By Chris Sorensen - Friday, March 8, 2013 - 0 Comments
Why rock-bottom mortgage rates could spell trouble
Canadian lenders are hoping a return to rock-bottom mortgage rates will reignite a cooling housing market that threatens to take a bite out of their income.
The Bank of Montreal recently shaved its advertised five-year fixed rate to 2.99 per cent for the second time in less than a year, prompting federal Finance Minister Jim Flaherty to reiterate an earlier warning of the need to avoid “the type of ‘race to the bottom’ practices that led to a mortgage crisis in the United States.”
Analysts say the falling rates are a predictable response to Canada’s sluggish economic growth, just 0.6 per cent during the fourth quarter, as well as to expectations the Bank of Canada may not hike its trendsetting rate, stuck at one per cent, until 2014.
But the falling mortgage rates also threaten to undo Flaherty’s controversial efforts last summer to gradually let the hot air out of the housing market by tightening rules for government-backed mortgages, reducing the maximum amortization period to 25 years from 30. That, in turn, could push home prices farther into the stratosphere—at a time when debt rating agency Fitch argues they are 20 per cent overvalued—while adding more debt to Canadians’ creaking balance sheets.
A short-term boost, to be sure, but it’s the hangover we should be worried about.
By Tamsin McMahon - Monday, March 4, 2013 at 7:00 AM - 0 Comments
Around the world, housing is fuelling a whole new frenzy of speculation and unrealistic optimism
For the past decade American economists Karl Case and Robert Shiller, whose Case-Shiller indices are considered the official barometer of the U.S. housing sector, have regularly polled recent home buyers on where they think house prices are headed. The 5,000 buyers in their survey have proved remarkably perceptive, consistently predicting how far prices would rise or fall a year into the future.
But when they asked buyers where they thought prices would be in a decade, a different picture emerged. Buyers have regularly predicted large and steady long-term increases in home prices. Even in 2009, during the depths of the financial crisis as prices fell more than 30 per cent, buyers were still predicting their homes would likely double in value over the next 10 years.
With this enduring faith in the infallibility of house prices, America’s housing market suddenly seems to be springing to life once more. Nationally, prices jumped more than 12 per cent in January over the previous year, the largest increase since 2006. Prices are up in more than 100 cities, according to real estate data firm Zillow, with increases above 10 per cent in more than 47 major centres.
By Chris Sorensen - Wednesday, January 9, 2013 at 3:59 PM - 0 Comments
The housing bubble has burst, and few will emerge unscathed
Keith Roy began warning his clients about a faltering Vancouver housing market in early 2012. The realtor says he was tipped off not by industry statistics, but by chatter across backyard fences. “When you hear about a homeowner who thinks his neighbour got too much money when he sold his house, you know there’s something going on,” says Roy. “That was the first clue.”
The next shoe to drop was a handful of homes in desirable west side neighbourhoods that took a few extra days to sell. Sensing a shift in the market, Roy put his own house up for sale in June and penned a blog posting the following month that advised people to “cash out.” Though he was criticized by fellow agents for breaking rank, Roy says he now feels vindicated after watching Vancouver home sales crumble to their lowest point in more than decade, with prices falling 3.5 per cent since hitting a high last May. The lesson? Recognizing a looming real estate downturn is more art than science; once it shows up in the numbers, it’s too late to do much about it. “One day the phone just stops ringing,” Roy says. “Then you’re in it.” Continue…
By Chris Sorensen - Wednesday, July 18, 2012 at 10:34 AM - 0 Comments
There are signs the real estate market may finally have stopped soaring
There’s a theory that whenever someone plans the world’s tallest skyscraper—whether it’s the Empire State Building in the late 1920s or the Burj Dubai in the mid-2000s—a financial disaster can’t be far behind. But could the same be true when it comes to over-the-top condo projects in Canada, a country many believe is in the grips of a massive real-estate bubble?
Barely a month ago, the developers behind the proposed E Condos in Toronto released a set of stylized renderings of the project, scheduled to be completed in 2017. They depicted two slender towers with glass-walled swimming pools that will partly overhang the sidewalk a dozen-or-so floors up, granting bathing-suit-clad residents “amazing underwater views of the city.”
It may just be a coincidence, but the eye candy appeared around the same time Toronto’s blazing real estate market finally began to lose steam. Sales in Toronto slumped 13 per cent during the month of June, with the biggest decline—18 per cent—coming in the city’s frothy condo sector, which Finance Minister Jim Flaherty has identified as a key source of concern.
By Ben Rabidoux - Thursday, May 24, 2012 at 1:21 PM - 0 Comments
Ben Rabidoux is is an analyst at M Hanson Advisors, a market research firm, where he focuses on Canadian mortgage and credit trends and their implications for the broader economy.
The Canadian Centre for Policy Alternatives made quite a stir a few weeks ago when they released a report detailing a “secret” Canadian bank bailout. The report focused on three programs the government used to support Canadian banks during the financial crisis–primarily the $69 billion Insured Mortgage Purchase Program initiated by Ottawa as a means to ensure that banks would be able to keep funding consumer mortgages. The report labeled the IMPP a “bailout,”but banks were quick to point out that this program presented a zero net increase in taxpayer liabilities as these mortgages were already insured by Canada Mortgage and Housing Corporation.
However, the 2011 CMHC annual report reveals clear evidence that taxpayers did in fact take on significant risk in propping up the mortgage market during the financial crisis and Ottawa owes Canadians some answers on exactly why this was allowed to happen.
First, though, some background. In Canada, bank-originated mortgages with less than a 20 per cent down payment must carry mortgage insurance, which is typically paid for by the borrower. CMHC is the primary provider of such insurance in Canada. However, banks also have the ability to purchase insurance on pools of low-ratio mortgages (i.e. where the borrowers have made a down payment of more than 20 per cent of the value of the house) if they choose. This is commonly known as “bulk portfolio insurance.”
As the table below shows, CMHC bulk portfolio insurance for low ratio mortgages ballooned in 2008 and 2009, at the height of the financial crisis, and then again in late 2011. CMHC recently announced that it is going to start heavily rationing bulk portfolio insurance as it rapidly approached its $600 billion parliamentary-approved mortgage insurance cap–which Ottawa, as I have written before, isn’t likely to raise as CMHC insurance represents a direct liability of the Canadian government (i.e. taxpayers) and stood at only $250 billion in 2003.
By Gabriela Perdomo - Wednesday, April 18, 2012 at 10:37 AM - 0 Comments
Despite warnings, the province’s government is offering incentives for first-time homebuyers
While warnings about a Canadian housing bubble and rising household debt keep piling up, the government of British Columbia appears intent on fuelling the fire. This spring, first-time homebuyers can get a cash-back bonus of up to $10,000 for a newly built home. This “tax relief,” which aims to also “assist the residential construction industry,” will last until 2013. Government stimulus seems like the last thing Vancouver’s market (the priciest in the country) needs. Tina Mak, a broker with Coldwell Banker in Vancouver, knows of at least two condo projects that sold out in a matter of hours earlier this year with prices starting well above $500,000. Robert Kavcic, an economist with BMO, explains the intent of the program is “to ease the transition back into the [provincial sales tax] system.” With the harmonized sales tax, implemented in 2010, taxes for new homes rose from five to 12 per cent. A referendum forced the province to scrap the HST. It will be discontinued next spring. Kavcic thinks the bonus will help the industry through a down year, as people hold off on entering the new home market until taxes drop. Sales will likely go back to normal in 2013, he adds. But Mak expects a buying boom. Her phone has been ringing off the hook with clients interested in the rebate.