20 Dec

Canadian home prices to fall 5 percent: BofA report


Posted by: Mike Hattim

By Jon Cook

TORONTO (Reuters) – Weaker Canadian economic growth and an oversupply of condos will lead to a 5 percent drop in home prices in the first half of next year, a report released on Monday by Bank of America Merrill Lynch said.

Canadian housing prices are overvalued by as much as 10 percent, the report said, with demand spurred by record-low mortgage rates spawned by the Bank of Canada’s decision to keep its key interest rate at an ultra-low 1 percent.

“The combination of weak growth, large supply in certain large markets and the relative valuations themselves conspire to warrant a contraction (in 2012),” said Bank of America economist Sheryl King.

“A 5 percent contraction is pretty modest by historical standards,” King added. “I don’t think that it’s a very bold call at this point.”

BofA forecast home prices would contract in the first half of 2012 as demand slows in a tougher job and income-growth environment. It said, however, that they would end the year flat as economic activity accelerates.

The majority of the correction will come in Toronto area, where an oversupply of condominiums is expected to push prices down, the report said.

“We estimate there are already enough units in the pipeline to satisfy fundamental demand for the next five years,” it said.

Household debt, which rose to a record high in the third quarter as mortgage and consumer credit increased, and an unemployment rate that BofA predicts will rise to 8 percent will also hit demand.

The BofA outlook was more bearish than a November report by Canada Mortgage and Housing Corp. It forecast the average home price in Canada will reach $368,200 in 2012, up from $363,900 in 2011.

“I haven’t read the CMHC report but I would assume they probably have a more optimistic outlook for economic activity for 2012,” King said. “The growth in the first half of the year is going to be really quite weak. We’re already starting off domestically on a pretty weak footing, having lost 73,000 jobs in the past two months.”

Housing starts fell in November to a seasonally adjusted annualized rate of 181,100 units from an upwardly revised 208,800 units a month earlier, according to the CMHC’s December results. Analysts had forecast 200,000 starts in November.

Nationwide, prices rose 2.5 percent in the 12 months to October and since mid-2010 have been well above the pre-recession levels of 2008, according to Statistics Canada.

19 Dec

Variable rate mortgage discounts disappearing


Posted by: Mike Hattim

Garry Marr – Dec 17, 2011
Financial Post

The days of getting any sort of discount on a variable rate mortgage are over — again.

Those mortgages, tied to prime, have become a mainstay of the housing market. And, why not? While prime has stood at 3% at most major financial institutions, the discount has meant a rate as low as 2.1% at times this year.

However, in the last 10 days what was left of that discount — it had already been shrinking for weeks — has disappeared at all of the major banks.

You have to head back to the credit crisis of 2008 to find a similar period where the discount disappeared. At the time, consumers were paying a 100 basis point premium above prime for the privilege of a floating rate.

The new reality is expected to reshape the mortgage market in the coming months, reversing a strong trend that had seen consumers roll the dice on interest rates, confident in the belief they were not going up.

How confident were they? Well the Canadian Association of Accredited Mortgage Professionals says 37% of consumers opted for variable rate mortgages over the last year, bringing the total percentage of those with a floating rate to 31%.

To be clear, anybody with an existing mortgage is unaffected until they renew. Why would you want to renew early or lock in if your present rate is 2.1%?

“If you have three and half years left on that term you are not going to give it up,” said Vince Gaetano, of Monster Mortgage, adding you can borrow at 3.29% if you lock in for five years or 3.09% for four years. “The last decade I’ve been telling people to go variable but I’m saying go fixed [for new clients].”

The other key advantage for a term five years or longer is you get to use the rate on your contract to qualify for a mortgage as opposed to the current five-year posted rate of 5.39%. The difference means you’ll qualify for a larger loan by locking in.

“People are being heavily compelled to lock in,” says Doug Porter, deputy chief economist with the Bank of Montreal, in talking about the negligible spread between short and long-term money.

Will Dunning, an economist CAAMP, said his group was not surveying consumers the last time short-term rates climbed like this so he can’t be sure what the reaction will be this time around.

