31 May

More Canadians locking in low-rate mortgages, reducing debt


Posted by: Mike Hattim

Garry Marr
Financial Post

Canadians have been taking advantage of record-low interest rates to lock in their mortgages, a new survey suggests.

The Canadian Association of Accredited Mortgage Professionals, in its annual spring release, says among the 3.8 million Canadians with a fixed rate mortgage, 14% chose to lock in during the past year.

“This data supports comments by lenders that they have high numbers of new borrowers who start with variable rate mortgages but soon opt for the security of fixed rates,” says CAAMP in the report. Overall, 29% of those with mortgages have a variable rate leaving them with exposure to any changes in the Bank of Canada’s lending rate which the prime rate — used in those loans — tends to track.

The survey also found Canadians are making significant efforts to reduce their debt with 23% of respondents saying they voluntarily increased their regular payments, 19% making lump sum payments and 10% doing both.

For those who increased their regular payments, the average amount of the increase was $400-$450 per month. With about 5.85 million mortgage holders in Canada and roughly 1.35 million increasing their payments, it translates into about $7-billion per year. Lump sum payments averaged $12,500, and with about 1.1 million people making these payments, that equals about $13.75-billion.

“Despite daily warnings in the media about mortgage indebtedness — or maybe because of them — Canadians are making responsible decisions about their mortgages and they’re exhibiting confidence in their own situations,” said Jim Murphy, chief executive of CAAMP. “We should feel encouraged by this behaviour — it means Canadians are well positioned to weather a potential rise in interest rates.”

Overall Canadians have $994-billion in mortgages on their primary residences and $161-billion in controversial home equity lines of credit or HELOCs which allow them access to the equity in their home.

The total equity takeout from residences was $46-billion in the past year with renovations accounting for $17.25-billion of the money used. Another $10-billion was used for investments and $9.25-billion for debt consolidation.

Amortization periods, which have been legally shortened by Ottawa for insured government backed loans, are shortening. Lengths are down 20% but Ottawa legally reduced the length a mortgage could be amortized from 40 to 30 years over the past three years.

Craig Alexander, chief economist with Toronto-Dominion Bank, said the locking of mortgage rates has protected consumers from future rise in rates. “It’s a very positive thing that people are shifting to fixed rate because it provides greater security in protecting from upside risk in interest rates,” he said.

The survey also found despite the fact three of the major banks are either out of or backing out of the mortgage broker channel, it still is an important segment of the market. Brokers account for 26% of the market overall and captured 31% of activity in 2011.

The report is based on information gathered by Maritz Research Canada in a survey of 2,000 Canadian consumers in April and May 2012.

29 May

Home ownership getting less affordable in Canada


Posted by: Mike Hattim

David Paddon
The Canadian Press

TORONTO — RBC says home ownership was less affordable in most major Canadian cities during the first quarter, although Calgary and Edmonton bucked the trend.

The latest RBC Economics report on home affordability says its index deteriorated sharply in Vancouver and to a lesser degree in Toronto, Montreal and Ottawa — primarily due to higher real-estate prices.

The report tracks how much of a home owner’s income would be required to pay typical costs associated with owning a standard one-storey detached house.

In Vancouver, RBC estimates the combined cost of mortgage payments, utilities and property taxes rose 3.1 percentage points to 88.9%.

In Calgary, by contrast, only about 36.7% of pre-tax income would be required to pay for a standard bungalow — unchanged from the previous study — and in Edmonton the index improved by 0.4 percentage point to 32.4%.

In Toronto, the index deteriorated by 1.2 percentage points to 53.4%; in Montreal, the cost of ownership increased 1.2 percentage points to 41.4% of income and in Ottawa it was up 0.9% to 41.8%.

“It became a little tougher on household budgets to carry the costs of owning a home at market prices at the start of this year,” said Craig Wright, RBC’s chief economist said in a statement Tuesday.

“Strong buyer demand was a principal driver of the modest rise in homeownership costs. While the deterioration in affordability was felt to varying degrees across the country, it was mild in most cases.”

He said the challenge will likely increase once the Bank of Canada begins raising interest rates.

“Exceptionally low interest rates have been the key force in keeping affordability from hitting dangerous levels in Canada in recent years,” Wright said.

“Affordability headwinds are likely to increase next year, as interest rates make their way towards more normal levels.”

He said RBC expects Canada’s central bank will hike rates gradually, starting in the fourth quarter.

