Jenkins says no housing bubble

Mon Feb 22, 2010 3:39pm EST

VANCOUVER (Reuters) - The Canadian housing market is strong, but it is not experiencing a bubble, Paul Jenkins, senior deputy governor of the Bank of Canada said on Monday.

The Canadian government said last week it will bring in new mortgage rules to cool the housing sector and prevent home buyers, tempted by record low interest rates, from overextending themselves.

At the same time, it said there was no housing bubble, a point echoed on Monday by Jenkins, who was speaking at a panel discussion at the government of Canada and Financial Times Global Business Leaders Day in Vancouver, where the housing market is especially hot.

"At the moment, we are certainly seeing a certain amount of the recovery in the Canadian economy coming from the housing sector" he said.

"I would certainly not say we are looking at a housing bubble," he added.

Unlike the struggling U.S. housing market, sales and prices of existing homes in Canada soared last year, boosted by the central bank's near-zero interest rates and the resulting low-cost mortgages. Many in the industry have forecast further strength in 2010.

(Reporting by Nicole Mordant, writing by John McCrank)

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MORTGAGE INSURANCE RULES ANNOUNCEMENT

This morning, Federal Finance Minister Jim Flaherty announced prudent changes to mortgage insurance rules intended to come into force on April 19, 2010. CAAMP was actively engaged in the discussions around these changes which are as follows:

1. All borrowers must meet the standards for a five-year fixed rate mortgage even if they choose a mortgage with a lower interest rate and shorter term;
2. The maximum amount one can withdraw in refinancing their mortgage will be reduced to 90% from the current 95% of the value of one's home;
3. Non-owner occupied properties will require a minimum down payment of 20%.

There were no changes to down payment requirements or length of amortizations for owner-occupied residences

Courtesy of CAAMP

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Real estate market heats up in capital

Looming interest rate hike fuels multiple offers on starter homes

By Carla Wilson, Times Colonist February 9, 2010

Strong demand is once again fueling multiple bids for attractive starter homes in Greater Victoria -- just as the Canadian Real Estate Association is predicting national records this year for average prices and sales.

Local buyers are shopping for homes in the $450,000 to $600,000 range, real estate agent Geoff McLean said yesterday. "When it comes on and it's well-priced, they are jumping on it."

Multiple offers are less frequent for properties priced above $600,000, he said. A good-quality basement suite can attract $1,000 per month in rent, so "suites are a big draw," McLean said.

The market is hotter now than it was this time last year, when sales slumped during the recession. But McLean said it isn't "as fast and furious as it was in 2007 and 2008."

Greater Victoria inventory is tighter these days and buyers are shopping now because they expect interest rates to rise later this year, McLean says.

The harmonized sales tax, coming into effect in July, is also spurring sales.

The province has announced that the threshold for the HST housing rebate will increase to $525,000, meaning most buyers of new homes will not pay more tax than they would have prior to the HST. But the rules are not understood by all would-be home buyers, said McLean, as the tax will not apply to existing homes.

Randi Masters, president of the Victoria Real Estate Board, said Greater Victoria has a balanced, steady market without too much, if any, pressure for higher prices.

"One exception is the upward pressure being seen on entry-level homes and homes with suites, or easy potential [for suites]." Some multiple offers are coming in that category, where first-time buyers are coming into the market because interest rates are low, she said.

House prices vary drastically within Canada. The average price of a single-family house in Victoria last month was $644,678, with a median of $595,000.

But the Windsor, Ont., housing market, for example, is very different. In the price range of up to $400,000, a total of 1,387 houses are listed on the Multiple Listing Service. The top of that category features newer executive-style homes, with multiple bedrooms and bathrooms. Compare that with the capital region where there are only 75 listings in that category, including mobile homes, and many out-of-town properties.

As Canada's housing market regains its feet, the idea of tightening mortgage-lending rules is being raised within the financial sector and government. The discussion centres on boosting minimum down payments to 10 per cent and restricting amortization periods to 25 years, as they once were. As it stands now, mortgage insurance is required from homebuyers borrowing more than 80 per cent of the value of their home from a financial institution covered by the federal Bank Act.

Today's rules require buyers to have a down payment of at least five per cent, and there's a 35-year amortization limit.

Bank of Canada governor Mark Carney has warned about rising levels of household debt, which is reaching record levels. Finance Minister Jim Flaherty has suggested he's prepared to tighten mortgage requirements.

"One of the legitimate concerns of the finance minister might be if you make qualifying for mortgage-default insurance prematurely restrictive that it will quell housing activity, even as erosion in affordability continues," said Gregory Klump, chief economist with the Canadian Real Estate Association.

Michael Holmes, managing broker for Pemberton Holmes in Victoria, said tighter mortgage rules would have some effect here, but he does not think it would be dramatic.

