New Canadian Mortgage Rules are Possible
Below is a commentary on the possible new rules for Canadian mortgages. Anyone looking at buying with 5% down (which is about 80% of our clients) or using a 30 year amortization (75% of our clients) should look at buying sooner than later.
Comparing New Amortization & Down Payment Rules
Government mortgage restrictions instituted from 2008-2011 have not achieved their goal, suggests Desjardins’ Senior Economist Benoit Durocher.
He wrote this on Thursday: “…The third series of [government mortgage rules] was announced nearly a year ago now, and we must conclude that the tightening introduced to date has not
slowed the market enough.
Under these conditions, it is likely, and perhaps even desirable, that the federal government will shortly announce a fourth series of measures to further limit mortgage credit.”
It almost sounds like Durocher has some inside info.
He adds: “Among other things, the government could be tempted to once again raise the minimum down payment on new loans (it went from 0% to 5% in October 2008).”
Many believe a down payment increase would have a more chilling effect on home prices than the other option being talked about: a reduction in the maximum amortization from 30 to 25 years.
The difference in impact would depend, however, on the degree of rule changes.
For example, raising the minimum down payment from 5.0% to 7.5% (a possibility that’s been discussed) would require that entry-level homebuyers come up with $8,700 more on a typical Canadian home purchase. For most, that’s not totally out of reach.
A five percentage point increase to the minimum down payment is a somewhat different story. Requiring 10% down equates to $34,780 on an average home. That’s beyond the means of a sizable minority of first-time buyers.
First-time buyers are essential to home price stability. They account for 1/2 of unit demand according to Altus Group research. While the latest data suggests that average down payments are somewhere around 30% (an estimated $104,000), first-time buyers put down far less.
That means stricter down payment rules could potentially hurt home values at the margin, if other things are held equal.
In terms of amortization, a government-imposed reduction—from 30 to 25 years—would lower a typical family’s maximum purchase price by roughly 9%. (That’s based on today’s 5-year fixed rates, normal qualification guidelines, median incomes, and average consumer debt.)
To put this in perspective, a reduction in amortization from 30 to 25 years would cut a typical buyer’s maximum possible purchase price by ~$31,000 (again, based on an average income, average debt, a 5% down payment, etc.).
Fortunately, most people don’t need a 30-year amortization to buy a home. Despite 41% of homebuyers choosing extended amortizations, the majority could have qualified with a standard 25-year mortgage. (That said, this doesn’t mean that cutting amortizations across the board is justified. Well-qualified borrowers deserve a carve-out in the rules because they utilize extended amortizations for legitimate cash-flow management purposes. But that’s a topic for another day.)
Rates, spreads and all the rest
This is an article that was sent to me. It is totally technical and I love it. This is the real reason behind what are the lowest rates we have ever seen.
It also explains why the days of Prime -.95% are GONE for what looks like a long time.
In between the lines is says rates are going to go up quickly as soon as there is a sniff of recovery.
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In the last few days, RBC and Scotiabank have eliminated their advertised variable-rate discounts.
They’re now promoting variable mortgages at prime + 0.10%, twenty basis points more than their previous “special offers.”
Prime + 0.10% (i.e., 3.10%) is an interesting number. A few months ago consumers thought that fat variable-rate discounts were here to stay. Variables above prime will now come as a shock to some people.
The banks are well aware of that. They know that pricing above prime impacts consumer psychology.
They could have priced at prime. Spreads are not that horrendous. But pricing above prime makes more of an impact. It makes higher-profit fixed rates more appealing and it mentally prepares consumers for potentially higher VRM premiums down the road.
That said, banks are not just arbitrarily sticking it to borrowers. Far and away, the main reason variable rates are worsening is that banks’ costs are rising.
At the moment, there are multiple factors at play:
• Higher risk premiums are compressing margins.
O We have Europe to thank for the that.
O The TED spread, a measure of interbank credit risk, just made a new 2½ year high. As volatility increases, banks have to factor that into their funding models.
O Another reflection of risk is the most recent floating rate Canada Mortgage Bond (which some lenders use to fund variable-rate mortgages). It was issued at a 15 basis point premium over the prior issue in August.
• Margin balancing is an underlying bank motive.
O Banks have publicly stated their desire to even out margins between profitable fixed rates and low-margin variables, and they’re slowly doing just that.
O Back in September, RBC Bank exec David McKay put it this way: “…Given the dislocation between fixed and variable, the very, very thin margins (of variables), we felt we needed to move prices up in our variable rate book.”
• New regulations (e.g., IFRS) have boosted the amount of capital required for mortgage lending.
