Home Purchasing

As if property in Vancouver didn't cost enough, now realty firm Royal LePage is predicting that real estate prices in the Metro Vancouver area will rise by 7.2 per cent in 2010. With the average 2009 price of a home in Vancouver sitting at $592,000 that's not exactly small change.

Obviously, what happens will depend upon how much mortgage rates increase in mid-2010, when the Bank of Canada has stated that the key overnight lending rate is likely to rise.

At this point, Canada Mortgage and Housing Corporation (CMHC) predicts that Canadian mortgage rates will potentially rise by less than a percentage point this year, which should still be manageable for most home buyers.

In my early-twenties, I bought a condo in downtown Toronto. When I bought it, it was an empty lot and a drawing on a piece of paper. It took over three years for it to become a building. I only lived in it for two years before I sold it in search of a detached house with a yard. While the condo was a two bedroom unit, I didn't think that the 700 square foot apartment would be able to hold my growing family.

David Foot, demographer and author of Boom, Bust & Echo, says that it's "downtown in your twenties, suburbs in your thirties and forties". Apparently, I'm true to my demographic.

While families are getting smaller, the typical condominium unit averages one bedroom and is only 600 square feet. That's a tight fit for anyone with a family.

Of course, when I moved out of the downtown core there were many trade-offs: more space meant a longer commute and a larger mortgage payment, but it was worth it to have more space.

It's the Christmas season and everywhere people are wrapping presents big and small. Some are bigger than others, a lot bigger. After days of writing about personal debt warnings and real estate bubbles, I just couldn't resist sharing this article that I came across this morning.

It seems that a self proclaimed "off the wall" real estate agent in Oshawa, Ontario decided to gift wrap a client's new house for them, just in time for Christmas. The agent used gold and silver wrapping paper and wrapped the house in red ribbon fashioned out of plastic tablecloths.

With mortgage rates at historically low levels, the realty market is very competitive and this agent claims to include fun in his list of offered services. It's a great prank, but who has to clean it all up?

Another day, another survey  -  this time real estate agents and mortgage brokers were asked to rank the biggest issues faced by home buyers over the past three months.

The number one concern among buyers? Not surprisingly, 38 per cent said that they were uneasy about economic volatility. This was followed, at 33 per cent, by those who said that they were worried that they wouldn't be able to sell their current home for an excellent price.

Despite these concerns, 20 per cent of respondents said that they have not heard concerns from buyers. That means that one-fifth of Canadians are feeling secure enough in their own personal situations during the economic downturn to take on a home mortgage. With rates likely to rise in 2010, this would be the time to buy a house.

I was standing in line at Starbucks the other day when glancing at the cover of the Globe and Mail I couldn't help but notice the gigantic headline under Colin Firth's smirking face:

• The average price of a house in Canada
• October 2008: $282,583
• October 2009: $341,079

That's an increase of $58,496 on average to buy a house in Canada. Did I miss something? Aren't we in an economic downturn?

That's an increase of $58,496 on average to buy a house in Canada. Did I miss something? Aren't we in an economic downturn?

The price of houses has escalated so much that people are lining up overnight (or recently in Toronto for up to a week) to be the first in line to purchase units in new condo developments.

I know that home mortgage rates are unbeatable right now, but I can't help but wonder how long until the market becomes unsustainable.

Last month the Canadian Association of Accredited Mortgage Professionals (CAAMP) released their Annual State of the Residential Mortgage Market in Canada report. The report is based on several resources including an online survey of 2,000 Canadians.

The report shows that new housing starts between August and October 2009 were generally down across Canada from the previous year. However, the overall good news is that despite the economic downturn, Canadian consumers are optimistic that this is a good time to buy a home.

As well, the average MLS resale price for local markets was up. As of October 2009, the least expensive place in Canada to buy a house was Saint John at $178,632. The most expensive properties continue to be in Vancouver with an average amount of $638,948.

With the Bank of Canada expected to hold the interest rate at 0.25% and the prime lending rate at 2.25% until mid-2010, there's still time to contact your mortgage broker to get into the housing market before rates rise.

It seems that all the doom and gloom about the current economic downturn hasn't dampened consumer demand for residential properties. Every day I see yet another article discussing how housing sales are booming due to low interest rates. Traditionally, November isn't the busiest month in the real estate market but this whole economic crisis seems to have changed all the rules.

