28 Feb

Homes more affordable, but not for long

General

Posted by: Mike Hattim

Canadians experienced less financial strain to own a home in the final months of 2010, according to a report from Royal Bank of Canada.

On Thursday, RBC Economics Research said the affordability of home ownership improved in the final three months of last year for the second straight quarter.

However, it warned that this reprieve — the result of lower mortgage rates and little rise in home prices — is temporary.

“Some of the stress that had been building in the housing market between 2009 and the first half of 2010 has been relieved, but tensions persist overall, and the recent improvement in affordability is likely to be short-lived,” said RBC senior economist Robert Hogue. “We expect that the Bank of Canada will resume its rate-hike campaign this spring, and with borrowing costs set to climb further in the next two years, housing affordability will erode across the country.

“That said, we don’t expect this to derail the housing market because of rising household income and job creation from the sustained economic recovery.”

RBC said the proportion of gross income needed to pay for home ownership — including mortgage payments, property taxes and utilities — fell 0.8 percentage points to 39.9% in last year’s fourth quarter for a detached bungalow.

For a standard two-storey, the toll declined 0.4 points to 46%, and for condominiums, it was down 0.4 points to 27.6%.

Most major markets saw declines. For bungalows, the amount of income needed to own a home fell 0.4 points to 68.7% in Vancouver, 0.5 points to 46.8% in Toronto and 0.4 points to 41.3% in Montreal.

The declines were particularly pronounced in Alberta, which RBC said “officially became the most affordable provincial market in the country in the fourth quarter.” The proportion of income needed for a bungalow fell 3.1 points to 34.9% in Calgary and 2.4 points to 31% in Edmonton.

RBC said improved affordability in Alberta was helped by lower prices as demand eased last spring and summer. However, RBC said with current rising demand and economic growth in Alberta, home ownership affordability will erode there, too, this year, as in other parts of the country.

25 Feb

ONTARIO’S HOUSING RESALE ACTIVITY ACCELERATED AND PROPERTY VALUE CLIMBED IN FOURTH QUARTER:RBC Economics

General

Posted by: Mike Hattim

Shrugging off concerns last year that the housing market would falter, Ontario’s resale activity accelerated and property values resumed appreciation in the fourth quarter of 2010, according to the latest Housing Trends and Affordability Report issued today by RBC Economics.

“Ontario’s slowdown in activity last spring and summer largely reflected transitory factors, including the introduction of the HST and changes in mortgage lending rules which nudged demand forward to the start of the year,” said Robert Hogue, senior economist, RBC. “The silver lining of this slowdown is a slight improvement in affordability, which at this point plays a neutral role in housing demand as affordability levels sit close to their long-run average.”

The RBC Housing Affordability Measures for Ontario, which capture the province’s proportion of pre-tax household income needed to service the costs of owning a home, edged lower for the second consecutive quarter for most housing categories in the fourth quarter with the exception of two-storey homes, which became marginally less affordable amid notable price gains.

The measure for the benchmark detached bungalow declined to 38.7 per cent (down 0.3 percentage points from the previous quarter) and the standard condominium to 27.3 per cent (down 0.2 percentage points), while the standard two-storey home rose to 45.1 per cent (up 0.1 percentage points).

The RBC report notes that the Toronto-area market sustained a rebound in activity in the latter part of 2010, following a steep fall in the spring and early summer from earlier unsustainably high levels.

“Toronto’s market has climbed its way back toward more sustainable activity. These improvements confirm our view that earlier weakness had more to do with transitory factors than permanent evaporation of demand,” said Hogue.

Owing primarily to lower mortgage rates, Toronto-area homebuyers enjoyed improved affordability in most housing categories with measures generally standing close to long-term averages in the fourth quarter. RBC Measures eased for both condominium apartments and detached bungalows (down 0.6 and 0.5 percentage points respectively). On the other hand, two-storey homes rose by a modest 0.3 percentage points.

Ottawa’s housing market saw fairly sizeable price increases which pushed homeownership costs up; however, savings generated by lower mortgage rates provided some offset.

“Contrary to the general trend among Canada’s large cities, Ottawa did not experience an improvement in affordability,” noted Hogue. “Nevertheless, waning affordability did little to dampen enthusiasm of homebuyers with home resales trending to strong levels experienced prior to the wild swings in 2009 and early 2010.”