O That has lowered the return on capital for mortgages, and thus influenced rates higher.
• Status Quo for prime rate doesn’t help margins.
O Lenders partly rely on deposits (that money rotting in your chequing and savings accounts) to fund VRMs.
O Demand deposit rates rise slower than prime rate. So, when prime goes up, some lenders get wider margins temporarily.
O When expectations changed three months ago to suggest that prime rate will fall or stay flat (instead of rise like expected), it was bad news for some deposit-taking lenders. That’s because they now have no spread improvement to look forward to in the near-to-medium term.
O MBABC President Geoff Parkin says that until recently, “lenders have been prepared to accept low (VRM) profit margins with the knowledge that, as the prime rate inevitably rises, so too will their profit on variable mortgages.” As it turns out, the inevitable is taking longer than the market expected.
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Canadians still looking towards Alberta for employment
Comment – all the in-migration is what caused the home prices to boom form 200k to 400k in 6 months in 2006 and 2007. This is all happening again right now – as noted below.
The outcome will not be prices going to 600k but well priced homes will move quickly and there will be upward price pressure until most of the excess inventory is moved.
Alberta continues to be a draw for people in other parts of the country.
And that’s good news because in recent months there has been more talk about looming labour shortages in the future.
According to Dan Sumner, economist with ATB Financial in Calgary, 4,720 Canadians relocated to Alberta during the second quarter of 2011, largely unchanged from the 5,275 that moved here during the first quarter. But Alberta is on pace for about 20,000 net-interprovincial migrants in 2011, which if achieved will be the highest annual pace for net interprovincial migration since 2006.
Sumner says the largest net migration gain in the second quarter was from Ontario. Alberta was by far the largest benefactor of net-interprovincial migration in the country with Saskatchewan in second place gaining only 1,239 net migrants.
“Interprovincial migration can be a difficult variable to predict; however, with the unemployment rate lower in Alberta, wages higher, housing prices relatively affordable and the provincial economy expected to grow among the fastest in the country, it’s hard to imagine that more Canadians won’t be calling Alberta home over the near future,” adds Sumner.
“While more skilled workers is essential for the continued development of Alberta’s economy, it also puts pressure on social and institutional resources. As a former premier of this province once stated, ‘when people move to Alberta, they don’t bring their schools and hospitals with them’.”
Calgary resale homes top $400,000 average
CALGARY — The average price of resale homes in Calgary topped $400,000 in August, according to a report released Friday by the Conference Board of Canada.
The board said all residential property sales in the city hit an average of $404,755 during the month, up from $391,497 a year ago.
The seasonally-adjusted annualized rate of sales also jumped to 22,092 from 18,816 in August 2010.
And the annualized rate for new listings has also increased to 44,940 from 43,536.
The board said the sales to new listings ratio in Calgary increased to 0.466 in August from 0.410 a year ago.
The board also forecasts short-term year-over-year price growth of between five to seven per cent for Calgary.
According to the Calgary Real Estate Board, month-to-date up to and including Thursday, there were 740 single-family MLS sales for an average price of $466,754 and 307 condo sales for an average of $302,460.
For the same period in 2010 up to Sept. 22, there were 682 single-family transactions at an average of $467,486 and 258 condo sales for an average price of $280,790.
© Copyright (c) The Calgary Herald
Calgary MLS sales jump 22% in August
CALGARY — MLS sales in Calgary rose by 22.1 per cent in August compared with a year ago — a greater year-over-year rate of growth than the rest of the country.
The Canadian Real Estate Association said Thursday that Calgary recorded 1,907 MLS sales for all residential properties during the month for an average price of $394,251, up 2.2 per cent from last year.
New listings in Calgary rose by 11.7 per cent in August to 3,819 and the sales as a percentage of new listings jumped by 4.2 per cent to 49.9 per cent.
In Canada, sales of 39,542 were 15.8 per cent higher than August 2010 and the average sale price of $349,916 was up 7.7 per cent.
New listings in Canada rose by 13.4 per cent to 73,125 and the sales as a percentage of new listings jumped by 1.1 per cent to 54.1 per cent.
“The housing market in Canada remained on a firm footing in August when compared to volatile financial markets,” said Gary Morse, president of CREA. “Through their actions, homebuyers are showing that they remain confident about the stability of the Canadian housing market, and recognize that the continuation of low interest rates represents an excellent opportunity to buy their first home or trade up.”
Gregory Klump, CREA’s chief economist, said economic and financial market headwinds outside Canada are keeping interest rates lower for longer.
