Market looks up just as government changes mortgages | Toronto Real Estate Trends

Market looks up just as government changes mortgages

By Dan Chalcraft


Looking to buy a house and not sure what the real estate market is doing? The real estate market is starting to balance out changing from last year, when it was more a buyer’s than a seller’s market.

“It was an increase of 15 per cent of houses sold but a decrease in value of about 5 per cent as the economy was still hurting us; it was a buyers market,” said Heather Malin, owner/broker of Drayton Valley’s ReMax Vision Realty. She stated that this past year there were 123 houses sold by ReMax in Drayton Valley and the average price of a home came to $271,913 according to the statistics from Remax. This was an increase from 2009, as they sold 104 houses and the average price of a home came to $285,111.

Malin stated that the Canadian economy was still trying to turn around in the early part of 2010, however she indicated that sales were picking up in the latter part of the year and looking optimistically towards the future.

In Brazeau County, the number of homes sold was 40 in 2010 and the average home was going for $329,375 which was up from 2009 where there only 32 homes sold but the average cost for a home was more expensive priced at $341,531.

“There are a lot of the middle of the road houses are selling and some more expensive homes, we had one sell for more than $500,000” she said.

She pointed to the fact that it’s a lot of younger people buying with it being hard to sell adult condo.

According to Malin, 40 per cent of houses sold by Remax were under $250,000 in 2010, the other 40 per cent were purchased between $250,000 to $350,000, then there was another 15 per cent that sold for between $350,000 to $400,000 and then only 5 per cent that bought a property over $400,000.

In Brazeau County, there were up to 40 per cent of the homes sold in the range of $250,000, where between the $250,000 to $300,000 there were 23 per cent of the homes sold.

Seventeen per cent of the homes sold in the $350,000 to $500,000 range and 20 per cent of the homes sold were over $500,000 with the most expensive property being a newer home in Parview Estates in the $600,000 range.

On Jan. 17, the Federal Finance Minister Jim Flaherty announced that beginning March 18, the maximum amortization period for a mortgage will drop to 30 years from 35, effectively reducing the maximum Canadians can borrow for their home.

Canadians will also be able to borrow less when they refinance mortgages and the government will stop insuring home equity lines of credit.

“The Canadian Housing Mortgage Association are doing this for the good of Canadians as they don’t want them too far in debt”, said Malin. “We don’t want to see the mistakes that have taken place down in the United States.”

She believes that the shift in the amortization period will not have much of an affect, believing it really doesn’t make a lot of difference in your monthly mortgage payment and depending on the size of the mortgage it could only mean a difference of $50.

Dawn Konelsky, owner/broker at Kastle Real Estate feels that the switch from 35 down to 30 years amortization rate change will affect home buyers who cannot qualify at the monthly payment because it will be higher.

Konelsky noted people already struggling with getting a down payment or people with high consumer debt will be affected as the 5 per cent on a new mortgage remains the same along with 10 per cent down on a new home for the self employed.

“I believe that this [the government stop insuring home equity lines of credit] will have little impact as the banks lowered the refinancing rate back last April from 95 per cent – 90 per cent equity,” said Konelsky. “Now they have dropped it again to 85 per cent but most banks were not allowing any higher of a rate anyway.”

Roger Coles, a broker at Century 21 in Drayton Valley stated that he’s never sold a house in his 20 years in real estate with a 35 year mortgage and at Century 21 they prefer people to take a lower amortization to save on interest payments and to own your house sooner. He added that people would be saving between $13,000 to $15,000 on a 30-year mortgage by taking five years off that amortization.

Joseph Doucet, Enbridge Professor of Energy Policy in the School of Business at the University of Alberta who specializes in Alberta and Canadian economies said; “changes in mortgage rules are designed to reduce the risk of default in the market, so obviously they target buyers who would be at risk of default if interest rates rise.” “Overall [it] will make home purchases more difficult for some, but that may not be a bad thing if the affected parties are not able to bear the risk of rates rising,” he said.