Meanwhile Farhaneh Haque, director of mortgage advice and real estate secured lending with TD Canada, says she’s already seeing the effects as people shy away from variable. Her financial institution is not offering any discount at all on prime these days, a move necessitated by rising borrowing costs for the bank.

“I think there is a whole different conversation that we are having now than we were a few years ago,” says Ms. Haque, adding at today’s rates fixed products have their own attraction. “The stability it offers with a low rate makes it more affordable.”

While Benjamin Tal, deputy chief economist with CIBC World Markets, doesn’t think variable rates premiums will rise above prime, the drop in the discount we’ve seen in the last few months could impact on the housing market.

In particular, the condominium market seems the most vulnerable as investors trying to stay cash flow positive — virtually impossible in Toronto’s current condo market based on rental rates and the costs of carrying a mortgage with a 25% down payment. Investors have opted for the cheaper variable rate products in an attempt to keep costs down as they waited for a payday based on capital appreciation.

“You know 80 basis points below didn’t make much sense either. I think variable at prime is the new normal. They won’t go higher unless we get a new crisis,” says Mr. Tal, adding banks were not making much money on variable with the steep discounts so they backed away from them.

Mr. Tal’s information points to the record high for variable rate products being driven by investors and he thinks the new rates will hit that segment of the market

“I think you will see an impact on the investor market in the next six months. The shift hasn’t happened yet,” says Mr. Tal.

Clearly there is no discounting how dependent the housing sector has become on cheap money.

15 Dec

Shoppers feeling frugal amid debt, global woes


Posted by: Mike Hattim

Dana Flavelle
Business Reporter

With Christmas less than two weeks away, Canadians are still in a frugal mood, the latest surveys of shoppers’ intentions reveal.

Only 6 per cent of Canadians say they plan to spend more on gifts this year than last year, while 41 per cent say they plan to spend less, an Angus Reid Public Opinion poll shows.

The rest, 52 per cent, say they plan to spend about the same amount as last year.

“I see lots of people shopping. I don’t see lots of people carrying bags. What that tells me is people are being a little bit more careful,” said Ken Wong, a professor with Queen’s University’s School of Business. “I think you’re going to see people giving fewer gifts, maybe spending a little more time thinking about what they’re giving. Certainly I don’t see any reason to believe the fact that it’s Christmas is making people any less value conscious than they’ve been since the recession.”

The Angus Reid poll, conducted the week of Nov. 21, comes on the heels of more warnings Canadians are already carrying worrisome levels of household debt.

The average ratio of debt to personal disposable income is now 152.98, Statistics Canada said Tuesday. Households with high debt loads are move vulnerable to unexpected events, such as a job loss or interest rate hike.

Canadians feel relatively optimistic about the domestic economy, but the bad news out of Europe and the U.S. is dampening their spirits, a separate report released Wednesday said.

Canadians say they’re worried about their job prospects, personal finances and whether it’s wise to spend money, according to a survey by Nielsen, a global leader in market research.

Canadian consumers’ confidence fell in the third quarter to 96 points after fluctuating between 99 and 102 points for the past 18 months, Nielsen found. It’s now at the same level it was in the third quarter of 2008.

“We’ve been on a roller-coaster ride, with a lot of ups and downs and screaming along the way and the ride is not over yet,” said Carman Allison, Nielsen’s director of consumer insights. “We’re about to hit another turn.”

The Nielsen survey was conducted in late August and early September as the debt crisis in the European Union was heating up.

Retail sales in Canada are forecast to rise about 2.5 per cent this holiday season, according to an earlier report published by BMO Capital Markets. The forecast excludes cars and gas.

That’s slower than last year’s 3.1 per cent rise and also below the historic average of 4.6 per cent, BMO said.

12 Dec

Is that new condo a good investment?


Posted by: Mike Hattim

Globe and Mail Update
Published Monday, Dec. 12, 2011

Risks Associated with Buying Pre-Construction

Buying pre-construction real estate is really a leap of faith. As much as five years could pass from the time you sign the offer until you get the keys to your unit. Many “moving parts” could affect how long it takes, and how profitable your investment will be. The following are some examples.

