales in Vancouver’s priciest neighbourhoods surged to all-time record levels, which skewed the national average price upward considerably,” he said.

Phil Soper, chief executive of Royal LePage Real Estate Services, noted January 2012 sales were still up 4% from a year ago and in-line with his expectations for the market. “I think if we step back and look at the numbers, they were impacted by the lack of inventory in the Toronto market, our largest,” said Mr. Soper, adding he does expect both prices and sales to cool in 2012. “The pricing we are seeing is in line with a 2.8% increase we are expecting for 2012.”

He says while a crash is unlikely, consumers are going to have get used to a moderate housing market where prices are not in the double-digit year-over year range. “There aren’t any more people to pull into transactions. The stimulative impact of interest rates can pull some people into the market but not some kid out of college who doesn’t have a job yet,” said Mr. Soper.

Others in the industry maintain the giant collapse that has been forecast for the last four or five years is not coming and certainly not to the degree housing values dropped in the United States.

Gerry Soloway, chief executive of Home Capital Group, thinks Canadians have been convinced of a crash because of the information that flows north from the U.S.

“I think there has been a great deal of attention by people who look at the housing market from the U.S. perspective, it went down so it’s gotta go down in Canada. It doesn’t,” said Mr. Solway whose company reported adjusted basic earnings up 30.6% in 2011 from a year earlier. “I very much agree with what [Canada Mortgage and Housing Corporation] said, that levels will stay close to last year.”

CMHC said the combination of low mortgage rates and a moderate expansion in the Canadian economy should keep new home construction and existing home sales at about the same level in 2012 as 2011. The Crown corporation even sees a 2.7% price increase for this year.

Adrienne Warren, an economist with Bank of Nova Scotia, agrees with the assessment the market will be flat in 2012. “Despite the lure of historically low interest rates, the softening trend in employment growth over the past six month combined with tightening in mortgage rules last spring have lowered the temperature on Canada’s previously red-hot housing market,” she said, adding markets to the west should outperform those in central and eastern Canada.

16 Feb

Two steady housing years ahead: CMHC


Posted by: Mike Hattim

Globe and Mail

Canada’s housing market has two good years ahead of it yet, Canada Mortgage and Housing Corp. said Monday, with low interest rates and a “moderately” expanding economy keeping price corrections at bay.

The Crown corporation – which insures Canadian mortgages – has had a consistently rosier view of the market than many private sector forecasters.

Canadian banks have recently issued reports probing the consequences of cheap money, and trying to predict whether there is a bubble in prices that will eventually pop and cause prices to crash. They are particularly concerned about Vancouver and Toronto, where some have predicted price corrections of up to 10 per cent because of overbuilding in the condo market.

But CMHC said Monday Canadian markets would “remain steady in 2012 and 2013.

“With the Canadian economy set to expand at a moderate pace and mortgage rates expected to remain low, activity levels in 2012 in both new home construction and sales of existing homes will stay close to levels seen in 2011,” said Mathieu Laberge, deputy chief economist.

Also in the forecast: “Housing starts will be in the range of 164,000 to 212,700 units in 2012, with a point forecast of 190,000 units. In 2013, housing starts will be in the range of 168,900 to 219,300 units, with a point forecast of 193,800 units.

Existing home sales will be in the range of 406,000 to 504,500 units in 2012, with a point forecast of 457,300 units. In 2013, MLS sales are expected to move up in the range of 417,600 to 517,400 units, with a point forecast of 468,200 units.

The average MLS price is forecast to be between $330,000 and $410,000 in 2012 and between $335,000 and $430,000 in 2013. CMHC’s point forecast for the average MLS price is $368,900 for 2012 and $379,000 for 2013. The moderate increases in the average MLS price are consistent with the balanced market conditions that occurred in 2011, and that are expected to continue in 2012 and 2013.”

16 Feb

Housing cools as sellers hold back


Posted by: Mike Hattim


The hot housing market that powered the country’s post-recession recovery is slowing to a crawl.

The Canadian Real Estate Association said sales dropped and prices moderated in January, with the weakness spread among more than half of the country’s cities. Sales in Vancouver and Toronto slowed to a crawl, with few houses available to would-be buyers.

The low number of listings means there could be a rush of sellers trying to capitalize on the spring market, keeping a lid on the bidding wars that have driven prices sharply higher in some of the country’s largest markets.

“There is really a lack of product,” said Phil Soper, president of Brookfield Residential Real Estate Services, which operates Royal LePage. “We expect that to pick up considerably, and by the end of March Break you’ll really be able to gauge the Canadian market’s health. Or lack of health.”

Canada’s sizzling property market has made headlines around the world, and so far defied some predictions that it’s a debt-fuelled bubble bound to pop. Forecasts for home prices for the next several years vary wildly – with economists and analysts predicting everything from a 25 per cent drop to modest gains.

The latest figures suggest a levelling off. Home sales across the country were down 4.5 per cent in January from December, the sharpest monthly decline since July, 2010.

Average prices were 2 per cent higher than a year ago at $348,178, the smallest year-over-year increase in the past year.

