Fixed or variable? Time to revisit

Jonathan Ratner, Financial Post Published: Thursday, October 22, 2009
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While history has shown that variable mortgage rates save borrowers more money, the anticipated upward trend in interest rates as the economy emerges from recession could make this one of the rare periods when a fixed rate turns out to be the superior choice, a new report says.

Inflation may not have been a problem in Canada since the early 1990s, but there is an outside risk that inflation flares up amid record government deficits and as global central banks keep "the pedal to the policy metal," says a new report BMO Capital Markets. The inflation risk becomes even more prominent if the global economic recovery turns out to be stronger than expected.

This could force the Bank of Canada to aggressively raise interest rates, driving variable mortgage rates higher, but leaving fixed rate choosers unscathed.

"Another reason fixed rates are attractive in the current environment is that short-term rates are already as low as they can go -- rates are only going to move higher from here as the economy recovers," said BMO economists Douglas Porter and Benjamin Reitzes.

Fixed rates were advantageous during only two recent periods -- through the late 1970s and briefly in the late 1980s. In both cases, this was ahead of a period of rising interest rates, as is the case now, the economists added.

For those with limited financial flexibility who could run into problems if there was a pronounced upswing in interest rates, such as your average first-time home buyer, the moderate extra cost for the peace of mind a fixed rate mortgage provides may be worth it.

On the flipside, the case for variable rate mortgages is driven by an inflation outlook that remains benign as the soaring Canadian dollar puts downward pressure on prices. As a result, it looks like the Central Bank may follow through on its commitment to hold rates steady through June 2010.

There is also the possibility that fixed rates fall even further if the economy performs worse than anticipated.

Read more: http://www.nationalpost.com/news/story.html?id=2133046#ixzz0UmpgE2LO

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B.C. house prices forecast to hit new highs over next 2 years

By Business Reporter, The Province
October 21, 2009

B.C.'s born-again real-estate market will see house prices hit record levels in 2010 and 2011, a new report predicts.

Low mortgage rates and economic recovery are driving the sector's resurgent activity, Central 1 Credit Union said as it released a market forecast yesterday.

"The strong market momentum coming out of the recession will carry into 2010, driving unit sales and prices to new highs," Central 1 chief economist Helmut Pastrick said.

Housing sales, which fell 25 per cent in 2008, will rise 10 per cent this year and 30 per cent in 2010.

Sales are expected to dip slightly in 2011, reflecting a typical cyclical sequence of strong initial recovery, fall-back and then a renewed climb, Central 1 said.

The median sales price for residential properties in the province will climb to $369,000 in 2009 from $360,000 in 2008, Central 1 said.

A six-per-cent gain in each of the next two years will drive the median price to a record $391,000 in 2010 and $415,000 in 2011, Central 1 said.

"The monthly sales price will set a new high before the end of this year, regaining the entire amount lost during the recession," it said.

Housing starts, which will plunge from 34,321 in 2008 to an expected 14,600 this year, will also strengthen over the next two years.

The arrival of the harmonized sales tax on July 1, 2010, will add to the cost of higher-priced new homes, spurring builders to produce more units before it takes effect, Central 1 said.

"Builders are expected to ramp up production to meet the strong pickup in sales and build houses early in the year to beat the implementation of the HST," Central 1 said.

Starts will rebound almost 50 per cent to 21,400 units next year, rising to 27,500 in 2011.

Renovation spending is expected to rise four per cent to $5.5 billion this year from $5.3 billion last year.

With the Home Renovation Tax Credit expiring next February, renovation spending will slip to $5.35 billion in 2010. Resumed growth in 2011 will see spending rise to $5.65 billion that year, Central 1 said.

The jump in housing sales has been much more robust in metropolitan markets such as Vancouver and Victoria than in resource-dependent areas of northern B.C. or the Kootenay. Multiple Listing Sales will grow 45 per cent in Vancouver and 25 per cent in Victoria this year, the report said.

But sales gains of 30-50 per cent next year in the Okanagan, the northeast and Vancouver Island outside of Victoria will surpass the 20-25 per cent expected for Vancouver and Victoria.

A double-dip recession is identified as the biggest risk factor in the credit union's forecast but is given a less than 20-per-cent probability.

© Copyright (c) The Province

Why Canada's housing sector didn't collapse

Globe and Mail Update Published on Monday, Oct. 19, 2009

While it's tempting to think of a “housing correction” as a continent-wide phenomenon, National Bank Financial says the Canadian and U.S. markets couldn't be more different.