The State of the Economy Today and in the Future

If you buy a pre-construction condo today as an investment with the hope that the future value will be much higher, you’re banking on the assumption that the economy will be healthy and keep growing. How can you forecast economic fundamentals in the future? While it might seem like an arduous task, using the REal Experts Property Analyzer will guide you and empower you to make the right decision.

Legal Changes

Above and beyond condo regulations and by-laws, changes to the law – from local by-laws right up to federal laws – can have a considerable impact on the future value of your condo, especially if these occur during the construction phase. Federally, laws on foreign ownership of real estate can change. Regionally, land-use policies can change. Locally, property taxes can change, which may have a severe impact on the desirability of your property, if and when the time comes for you to sell.

Strikes and Work Stoppages

Prolonged strikes for trades or government can significantly delay the time it takes for your project to be completed.

The Availability (or Not) of Skilled Labour

The general quality of the local construction work force can have an impact on your condo building, but even more important is availability. If there is a shortage of skilled trades, rising costs and delays are more likely.

Builder Reputation and Construction Quality

Look for a builder with a reputation for completing projects on time and with high-quality standards. That good reputation should be consistent across many projects. Keep in mind that builders that don’t have their own construction team could have different trades with different construction managers, meaning that it can be difficult to judge quality from previous projects. Construction quality is impossible to guarantee when buying pre-construction, which is why it presents a huge risk when buying. Since there is no way to see into the future, steps can be taken to mitigate risks – that means doing your due diligence.

Changes to the Neighbourhood

Neighbourhoods that are going through “gentrification” or renewal are in a process of great change. Perhaps the neighbourhood has had a high crime rate, or many of the amenities that draw people to a neighbourhood have been missing (parks, schools, shopping, mature trees), or there was a lot of noise from traffic or construction. These can all be turnoffs to end-users if the area hasn’t fully transitioned by the time the building is complete.

Other things to consider in rapidly developing neighbourhoods is your potential view. It’s possible that a new building will pop up and block your fantastic view. Zoning by-laws could change suddenly, with the effect of eliminating desirable neighbourhood features (such as restaurants and bars) or encourage undesirable characteristics (such as a new landfill site).

Legal Risks

Builders’ contracts are thick and complex documents, certainly more daunting than an agreement for the purchase and sale of a typical single-family home. It is imperative you hire an experienced lawyer to review your contracts, a lawyer who has represented clients who have purchased condos.

Taxes and Fees

New-home buyers in provinces such as Ontario and B.C. got a bit of a shock when the Harmonized Sales Tax (HST) was introduced in 2010. New homes had previously been subject to the 5 per cent Goods and Services Tax (GST), but with the introduction of the combined federal and provincial sales tax, new-home buyers were suddenly left to deal with a substantial increase (12 per cent in B.C., and 13 per cent in Ontario) in the cost of buying a property, without anything in return. Since changes in taxes can be made at the whim of a local or provincial government, they must be taken into account. Taxes can come in many forms. One form, charged by local governments, is development charges. Development charges can range from education levies and regional development levies to municipal levies, and can add a substantial amount to the cost of the property.

Along with taxes and development charges, closing fees are also higher with new condos than resale condos. Closing fees are normal with any real estate transaction, but newly built properties are subject to many more fees, including new-home warranty fees, paperwork fees, legal fees, utility hookup fees, and more. Some charges, such as those for guest suites or superintendant suites, are buried in the condo maintenance clause. What’s worse, fees and taxes are constantly changing, hidden in the builder’s contract, and very hard to calculate beforehand, and many cannot be financed by banks (meaning you have to be prepared to pay for them on top of your down payment).

Zoning Risks

Today, many developers start pre-selling their condos before zoning changes and approvals are given by the city. When a developer pre-sells a substantial number of the units in a building, they are able to get financing to complete their project fairly cheaply, which allows them to sell the units at an affordable price. This carries an inherent risk, though, since in some cases the city will reject a developer’s plan. If this happens, any buyers will have their deposits returned.

8 Dec

Just say no when you’re offered more credit


Posted by: Mike Hattim

By Madhavi Acharya-Tom Yew

Canadians have gone from a standing start 20 years to owing $219 billion on lines of credit today. Credit line use is growing faster than mortgage debt and now accounts for 12 per cent of all consumer debt owed by Canadians.