Greater Victoria's housing market is balanced and continues to attract retiring baby boomers, he said.

Nationally, housing resales and prices are predicted to hit record highs in 2010, said the Canadian Real Estate Association.

B.C. and Ontario are expected to be in the forefront in both average prices and number of sales because of low interest rates and eagerness to buy in the first six months of this year, before the HST is imposed on both provinces, the association said.

A national total of 527,300 sales are predicted for this year, up 13.3 per cent from last year. If that number is reached, it would top the previous record, set in 2007, by 1.2 per cent.

Canada's average home price is expected to climb by 5.4 per cent over last year, to a record $337,500.

Next year, both average prices and sales values likely will decline as interest rates increase and pent-up demand is absorbed, the association said.

cjwilson@tc.canwest.com

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Canada Mortgage Bonds 101

Enhance financing that reduces mortgage financing costs for Canadian homebuyers

Canada Mortgage Bonds (CMBs) are debt securities fully backed by CMHC, that provide investors with a return that’s better than government bonds. CMBs are important to the Canadian housing market, because they provide vital liquidity to keep the housing market moving.

The amount of debt outstanding under the CMB program has increased by 20% over the last year (mid-August 2009) to $168 billion and attracted international investor support, which suggests continuing investor confidence in the Canadian residential real estate market.

Here’s how the process works:

1. Lenders originate mortgages
2. Lenders aggregate a group mortgages (also known as pools) for the purpose of selling them to investors
3. Lenders sell these pools as mortgage-backed securities (MBS) to the Canadian Housing Trust (CHT), a CMHC-run entity
4. The CHT sells Canada Mortgage Bonds (CMBs) to generate funds to buy the lenders' mortgages
5. The CHT uses the MBS cash flows to make interest payments on these CMBs to investors.
6. The lenders take their proceeds and re-circulate them again as new mortgages

Because CMBs are fully guaranteed by the government, investors demand less interest on CMBs. That lowers the cost of funds for lenders and thereby lowers the cost of mortgage financing in Canada.

Courtesy of First National Financial

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British Columbia Enacts Significant Changes to the Strata Property Act

In December of 2009, the Province enacted several changes to the Strata Property Act (the “Act”). Some of the key changes which take effect January 1, 2010 include:

1. Special Levies: Strata corporations must account for funds raised by special levy, separately from other strata funds. The strata corporation must invest those funds in investments permitted by the regulations or in insured accounts with savings institutions in British Columbia. They may also charge interest on money owed and outstanding by strata owners per a special levy. As a result, the strata corporation will be able to register liens against a strata lot for interest owing due to late payment of the levy. Lastly, some special resolutions fail where a bare majority but not a ¾ super-majority of strata owners vote to assess a special levy to repair or replace common assets. In such instances the Act now permits the strata corporation to apply to either Provincial or Supreme Court, not later than 90 days from the vote, for an order authorizing the special levy be assessed and the repairs go forward, irrespective of the failure to achieve the requisite ¾ vote.

2. Rental Restrictions: Under the new provisions, new strata corporations would not be able to change rules about rental units that impact the rights of owners and purchasers or the marketability of the units. Owners would be able to continue to rent their units until the date the rental period originally defined by the developer in the Form J Rental Disclosure Statement expires. Existing strata owners do not benefit from these changes.

3. Age Restrictions: The Act now grants strata corporations the express authority to pass bylaws restricting the age of persons who may reside in a given strata lot.

In addition, look for the following provisions in the Act to be brought into force later in 2010:

1. Audited Financial Statements: The Act will require that the strata corporation’s financial statements be audited. Owners and purchasers reviewing the statements will know they are materially correct and conform to generally accepted accounting practices. This audit requirement may be waived by a ¾ vote of the strata owners.

2. Depreciation Reports: Strata corporations will be required to obtain regular depreciation reports (a “Report”). The Report must estimate repair and replacement costs for major items in the strata corporation, as well as the expected lifespan of those items. Owners may waive this requirement by a 3/4 vote. Strata corporations must disclose the Report in a Form B request made by owners or purchasers or their representatives.

3. Changes to Dispute Resolution: Under the former provisions of the Act most Strata disputes were required to be submitted to the B.C. Supreme Court for resolution. Under the new provisions, many of these same disputes may proceed in Provincial Court.

4. Form B Information Certificates: In addition to requiring that the Form B details the most recent depreciation report, the new provisions of the Act will require that the Form B detail which parking stalls and storage lockers are allocated to a particular strata lot.