Ottawa’s affordability has deteriorated to levels likely to pinch demand going forward. RBC Measures for Ottawa are above their long-run averages for all housing types in the area. The measure for detached bungalows and condominium apartments both rose by 0.5 percentage points, while the measure remained unchanged for two-storey homes.

Elsewhere in the country, a majority of provinces saw improvements in affordability in the fourth quarter. Only the standard two-storey benchmark became less affordable in Ontario and Quebec, as did the standard condominium apartment in Quebec and the Atlantic region.

RBC’s Housing Affordability Measure for a detached bungalow in Canada’s largest cities is as follows: Vancouver 68.7 per cent (down 0.4 percentage points from the last quarter), Toronto 46.8 per cent (down 0.5 percentage points), Montreal 41.3 per cent (down 0.4 percentage points), Ottawa 38.7 per cent (up 0.5 percentage points), Calgary 34.9 per cent (down 3.1 percentage points) and Edmonton 31.0 per cent (down 2.4 percentage points).

The RBC Housing Affordability Measure, which has been compiled since 1985, is based on the costs of owning a detached bungalow, a reasonable property benchmark for the housing market in Canada. Alternative housing types are also presented including a standard two-storey home and a standard condominium. The higher the reading, the more costly it is to afford a home. For example, an affordability reading of 50 per cent means that homeownership costs, including mortgage payments, utilities and property taxes, take up 50 per cent of a typical household’s monthly pre-tax income. 

24 Feb

CANADIAN HOMEOWNERSHIP COSTS EASE FOR SECOND CONSECUTIVE QUARTER: RBC ECONOMICS

General

Posted by: Mike Hattim

TORONTO, Feb. 24 /CNW/ – Canada’s housing affordability continued to improve in the fourth quarter of 2010, thanks in part to slight decreases in five-year fixed mortgage rates and minimal home price appreciation across the country, according to the latest Housing Trends and Affordability report released today by RBC Economics Research.

“Some of the stress that had been building in the housing market between 2009 and the first half of 2010 has been relieved, but tensions persist overall and the recent improvement in affordability is likely to be short-lived,” said Robert Hogue, senior economist, RBC. “We expect that the Bank of Canada will resume its rate hike campaign this spring and with borrowing costs set to climb further in the next two years, housing affordability will erode across the country. That said, we don’t expect this to derail the housing market because of rising household income and job creation from the sustained economic recovery.”

The RBC Housing Affordability Measure captures the proportion of pre-tax household income needed to service the costs of owning a specified category of home. During the fourth quarter of 2010, measures at the national level fell between 0.4 and 0.8 percentage points across the housing types tracked by RBC (a decrease represents an improvement in affordability).

The detached bungalow benchmark measure eased by 0.8 of a percentage point to 39.9 per cent, the standard condominium measure declined by 0.4 of a percentage point to 27.6 per cent and the standard two-storey home decreased 0.4 percentage points to 46.0 per cent.

“We expect affordability measures will rise gradually in the next three years or so while monetary policy is readjusted, but will land softly thereafter once interest rates stabilize at higher levels,” added Hogue. “This pattern would be consistent with moderate yet sustained stress on Canada’s housing market. Overall, the era of rapid home price appreciation of the past 10 years has likely run its course and we believe that Canada has entered a period of very modest increases.”

A majority of provinces saw improvements in affordability in the fourth quarter, most notably in Alberta where falling home prices once again contributed to lower the bar for affording a home. Only the standard two-storey benchmark became less affordable in Ontario and Quebec, as did the standard condominium apartment in Quebec and the Atlantic region.

RBC’s Housing Affordability Measure for a detached bungalow in Canada’s largest cities is as follows: Vancouver 68.7 per cent (down 0.4 percentage points from the last quarter), Toronto 46.8 per cent (down 0.5 percentage points), Montreal 41.3 per cent (down 0.4 percentage points), Ottawa 38.7 per cent (up 0.5 percentage points), Calgary 34.9 per cent (down 3.1 percentage points) and Edmonton 31.0 per cent (down 2.4 percentage points).