Last month saw the Metro Vancouver area's third busiest November ever. The Real Estate Board of Greater Vancouver reported that 3,083 sales were made through the Multiple Listing Service, a 12.4 per cent increase from last November.

It's not only first time homebuyers taking advantage of the low rates, but established homeowners who are interested in upsizing their houses for roughly the same monthly mortgage payment.

Of course, it's important to realize that by the time those mortgages terms are up interest rates may have dramatically risen. It'll be interesting to see which direction housing sales figures take by November 2010.

While I knew that home ownership was taking a huge chunk out of my budget every month, I didn't realize just how much. A recent report released by RBC Economics Research shows that home ownership costs (the cost of carrying a mortgage as well as property taxes and utilities) are on the rise.

But what really got me was exactly how much pre-tax income was going towards my house in Toronto and how it differed across the country. According to RBC - using an average detached bungalow as a benchmark - almost half (48.6%) of my gross income is being spent on housing costs.

The study outlined how the rest of the country stacks up:

• Vancouver: 66.8%
• Ottawa: 39.2%
• Montreal: 37.5%
• Calgary: 36.7%

Mortgage brokers expect rates expected to rise in 2010 and housing prices on the rebound, it looks like the cost of ownership is going to keep going up. My only consolation at this point is that at least I don't live in Vancouver.

When it comes to new home purchasing, the power has shifted to buyers. The Canadian Real Estate Association (CREA) reported last Friday that listings on MLS sites across Canada reached record levels in July. Residential listings came in at 80,147 units, up 1.4 per cent from June and up by half a per cent over the previous record set in May.

With so many houses on the market, buyers are seeing a "healthy correction" in prices, according to Michael Gregory, an economist with BMO Capital Markets. A larger housing inventory means buyers can afford to be choosy and take their time, which translates into lower listing prices.

Affordability has affected new home purchasing in the past few years, but with more homes listed, prices have begun to drop slightly. CREA reported that the average July 2008 sale price was down 2.4% compared to July, 2007. CREA's chief economist, Gregory Klump, expects price gains to be very modest into 2009, another sign that this is a buyer's market. More good news - Klump believes that the fundamentals of Canada's economy are strong and that we will avoid a U.S.-style housing market collapse.

New home purchasing (as opposed to resale) is becoming an option for fewer people and it is not just because of high housing prices. Current GST rebate policies have also had an impact on the affordability of new homes, according to the Canadian Home Builders' Association (CHBA).

As it stands right now, anyone purchasing a new home or condo valued at less than $350,000 will receive a refund of 36% on the GST charged. Sounds good, but what if you live in a large or even medium-sized city where new homes in that price range are hard to come by? Seems you are out of luck. If your home costs between $350,000 and $450,000, the amount of the GST rebate is pegged to the cost of the home, declining proportionally to zero. So if you buy a $400,000 house, the GST rebate will be only 21%. If your house costs more than $450,000, there is no rebate at all.

A tax that makes new home purchasing less affordable is particularly troublesome in today's market, where all predictions point to a significant decline in new home starts. As Michael Moldenhauer wrote this past weekend in the Toronto Star, the CHBA is proposing that the federal government follow through on a long ago promise to "adjust the thresholds at least every two years to ensure they continue to reflect changes in housing prices."

Moldenhauer continues by noting that since the GST was introduced in 1991 the Statistics Canada new house price index has increased by more than 57%. If the GST rebates had been adjusted to home purchase prices, the drop-off in rebates would now apply to new homes priced between $550,000 and $750,000 and that $400,000 home would get the full 36% rebate.

Until the policy changes, people considering a new home purchase would do well to mull over this state of affairs and ensure their mortgage covers them in the very likely case that the cost of their house makes them ineligible for a GST rebate.

If you are buying your first home or wrestling with choosing the right mortgage, Rob Carrick's "Personal Finance" column in today's Report on Business gives some valuable insight on whether to go for a fixed-rate or variable-rate mortgage.
 
Canadian banks and industry analysts are still coming to terms with the Bank of Canada's June 10th decision not to raise its main lending rate.  The Bank of Canada's decision to hold its main rate instead of cutting it to stimulate economic growth highlights the concerns that G7 central bankers have over the possibility of renewed inflation.
 