“A gradual pace of increases will allow income growth to provide some offset,” he said.

28 May

Rising mortgage debt rendering ‘Canadian households stretched thin’: DBRS


Posted by: Mike Hattim

Barry Critchley
Financial Post

DBRS, the Canadian headquartered credit rating agency, has joined a long list of organizations that have weighed in on the matter of the Canadian residential housing market.

Like many of those previous studies and against the background of concerns being raised by the federal government and the Bank of Canada, DBRS found some positive — and negative — aspects about the sector that seems to consume Canadians. And with good reason: in many cases, the family home is the largest source of household wealth.

For instance, despite record high levels of household debt, DBRS argued that Canadian households have net worth that could withstand a property value decline of 40%.

But “rising household financial leverage and reduced affordability are of concern, rendering Canadian households stretched thin and vulnerable to liquidity shock or cash flow shortage, such as loss of income or unexpected expenses,” wrote DBRS.

At the end of 2011, Canadian mortgage lending amounted to $1.1-trillion — or more than double what it was a decade earlier. Add in home equity lines of credit and outstanding mortgage-related debt was about $1.3-trillion.

Along with rising mortgage and consumer debt, average house prices are now 4.9 times average gross family income — a level that would require Canadian household to allocate 37% of its pre-tax income to housing-related costs — the so-called “housing affordability ratio.” (House prices have risen faster than average household income.)

DBRS noted that the 37% ratio “is aided by the low interest rate environment and is only slightly worse than the long-term average.” But if interest rates were to jump by 2% the ratio could rise to 43% or more of pre-tax income. “Adding in other household expenses and payments, the average household is left with little residual cash flow or savings,” it said.

Affordability measurements based on national average values “are misleading and do not consider regional or market-specific preferences, differences or even property types,” DBRS said.

Accordingly and “barring a nationwide economic contraction, the real estate market for most Canadian cities appears balanced based on sales activities or housing inventory supply, but moderately overvalued based on the price-to-average income or affordability ratio, with potential overvaluations or pockets of vulnerability in certain markets and segments.”

So what are the big levers?

DBRS said that “a combination of higher interest rates, lower property values and a drastic increase in unemployment would be of great concern as mortgage defaults are closely related to employment and individual family situations.”

23 May

OECD urges Canada to hike rates this fall to cool housing market


Posted by: Mike Hattim

Julia Johnson
Financial Post

Canada’s economy is gradually recovering and is expected to grow by 2.25 % this year and 2.5 % in 2013, according to a new report by the Organization for Economic Co-operation and Development.

Private consumption and investment will continue to be the primary drivers of growth in Canada, said the report, which was published Tuesday.

Canada’s growth will slightly outpace the OECD average, which is expected to be 1.6% in 2012 and 2.2% in 2013.

“It’s not a great outcome. A generation ago, coming out of a recession like this, we would have thought this was deplorable, but it’s not bad,” said Peter Jarrett, senior economist with the organization.

Assuming the euro zone “muddles through” its crisis, avoiding a Greek exit, Mr. Jarrett said OECD wants the Bank of Canada to start raising interest rates in the fall to avoid speedy inflation that will follow the economic growth.

“In order to head off that eventuality, we assume that beginning in the fourth quarter the Bank would move at a rate of a quarter of a point per quarter, bringing us to a rate of about 2.25 % by end of 2013,” Mr. Jarrett said.

The benchmark interest rate in Canada has been 1% since September 2010.

A rate hike is also needed to slow down quick-climbing housing prices. “We also feel that would help cool off the housing market in the places where it’s been hot and we expect it to remain hot in some of those places, particular in Toronto,” Mr. Jarrett said.

But if interest rates are increased, mortgages rates are also likely to rise, which could hinder the ability of some homeowners to make their payments. “We don’t want to end up in the same situation as our neighbours to the south,” said Mr. Jarrett.

The OECD report flagged Canada’s housing sector as imbalanced, but noted stiffer lending rules surrounding mortgages have helped reduce risk. The report comes on the heels of a Fitch Rating report released Monday that called Canada’s fast-climbing housing prices and record household debt levels unsustainable.

“The Bank of Canada is doing its best to ensure that lending is taking place on a prudent basis so that if indeed interest rates do have to go up more suddenly than one might have expected, then the number of people who can’t afford their houses is not too great and the impact on banks and lending institutions isn’t too great,” Mr. Jarrett said.