The RBC Housing Affordability Measure, which has been compiled since 1985, is based on the costs of owning a detached bungalow, a reasonable property benchmark for the housing market in Canada. Alternative housing types are also presented including a standard two-storey home and a standard condominium. The higher the reading, the more costly it is to afford a home. For example, an affordability reading of 50 per cent means that homeownership costs, including mortgage payments, utilities and property taxes, take up 50 per cent of a typical household’s monthly pre-tax income.

Highlights from across Canada:

  • British Columbia: Buying a home in B.C. became slightly more affordable in the fourth quarter of 2010, due primarily to a small drop in mortgage rates. After experiencing some declines in the previous quarter, home prices rose modestly for most housing categories; condominium apartments bucked the trend, however, and depreciated slightly. Prices were supported by a tightening in market conditions with home resales picking up smartly following substantial cooling in the spring and summer that saw sellers lose their edge in setting property values. Demand and supply in the province are judged to be quite balanced at this point. RBC’s Affordability Measures fell between 0.8 and 1.0 percentage points in the fourth quarter which came on the heels of much more substantial drops (1.7 to 4.8 percentage points) in the third quarter. Notwithstanding these declines, affordability remains poor and will weigh on housing demand going forward.
  • Alberta: Alberta officially became the most affordable provincial market in the country in the fourth quarter, according to the RBC Measures which fell once again by 1.0 to 2.4 percentage points, extending their declines since late-2007. In addition to the lower mortgage rates, the further depreciation of home prices contributed to lowering homeownership costs. Property values were negatively affected by a substantial downswing in demand in the spring and early summer, which put buyers in the drivers’ seat. The significant improvement in affordability is near the end of its line, however, as demand has shown more vigour in recent months – alongside a provincial economy that is gaining more traction – and the market has become better balanced. RBC expects that this will stem price declines this year, thereby removing a potential offset to the negative effect of projected rise in interest rates on affordability.
  • Saskatchewan: The provincial housing market finished 2010 on an enviable note as affordability improved even though home prices, for the most part, rose slightly in the fourth quarter. Generally, the price increases more than reversed declines in the previous period but were too small to negate the beneficial effect of lower mortgage rates. The home resale market gained back solid forward momentum in the second half of 2010, notwithstanding some softening in the final months, which re-established a stronger balance between demand and supply. The RBC Measures fell between 0.6 and 1.1 percentage points in the quarter, although the levels continue to be modestly above historical averages in the province. RBC projects the Saskatchewan market will take its current affordability position in stride as a rebound in provincial economic growth and continued strong migration inflows will support housing demand this year.
  • Manitoba: Manitoba’s market enjoyed the best of both worlds in the fourth quarter of 2010 as home price were higher but ownership costs were lower. Thanks to lower mortgage rates in the quarter and continued growth in household income, the negative effect of small gains in property values on affordability was more than offset. The RBC Measures eased between 0.1 and 0.6 percentage points in the fourth quarter, keeping Manitoba among the only two provincial markets in Canada (with Alberta) in which Affordability Measures stand below long-term averages for all housing categories. Sales of existing homes ramped up considerably in the fall, reaching near historical peaks by December. Housing demand is being boosted by the strongest net international immigration in the province since the mid-1950s and by improved job prospects – Manitoba boasts the lowest unemployment rate in Canada (as of the fourth quarter of 2010) and RBC expects this to continue in 2011.
  • Ontario: Concerns last year that the housing market would falter have now largely dissipated as home resale activity picked up smartly in the fall and property values resumed their appreciation trend in the closing months of 2010. The slowdown in market activity in the spring and summer last year largely reflected various transitory factors – including the introduction of the HST and changes in mortgage lending rules – that brought demand forward to the start of the year. The silver lining of this slowdown, however, has been an improvement in affordability. The RBC Measures edged lower for the second consecutive time for most housing categories in the fourth quarter, down by 0.2 to 0.3 percentage points. The only exception was two-storey homes, which became marginally less affordable amid notable price gains. RBC expects affordability will play a neutral role for demand in Ontario with RBC Measures close to their long-run average.
  • Quebec: Higher home prices in the fourth quarter of 2010 caused some deterioration in affordability following meaningful improvement in the previous period. Home resales strengthened in the latter part of 2010, contributing to tightened market conditions that gave sellers a stronger hand in negotiating prices, particularly for two-storey homes. Price gains and rising household income dominated the positive effects of lower mortgage rates on affordability in the fourth quarter for all housing types except detached bungalows (where a small improvement was registered). RBC Measures rose marginally by 0.1 to 0.2 percentage points for two-storey homes and condominium apartments, and fell by 0.6 percentage points for detached bungalows; however, the levels of all Measures still modestly exceeded long-term averages in the province. RBC expects that modestly strained affordability in Quebec will further deteriorate in the period ahead when interest rates rise.
  • Atlantic Canada: Home resale activity sputtered late in 2010 and reversed some of the gains achieved at the end of the summer and early fall. This has not disrupted property values in the fourth quarter as home prices generally appreciated; yet, housing affordability improved for most housing categories because declines in interest rates provided a dominant offset. Only condominium apartments saw a slim deterioration in affordability as the RBC Measures rose by 0.1 percentage point compared with declines of 0.5 percentage points for detached bungalows and two-storey homes. Affordability levels continue to be mostly attractive in Atlantic Canada from both historical and cross-country perspectives. RBC projects that is likely to remain so in the near-term despite our expectation of higher interest rates. Market conditions have recently swung in favour of buyers which will exert downward pressure on prices in coming months. 
23 Feb