Whether first-time home buyers or those wrestling with all-important refinancing decisions should go variable-rate and bet that interest rates are not headed up when the BofC reconvenes to look at interest rates on July 15th, or whether prudent mortgage shoppers should lock into fixed-rates that are still very low historically is perhaps the question of the day given the Bank of Canada's somewhat unexpected position on its main rate.  The answers to that question, however, are mixed.
 
"Locking into a five-year mortgage right this minute is not a bad play, Mr. Carrick writes, noting that "some lenders may still offer comparatively good deals on this term." This despite a 0.85% surge in the fixed-rate mortgages the banks are offering this week in the wake of the Bank of Canada's interest rate move (or, rather, non-move).  Yet locking-in may not be the best move for everyone currently in the market for a mortgage.
 
"There's a rough consensus that the cost of variable-rate mortgages is going to rise at some point in the next six to 12 months, Mr. Carrick rightly observes." " The Bank of Canada signaled this last week when it faked out all the analysts who were expecting a rate cut and instead left rates untouched."
 
Yet Mr. Carrick points out that there is a solid rationale in the current rate structure for mortgage buyers who are looking at signing on at the current low rates for a variable-rate mortgage with a view to converting to a fixed-rate mortgage when the prime rate starts to rise, as can be expected, later this year.
 
Given the volatility and seeming unpredictability of the Canadian mortgages market as analysts and bankers continue to struggle with the twin specters of slowed economic growth and the potential for inflation increasing given soaring (for now) energy and commodities prices, whether to go variable-rate or fixed-rate is a perplexing question, even for industry analysts.  The best advice, it seems, if you are buying your first home or wrestling with the task of choosing the right mortgage is to consult with a trusted and experienced Canadian mortgage broker and have them do the math and comparison shopping for you.

For those Canadians making or contemplating their home purchasing options and looking at a fixed rather than variable rate mortgage, now may be the time to act.  In the wake of what, to some, was a surprising announcement that the Bank of Canada would not further lower its benchmark main overnight lending rate (the interest rate that financial institutions use to peg the interest rate they charge for prime loans and variable-rate mortgages), the market for five-year Canadian government bonds rallied.  Unlike variable-rate mortgages, fixed-rate mortgage interest historically tracks the rise and fall of the five-year government bond market.  News that the bond market has rallied in wake of the Bank of Canada's action (or, rather, inaction) on June 10th should trigger consumers shopping for the best fixed-rate mortgages out there to lock in now, rather than later.

"(A)ny increases in fixed mortgage rates may be limited by competition for customers in a cooling housing market, particularly as credit market conditions improve, writes financial reporter, Alia McMullen, in today's National Post. Yet, all indications are that the Canadian real estate market is in the midst of a soft landing, rather than the precipitous fall we have winessed in the U.S.

While banks, credit unions and caisses depots may be initially reluctant to mark up their fixed rate mortgage rates, keeping a wary competitive eye on each other, don't expect this initial reluctance to last for long.  If you are weighing a home purchasing decision, now is most likely the opportune time to take advantage and lock into near-historically low mortgage rates, given the voiced concerns of central bankers across the G7 about increases in inflationary pressures on our economies - notably that of Federal Reserve Chairman, Ben Bernanke, and now rookie Bank of Canada Governor, Mark Carney.  A further Bank of Canada rate cut seems unlikely when the Bank of Canada re-examines its main rate on July 15th, when Canadians are likely to still be experiencing record-high gas prices in the midst of the summer driving season.  Continuing high energy and commodity prices seem only likely to put more pressure on the government bond market and push fixed-rate mortgage prices higher.

Home purchasing is still, for most, the first step in wealth accumulation and management.  Wednesday's Globe and Mail special information supplement on Canadian mortgages stated the case quite clearly: "A first home can create tax-free wealth."

"We're still at historically low interest rates, and we're in a declining rate environment," according to TD Canada Trust's V.P., of Real Estate Secured Lending, Joan Dal Bianco.  Ms. Dal Bianco points out that, "compared to rent, it is quite feasible to get into the housing market."  Indeed, in all but the most competitive rental markets, most non-apartment building rentals, house rentals, townhomes and semis etc., will rent out for more than it would cost with a 5% down payment to carry a mortgage on the rental property.