“Those headwinds will likely persist until, and indeed after, fiscal quagmires in the U.S. and Europe are resolved,” he said. “In the meantime, the Bank of Canada will have ample reason to delay raising interest rates further, which is supportive for the Canadian housing market.”
© Copyright (c) The Calgary Herald
Housing Market in Canada is Stable
Housing Market Still Stable: CREA
- Friday, 16 September 2011
According to new data released from the Canadian Real Estate Association, housing activity in Canada remained stable in the month of August, which represents the second month in a row.
“The housing market in Canada remained on a firm footing in August when compared to volatile financial markets,” said Gary Morse, CREA President. “Through their actions, homebuyers are showing that they remain confident about the stability of the Canadian housing market, and recognize that the continuation of low interest rates represents an excellent opportunity to buy their first home or trade up.”
Looking at specific metropolitan centres, Toronto and Ottawa registered a monthly increase in activity, compared with Calgary, Montreal and Vancouver registering slight declines. Year-over-year, actual sales activity nationally rose by 15.8%.
Representing the first time that year-to-date activity has surpassed 2010 levels, 324,030 homes have traded hands, which is also in line with the ten year average.
70% of all local markets were solidly in balanced territory for the month of August, which represents the largest percentage on record. Only 12 markets reported being in buyer’s market position.
The national sales-to-new listings ratio, a measure of market balance, stood at 51.6 per cent in August, unchanged compared to July. The actual (not seasonally adjusted) national average price for homes registered in at $349,916, which marks a 7.7 % increase year-over-year, which was also the lowest price point seen in 2010.
“Once again, economic and financial market headwinds outside Canada are keeping interest rates lower for longer,” said Gregory Klump, CREA’s Chief Economist. “Those headwinds will likely persist until, and indeed after, fiscal quagmires in the U.S. and Europe are resolved. In the meantime, the Bank of Canada will have ample reason to delay raising interest rates further, which is supportive for the Canadian housing market.”
Centres that had been hotbeds for both sales and for price appreciation, that had been having the effect of skewing national prices upwards like Toronto and Vancouver appear to have moderated somewhat, pulling price levels more in line with averages.
Owning a Calgary house more expensive: But still among most affordable in Canada
This is good news for those looking to buy. Prices are stable and affordable.
Owning a home in Calgary became more expensive in the second quarter of this year but housing in the city is one of the most affordable among major cities in Canada, says a report released Monday.
“The long hoped for rebound in the Calgary-area market that appeared to be on track earlier this year lost some momentum in the second quarter,” says the RBC Housing Trends and Affordability report.
“After posting two successive increases, home resales edged down during the April-June period, providing little impetus to prices, which continued to move sideways for the most part.
“With such absence of price pressure, the loss of housing affordability was minimal in the quarter. The RBC measures for the Calgary area rose between 0.4 and 1.1 percentage points, representing a smaller deterioration among major Canadian cities. Owning a home in the area, therefore, continues to be close to the most affordable that it has been in almost six years.”
The RBC Housing Affordability Measure, which has been compiled since 1985, shows the proportion of median pre-tax household income that would be required to service the cost of mortgage payments (principal and interest), property taxes and utilities. The higher the measure, the more difficult it is to afford a house. For example, an affordability measure of 50 per cent means that home ownership costs take up 50 per cent of a typical household’s pre-tax income.
In the second quarter, Calgary’s measures were 37.1 per cent for a detached bungalow, 38.5 per cent for a standard two-storey, and 23.0 per cent for a standard condominium. The measures increased by 0.6 per cent (bungalow), 1.1. per cent (two-storey) and 0.4 per cent (condo).
However, they are lower than a year ago by 3.1 per cent for a bungalow, 2.9 per cent for a two-storey and 1.6 per cent for a condo.
“Notwithstanding the latest bout of uncertainty, we believe that the strong economic fundamentals of Alberta and Calgary will find their way into the housing market and will support homebuyer demand in the period ahead,” says the report.
RBC says the average bungalow price in Calgary declined by two per cent year-over-year in the second quarter to $411,700 while a two-storey dropped by 1.6 per cent to $415,200 and a condo fell by 1.1 per cent to $249,000.
Sano Stante, president of the Calgary Real Estate Board, said prevailing negative economic conditions will restrain any increases in interest rates for awhile.
“Those are increases that we fully expected prior to these events and they’ve now been abated,” said Stante. “That was our biggest risk of deteriorating affordability.
“With an assurance that interest rates are going to stay low for the next 12 months anyway — and there’s somewhat of an assurance — then it really looks like we’re going to lead the nation in affordability especially when we start to get increased employment and in-migration towards the end of this year. That should really lend to a more robust real estate market.”