Canadian real estate sales down but prices are up

General

Posted by: Mike Hattim

The resiliency of the Canadian housing market has to impress even the most cynical observer. And while the consensus even among industry insiders is the days of double-digit percentage price increases are over, nobody is expecting an American-style housing collapse in Canada. “The fear proved to be unfounded,” says Pascal Gauthier, a senior economist at Toronto-Dominion Bank. He points out average prices in Canada only dropped 13% from peak to trough. Other than a brief blip in 2008, the average home price has been on a tear since 1996, reaching almost $340,000 in 2010. A decade ago, it was $163,992.

Alas, the good times are about to end. Gauthier says prices will actually go down in 2011, albeit by less than 1%. By 2012, the loss could be 1% to 2%. Even real-estate companies are not overly optimistic. For example, Re/Max says Canadians can expect an average 3% price increase in 2011. Such uncertainty doesn’t necessarily mean abandoning the housing market in the coming years. Indeed, it may even be time to take some of that bloated equity in your principal residence and bet on an investment property, such as a condominium, cottage or perhaps even something in the moribund real-estate market down south.

Scott Plaskett, a certified financial planner at IronShield Financial Planning in Toronto, isn’t opposed to using home equity to buy other assets. “I recommend it in the right circumstances,” says Plaskett. “I wouldn’t suggest just real estate. But real estate is a great option, because it’s one of those assets that can produce cash flow while holding the assets.”

But finding condominium investment properties that produce positive cash flow is getting tougher and tougher in Canada because of the high valuations. Ben Myers, editor of Urbanation Inc., which tracks Toronto’s condo market, says about 50% to 60% of the city’s condos are now being bought by investors looking for hefty price gains. “People have been playing off that. Over the last three years, we’ve had 7% to 9% annual price increases,” says Myers. Those price increases have made some people rich. If you bought a new unit for, say, $300,000, it would be worth about $367,000 by the time it was built, based on 7% appreciation over three years. That’s more than 100% return on your 20% downpayment, if you flipped the condo after taking possession.

But a flatter market means investors may be stuck carrying their properties and making money that way is more difficult. To carry a 500-square-foot condominium, which can easily cost $300,000 in downtown Toronto, you would need to recoup $1,900 per month based on a $240,000 mortgage. Here’s the math: monthly mortgage payments are about $1,275 based on 4% interest and amortized over 25 years, and then add condo fees of $250, taxes of $250 and $125 for heat and hydro. To reduce costs, Myers says some investors are choosing variable-rate mortgages. That can save $150 a month in carrying costs, but leaves investors heavily exposed to rising rates. “The worry is if rates go up, are all these investors going to [sell] and flood the market with units?” he says. “At more than $600 a square foot to buy, can rents go to $2,000 for a 500-square-foot unit?” Renters are willing to pay more for condominiums than apartments, according to a Canada Mortgage and Housing Corp. report at the end of 2010. For example, the average rent for a two-bedroom condominium in Vancouver was $1,610 versus $1,195 for a similar conventional apartment. But that difference won’t cover an investor’s costs.