“The two have absolutely nothing in common,” senior economist Marc Pinsonneault wrote in an economic update Monday. “In Canada, the correction got under way much later and lasted nowhere as long.”

Mr. Pinsonneault said “prudent lending practices” in Canada prevented the housing market from falling as hard as its American counterpart, and pointed out that Canada's crisis was a side-effect of its recession rather than its cause.

Here are four ways the markets have differed:

Duration of slowdown

The Canadian market began to slide in October, 2008, while the American slump has lasted 2 1/2 years.

“People wishing to sell their homes either cut their asking price or quite simply took their property off the market,” he said of the Canadian market. “Lower interest rates, lower home prices and renewed consumer confidence led to a quick recovery in sales, so much so that as early as last May, these had surpassed pre-recession levels.

Price declines

According to Teranet, Canadian home prices fell 8.9 per cent from their August, 2008, highs to their recessionary lows eight months later. In the U.S., the S&P/Case Shiller index shows prices slid 33 per cent in 33 months.

Delinquency rates

Canadian banks have seen delinquency rates climb to 0.4 per cent, compared to the 0.65 per cent high reached in 1992. The number is far greater in the U.S., at 3.67 per cent.

Consumer spending

When home prices are under pressure, consumers tend to reel in the spending.

“According to Statistics Canada, from the end of Q3 2008 to mid-2009, the value of household real estate wealth sagged only 1.1 per cent,” he said. “The impact of this impoverishment on consumer spending has been negligible.”

In the U.S., the value of household real estate wealth dropped 18.2 per cent. The Federal Reserve estimates that for each dollar lost in housing wealth, consumer spending pulls back up to 15 cents.

Steve Ladurantaye

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Hong Kong apartment sells for $57 million

THE ASSOCIATED PRESS

HONG KONG — It’s a price tag that would make even New Yorkers and Londoners gasp — an outsized luxury apartment sold for nearly $57 million US in Hong Kong Wednesday amid growing fears of a real estate bubble.

The five-bedroom duplex suite with as much as 6,158 square feet was sold to an unidentified buyer from mainland China, said the developer, Henderson Land Development, a major Hong Kong property company. It is believed to be Asia’s most expensive property by square foot at nearly $9,200.

Aside from an aroma spa centre, fitness room, outdoor yoga gym and grand harbour views, the new homeowner will enjoy an exclusive address in the hills of Hong Kong’s main island — “a majestic realm for the city who’s who,” according to a statement from the developer.

The deal comes at a time when ever-higher prices of Hong Kong real estate, benefiting from mainland China’s booming market and easy money sloshing through the world financial system, are inspiring worries of a bubble in the making. Several blockbuster deals in the tens of millions of dollars have made headlines of late.
Hong Kong’s leader, Donald Tsang, said Wednesday in his annual policy address that the government may free up more land for development to help add supply and bring down prices.

“The relatively small number of residential units completed and the record prices attained in certain transactions this year have caused concern about the supply of flats, difficulty in purchasing a home, and the possibility of a property bubble,” Tsang told lawmakers.

The city has long had one of the world’s most expensive property markets, with prices that many local residents are hard pressed to afford. About 47 per cent of Hong Kong lives in publicly subsidized housing, according to government data.
At 39 Conduit Rd., the name and site of the building where the high-end apartment was purchased, another unit was snapped up for a mere $51 million.

The building “offers a chance to allow the elites in town to enjoy such prestigious property,” said Thomas Lam, Henderson’s sales general manager.

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Average Canadian home prices up slightly, says Royal LePage survey

The Canadian Press

TORONTO - The housing market may be recovering, but is experiencing an under supply of homes for sale in southern Ontario and elsewhere in Canada.

That's according to the latest house price survey by Royal LePage. It says with the recession retreating, home prices are stabilizing and unit sales are increasingly driven by improved affordability.

Royal LePage says the average price of a two storey home in Canada is up just 0.1 per cent from a year ago at $409,335.

Average bungalow values grew 0.06 per cent year-over-year to $341,146, while the price of an average condo increased 0.09 per cent to $243,748.

Royal LePage says a shortage in housing supply is leading to bidding wars in several cities, including Toronto, Montreal, St. John's, N.L.; St. John, N.B. Moncton, Edmonton, Calgary, North and West Vancouver, and Victoria.

While the Atlantic provinces saw a strong recovery in home prices, western provinces have been slower to recover from significant price corrections in 2008, particularly in British Columbia and Alberta.

Ontario and Quebec saw home prices stabilize or gain slightly year-over-year with much of the recovery occurring in a strong third quarter.

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