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Make Sure you can afford your Dream Home

January 11, 2010
By Jim Adair

For first-time buyers in particular, it s a confusing time. Canada is just coming out of a tough recession that cost a lot of jobs and hurt consumer confidence. Everyone is aware of the troubled real estate market in the U.S. But since the spring, Canada s resale housing market has been booming, thanks to rock-bottom mortgage interest rates. So is now the time to buy and take advantage of the low rates?

While today s ultra-low borrowing costs represent a unique opportunity to purchase a property, home buyers need to proceed with caution and keep in mind that renewal rates will likely be substantially higher in coming years, says Sal Guatieri, senior economist with BMO Capital Markets.

Jan Yuen, a senior manager at BMO Capital Markets, adds: Stretching the limits of your budget by choosing the maximum amortization period and a minimum downpayment leaves you little wiggle room to deal with an unexpected financial challenge. A meaningful downpayment and shortening your amortization by making extra payments on your mortgage will save you tens of thousands of dollars in interest costs.

For example, Benjamin Tal of CIBC World Markets says that on a $250,000 mortgage with a five per cent rate amortized over 30 years, adding a full month of extra payments each year works out to a de facto shortening of the mortgage amortization period by five years. If interest rates have gone up, translating years into basis points means that by simply switching from an accelerated payment plan to a regular one means borrowers would be able to absorb the first 75 basic points on a rate increase, says Tal.

BMO advises borrowers to do a stress test on their budget to see if they can afford rate increases. For example, customers looking to renew a $250,000 mortgage currently priced at 2.25 per cent would see their monthly payment to increase by $260 a month if rates were to increase by two percentage points, says BMO.

BMO also suggests that mortgage holders make weekly or bi-weekly mortgage payments if possible. They should also take a close look at fixed versus variable-rate mortgages. While variable-rate mortgages have been a winning strategy over the long term, fixed-rate mortgages (currently at historic lows) come with the peace of mind of being insulated against rate increases and knowing how much of your mortgage you will have paid down at the end of your term.

It says total household costs, including mortgage payments, property taxes, heating and utilities, should not be more than one-third of household income.

The Bank of Canada says that 5.9 per cent of Canadian households are vulnerable to rising interest rates because their debt-service ratio is more than 40 per cent. It says that if rates rise by 300 basis points by 2012, that percentage of vulnerable households would rise to 8.5 per cent.

But in a recent report, Tal says that focusing on a borrower s debt-service ratio with no reference to the underlying asset (the equity in the house) can be misleading. He says when equity is added to the equation, the number of households that would be vulnerable to a rate shock is less than four per cent.

Another potential buffer to rate shock, says Tal, is the fact that most Canadian financial institutions limit their variable-rate customers to a mortgage that they would qualify for at today s three-year fixed-term rate, well above current variable rates. While all borrowers will face the impact of higher rates, most of them will therefore be able to absorb a 300 basis point rate hike and still remain within the qualification threshold.

Tal adds: Also note that in general, low-income Canadians tend to rely more heavily on fixed-rate mortgages -- the complete opposite of the situation south of the border where low-income Americans were heavy users of variable-rate mortgages. While even fixed-term mortgages will eventually be reset, the longer time frame for any hikes in their borrowing rates leaves them with more time to pay down principal and benefit from rising incomes before that hits.

Many analysts believe the housing market will slow down during the coming year, and that house prices will not appreciate as rapidly as in 2009. In the housing industry, everyone from the Mortgage Brokers Association of British Columbia to the president of the Building Industry and Land Development Association of Toronto is urging Flaherty to let the market settle down on its own before taking regulatory steps.

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Top 10 financial resolutions for 2010

Roma Luciw

From Monday's Globe and Mail Published on Sunday, Jan. 03, 2010 6:26PM EST Last updated on Monday, Jan. 04, 2010 4:18PM EST

With 2009 slated to go down as a tumultuous time for your money, 2010 could prove to be the year when Canadians put their financial house in order – provided they can get their balance sheets under control.

Heading into the new year, debt is the biggest financial hurdle for many families, says certified financial planner Bradley Roulston, a manager of the Nelson & District Credit Union in British Columbia.

“Household debt – mostly mortgages and consumer debt – has increased to record levels. And with interest rates bound to go up, people need to make sure they have enough cash flow to sustain a few percentage [point] increases on their payments.”

The debt-to-income ratio among households hit a record this year. The latest Statscan

report showed that for every $100 of personal disposable income, Canadians are carrying $145 in debt, up sharply from $88.60 in 1990. The ballooning debt comes at a time when the Bank of Canada is warning of higher interest rates.

Citing potential interest rate increases, Manulife Securities senior financial adviser Kurt Rosentreter is advising clients shopping for real estate in 2010 to take defensive measures. “Resist overpaying for a home, delay the purchase of secondary or recreational real estate, save for larger initial deposits and focus on debt repayment more than new, optional portfolio savings.”

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