Don Campbell, founder of the Real Estate Investment Network in Calgary, uses an investing formula that looks at an area’s growth in gross domestic product. “GDP growth leads to job growth and that leads to in-migration growth about 12 months later,” he says. The more new people there are, the lower rental vacancies go, and the higher rents go. That leads to increased demand for investment property and a better return on investment. “That trickles into the resale market because people say, ‘Rents are so much, I’ll just buy something,'” says Campbell. Using that analysis, Campbell likes Calgary, Edmonton and — in Ontario — Hamilton, Kitchener-Waterloo and Cambridge.

Canadians looking for something cheap are also eyeing the United States, because property prices have collapsed and the dollar is at par. But before rushing south, Philip McKernan, the author of South of 49 and Fire Sale, two books on investing in the U.S., says Canadians first must distinguish between buying a property as an investment and buying one for recreational use. “A vacation property is not an investment,” he says. “You buy it for ego to say you own a four-bedroom townhouse on a golf course so you can keep a toothbrush there four weeks a year.”

If investing, McKernan says Canadians should go for direct investment, but look for a management team that can handle the property. “I’d look for jurisdictions not in the traditional sun-belt,” he says. “Look for a diverse economy, not some highly speculative vacation area.” But McKernan is not a fan of using existing home equity to buy vacation or investment properties. “Some of them are leveraging their homes to 95% to buy in the U.S. It could come back to haunt them.”

– – –

5.7%

Average price increase last year for a Canadian home, which cost an average of $338,676, compared to $320,333 in 2009

3%

Decline in the number of home sales, which dropped to 451,825 units from 465,251 units in 2009

23 Feb

Windsor to lead growth this year

General

Posted by: Mike Hattim

OTTAWA — The “overexuberance” in consumer spending that lifted Canada out of the recession at the end of 2009 and early in 2010 is well behind us, according to a report released Tuesday that suggests that most cities will see growth slow this year.

Only nine of the 27 census metropolitan areas studied for the winter 2011 edition of the Conference Board of Canada’s Metropolitan Outlook will grow more in 2011 than in 2010, the board says.

“Household spending was the predominant factor in lifting Canada’s economy out of recession, but the overexuberance that ended 2009 and started 2010 is now falling,” the report’s authors write, noting that the housing market is set to decline as mortgage rates rise, and housing starts will begin start to fall off as developers react to the slowing market, which will in turn have a ripple effect through various sectors.

Continuing uncertainty over the strength of the economic recovery in the United States will also weigh on Canada’s economic progress, as will the winding down of stimulus packages. The end result will be “stable or lower growth in a majority of cities,” says Mario Lefebvre, co-author of the report and director, centre for municipal studies.

A variety of factors will be at play for the cities whose 2011 economies are expected to outpace their 2010 performances: Windsor, Ont., Calgary, Oshawa, Ont., Regina, Saskatoon, London, Ont., Sherbrooke, Que., Winnipeg and Thunder Bay, Ont.

In Windsor, which is forecast to have the fastest-growing economy in the country this year, a resurgence in construction activity with the construction of the Windsor-Essex Parkway is expected to be the main driver. Its 2011 GDP is expected to grow 3.9% — more than 2010’s 3.5%, but still below 2007 levels “and Windsor’s economy remains fragile,” the study says.

“Calgary’s economy will regain its place as one of the fastest-growing CMAs in Canada over the next two years” as the energy sector recovers, the authors say.

The manufacturing sector — specifically auto production — will be responsible for growth in Oshawa, while the resource boom will be the driver in Regina and construction will support growth in Saskatoon.

London’s services sector, Sherbrooke’s manufacturing and services sectors, and Winnipeg’s manufacturing sector will lead the growth in those cities, while construction, along with the utilities sector, will drive growth in Thunder Bay, according to the report.

22 Feb

Inflation fairly tame, bucks global trend

General

Posted by: Mike Hattim

OTTAWA (Reuters) – Canada’s annual inflation rate slipped to a relatively tame 2.3 percent in January, bucking a trend which has seen several major nations struggle to keep rising prices under control.

The increase, which matched market expectations, compares with the 2.4 percent recorded in December. It also means the Bank of Canada will be under no immediate pressure to raise interest rates on March 1.

Statistics Canada said on Friday that energy prices had risen 9.0 percent in the 12 months to January following a 10.5 percent year-on-year rise in December. Gasoline prices advanced by 13.0 percent on the year, the same rate seen in December.

