By Chris Sorensen - Saturday, March 30, 2013 - 0 Comments
Canadians look south at home loan heaven
Finance Minister Jim Flaherty has been scolding mortgage lenders who offer their customers five-year fixed rates below three per cent, lest they spark a flurry of home buying and further inflate Canada’s housing bubble. Meanwhile, south of the border, where the housing market is just beginning to claw its way back from its 2007 implosion, banks are wooing nervous consumers with rates that are just a touch higher—at 3.63 per cent—but can be locked in for 30 years. Not only is that a far better deal than Canada’s current 10-year fixed rates of 3.69 per cent, the maximum term most lenders will offer, but it’s a great way to guard against an inevitable rise in interest rates down the road.
On the surface, it seems like another case of Canadians getting a worse deal than their American counterparts—not unlike when they buy a hardcover book or a new car. Across the board, mortgages are now cheaper in the U.S., where interest rates are currently lower and competition much greater in general. The 30-year mortgages are also not, technically, fixed-rate, because they can easily be refinanced by borrowers who want to take advantage of lower rates. “The person borrowing can get out at any time by switching to another lender, or just by paying it off,” says Nicholas Rowe, an associate professor of economics at Ottawa’s Carleton University. “The rates can’t go up, but they might go down if you find a better deal.”
While a great deal for borrowers, Rowe cautions the U.S.-style 30-year mortgage still comes at a price. Since lenders face an increased risk if rates fall, they need to compensate by charging slightly higher interest rates. (In contrast, the most popular Canadian mortgages are “closed,” meaning they can’t be refinanced or paid off early without incurring a penalty, and are for significantly shorter terms—usually five years.) Patrick Lawler, the chief economist of the U.S. Federal Housing Finance Agency, said in a panel discussion two years ago that U.S. borrowers pay at least an extra 0.25 to 0.5 percentage point in rates in exchange for the option to prepay without penalty and sometimes “another percentage point or two” to have a long-term fixed rate, according to a report in the Wall Street Journal. Nevertheless, as many as 80 per cent of borrowers in America opt for 30-year mortgages, which are backed by housing finance giants Fannie Mae and Freddie Mac (another reason why U.S. rates are cheaper despite heightened risk).
By The Canadian Press - Tuesday, March 19, 2013 at 9:01 PM - 0 Comments
OTTAWA – Finance Minister Jim Flaherty is coming under fire for using his position…
OTTAWA – Finance Minister Jim Flaherty is coming under fire for using his position to pressure a private sector mortgage lender to raise its interest rates.
“That’s Banana Republic behaviour,” said NDP Leader Tom Mulcair, who added the minister has no business interfering with the free marketplace.
Liberal interim leader Bob Rae called the minister’s actions “ridiculous” and in essence working to increase borrowing costs for Canadians.
“Either we have a market or we don’t,” he said. “The banks have huge profits. The idea that they shouldn’t be able to give a break to consumers is ridiculous and the idea that the Minister of Finance would basically be trying to create some kind of a cartel among the banks and the financial institutions as to what they can offer consumers by way of interest rates is I think completely inappropriate, completely wrong actually.”
On Tuesday, Flaherty admitted he asked a member of his staff to phone Manulife Financial Corp. (TSX:MFC) after it had cut its posted rate for five-year fixed mortgages to 2.89 per cent from 3.09 per cent.
The company quickly reversed its decision, saying only that “after consulting with the Department of Finance, Manulife Bank has withdrawn the promotional campaign and reverted to our previous posted rate.”
It’s the second time in a few weeks that Flaherty interfered in the mortgage market. Earlier in the month, he called the Bank of Montreal (TSX:BMO) after it had dropped its posted five-year rate to 2.99 per cent, but on that occasion BMO did not reverse itself.
Afterwards, he thanked other institutions for not following the BMO lead, at least until Manulife’s brief discounted offering.
Since the government tightened mortgage rates in July, Canada’s housing market has slowed considerably in terms of sales, starts and even prices. Two weeks ago, the Bank of Canada signalled it was no longer as concerned about Canadian debt levels, saying it does not expect the situation to worse appreciably from its current high levels.
Slowing home sales and credit, however, has intensified competition among financial institutions and banks for a dwindling slice of the mortgage market, a relatively safe and lucrative sector of the industry.
Flaherty told reporters he acted with Manulife to keep lenders from taking on risky loans and was happy with the company’s subsequent decision.
“As I said before, we encourage prudent lending practices, we don’t want a race to the bottom on mortgage rates by our financial institutions so I’m pleased at their response,” he said.
“I had one of my staff call them and indicate my displeasure, which is the same thing I did with the BMO except I called myself.”
But the opposition leaders said the government has no right to interfere in the free marketplace once it sets the ground-rules. To act otherwise is to substitute its opinion for that of the players in the market.
“That company is operating completely with full respect of the law, they see an advantage in attracting clients at this rate, why shouldn’t they go out to do that?” Mulcair asked.