The stories revealed that home equity lines of credit have become popular for many reasons. They are typically secured by your home, and you can borrow up to 80 per cent of your home equity against it. Because of that security the banks offer a low interest rate – much lower than credit cards.

Most seductive is that the minimum monthly payments often cover just the interest, which masks the true cost of repaying the amount borrowed.

Banks say that it’s up to consumers to know their borrowing and spending limits and be aware of the warning signs that they’re in over their heads. They say that they are prudent and responsible lenders and that delinquency rates on lines of credit are low.

Readers like Roberto Cárdenas know what it’s like to slide into the temptation of easy credit – and how difficult it is to pull yourself out of that hole.

Cárdenas, who came here from Mexico in 2004, likes to say that Canada accepted him with open arms – and open lines of credit. “How else does an immigrant go from a secured $500 credit card to more than $57,000 in consumer debt, plus a mortgage, in a couple of years?” Cárdenas said.

At first the line of credit was very useful. He and his wife used it to get settled in their first apartment. But then, when he finished school and got a better job, the bank increased their credit. The Cárdenases obliged by spending it – electronics, a television set, clothing trips, furniture, and sometimes groceries.

Last year, they turned to their family for help to pay off the remaining debt, about $44,000. Cárdenas, an IT network administrator, hopes to have paid back his relatives within about five years.

“It was a lesson learned in a very, very hard way. My advice to others is to just say no when the bank offers more credit. If you’re not going to use a credit line, why take it? If you need to ask for credit, don’t ask for more than what you earn in a month.”

We asked readers for their experiences and received hundreds of emails and comments. Some praised LOCs, and pointed out that, if wisely used, they are a powerful source of cheap credit. Others lamented that they had abused them and in some cases almost ruined their lives.

Here’s what you said:

The pros:

• They are useful for consolidating high-interest debt.

• They are are an effective way to deal with a large, unexpected expense.

• They are an easy way to make investments in such things as stocks and mutual funds.

• They are flexible and convenient, if used properly.

The cons:

• It’s easy to give into temptation and start spending.

Beware of paying interest only. It makes the debt seems smaller, while allowing it to mount up.

A sudden death or illness leaving the family breadwinner unable to work, leave you unable to pay the money back.

• You’re vulnerable to interest rate changes.

• If you sell your home and the credit line is secured by the house, a lender can demand immediate repayment.

• If the credit line gets away from you it could take years to pay off.

Audrey Barrett says that she and her husband – prompted by their banker – took out a $70,000 home equity line of credit to consolidate their bills in 2005. Her husband died in 2008. Barrett was certain they had insurance from the bank to cover the debt. The bank says the insurance was not approved because of an issue with her husband’s health.

The 68-year-old Brampton retiree is now battling the bank and various regulators, while struggling to pay back what feels like an insurmountable debt.

“If they had said to me you haven’t been approved for life insurance I would have said then you’re not using this money to pay the bills,” Barrett said.

“I never in my wildest dream thought this would happen.”

Louise, who asked that her last name not be used, and her husband had a home equity line of credit worth $243,000. They had big plans for it – renovating the basement to create an in-law suite, and maybe taking a trip.

Instead, they dipped into it to keep afloat when her husband lost his job.

But then bad got worse. Her husband, who suffers from depression and bi-polar disorder, began drawing the funds down quickly and has been unable to pay it back.

Louise and her husband recently separated after 34 years of marriage.

When she called the bank to try to stop him from accessing the line of credit, she was told that would be very difficult, if not impossible, because the account is in both their names.

“For us the line of credit turned into a financial nightmare,” Louise said. “I wish the bank had not given us so much. It was just too much.”

Some readers complained they have been hit by inactivity fees on their lines of credit if they’re not used each year. Others said they’ve been told there are charges related to closing or cancelling the account.

Some readers wrote to praise the line of credit.

“Far better to use a line of credit when older than giving away your assets by buying a reverse mortgage,” wrote Barbara Allentoff of Thornhill.

“I have used my home equity line of credit only for (tax deductible) investment purposes,” wrote Andrew Chong of Toronto.