Overall, prices were up by 0.3 percent from December. The year-on-year core rate, which is closely watched by the Bank of Canada, slipped to 1.4 percent from 1.5 percent.

Friday’s figures do little to challenge market expectations that the central bank, which targets 2 percent inflation, will hold rates steady until at least May. It halted its rate hike campaign last year on concern about the strength of the economic recovery.

18 Feb

Average family debt in Canada hits six figures

General

Posted by: Mike Hattim

Canadian families’ average debt has hit six figures for the first time — and what they owe now amounts to one and a half times what they make, according to the latest family finance checkup from the Vanier Institute of the Family.

The Ottawa-based think-tank’s 12th annual report, released Thursday, finds that average family debt, including mortgage, has hit $100,000 and the debt-to-income ratio is 150%, meaning that for every $1,000 in after-tax income they make, Canadian families owe $1,500.

“The fact that so many families are still reporting very shaky economic prospects, I think, reveals the disparities that are growing,” says Katherine Scott, director of programs and research. “Sometimes I think we get hung up on the good story or the aggregate numbers, so we don’t look below to see that a significant number of families do continue to struggle economically.”

In 1990, the average household debt was $56,800, the institute said, which means family debt has grown 78% over the past two decades.

At the same time, savings have shrunk, with the average 1990 family managing to sock away 13% of their income, or $8,000, compared with a savings rate of 4.2%, or $2,500, in 2010.

Canada’s debt-to-income ratio is now about even with that of the United States — a finding Ms. Scott said may come as a surprise.

“There is still this sense that we are a more frugal nation and that’s simply not the case,” she said. “It was the case 20 years ago, but it’s certainly not anymore.”

The latest employment and GDP figures point to continued improvement from the low point of the recession, she said, but the momentum of early 2010 slowed near the end of the year, and some areas of the country continue to struggle.

The report said that multiple surveys and reports from the past few months reveal that individual Canadians and families aren’t feeling any more confident.

“The story right now is that Canadians are still holding their breath and waiting to see how the next year plays out,” Ms. Scott said. “Many are sitting precariously at this point.”

Kurt Rosentreter, a Toronto-based certified financial planner known as the “Family CFO,” said the most common problem he sees with family finances is that people don’t have a plan or a clue of how to reach their goals.

He calls 50 the “deer in the headlights” age because people who start their careers, marry, buy houses and have kids around age 30 finally have time to take a deep breath — only to realize major expenses, such as retirement and children’s educations, are looming.

“No one has a focus on their goals; they don’t know what their goals are,” he said. “They spend more time on their vacation planning than they do on sitting down with someone and going over their finances once a year.”

Contemporary families are also saddling themselves with the biggest mortgages any generation has struggled with, Mr. Rosentreter said, as they try to keep up with the people down the street or land a desirable postal code. But they’re leaving little money for vacations and car payments — or RRSP and RESP contributions, he said.

18 Feb

Why do mortgage rates rise fast, fall slowly?

General

Posted by: Mike Hattim

Why do mortgage rates rise quickly but fall like molasses?

That’s the question posed by an article in the latest issue of the Bank of Canada Review, and it’s a good one.

The report, by Jason Allen of the central bank’s financial stability department, notes that the big banks that dominate the market tend to adjust interest rates faster when they’re on the way up than they do when rates are falling.

While it come as no surprise to borrowers that such is the case, the article draws an interesting conclusion: That such behaviour by banks and other lenders may have broader implications for Canada’s monetary policy, and that the central bank may want to take this into account when it comes time to plot strategy.

The report comes on the heels of a decision by the federal government to tighten mortgage rules as a way to head off a potential real estate bubble.

All the major lenders in this country tend to offer the same types of mortgage products, credit cards and other services, and in fact Canadians tend to treat their bank as a “one stop shop” where they buy a majority of their financial services, according Mr. Allen.

Leaving aside the issue of whether this is a healthy situation, the author concludes that the mortgage market is “consistent with a model where consumers have different preferences and skills when shopping and bargaining for a mortgage and where lenders maximize profits based on observing these preferences and skills.”

Simply put, borrowers are often complacent and end up paying more than they should.

One of the quirks of the industry in Canada is the prevalence of mortgages with terms of five-years or less, even though the loans amortize over as much as 40 years, according to the article.