“It’s none of his business. It’s the minister’s opinion, it’s nuts. We’ve never seen this before.”
Flaherty has for the past several years complained that Canadians are borrowing beyond their means, particularly on mortgages, and worried they will be trapped once interest rates start to rise.
To slow down borrowing, he has tightened the rules on four occasions, reducing the amortization rate to 25 years from a historic high of 40 years, which was reached under Flaherty’s watch.
As well, he has asked the federal watchdog on financial institutions to enact stricter lending practices and controls.
While the first three attempts did little to slow down the housing and credit growth, the last move in July seemed to accomplish the trick. The market has been on a steady downward slide ever since, with analysts predicted prices may fall between 10 per cent and 25 per cent over the next few years.
The central bank notes that credit growth has also slowed, adding it expects household debt to disposable income to remain at or near the record level of 166 per cent, where it has been the past two quarters.
But while Ottawa has apparently succeeded in pricking the housing bubble, one of the offshoots of the policy has been to slow down economic growth to below two per cent.
By macleans.ca - Thursday, March 14, 2013 at 6:00 PM - 0 Comments
A weekly round-up from around the world
Up to the task
Jim Flaherty’s decision to scold the Bank of Montreal for dropping its five-year mortgage rate to 2.99 per cent was seemingly out of character. But the pro-competition finance minister was left with little choice after BMO’s move threatened to undo Ottawa’s efforts to cool the housing market and rein in household debt. With England-bound Bank of Canada governor Mark Carney bizarrely declaring the country’s debt worries over, the task of saving Canadians from themselves has fallen to Flaherty. He deserves credit for taking on the unenviable task.
A basic right
A Quebec court judge rejected a preposterous bid by the lawyers of alleged killer Luka Magnotta to have parts of the trial conducted out of the public eye. Though the media is generally prohibited from reporting what happens during a preliminary hearing, at least until the trial is over, Magnotta’s lawyers were hoping to have the public barred from the courtroom entirely, arguing that the high profile nature of the case could jeopardize Magnotta’s right to a fair trial. But in an era when publication bans are increasingly commonplace, the ruling wisely upheld the public’s equally important right to see the wheels of justice in motion.
By Julian Beltrame, The Canadian Press - Monday, March 4, 2013 at 7:13 PM - 0 Comments
OTTAWA – Despite ongoing concerns about high levels of debt, analysts say interest rates…
OTTAWA – Despite ongoing concerns about high levels of debt, analysts say interest rates in Canada are going nowhere except perhaps down — as demonstrated by one major bank’s decision to shave the rate it charges for five-year mortgages.
The Bank of Montreal (TSX:BMO) has dropped its posted five-year fixed mortgage rate by 0.10 points to 2.99 per cent in an effort to attract new borrowers ahead of the important spring real estate market.
Other banks may follow suit, although analysts note that many borrowers have been able to negotiate a 2.99 rate or lower even when the posted rate among major Canadian banks was at 3.09 per cent
The concern is that with teaser mortgage rates like the one announced Sunday by BMO, Canadians will continue to invest in real estate and push home prices up, with potentially dire consequences for the economy and homeowners.
In a statement, Finance Minister Jim Flaherty said he has taken several steps — including reducing the maximum amortization period to 25 years from 30 in July — to discourage marginal buyers from being lured into taking on a bigger mortgage than they can afford over the lifetime of the loan.
Flaherty also warned banks to be wary.
“As I have said repeatedly before, my expectation is that banks will engage in prudent lending – not the type of ‘race to the bottom’ practices that led to a mortgage crisis in the United States.”
In a report Monday, the U.S.-based Fitch rating service said it believes Canadian homes are overvalued by approximately 20 per cent in real terms, although it does not expect big a correction.
But analysts said lenders are merely responding to the market forces given that the Bank of Canada appears rooted to keeping its trendsetting policy rate at one per cent for much longer than was anticipated a few months ago.
Borrowing costs for banks have fallen, said David Madani, chief economist with Capital Economics in Toronto, freeing room for banks to lower their rates.
He noted that Royal Bank chief executive Gord Nixon noted last week that the demand for mortgages has also dropped.
“Banks will be banks. It’s not the first time the banks have tried to undercut each other in order to prop up their loan growth,” Madani said.
And interest rates are unlikely to feel any upward pressure any time soon, said CIBC chief economist Avery Shenfeld.
Also on Monday, CIBC World Markets extended its forecast for when the central bank would start hiking rates to the third quarter of 2014 — six months longer than it had previously anticipated.
Shenfeld said he would like to see bank governor Mark Carney drop his tightening advisory on Wednesday, the next rate setting meeting, but doubts he will for fear of enticing Canadians to borrow beyond their means.
“I think the bank should drop that rate hike warning to help cool the currency even further to help exports, but I doubt they’ll do that,” he said.
Lower mortgage costs could revive what has been a slowing housing market, say analysts, but given that household debt is at record highs and income growth has been modest, the inducement may not be as effective as in previous years.