If Greece does leave its peers — the probability of which is rising, according to Mr. Jarrett — Canada will feel the effect through the financial markets rather than through its exports or bank-based contagion. Mr. Jarrett said a Greek exit would trigger a rush for low-risk assets, causing commodity prices to fall, and demand for the U.S. dollar, pushing down the loonie.

He said Canadian banks are better positioned than some their international counterparts to withstand a deeper crisis because they don’t rely as much on whole-sale borrowing. “The Canadian deposit base is quite solid compared to a lot of other countries,” Mr. Jarrett said.

Overall the global economy is slowly recovering, the OECD said, but at substantially different rates.

The euro zone crisis is dragging down the overall economic recovery.

“The crisis in the euro zone remains the single biggest downside risk facing the global outlook,” said OECD chief economist Pier Carlo Padoan in a statement.

Heading into a European Union summit in Brussels this week, the OECD urged leaders to take immediate action to avoid a deepening of the crisis in the euro zone and spillover effects to other nations.

23 May

Is there ever a bad time to invest in a rental property?


Posted by: Mike Hattim

Fabio Campanella
Special to Financial Post

Record low interest rates coupled with an overly extended bull market for Canadian residential real estate has some investors questioning the validity of investing in a rental property.

Current economic indicators support these fears: mortgage rates scheduled to rise, a global economy not yet out of the recessionary trenches, residential real estate prices in Canada that have clearly outpaced increases in general earnings over the last decade.

This all paints a compelling picture supporting the hesitation some investors have when dealing with rental properties. But is this hesitation legitimate? Is there ever really a good or bad time to get into the real estate rental market? The answer is yes, and also no; it all depends on your current financial situation.

If the Toronto residential market is used as a barometer we can see that residential real estate has treated us quite well over the past 20 years. During the period from 1992 to 2011 the average sale price for a home in Toronto increased from $214,971 to $465,412 according to the Toronto Real Estate Board (TREB).

That’s a 116.50% ROI over 20 years or 3.94% compound annual return, and that’s just the price increase not including any potential rental profits. In fact, over the last 20 years we have only seen four years of negative returns in the Toronto market and they all fell between 1992 to 1996.

Assuming you were to have purchased an average single-family Toronto rental property in 1992, put 25% down, taken a mortgage for the rest, and found a tenant who’s rental payments covered only your property’s basic operating expenses, taxes, maintenance and the interest portion of your mortgage (leaving you to cover the principal portion yourself) you’d have achieved an 11.40% annualized return on investment as at the end of 2011.

Not bad considering that the TSX would have given you 8.69% over the same time period. Using the same assumptions in the previous example on rolling 20-year periods from 1966 to 2011 the average investor would have achieved annualized compound returns of 13.96%.

In fact even if you were to have purchased a property at the bull market peak just before the infamous GTA real estate crash of 1990 you would still have achieved an 8.94% ROI if you held the property with a decent tenant until 2008 even though the value of your investment would have dropped by 25% over the first 4 years.

So what’s the point? Are rental properties a good investment and is this the right or wrong time to make a move? The answer is yes but only if you’re in it for the long-haul and only if your current financial position allows you to do so. Novice investors tend to follow market momentum and stretch themselves thin. They see prices increasing year over year then go out and take massive amounts of leverage to get in on the action “before it’s too late.”

What often happens is they buy more than they can handle, they don’t do proper due diligence on their tenants, and they get caught with a dud investment that they can’t support with their personal cash flow. This frequently leads to panic selling in order to raise funds to pay off large amounts of debt consequently resulting in losses.

Smart investors take their time. They seek out properties in desirable neighbourhoods, scrutinize their tenant’s ability to make rent payments before they take them on, manage the property with a keen eye, but most importantly they do not over-extend their leverage. Smart investors realize that there may be times that tenants can’t make rent or that markets may temporarily turn south.

Even if the original intention for a real estate investment is a short term flip, the smart investor will not purchase a property they aren’t able to hold over a long period of time should price momentum not go their way in the short run.

Direct investment in real estate is not like buying a passive investment such as a mutual fund. It requires a time commitment, experience, and patience but the long-term results can be superb when done properly.

17 May

Mortgage vs life insurance: Which is best?


Posted by: Mike Hattim

By Carola Vyhnak

If no one mentioned it during the course of financing your new home, the term “mortgage insurance” could be an unwelcome surprise that stretches a tight budget even tighter.