It’s not the first sign that the much-talked-about slowdown may have arrived.

The Teranet-National Bank index, an alternative measure of price gains that lags CREA by several months, showed prices dipped 0.2 per cent in November, marking the first drop since the fall of 2010.

In Toronto, the bidding wars have largely given way to a market where houses sit longer and sell for closer to their asking price, said Richard Silver, president of the Toronto Real Estate Board. But hot neighbourhoods continue to fetch top dollar, especially considering the lack of listings.

Matthew Slutsky, chief executive officer of real estate site BuzzBuzzHome.com, has been trying to buy a house in one downtown neighbourhood for months. Along with his wife Carlie Brand, he’s been popping letters in mailboxes imploring their owners to consider a sale.

“I really hope it’s the calm before the storm and more listings pop up,” he said. “Right now it feels like we are auditioning for a house, and I don’t know if I want to wait and see what happens in the spring.”

There’s been a sense of unease surrounding Canada’s housing market for more than a year. The federal government tightened its mortgage qualification requirements to try to prevent buyers from taking on too much debt in a low-interest-rate environment, and the Bank of Canada has issued a steady stream of warnings about high levels of household debt.

The fear is that rates will rise as the economy improves, and many people who could afford their house when interest rates were low may find those same houses unaffordable as rates rise. Financial turmoil in Europe also has many market watchers concerned, with any default in Greece expected to have ripple effects around the world.

Lenders such as Gerry Soloway, CEO of Home Capital Corp., have cautiously tightened their lending standards in recent months as the economy wobbled. But he doesn’t see prices crashing any time soon, even if things slow down considerably.

“I just don’t see the catalyst for a big price drop,” he said.

It’s a theory echoed by Ross McCredie, CEO of Sotheby’s International Realty Canada, who recently had 16 buyers check out a $2.5-million home in Toronto.

“We are finding if the home is priced right and a quality home, it is moving fairly quick,” he said. “Too many people who are listing are expecting prices well above the market. We are spending a lot of time with our agents to ensure we are only taking on listings at the right price.”

15 Feb

Handle lines of credit with care


Posted by: Mike Hattim


Give people enough line of credit and they’ll hang themselves with debt.

The bad boy of borrowing products – that’s the line of credit. Recently, the federal government asked the banks to stop blithely handing out home-equity credit lines to people. In his new book The Wealthy Barber Returns, David Chilton writes that credit lines can be an excellent financial tool for disciplined people. “The other 71.9 per cent of Canadians, however, should be careful. Very careful.”

Debt is never more comfortable than it is with the line of credit because money is instantly accessible and the rules for paying it back are slack. You can’t ignore a credit line, but you can stretch repayment out indefinitely. And then there’s the rising interest rate risk. Lines of credit are floating rate debt, and that means you’ll pay more every time rates edge higher.

Here are some tips for managing a line of credit from Stephanie Holmes-Winton, who as president of The Money Finder trains financial advisers to address their clients’ debt problems:

1. If you’re bad with debt, a line of credit won’t save you

Ms. Holmes-Winton says she used to advise people with high credit card debts to switch to a credit line where the interest rate is vastly lower. What she found was that these people simply went and ran up the credit line balances.

“I might as well have been blindfolding these people, spinning them in a circle, handing them a Skilsaw and then wondering why they cut their finger off,” Ms. Holmes-Winton said.

2. Your LOC is not an ATM

Ms. Holmes-Winton has come across people who take out $100 here and there from their credit lines to help them make it through the week. That’s called living beyond your means. You end up with an amorphous mass of debt racked up for purchases that brought only a moment’s satisfaction.

3. Beware the LOC-dependent lifestyle

Having a permanent balance on your LOC is an admission that you can’t afford your current level of spending. Even if the payments are affordable, they’re burning up money that could be used for savings or other more productive purposes. “What I don’t want people to do is get in the habit of paying $10,000 down on their line of credit, and then racking it back up again by $10,000,” Ms. Holmes-Winton said.

She sometimes suggests people take advantage of the comparatively low cost of a credit line to pay off debt at much higher interest rates (credit cards are the classic example). She says that 10 years is the maximum timeframe for getting this line of credit debt paid off. Smaller purchases, say $5,000 or less, should be paid back in 24 months or less, while 48 months is realistic for purchases in the $10,000 range.

4. Turn your LOC into a loan

Home-equity lines of credit often allow you to divide your borrowing into different chunks, or sub-accounts, Ms. Holmes-Winton said. To impose some discipline in repaying a line of credit debt, ask your lender to set up automatic monthly payments to a sub-account that combines both principal and interest. Set the payments so you’ll have your debt paid down over a set period of time.

5. Plan for higher interest rates

Credit lines are priced off the prime rate, which today is 3 per cent. As recently as 2006-07, the prime sat around 6 per cent. That’s the background for Ms. Holmes-Winton’s suggestion that people estimate whether they can afford to carry the current balance on their LOC at double today’s rates.