Eight years ago, a new account manager at the bank convinced Jenny Misener to take out a line of credit. She was a renter, and didn’t think she would ever use it. A few months later, she found herself putting in an offer on a house, and that line of credit allowed her to write a cheque towards the offer.

“I certainly didn’t have that kind of cash in my account, but thanks to an energetic and far-sighted account manager, today I have a house. I didn’t use that line of credit again.”

Others offered cautions.

Ian Murray said he didn’t negotiate a fixed rate on his line of credit, and the interest rate went from 3.95 per cent to 4.7 per cent in less than six months.

Royden Hickingbottom was pleased to use his home equity line of credit to renovate the basement. The wake-up call came when he sold the property and the lenders said, “No new mortgage money until this is paid off in full.”

They didn’t have enough equity to pay off all the debt and still be able to purchase the new house they had already signed for. “We did move into our new home but had to borrow heavily from family (thank God for them) and start all over,” Hickingbottom wrote.

Jen Hagerty and her husband just refinanced their mortgage to bail themselves out of $20,000 on a line of credit and an another $10,000 on a credit card. They have a mortgage with a 30-year amortization but plan to pay it off in 24 years.

Now, Hagerty says that she uses “an envelope system” to learn how to save money.

“My recommendation is to stay away from likes of credit,” Peter Campbell wrote. “They offer nothing but a chance to go into debt.”
7 Dec

Mortgage rates are poised to rise


Posted by: Mike Hattim

By Josh Rubin | Tue Dec 06 2011

Mortgage rates could be drifting up again soon, even if the Bank of Canada is standing pat for now, experts say.

Already over the last few months, variable-rate mortgages have started to climb, erasing much of the advantage they had over traditional fixed-rate mortgages, says Kerri-Lynn McAllister, community manager at RateHub.ca. McAllister says we can expect more of the same.

“A few months ago, there was basically a one per cent spread between fixed and variable. Now it’s .2 or .3,” said McAllister. “I don’t think they’re done. We’re still seeing banks increase their premiums.”

Part of the reason for the hike, says McAllister, is that with mortgage rates as low as they’ve been, banks have a harder time making money.

“That’s definitely a way to improve their margins,” McAllister said. “It also creates more incentive for people to move over to fixed rates. The fixed rates are definitely more profitable for them.

Even fixed rates could be in for a rise in the new year, suggests Joseph Haimowitz, principal economist at economic think tank Conference Board of Canada.

“I think they’ll probably rise slightly in anticipation of Bank of Canada hikes, especially if the Bank communicates its intentions clearly. No bank wants to lend out money at 4 per cent today if its costs are going to be at 5 per cent next week,” said Haimowitz.

He expects fixed mortgage rates could rise by up to .25 per cent by mid-2012.

Tuesday, Bank of Canada governor Mark Carney announced the Bank was keeping its key overnight lending rate at 1 per cent. That overnight lending rate affects the prime rate which banks charge their best customers. Prime rate at most banks is currently 3 per cent.

The days of deep-discount variable rate mortgages offering rates half a per cent or more below prime are gone for now, according to Robert McLister, editor of Mortgage Rate Trends.

“Is it gone forever? I don’t think so. But it’s gone for the foreseeable future,” said McLister. He predicted variable rates could rise by as much as .2 per cent over the next few months.

While the average posted rate for a 5-year fixed rate mortgage is 5.29 per cent, many banks are offering fixed rates as low as 3.25 per cent, says McLister. That compares very favourably to the average rate of 2.8 per cent for variable rate mortgages over the same 5-year term, McLister says.

“The spread is maybe half a point. That’s a historical anomaly,” said McLister.

One contrary note came from panel put together by ratesupermarket.ca, which suggested that fixed rates could drop over the next month, while variable rates will stay put.

“With no quick fix on the horizon for the European debt crisis, the global economic outlook continues to be pessimistic causing downward pressure on longer-term bond yields. Couple this with decreased demand for home loans during the busy holiday season, and it is likely that fixed mortgage rates will stay low or even drop further over the next 30-45 days,” the panel said.