“Borrowing is slowing anyway, so I don’t believe that a modest drop (will make much of a difference),” said Shenfeld. “A modest drop in five-year mortgage rates might induce more people to lock in rather than take a variable mortgage, but I doubt it will have a huge impact on the volume on borrowing.”
Scotiabank’s Derek Holt also said he was not convinced by the “mortgage wars” scenario, suggesting that the recent sudden loss of momentum in housing had more to do with indebted households than Flaherty’s moves to tighten mortgage rules last summer.
“With pretty much all of the run-up in (housing starts and construction) being due to rising condo construction over recent years, what has prompted the cooling may have considerably more to do with a turn in the leveraged investor’s math than tighter mortgage rules,” Holt said in a note to clients.
Madani, who has long warned that housing is overheated and headed for a sharp correction, said lower mortgage costs won’t help, however.
“Some people believe housing prices only go up, so it’s now or never,” he explained. “Particularly first-time buyers, they look at today’s mortgage rates and say, ‘If I don’t buy today, I’ll be priced out.’ “
By Ben Rabidoux - Tuesday, September 11, 2012 at 1:39 PM - 0 Comments
August resale and housing starts figures are now out for all three of Canada’s biggest cities, and it’s not a pretty picture.
When the August resale data for Vancouver came out last week, the headline news was that sales had fallen to their second lowest level for the month since 1998. Sales were 30 per cent below what they were in August of last year and 40 per cent lower than the August average of the past 10 years.
But the numbers are even worse than the headline reveals. On paper, August 2008 holds the record as the weakest month of the past 15 years. However, it had two fewer week days than August 2012. If calendar differences are taken into account, last month represents the lowest sales volume of any August in 15 years.
By Chris Sorensen - Thursday, October 7, 2010 at 10:40 AM - 0 Comments
Housing affordability is deteriorating as prices remain stubbornly high
Canada’s hot housing market may be cooling off, but that doesn’t mean owning a home is about to get any cheaper. A study this week by the Royal Bank of Canada suggests that affordability continues to deteriorate across Canada, placing “greater than usual stress” on homebuyers. The problem is that, while interest rates are rising and fewer people are buying, housing prices haven’t budged because fewer homes are being put on the market. RBC says the situation doesn’t present an immediate threat for most of the country, with the possible exception of Vancouver where hikes in mortgage rates are amplified by a greater disparity between home prices and income levels. “Generally, we have dismissed the case of housing market bubbles in Canada,” the report said. “But the situation in Vancouver is probably the closest to one in the country.”
By Jason Kirby - Saturday, September 4, 2010 at 10:20 AM - 0 Comments
For all the ominous talk of a housing market collapse, the end result could be yet another rebound in prices
As the housing market stalls, several people who bought pricey Vancouver condos before they were built are suing to get out of the deals. In Toronto, condo sales during the first half of the year fell for the first time since 1994. And at least one homeowner near Halifax just offered to give away his house for free, so long as whomever took it assumed the $395,000 mortgage. Everywhere, tales of real estate woe and miserable sales data have prompted predictions of a crash. James Grant, a prominent U.S. investment newsletter author well known for his bearish outlook on the American economy, has warned house prices here are primed to fall: “The median Canadian house is, in fact, certifiably unaffordable.” Even if prices tumble, though, as happened in 2008—when the economy was also teetering and house prices were at record levels—they could still make another surprising comeback.
No question Canadian prices are outrageously high. As Grant points out, compared to rental rates, home prices in Canada are more than 60 per cent above the historical average. And with home ownership rates and household debt levels higher than they’ve ever been, Scotiabank economist Derek Holt says there’s nowhere for prices to go but down. “This time when we come off the boil, prices are going to stay lower,” he says.
By Jason Kirby - Thursday, December 17, 2009 at 9:33 AM - 17 Comments
A home is seen as a ticket to retirement. But is that wise?
It may be winter, but Vancouver’s love affair with real estate is in full bloom. After a brief pause to mark the recession, the hot topic over lattes is once again square footage and million-dollar views. Which is roughly the price tag Michael Lin kept coming across last week as he and a friend sat in a Granville Street café surfing MLS, the real estate listing website, on his laptop.
Lin, a computer programmer in his late 20s, has watched the ups and downs, and then ups again, of Vancouver’s housing market from his rented apartment. Now, with the economy in repair mode and mortgage rates still near record lows, he’s eager to take the plunge into the city’s condo market. He admits prices are higher than he’d like, but believes he can easily cover the mortgage payments even if interest rates start to rise. But when asked whether he will have enough left over at the end of the month to save for retirement, he chuckles. He wasn’t saving much before, either. “This way,” he says, “I’ll be forced to save.”
Lin has plenty of company. A growing number of Canadians have come to view their homes as the ticket to a secure retirement. There’s a lot to be said for that approach. Your house is the biggest investment you’ll ever make, and it compels you to watch your pennies. It’s also true that those Canadians who had all their money tied up in their homes instead of stock markets have come through the financial crisis with their household balance sheets largely intact.