But it also comes strongly recommended, because it protects your investment if you die. Industry expert Yousry Bissada calls it “peace of mind for the family.”

If something happens to you, the mortgage is paid and your family won’t be out on the street.

Many homebuyers, especially first-timers, are already reeling from the myriad tasks and decisions to worry about with insurance.

“Pretty much everything is brand new,” sympathizes Cobourg realtor Dale Bryant. “There’s so much to think about and do. But after all that, you want to protect your home.”

Here’s how mortgage insurance works: You purchase a policy for the amount you owe on your home, and, if you die, the insurer pays off the mortgage lender. The coverage is optional.

(This insurance is different from high ratio default insurance required if you have less than a 20 per cent down payment. This insurance is underwritten by the Canada Mortgage and Housing corp. or Genworth Financial.)

Here’s where things get complicated, starting with the terms “mortgage insurance,” “mortgage life insurance” and “creditor insurance,” which all mean the same thing. You can buy that coverage from the financial institution that’s lending you the mortgage money. The premiums are usually tacked on to your mortgage payments.

But you can, instead, buy term life insurance for the amount of the mortgage from an insurance broker or agent. Either way, your mortgage is paid off if you die. But there are significant differences between the two options.

Mortgage insurance from a bank or other lender could cost much more than a term life policy, depending on your health and age. As an example, the premium on a $250,000 mortgage for a couple aged 35 would be about $52 a month while 10-year term life insurance for the same face value would be about half that, according to a comparison on Kanetix, an online marketplace for insurance and financial products.

The premiums on mortgage insurance stay the same throughout the term (five years, for example), but the payout, if there is one, shrinks with the mortgage. Each time you renew your mortgage or switch lenders, you have to renew your policy.

With term life insurance, which typically covers you for 10, 20 or 30 years, the amount of money that’s paid out to the beneficiary never changes, although premiums do when you renew for another term. If you have an existing policy, coverage can be boosted to include your mortgage debt. Your family can then decide whether to pay it off or use the money some other way if you die early.

Mortgage insurance provided through the bank is quick and easy to arrange, and, typically, only requires answering a few health-related questions. Buying a term life insurance policy, on the other hand, is a longer process that involves delving into your medical history.

All this means there are many factors to consider in deciding on the best way to protect your home.

Dale Bryant, an accredited mortgage professional, urges people to shop around. “Look at the whole picture,” he advises, noting that everyone’s circumstances, living costs and insurance needs are different.

Yousry Bissada, president and CEO of Kanetix, suggests home buyers use his company’s website to compare insurance costs.

“There are many options out there,” says Bissada, who has a mortgage and banking background. “A person has to shop and get what they need for them.”

Insurance facts

Mortgage insurance and term life insurance serve the same purpose but there are key differences:

• Cost: Premiums on mortgage insurance are typically higher than on term life insurance.

• Convenience: Insurance through your lender can usually be arranged quickly and easily when you sign your mortgage papers. Term life insurance involves more time and effort.

• Portability: If you change lenders or sell and buy a new home, you’ll have to apply for a new mortgage insurance policy. Term life insurance, however, stays with you.

• Payout: With bank insurance, the amount of coverage and subsequent payout if you die decreases with your mortgage balance. But the amount of term life insurance stays the same throughout its term.

• Flexibility: The bank is the beneficiary with mortgage insurance, whereas term life insurance, which you own and control, allows you to name your beneficiaries, who can then decide what to do with the money.

17 May

Mortgage terminology: A simple guide


Posted by: Mike Hattim

By Madhavi Acharya-Tom Yew

Understanding the nuts and bolts of your mortgage may seem intimidating at first, but it’s not as difficult as it sounds. Learning more about how mortgages work could save you thousands of dollars in interest or penalties.

There are three basic parts to a mortgage: the amortization, the term, and the interest rate, which could be fixed or variable.

• Amortization: This is the total number of years it will take to pay off your mortgage completely. The maximum is 30 years. The longer the amortization, the lower your monthly payments, but you’ll end up paying more interest over the life of your mortgage.

• Term: The term is the length of time you have agreed to a certain interest rate and payment schedule. It can range from six months to 25 years, but homebuyers tend to go for terms of three or five years. Ten-year terms have become more popular recently, because fixed mortgage rates are at historic lows.