5 Dec

5 reasons why a fixed-rate mortgage could be your best bet


Posted by: Mike Hattim

Posted: Dec 5, 2011

It’s a decision that millions of Canadian homeowners struggle with repeatedly during their time as homeowners: Do they choose the security of a fixed-rate mortgage, or opt for the flexibility (and usually lower cost) of a variable rate and hope that rates don’t spike higher? But right now, conditions in the mortgage market mean homeowners can actually get the best of both worlds, according to market-watchers.

For years, we’ve seen evidence that people who opted for variable-rate mortgages ended up saving money over the fixed-rate crowd —anywhere from 77 to 90 per cent of the time, depending on the period selected and the assumptions used.

Despite that, 60 per cent of the 5.8 million mortgages out there are fixed-rate mortgages, and the five-year term is especially popular. Another 31 per cent of mortgages are variable- or adjustable-rate. The rest are hybrids that a bit of both types of mortgage built in.

In the past year, we’ve seen evidence that people have been starting to swing more towards variables (see table). But in the past few months, two things have happened in the Canadian mortgage market that may have the “variable-is-best” crowd changing their minds … or at least re-thinking what used to be an easy decision.

Variable has a catch

First of all, the traditional discount that lenders used to apply to variable rate mortgages is fast becoming a thing of the past.

“In the last couple of months, there’s been a big shift back to fixed rates,” says mortgage broker Robert McLister, who edits the popular mortgage news site CanadianMortgageTrends.com. “The average discount went from prime minus 0.80 per cent to prime minus a quarter,” he told CBC News.

That puts a typical five-year variable-rate mortgage around 2.75 per cent.

At the same time, McLister says fixed rates have dropped. Mortgage brokers can arrange a five-year fixed-rate mortgage for as little as 3.25 per cent – or about two full percentage points below the posted rates at the big banks. That rate represents a spread of just half a percentage point over the variable-rate mortgage. McLister says the spread between these two is normally 125 basis points or more (1.25 percentage points).

At this point, you may be thinking that people who have variable-rate mortgages still can’t lose, because they can always choose to lock in to a fixed-rate mortgage at any time. Very true. But McLister points out that people who do this typically don’t get the lowest rates.

That’s not too surprising. After all, you can’t change lenders when you switch from a variable to a fixed mortage without paying a penalty, and your lender knows this. “The rates that lenders give to people when locking in are always at least a quarter percentage point above what’s available elsewhere in the market,” he says.

McLister also points out that it’s never immediately clear where or when mortgage rates will bottom out. “Some people may think about getting a variable in hopes of riding down rates if they drop further,” he says. “The thing is, if you’re that good at predicting interest rates, you’d make a lot more money as a bond trader.”

Fixed-rate bargains

Of course, there are other reasons besides interest rates that can sway someone’s decision on mortgage type. If someone needs to break a five-year fixed rate mortgage early, for example, the penalty (based on what’s called the interest rate differential) can be many thousands of dollars. With a variable-rate mortgage, the penalty is never more than three months interest.

But some people will always opt for fixed-rate mortgages simply for the security of knowing that they won’t be affected by any future upswing in interest rates – at least until their mortgage comes up for renewal.

Here’s another reason to consider fixed-rate mortgages. Some lenders have chosen to stake out some market share by offering exceptional bargains at terms other than five years.

The four-year fixed-rate mortgage – not a mainstay among the big banks – has become a battleground among some other lenders that mortgage brokers use. Brokers can arrange a four-year fixed-rate mortgage for 2.99 per cent at a few non-bank lenders, and the range generally available right now goes from 2.89 per cent to 3.09 per cent. One big bank lender – Scotiabank – offers a two-year fixed-rate mortgage for 2.49 per cent, which is even less than what lenders charge for a variable-rate mortgage.

As for the future, some mortgage experts see variable mortgage rate continuing to rise.

“Disappearing discounts [off prime] will continue as banks aim for greater profitability,” says a panel of five mortgage industry and academic experts surveyed by RateSupermarket.ca in November. “As a result, the panel believes Canadians can expect variable mortgage rates to inch up in the short term,” it said in a recent rate outlook.

The panel members see no change for fixed mortgage ratesin the short term. They expect the European debt crisis will cause money to pour into Canadian bonds, driving down yields. That could lead to an even smaller spread between fixed and variable.

Still not sure what to go for? Fixed or variable? Short or long-term?