Robert Hogue, senior economist with RBC, said he too expects Calgary’s affordability to remain about the same.
“Previous to a few weeks ago we expected higher interest rates would start really putting more and more pressure across the board in Canada including in Calgary on the monthly costs of home ownership,” he said. “Now we’ve pushed everything out to the middle of next year.
“For the next few months or quarters I think chances are that affordability is probably will go sideways, the same as the housing market.”
© Copyright (c) The Calgary Herald
Is Calgary’s boom back? Consumer confidence seen climbing ‘with a vengeance’
CALGARY – From BMWs to Bentleys to a good bottle of wine, Calgary consumers are opening their wallets in what’s being described as more than just a recovering economy – with some even willing to say the word “boom” again.
Retailer Wayne Henuset is in the thick of it, discovering his own barometer to measure what is quickly turning into a healthier marketplace.
The owner of Willow Park Wines and Spirits says consumer confidence has been rising “with a vengeance” since fall.
“We know this because when things are bad, people just buy wine, on sale, and bring it home.
“But when times are good, the restaurants are buying more wine from us, because people are going out more. And that’s what’s happening.”
It’s one of myriad examples that suggest Calgary is reclaiming its economic swagger, as sectors across the board enjoy a surge in consumer and investment confidence, including high-end retail, real estate, construction and, most importantly, oil and gas.
Henuset adds that during the 2008-09 recession, reduced prices and spot sales were what brought customers in.
“Now they’re not really paying attention to that as much, they’re just buying whenever,” Henuset said, adding that the pricier, highend bottles are also getting bought up more.
According to the BMO Blue Book report released this week, Alberta is expected to lead the country in real GDP growth by next year as the province’s economy starts humming again.
Real GDP is expected to expand 3.6 per cent this year before moderating to 3.4 per cent by 2012, according to BMO Capital Markets.
In Calgary, recent reports have suggested record leasing activity in the downtown office market last year, with experts saying job growth isn’t far behind.
Meanwhile, job growth has already started in the construction industry with construction giant Ledcor launching a massive recruitment campaign, with plans to hire up to 9,000 people this year in Alberta and other parts of Western Canada.
In the energy sector, industry activity is way up, says oil and gas analyst Peter Linder, with drilling activity significantly on the rise, record land sales and job prospects improving.
Alberta Energy reported this week it had sold oil and gas leases or licences on 271,000 hectares of land worth $842 million, including a whopping $107 million for a 7,900-hectare licence near Red Deer.
“All of that means more activity in the energy industry, and that means much more jobs,” said Linder.
“In fact, I think we’re on the cusp of another significant labour shortage, another boom.”
Even the lower natural gas prices that have been a hurdle in recent years will start to recover, Linder predicts.
“The second half of this year will be far, far better than the last three years.”
Ben Brunnen, chief economist with the Calgary Chamber of Commerce, explains that as oil prices recover, Calgary’s oil and gas sector is enjoying increased activity and investment confidence.
As of March 2011, 59 oilsands projects valued at nearly $100 billion were either planned or already underway in Alberta.
“And when investment is good, incomes increase here. That’s a unique perspective for Calgary because we are the head office of oil and gas,” Brunnen said.
Businesses seem to already be reaping the rewards of more disposable income.
Justin Havre, a realtor with CIR Realty, says Calgary’s real estate market is bouncing back, particularly in the luxury home market with 44 homes sold for over $1 million in Calgary alone last month.
“The luxury market is becoming really active, and it’s usually a good indicator that there’s some confidence in our economy and in Calgary investment.”
Tony Dilawri, who runs several car dealerships including Calgary BMW and the Distinctive Collection, which sells Bentleys and Aston Martins, says the luxury car market has also improved from last year.
“We’re finding consumer confidence is definitely up as people become a little more willing to spend money on their vehicles.”
BMW sales are up 20 per cent from last year, Dilawri said, adding that some 20 new and pre-owned Bentleys and Aston Martins were delivered to customers last month. Dilawri says the Calgary kind of wealth is on its way back, a swagger that’s proud, but not too boastful. Calgary is not like Montreal and Toronto, he said, filled with old money that isn’t always affected by economic shifts.
“We’re young in Alberta, and we work hard for our wealth,” he said.
“So when we get it back, we want to have some fun. We don’t want to boast, but we want to reward ourselves.”
Brunnen agreed Calgary’s economy is bouncing back, but consumers are still cautious.
“The investment is there, and the consumer confidence will come with it.”