• Variable rates: The interest rate on a variable-rate mortgage is tied to the bank’s prime rate. The prime rate, in turn, goes up and down according to the overnight rate, which is set by the Bank of Canada. A variable rate mortgage can typically be locked-in at a fixed rate, but sometimes there is a fee. Ask your lender for more details!

• Fixed rates: These rates are locked in for the length of your term, and they tend to be higher, but you’re paying for peace of mind. The payments, and the amount of interest that you owe, will not change during the term. These rates are dictated by supply and demand in the bond market, which, in turn, is influenced by world events — anything from the European debt crisis to the health of the Chinese economy to the health of Canada’s manufacturing sector can push these rates up and down — that’s why it’s so difficult even for experts to know where rates are headed.

• Open: An open mortgage means you can pay the mortgage down or off entirely at any time without any penalties. These typically carry a higher interest rate.

• Closed: A closed mortgage means that you will be restricted to how much of the principal you can pay down ahead of schedule. Most mortgages allow what are known as pre-payments or extra payments towards the principal of about 20 per cent per year. Check with your lender for more details! Some mortgages allow you to double up on your payments.

Your monthly mortgage payment consists of interest and principal. Early on in your mortgage, most of your payment will go to interest.

Q. What happens when the variable rate goes up?

A: Either your monthly payment will increase, because you will now owe more interest on your mortgage, or the payment could stay the same, and you will end up making the payments for a longer period of time.

Q. What happens if you pay off your mortgage early?
A: You may face a penalty of either three months interest or what’s known as interest-rate differential, whichever is greater. Interest-rate differential is the difference between the interest rate charged at the time you signed your mortgage and the interest rate available at the time of refinancing. This could add up to thousands of dollars. Ask your lender for more details!

• Pre-approval: A lender will typically pre-approve you for a maximum mortgage amount based on your income level at a certain rate for 120 days. If rates drop during that time, you should qualify for a lower rate. If rates increase, you’ll still get the lower rate.

Keep in mind that just because you’ve been pre-approved doesn’t mean you will get the financing for your home. Whether you are approved for a mortgage depends on the home you want to buy in the end. Your lender will need to know the total cost, including property taxes or maintenance fees, and conduct an appraisal before lending to you.

Q. How much do I need for a down-payment?

If your down-payment is 20 per cent or more of the home price, you will qualify for a conventional mortgage. If it is less than 20 per cent, you will be required to insure it with mortgage-default insurance from the Canada Mortgage and Housing Corp. These premiums can either be paid in a lump sum or amortized over the length of the mortgage. The larger your down-payment, the less you will need to borrow and the less you will pay in interest.

The Home Buyers’ Plan allows those who are eligible to withdraw up to $25,000 tax-free from their Registered Retirement Savings Plan to buy or build a home. It is a loan and must be repaid within 15 years. To be eligible, the buyer must not have owned or occupied a home as a principal residence at any time for four years. Check with your lender or financial advisor to see if you qualify!

16 May

Canadian banks not immune to housing bubble: OSFI official


Posted by: Mike Hattim

Andrew Mayeda
Financial Post

Canada’s banks, ranked the soundest on the planet by the World Economic Forum, aren’t immune to collapses triggered by falling housing prices, according to the government official implementing new mortgage rules.

Previous failures of Canadian financial institutions were due to bad real estate lending and sharp falls in housing prices, and these can happen again, Vlasios Melessanakis, manager of policy development at the Office of the Superintendent of Financial Institutions, wrote in documents obtained by Bloomberg News under freedom-of-information law. The last failure in Canada was in 1996.

“Canada is not immune,” Melessanakis wrote March 21 in internal notes responding to a posting on a mortgage-industry website. “Just because nothing happened in Canada in 2008 (a U.S.-centered crisis), does not mean that Canada is not vulnerable to a housing correction now.”

The comments underscore tension between policy makers and mortgage lenders as a booming housing market helps drive profits at banks. Finance Minister Jim Flaherty has tightened mortgage rules three times and put the federal housing agency’s books under regulator oversight, while Bank of Canada Governor Mark Carney has repeatedly warned household debt is the economy’s biggest domestic risk.

Participants at Bloomberg’s Canada Economic Summit in Toronto last week, including the head of the country’s biggest bank, downplayed talk of a housing bubble even after Canadian housing starts rose to the highest since September 2007 last month.

Pockets of Vulnerability

“When we look at the overall marketplace, there might be pockets of vulnerability but we remain quite comfortable,” Gordon Nixon, chief executive officer of Royal Bank of Canada, said May 8. “Frankly, I’d like to see the rhetoric come down a little bit.”