Either way, the good news is that rates are at historic lows. Rest assured that you can’t go far wrong these days, no matter which direction you go in.

“The cost of choosing the wrong term has probably never been lower,” says McLister.

5 Dec

Rates you can take to the bank


Posted by: Mike Hattim

Garry Marr  Dec 3, 2011

Are Canadian homeowners really that much of a safer bet than the Italian government?

It’s an interesting question given that Canadians can lock into a five-year mortgage at a rate just above 3%. There’s more than one European government that would like to borrow at that rate.

The reason Canadians can get such cheap money on a mortgage with as little as 5% down is mortgage default insurance, which is backed by the federal government for both Crown corporation Canada Mortgage and Housing Corp. and its private competitors.

Canadians pay steeply for that mortgage insurance with premiums that can amount to 2.75% on the purchase price of their home. But in the end you have to wonder whether that government backing reduces premiums and amounts to a subsidy for Canadians buying with high-ratio mortgages.


Given all that, it’s no wonder so many Canadians want to jump into the housing market — it’s the only way to get access to that much cheap debt financing. You can almost argue by not buying into the housing market you have missed out on a government program that thousands of Canadians have cashed in on.

“My perspective is it’s good value for Canadian consumers,” said one bank analyst who did not want to be identified. It’s even better value for Canadian banks because their loans are guaranteed by the federal government.

The rules in Canada are such that if you are buying a home with less than a 20% down payment and are borrowing from a financial institution covered under the Bank Act you must get mortgage default insurance.

“Potentially it leaves Canadian taxpayers on the hook for a big bill if things go terribly wrong although I don’t think there any indication things will go terribly wrong,” said the analyst. “There is a good argument that Canadian bank shareholders are being subsidized too.”

Finn Poschmann, vice-president of research with the C.D. Howe Institute, says in a world without government backing some people with high credit scores might end up paying even lower mortgage default insurance premiums.

“In an unregulated world where you don’t require insurance, your lenders would probably ask for it anyway. Your premium might be higher or it might be lower,” says Mr. Poschmann. “You would have market level, personalized risk adjustment on the premium.”

A disadvantage of insurance is you pay the fee up front, meaning if you sell your home you get nothing for that payout. Mortgage insurance is portable now to a degree so if you sell and buy another home, the disadvantage is limited.

The other question that hangs over the issue of default insurance is whether the mere existence of it has helped goose home prices in Canada. Given the average price of a home has more than doubled over the last 10 years, anybody who didn’t get involved in this leverage based investment has missed out on a major financial opportunity.

Author Garth Turner says mortgage insurance has removed the risk for lenders and given borrowers a status they would not get for any other investment.

“It’s a status far above what their real risk level would be,” says Mr. Turner. “If you are lender wanting 5% mortgage or 10% down payment you are high-risk high ratio client and normally under any credit rating system in the world the higher the risk the higher return any lender would demand.”

Nobody would give somebody with $50,000 in cash, $500,000 worth of stock but they give you that much if you are putting the money into a house. And once you’ve got that money, if your home is appreciating in value the way it has the last decade it almost seems like a slam dunk investment given how cheaply you can borrow.

“Some kid wandering into the bank who is 25 years old with 5% down buying a $500,000 condo is able to get the same rate as someone putting 80% down on a house in Rosedale,” says Mr. Turner, referring Toronto’s luxury home market. “CMHC has erased the traditional risk.”

Given all that, how can you pass on leverage investment that offers you cash at rate you could otherwise never get?

Mr. Turner, who continues to predict a pullback in the housing market, points out that with any leverage comes with increased risk — including housing.

“If you are borrowing 95% of the value of your condominium and the real estate market goes down 8%, you are screwed and that can happen extremely easily and in matter of weeks,” says Mr. Turner.

In that scenario, you’re low rate won’t mean too much. If you default, that mortgage insurance is going to come in handy — just not for the federal government.

2 Dec

Canadians paying off mortgages early: CMHC


Posted by: Mike Hattim

Financial Post Staff 

OTTAWA — Canadian homeowners are doing a good job of paying off their mortgages early, according to the Canada Mortgage and Housing Corp., which released its third-quarter results Tuesday.