While optimism is growing in Calgary, however, the economic mood elsewhere is guarded. Reuters reported last week the global economy is still in flux, with investors wary that the real stresses still lie ahead. European debt uncertainties and the arrest of the head of the International Monetary Fund mixed with Arab revolt and Japan’s recovery from natural disaster are all contributors.
“It is clear that some investors have decided that they need to take some risk off the table, but they do not want to take too much off,” said Andrew Milligan, head of global strategy at Standard Life Investments.
eferguson@calgaryherald.com
Calgary region MLS sales and prices forecast to rise: CMHC
Good news:
House sales up 5%
Prices up 1%
CALGARY — A report by Canada Mortgage and Housing Corp. forecasts MLS sales in the Calgary region to increase by nearly five per cent this year compared with a year ago while the average sale price will rise by just over one per cent.
The CMHC’s Spring 2011 Calgary Housing Market Outlook, released Monday, predicted MLS sales in the Calgary census metropolitan area would hit 22,000 this year, up by 4.8 per cent, and increase a further 2.3 per cent in 2012 to 22,500 transactions.
The agency forecast the average sale price to increase by 1.1 per cent this year to $403,000 while it would jump another 2.2 per cent in 2012 to $412,000.
ALBERTA’S HOUSING AFFORDABILITY REMAINS STABLE AND ATTRACTIVE: RBC ECONOMICS
Calgary market transitioning into a more vigorous phase.
This is great news as affordability is super important. Note in Vancouver it takes about 3/4 of a person’s income to pay for their home. Yikes! Have a look at some other good reports here.
TORONTO, May 20 /CNW/ – Unlike most other major centres across Canada, housing affordability in Alberta remained stable in the first quarter of 2011, according to the latest Housing Trends and Affordability report issued by RBC Economics Research.
Until the fall of 2010, abundant availability of homes for sale in the face of sluggish demand kept housing prices firmly under control. Resulting stable or slightly declining property values contributed to a substantial improvement in affordability in Alberta last year.
“The Alberta market continued to be stuck in low gear in the first quarter of 2011. Sales of existing homes and construction of new housing units showed very modest increases,” said Robert Hogue, senior economist, RBC. “While market conditions have become more balanced in recent months, owning a home doesn’t seem to be getting more expensive in the provincial market at this stage. Affordability levels are still looking quite attractive.”
RBC’s housing affordability measures for Alberta, which capture the province’s proportion of pre-tax household income needed to service the costs of owning a home, remained relatively unchanged and below their long-term averages in the first quarter of 2011. The measure for the benchmark detached bungalow in the province moved up to 31.3 per cent (an increase of 0.4 of a percentage point from the previous quarter), the standard condominium stayed flat at 20.2 per cent and the standard two-storey home fell to 34.2 per cent (down by 0.2 of a percentage point).
RBC’s report notes that there are signs that the Calgary housing market is finally overcoming its protracted slump. Home resales in the area grew for the second consecutive period in the first quarter, the most growth since the middle of 2009, helping to remove market slack and setting a healthier balance between demand and supply.
“Calgary home prices have yet to break out of their listless trends, but they rose at their fastest rate in more than a year in the first quarter, with detached bungalows leading the way,” said Hogue. “Firmer market conditions and higher prices had only limited impact on Calgary’s affordability, which remains among the most attractive of Canada’s major cities.”
The majority of Canadian markets experienced weakened affordability in the first quarter of 2011. Most notable was the sizeable deterioration in British Columbia. More specifically, Vancouver saw significant gains in property values, which drove the already elevated cost of homeownership even higher. Quebec’s homebuyers also faced noticeable rises in ownership costs, while those in Atlantic Canada saw their affordability advantage somewhat diminish. The picture remained mixed in other areas of the country, with Ontario, Alberta and Saskatchewan experiencing ups and downs in ownership costs, depending on the housing type.
“Despite the latest erosion in affordability, provincial levels generally continue to stand near their long-term averages, suggesting that owning a home remains affordable or, at worst, slightly unaffordable across Canada – with Vancouver being a notable exception,” said Hogue.
RBC’s housing affordability measure for a detached bungalow in Canada’s largest cities is as follows: Vancouver 72.1 per cent (up 3.4 percentage points from the last quarter), Toronto 47.5 per cent (up 0.8 of a percentage point), Montreal 43.1 per cent (up 2.0 percentage points), Ottawa 39.0 per cent (up 0.4 of a percentage point), Calgary 35.9 per cent (up 0.9 of a percentage point) and Edmonton 31.5 per cent (up 0.5 of a percentage point).
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.