Melessanakis wrote his comments to colleagues in response to a posting on a mortgage-industry website, Canadian Mortgage Trends, that criticized proposed standards published by Canada’s top banking regulator on March 19.

Ottawa-based OSFI suggested requiring lenders to take “reasonable steps” to verify borrower incomes, establish standards for measuring borrowers’ ability to pay their debts, and limit the size of loans secured by the equity in people’s homes. The draft guidelines are based on mortgage-lending principles set by the Financial Stability Board, a Basel-based group that coordinates global financial rules.

Unsound Fundamentals

“How many new lending ‘guidelines’ can the market bear before it breaks?” wrote Robert McLister, a mortgage planner who edits the website.

“The market may break because the fundamentals are not sound (i.e. overvaluation of homes), not because of OSFI guidance,” Melessanakis wrote in response.

A spokesman for the regulator said Melessanakis’s remarks don’t reflect the regulator’s official position. While they were shared with the agency’s communications and consultation division, they were not sent to superintendent Julie Dickson, spokesman Brock Kruger said in an e-mail.

There’s “no question” the proposed OSFI guidelines will curb demand and hurt housing prices, McLister said in an interview. “OSFI had good intentions here, but some of this policy is certainly misguided,” he said, when asked to react to Melessanakis’ comments.

Canadian existing home sales rose 0.8% in April from the previous month and 11.5% from a year earlier, the Canadian Real Estate Association said in a statement Wednesday. The average home price rose 0.9% from April 2011, the group said in a statement.

Strongest Banks

Melessanakis referred a request for comment to OSFI’s communications staff.

Four Canadian banks were among the world’s six strongest in Bloomberg’s second annual rankings. Canadian Imperial Bank of Commerce was No. 3, followed by Toronto-Dominion Bank (No. 4), National Bank of Canada (No. 5) and Royal Bank (No. 6).

Lenders have been increasingly skeptical of the need for new rules to cool the housing market. The government should hit the “pause” button and take stock of regulations introduced since the financial crisis, Terry Campbell, president of the Canadian Bankers Association, said in an April 3 speech.

In January last year, Flaherty reduced the amortization period on mortgages backed by the government to 30 years from 35, the third time since 2008 he has tightened rules for home loans.

Strengthening Oversight

Flaherty introduced legislation April 26 that includes measures to strengthen oversight of Canada Mortgage & Housing Corp., a government-owned mortgage insurer. The law allows OSFI to review CMHC’s books at least once a year, and prohibits banks from using insured mortgages to back covered bonds, which lenders have been issuing to fund their home-lending business.

OSFI’s Dickson said in a May 9 speech that Canadian banks should not be “lulled into a false sense of security” by steps policy makers are taking to prevent another financial crisis.

McLister pointed to banks’ low arrears rates on mortgages as evidence more rules aren’t needed. Melessanakis wasn’t convinced.

“This can change fast,” he wrote in his notes. “Are the banks equipped to handle a 40% drop (what occurred in Toronto market in early 1990’s)? Need to stress test to find out.”

McLister called the idea of a 40% decline in housing prices across the country “farcical.” Such a decline is “not going to happen, period. But in some places like Vancouver, maybe Toronto, obviously you’re going to have greater risk there of price volatility,” he said by telephone.


OSFI’s guidelines suggest lenders limit home-equity lines of credit to 65% of the property’s value. The regulator also recommends that HELOCs be paid off over a specific amortization period, like conventional mortgages.

While McLister wrote that those rules “portend a big slowdown in HELOCs,” Melessanakis responded that the loans have “contributed significantly to growing overall household debt.”

“This is not sustainable,” he wrote. “If (or when) housing prices drop, households will be vulnerable,” echoing comments made by Flaherty and Carney.

Melessanakis also disputed McLister’s point that many of OSFI’s recommendations are already employed by “scores of lenders.” “Not all, and not on a consistent basis,” the OSFI official said. “There are some enhancements in lending practices that are needed.”

Last Failure

Melessanakis doesn’t name specific lenders in his comments. OSFI regulates 151 deposit-taking institutions, including 77 banks as well as trusts, loan companies and credit unions.

The last financial institution failure in Canada occurred in 1996, when Security Home Mortgage Corp. collapsed, according to the Canada Deposit Insurance Corp., a government agency that insures deposits. Security Home Mortgage had assets of $65-million the year before it failed.