While mortgage repayments can be spread out over 30 years, the CMHC reports that the average amortization period for mortgages insured by the national housing agency is under 25 years, and the loan-to-value ratio of those homes was 80% or less. As of Sept. 30, the outstanding loan amount per household for all homeowner loans was $159,740, slightly above the figure for the previous year.

“CMHC analysis shows that a substantial percentage of CMHC-insured high ratio borrowers are ahead of their scheduled amortization,” the agency said in its report. “Accelerated payments shorten the overall amortization period, reduce interest costs, increase equity in the home at a faster rate and lower risk over time.”

The agency says its mortgage arrears rate is 0.42%, in line with industry trends.

Rules brought in by the federal government in March, in response to historic levels of household debt, which reduced amortization periods on certain mortgages, and limited the amount that can be borrowed when a house is refinanced, cut refinancing activity by 31% from last year, the CMHC said. The agency’s homeowner purchase mortgage insurance showed a year-over-year decrease of 12%.

“The level of household debt remains a concern but there are encouraging signals,” it says. “There has been a significant deceleration in the growth of mortgage credit since March, particularly in recent months, impacting the growth rate of total household credit. Growth in personal loans, lines of credit and credit cards has levelled off in recent months.”

The agency notes general economic conditions have been favourable in 2011, with stable mortgage rates, a healthy housing market and a declining unemployment rate.

“Overall arrears levels and arrears rates have been improving and (mortgage insurance) claims volumes have been lower than expected,” it said. “Given current economic forecasts, it is expected that trends will improve moderately going forward, although both downside and upside risks remain.”

While housing sales have slowed since January, the CMHC expects sales for the year to fall within a range of 423,600 to 470,100 units, and next year’s sales to be somewhere between 406,100 and 509,000 units. Prices should “modestly grow as market conditions are expected to remain in the balanced market range,” it said.

The agency notes it keeps an eye out for bubbles, but so far it sees “little evidence of over-valuation” in the Canadian housing market.

1 Dec

Canadian consumer debt loads stabilize


Posted by: Mike Hattim

Globe and Mail Blog

After years of whipping out their credit cards and tapping into lines of credit, there is further evidence that Canadians are thinking twice before taking on more consumer debt.

A quarterly analysis from credit bureau TransUnion showed that the average Canadian’s non-mortgage debt was $25,594 in the third quarter of 2011. That is down $9 from $25,603 in the previous quarter but $431 higher than $25,163 a year ago.

While the quarterly drop might not sound impressive, it marks the third-consecutive quarter that debt loads have either declined or remained about the same following 26-straight quarterly increases.

TransUnion’s report pointed to a deceleration in total debt increases, which basically means Canadians are taking on more debt at a slower pace.

Thomas Higgins, TransUnion’s vice-president of analytics and decision services, said the latest data suggests “Canadian debt loads are stabilizing.”

He attributed the slowdown to global economic uncertainty. “In the third quarter alone, Canadian consumers witnessed major stock market declines, the European debt crisis and continued high unemployment,” Mr. Higgins said.

The latest TransUnion report comes on the heels of new analysis from Canada Mortgage and Housing Corp. that shows the rate at which Canadians are racking up new mortgage debt has also slowed.

Policy makers like Bank of Canada Governor Mark Carney have been warning Canadians about excessive debt loads and their ability to repay the money they owe once interest rates rise from their current lows.

The average Canadian household has debt that is 150 per cent of income, and mortgage debt accounts for the largest chunk of credit that Canadian consumers hold.

Outside of mortgages, Canadian household debt levels have surged as consumers rely more on their credit cards and lines of credit. Lines of credit, which have lower rates than credit cards, now account for more than 40 per cent of all Canadian non-mortgage debt, TransUnion said.

TransUnion’s data showed that average Canadian credit card debt fell 2.65 per cent from a year ago but rose 0.59 per cent on a quarterly basis as the holiday season approaches. But Canadian lines of credit debt rose 4.5 per cent from a year ago and 0.79 per cent on a quarterly basis.

While debt delinquencies have remained relatively stable, both increased unemployment rates and the upcoming holiday shopping season may weigh in over the upcoming months, TransUnion noted.