Citing a recent study by John Kiff, a senior financial sector expert at the International Monetary Fund, it notes that Americans, by contrast, tend to opt for longer term mortgages than do Canadians, and they have a much broader choice.

The benefit of longer terms is that they provide the borrower with better protection against the risk of rising interest rates. If a loan is amortized over 25 years, the best way for the creditor to ensure he can always make the payments is to take a 25-year term.

Some economists refer to five-year products as “balloon mortgages” because of the possibility that the payments may suddenly shoot up at the end of the term.
Borrowers are also left vulnerable to “roll-over risk,” that the lender may be unwilling to renew the loan at any price.

According to Mr. Kiff, the main reason 10- and 20-year mortgages aren’t more common in Canada is because financial service providers consider them uneconomical.
Whenever banks make home loans they generally protect themselves from the risk that the customer may pay the money back early by including strict repayment penalties. But current regulations put strict limits on such penalties. “So the banks have this wall at five years,” Mr. Kiff said in an interview.

Bottom line: Lenders can’t charge what they feel they need to charge so they don’t offer longer term mortgages at an affordable price.

Mr. Kiff, who previously worked at the Bank of Canada, said Canadians would be better served if there was more choice of longer term mortgages. The IMF recently recommended that the federal government change the rules around mortgages so that lenders are able to provide broader product choice without unnecessary limits on how they charge for products.

What needs to happen is “at least, let the market determine where the rates should be,” he said. “What [mortgage] works best depends on the borrower, on the borrower’s own personal situation.”

18 Feb

Inflation down to 2.3% in January

General

Posted by: Mike Hattim

OTTAWA – Statistics Canada says annual inflation edged down one-tenth of a point to 2.3 per cent in January.

The agency says energy prices, particularly the cost of gasoline, as well as car insurance, home replacement costs and restaurant meals contributed to keeping inflation above the Bank of Canada’s ideal two-per-cent level. But the central bank’s other key measure — underlying core inflation that excludes volatile items like energy — remained well tethered at 1.4 per cent.

Prices were higher in January in seven of the eight major components tracked by the agency, although such items as women’s clothing, footwear, sports equipment, natural gas and travel tours cost less than a year ago.

On a month-to-month basis, consumer goods were 0.3 per cent more expensive last month than in December, mostly due to higher gasoline prices.

18 Feb

Canadian housing starts expecting to stabilize this year and next

General

Posted by: Mike Hattim

OTTAWA – Canada’s national housing agency says the pace of new-home construction will stabilize in 2011 and 2012 after trending lower at the end of last year.

Canada Mortgage and Housing Corp.’s predicts between 157,000 and 192,000 new housing units will be built this year, with the number remaining virtually the same in 2012. In its first quarter housing market outlook, released Thursday, it said economic growth and lower unemployment will prop up the need for new homes.

“This, in conjunction with relatively low mortgage rates, will continue to support demand for new homes. Housing starts will remain in line with long-term demographic fundamentals over the course of 2011 and 2012,” Bob Dugan, chief economist for CMHC said in a statement.

Dugan said listing prices are expected to keep pace with increases in inflation.

The corporation said sales of existing homes should be in the range of 398,000 and 485,000 this year. In its January figures, CMHC said Canada was on track to build 170,400 units of housing this year, about 10 per cent less than in 2010.

The Canadian housing market was unusually active in late 2009 and early 2010 due to a catch-up from the recessionary levels in late 2008 and early 2009, preparations for the 2010 Winter Olympics and historically low interest rates that kept the cost of borrowing low.

A powerful driver of economic recovery, the real estate market kicked off last year on a tear as buyers rushed into the market in advance of higher interest rates, new mortgage rules and a new harmonized tax regime in two provinces.

The Bank of Canada began raising its key interest rate last summer, after keeping it at the lowest possible 0.25 per cent for more than a year in an effort to stimulate economic activity.

The central bank’s key rate has risen to one per cent — still below the historical norm — but has been stable since October.

But at least three of the major banks increased several of their posted and special mortgage rates last week, and the federal finance minister says he expects them to rise even more, since lending rates have been hovering close to historic lows.

Some reports have warned that when interest rates rise, which many economists expect in the middle of this year, Canada’s real estate market could tank.