Eighteen financial institutions failed in the 1990s, including Confederation Life Insurance Co., which had $19.2-billion in assets at the end of 1993. There were 23 failures in the 1980s, including Northland Bank, which had $1-billion in assets.

10 May

Are Canadians ready for higher rates?


Posted by: Mike Hattim

OTTAWA— Globe and Mail Update

Policy makers are right to fret about overbuilding in the Toronto and Vancouver condo markets, but it’s worth remembering that unless those bubble-like markets burst, the less-than-ideal mix of high household debt and overpriced housing may be more manageable than it looks.

Concerns about housing have been in sharp relief for weeks now, long before Tuesday’s report from Canada Mortgage and Housing Corp. showed a surge in condominium construction, which helped push overall construction starts up 14 per cent last month to the fastest annual rate since September, 2007. That’s because Bank of Canada Governor Mark Carney started hinting in mid-April that he is looking for an opportunity to start lifting his key interest rate from the current 1 per cent. He also reiterated his concerns about too many people failing to resist the lure of cheap debt that won’t be as affordable when rates are higher.

Francis Fong, an economist with Toronto-Dominion Bank, says in a study released Tuesday that while most Canadians look “well-positioned” to absorb an interest-rate increase of around 2 percentage points, “there is a substantial minority that cannot.”

Specifically, Mr. Fong points to analysis from the Bank of Canada itself, which warns that 7.5 per cent of Canadian households could be in some financial trouble once borrowing costs “normalize.” He also points to a projection by the Canadian Association of Accredited Mortgage Professionals that a benchmark rate of 3 per cent would put 21 per cent of all mortgage holders in hot water.

But here’s the thing: nobody believes Mr. Carney has any intention (or capacity) to bring interest rates to that level anytime soon. Even TD, which predicts the first rate hike will come before the end of 2012, sees Mr. Carney moving very gradually to 2 per cent – by the end of 2013. The central banker will be able to move more aggressively once the European crisis seems more stable again, and once the U.S. economy is stronger and the Federal Reserve is closer to hiking, too. So, Mr. Fong warns, barring another “major shock” to the global economy, Mr. Carney’s rate (which directly influences variable-rate mortgages and other floating loans) will rise by at least 2 percentage points before 2015.

Mr. Fong’s main point is that while higher rates are hardly a boon for consumer spending, rates will go up so slowly that there “will likely be enough lead time” for many households to “adjust their spending habits” to account for higher payments.

Moreover, he points to signs that Canadians are already accumulating debt at a slower rate, as does Benjamin Tal of CIBC World Markets in a separate report. Even in an environment of historically low interest rates, Mr. Tal says, overall household credit is rising at the slowest pace since 2002.

“The pace of growth in household credit is no longer a reason for the Bank of Canada to move from the sidelines any time soon,” he argues, suggesting Mr. Carney’s warnings are being heeded after all.

No need to worry, then? Afraid not.

TD’s Mr. Fong notes that annual mortgage credit growth, while down from its pre-recession peak, has held steady at an almost 8-per-cent pace for three years. This suggests borrowers are using their credit cards and lines of credit less, but taking out mortgages at roughly the same clip.

And Mr. Tal notes in his report that the real-estate market is “overshooting,” even as signals suggest – in most markets, anyway – that activity is slowing down.

Which brings us back to overbuilding in Toronto and Vancouver. The same day that CMHC published its eye-popping housing starts numbers, the Crown corporation said in its annual report that it sees no “clear evidence” of a bubble. Mr. Carney, meanwhile, will probably never utter the B-word, but has been hinting for several months that he sees at least the makings of one in some cities.

This below is in his semi-annual assessment of the financial system, from December: “Certain areas of the national housing market may be more vulnerable to price declines,” he said, adding, “the supply of completed but unoccupied condominiums is elevated, which suggests a heightened risk of correction in this market.”

Over and over again since then, Mr. Carney has said authorities are watching closely, and will act to cool the market if necessary, while stressing that interest-rate hikes are too blunt an instrument to deal with this issue, other than in “exceptional circumstances.” With Greece and Spain roiling global markets again, and lukewarm economic news south of the border, it’s harder to imagine Mr. Carney raising rates this year than it was a few weeks ago. Still, the excess supply of condos in Canada’s biggest cities suggests we may have reached “exceptional circumstances.”

That leaves CMHC and, by extension, Finance Minister Jim Flaherty, who is in the process of beefing up oversight of the often clueless-sounding agency.