6. Don’t buy a car with your line of credit

People with small credit lines may find that the cost of buying a car uses up too much of their borrowing room, Ms. Holmes-Winton said. Also, adding the car to a bunch of other debts on the credit line can slow the repayment process. “It’s very easy for the lines to get blurry. We end up paying for these cars for 12 or 15 years and we can’t even tell when we’ve fully paid for them.”

7. LOCs can be a lifesaver

Ideally, you won’t buy things until you’ve saved enough money to pay cash, Ms. Holmes-Winton said. “That works with maybe a new sofa or redoing your bathroom for aesthetic reasons, but it’s not the same reality as if you have a leak in your bathroom that you must fix.”

In money emergencies like this, a LOC is the smart way to borrow. If you can handle it, that is.


Home equity vs. unsecured lines of credit


  Home equity Unsecured
Definition Your home secures your debt No collateral pledged
Rates Your bank’s prime rate in rare cases, or prime plus 0.5 or 1.0* Prime plus 1 to 7 percentage points or so
Repayment You can pay interest only on a monthly basis Usually a minimum of 2 or 3 per cent of your balance per month, or a minimum dollar amount
Set-up fees Can cost several hundred dollars to cover legal and other fees None
Limit Can be up to 80 per cent of the equity in your home Typically much less than home equity credit line
*the prime rate is currently 3 per cent
13 Feb

Mortgage brokers undercut banks


Posted by: Mike Hattim

Garry Marr

Mortgage brokers are once again undercutting the banks and some are willing to buy down your rate — eating part of their commission in the process — to gain customers.

Steep mortgage discounts from the major banks have all but disappeared from the market, leading mortgage brokers to make sacrifices for market share amid new rumours that another major Canadian bank is going to bring its business completely in-house.

“There are so many options out there besides the banks. [These latest rate hikes] have given brokers an edge because bank pricing is notably higher,” said Rob McLister, editor of Canadian Mortgage Trends.

Mr. McLister reported on his blog canadianmortgagetrends.com that Canadian Imperial Bank of Commerce is rumoured to be putting its discount arm, FirstLine Mortgages, up for sale.

He cited sources that said CIBC would exit the broker channel after the sale.

A CIBC spokesman said it is policy not to comment on industry speculation.

CIBC, which would be joining Royal Bank of Canada and Bank of Montreal in abandoning mortgage brokers, is said by Mr. McLister to have been the largest broker lender in the market in second quarter of 2011 with a mortgage book of $47-billion.

By the third quarter CIBC had fallen to fourth as it pulled back from the mortgage broker channel in favour of selling through branches.

Mortgage brokers have been facing more competition from banks, which are using so-called mobile mortgage specialists who are employed by financial institutions but go into the community to reach out to consumers.

The Canadian Association of Accredited Mortgage Professionals noted in its fall survey that 27% of consumers had obtained a mortgage from a broker in the previous 12 months, up from 25% a year earlier.

It was a month ago today that Bank of Montreal surprised the market by lowering the rate on its five-year, fixedrate closed mortgage to 2.99%. It came with conditions – limits on prepayments and only a 25-year amortization period – but it was the lowest rate in history for the most popular term among Canadians.

The BMO offer was quickly matched: Some banks offered the same rate over a four-year term with fewer restrictions. However, the all-time low rates have since disappeared.

BMO, which advertised its offer as a two-week special, now has a special low rate on a five-year term that is back up to 3.49% – still a discount from its 5.24% posted rate – but nowhere near what Mr. McLister said is obtainable by shopping around. “Since the special ended, we have had improvements in rates from a variety of our lenders,” he said.

“What I hear from my sources is there is less discretion from the bank’s mortgage specialists to lower rates,” Mr. McLister said.

On the discount front, fiveyear fixed mortgages can still be found for as low as 2.99%, if you accept some restrictions. A mortgage with full features like 20% prepayment of the principal per year is closer to 3.19%.

What has put the broker community back in the game are rising bond rates, which have increased the cost of capital for banks and squeezed their profits.

Farhaneh Haque, director of mortgage advice and real estate secured lending at Toronto-Dominion Bank, which had dropped its rate as low as 2.99% for a four-year fixed closed mortgage before increasing it to 3.39%, said competition drove the discounts.

“But bond yields changed and your cost of funds changed, therefore the banks had to [raise rates],” Ms. Haque said.

Kelvin Mangaroo, president of ratesupermarket.ca, said the banks had discounted so low they were squeezing brokers out of the market. “We never expected them to get that low [with rates] and that aggressive,” he said.

Sensing opportunity, brokers are fighting back. Some are willing to eat into their commission to lower rates.

Mr. Mangaroo says brokers in Montreal have gotten into a battle that has seen variable mortgage rates in the city drop by almost 50 basis points off the 3% prime rate.

Peter Aceto, chief executive of ING Direct Canada, which has been pretty consistent in discounting rates and offers a five-year mortgage for 3.34%, says consumers should ensure the product fits their needs before signing.

“Ask questions about the flexibility [of a mortgage product] and if you get the answers you want, take it, don’t come to us,” says Mr. Aceto, adding that was his response to BMO’s 2.99% mortgage.

“If you don’t get answers you like and are surprised by anything, turn and run.”