However, before making a home purchasing decision prospective first-time purchasers should consult an experienced Canadian mortgage broker - just as they would engage an experienced realtor - for wise counsel.   Buying a first home is a big life event," Ms. Dal Bianco notes. "It's important for first-time homebuyers to know what they're willing to pay before they get emotionally attached to a home."

With a wide variety of mortgage plans making home purchasing available at an earlier life and career stage for individuals' or couples' who would otherwise be renting, it is important for these first-time homebuyers to seek professional advice regarding the best available products and strategies for making and paying for what is likely to be their largest single lifetime investment.  One mortgage specialist cited by The Globe & Mail commented particularly on relatively new mortgage products with 30 and 40-year amortization rates.  These new mortgage products are increasingly being utilized to move from renter to homeowner earlier than was possible when amortization periods were fixed at a 25-year maximum.  "Increasingly, you see more first-timers take 40-year amortizations, but set up their payments based on a 25-year amortization, Lisa Luinenberg, president of Cortgage Centre Canada observed.  "This avoids higher interest costs, but provides the option of reverting to the lower 40-year paymnent level if something unexpected happens."

The Globe and Mail's helpful survey of the ins-and-outs of the current Canadian mortgage market underscores how important the advice of an experienced mortgage broker is when you are confronted with, if not the biggest, than the first big investment decision of your life.

The Bank of Canada has slashed its main interest rate by .5%. This second rate cut in the last six weeks set the table for the major banks to reduce rates for Canadian mortgages in order to bring the Canadian real estate market to a soft landing. While the major banks, which usually reduce their prime lending rates lockstep with a move in interest rates by the BoC, they were initially reluctant to do so. But by the end of the business day, TD-Canada Trust cut its prime rate and all of the major banks followed suit. What does that tell us for the Canadian mortgage and housing markets?

To answer this, we have to look at the BoC’s reasons for cutting its main rate. The consensus, according to The Globe and Mail is that the Bank of Canada’s rate cut was due to the weakening of the United States’ economy and its ongoing credit liquidity crunch. The downturn in the U.S. economy, particularly, is viewed as likely slowing Canadian growth by reducing the demand for exports to the American market.  Yet, the BoC still forecasts growth of 1.4% in the Canadian economy for 2008 and 2.4% growth in 2009, while the Canadian dollar remains strong against the American greenback despite a likely 3.5% drop in exports to the weakening U.S. market.

Does this mean that the BoC is likely to drop its main rate even further? Perhaps, but any further decreases in borrowing costs are likely to be modest, saiys Doug Porter, BMO Nesbit Burns’ deputy chief economist, as quoted by The Globe and Mail.The BoC has noted that the inflation rate remains below its 2.0% target and is likely to remain low at least until the Canadian economy returns to higher predicted growth rates in 2010. Richard Kally, senior economist at TD-Canada Trust, in analyzing the BoC’s latest rate cut notes that Canada's central bank seems to be concentrating on risk factors that are “looming over the horizon”, despite the latest round of statistics that “have underscored a resurgent strength in Canadian home construction, manufacturing and international trade.”

With larger than normal inventories of resale homes listed in a real estate market that is hesitant in its traditionally heaviest season, and the BoC’s main rate now 3% lower than it was last fall, now could be the time for astute buyers to enter the market.  While the introduction of extended mortgage amortizations of up to 40 years in 2006, rather than the customary 25, has some analysts questioning whether this has not kept the heat under Canada’s housing market. However, so long as prospective mortgage shoppers have their fundamentals in place this could be the time to go house shopping.

The introduction of 40 year mortgages has, of course, introduced a somewhat increased degree of vulnerability into the Canadian market for mortgage lenders, nonetheless more prospective purchasers are now able to enter into the housing market at point significantly earlier in their earning careers. Buying a house has become increasingly accessible,” observes Globe and Mail business reporter, Tavia Grant. The flipside, though, is that more home buyers are now susceptible should the housing or labour markets weaken, or if interest rates change direction.”

While interests rates have moved in the right direction and are likely to stay on that course, albeit with more moderate cuts when the BoC reviews its main rate again in June, prospective first-time buyers will need to be both proactive and cautious when searching out the right house deal.  When deciding whether now is the time to move from the rental market to home ownership, it seems only prudent to advise that first-time home buyers seek out the advice of a trusted and experienced Canadian mortgage broker to assess the timing and the mortgage product that is most appropriate for their current situation.