Mr. Flaherty warned recently that condo developers seem willing to build new units until sales dry up. This could lead to a crash, and the last buyers in could get burned, he warned in a meeting with The Globe and Mail’s editorial board last month.

Some of this frenzied building and buying is linked to foreign investment, the actual amount of which is hard to know since even the government says it doesn’t know. So there may be little the government can do, other than hope the market lands softly.

However, if Ottawa is so worried about the last buyers in, there is one thing it could do to ensure that those people are not the Canadians who can least afford to get burned. The last of three times that Mr. Flaherty has ordered CMHC to tighten its eligibility requirements, in January, 2011, he opted against raising the minimum down payment from the current 5 per cent. (Mr. Flaherty had been warned by the Canadian Real Estate Association and Canadian Association of Accredited Mortgage Professionals that raising the current 5-per-cent minimum down payment would shut too many first-time buyers out of the market and cost jobs.) Raising the minimum to, say, 7 per cent, would seem to be a measured, prudent way for Ottawa to limit the number of naive new borrowers who could be left holding the bag for a lifetime because greedy condo builders couldn’t rein themselves in.

10 May

Banks talk down consumer debt hysteria


Posted by: Mike Hattim

Garry Marr
Financial Post

The Bank of Canada may be thinking about raising interest rates but there’s apparently no need to because Canadians are hunkering down to cool debt obligations on their own.

“The pace of growth in household credit is no longer a reason for the Bank of Canada to move from the sidelines any time soon,” says Benjamin Tal, deputy chief economist at CIBC World Markets.

He wrote a report released Wednesday that suggests central bank intervention is not needed, especially with consumers already seeing interest payments on debt eating into 7.3% of their disposable income as of the fourth quarter of 2011, even at today’s low rates.

“Why are you raising rates? To slow down credit growth — but it’s already slowing,” Mr. Tal says. “I say let the market slow naturally. We are so concerned about this but it’s moving in the right direction.”

Toronto-Dominion Bank economist Francis Fong also weighed in, suggesting Canadians have begun to get the message about having too much debt, based on the slowdown in consumer credit growth.

Even the chief executive of one of the big five banks joined the discussion, hoping to extinguish some of the panic about Canadian debt.

“When we look at the overall marketplace, there might be pockets of vulnerability but we remain quite comfortable,” said Gord Nixon, chief executive of Royal Bank of Canada “Frankly, I’d like to see the rhetoric come down a little bit.”

None of the talk is doing much to dissuade author Gail Vaz Oxlade from her beliefs that Canadians have far too much debt.

“Yeah, yeah, I have heard it,” Ms. Vaz Oxlade says. “The number don’t lie. If the numbers say we are decreasing and only adding by 0.1%, I’m not going to argue. But the fact is we are already carrying too much debt and it’s still going up.”

She wonders whether Canadians are getting the message, if they are not actually paying down debt. She doesn’t care if more of the debt is going into long-term mortgages: “What’s the difference? That’s just debt we’ll pay three or four times more for.”

The CIBC report does note that as of March 2012, mortgage debt rose by 6.3% on a year-over-year basis, which is below the average rate of growth seen in the past two years of 7.3%.

Mr. Tal says there will be a gradual softening in the housing market with prices falling 10% in the coming year or two. He says tougher rules from regulators on loans will cool the market and notes the banks themselves are questioning values, citing “the increased use of full-scale appraisals as part of the adjudication process.”

Overall, Mr. Tal says that for the first time since 2002 consumer credit is rising more slowly than in the United States.

“Consumer credit [growth] is basically zero,” he says, adding Canadians have been optimizing their credit situation by taking high-interest credit card debt and transferring it to lines of credit.

TD’s Mr. Fong agrees that Canadians are starting to “hunker down” and pay off their debt, but at the same time he suggests a two-percentage-point increase in rates would leave many households at risk.

“It is safe to say that with household debt levels at record highs, a sizeable number of Canadians households are ill-prepared and could lead to difficulty keeping up with higher interest payments,” said Mr. Fong, who added efforts of Canadians to lock in their rates should cushion the coming blow.

Scott Hannah, president and CEO of the Credit Counselling Society, still thinks there is plenty to be worried about. “Things are pretty fragile,” he says. “Debt is still growing and we’ve got to start paying it down. We have to be concerned with the level of debt the average Canadian is carrying.”