The Bank of Canada on Jan. 18 left its key policy rate unchanged at one per cent while slightly boosting its outlook for economic growth this year and next year due to a pickup in U.S. demand and an anticipated strong rebound in business investment.

Doucet stated the very low interest rates provide stimulus for the economy, which is good overall as the county is coming out of a recession, and the economy is still relatively fragile. Society can’t lose sight of the fact that we depend a lot on US economy and the global rebound as for homeowners and those who owe money such as mortgages, and a line of credit low interest rates are obviously good, lower cost of borrowing, he said.

The Canadian Real Estate Association stated activity will drop nine per cent to 402,500 units in 2011 due to lack economic and job growth, muted consumer confidence and the resumption of interest rate increases are expected in 2011.

Kevin Sommerville, Bank of Montreal branch manager in Drayton Valley stated that the amortization change isn’t going to have much of an affect on homeowners, but it will for first time home buyers mainly because they are mostly in a low-income bracket.

“The main problem that people run into when buying a home is saving up money for the down payment,” he said. Sommerville added that it wouldn’t have much of an affect in Drayton Valley since many people here have such a high income and they can afford it.

“It’s a small town with a lot of money” said Sommerville. “Lots of young guys are working in the oil patch making like $7,000 a month.”

A survey unveiled by the Canada Mortgage and Housing Corporation revealed that most home buyers are between 25 and 34 years of age, plan to purchase a home within a year and will be buying with a spouse or partner. They prefer a two-bed apartment or townhouse between 800 to 1,199 square feet, a target price between $300,000 to $399,000, with down payments of at least 10 per cent of the purchase price.

These statistics doesn’t surprise Sommerville. “

People around here that are that age are planning to buy a home as in most cases they are married and they have a joint income.”

He stated that in Drayton Valley people, on average are looking at a three bedroom and 1,200 square feet with a garage.






Real estate dominating Canadian debt deals – The Globe and Mail

Real estate dominating Canadian debt deals


Globe and Mail Update

There is a reason you keep seeing stories about powerful Canadian real estate companies, like the Globe’s lunch with RioCan’s chief executive officer Edward Sonshine, or a sneak peek at what Oxford Properties has coming: these firms are looking to grow.

To do that, they need acquisition funds, which prompted four of them to tap the market for new debt last week. Not only were the funds successfully raised, but all of the issues were upsized, according to Desjardins Securities.

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The issuers included RioCan REIT (REI.UN-T23.39-0.02-0.09%), which raised $225-million to redeem $180-million of outstanding debt that paid 8.33 per cent annually; First Capital Realty (FCR-T15.590.010.06%), which raised $150-million; Cadillac Fairview Finance Trust, the real estate funding vehicle of the Ontario Teachers’ Pension Plan, which raised $2-billion in two parts; and H&R REIT (HR.UN-T20.55–%), which raised $180-million.

At the end of last week, real estate debt comprised about one-third of all new Canadian debt to date in 2011. Taking out the bank issuances, it blows every other sector out of the water.


Banks in spotlight amid rising housing debt

Banks in spotlight amid rising housing debt

Construction continues on new homes in the Arista Homes and Fieldgate Homes Vaughan Valley subdivision outside Toronto in Vaughan, Ontario, Canada, on Monday, Nov. 30, 2009.

Norm Betts/Bloomberg

Construction continues on new homes in the Arista Homes and Fieldgate Homes Vaughan Valley subdivision outside Toronto in Vaughan, Ontario, Canada, on Monday, Nov. 30, 2009.

John Greenwood, Financial Post · Wednesday, Jan. 26, 2011

Amid rising uncertainty around the Canadian economy many analysts are quietly expressing concern about the banks and their exposure to ballooning consumer debt.

One statistic that gets bandied about is the value of outstanding mortgages which recently passed the $1-trillion mark.

What happens if employment starts to deteriorate and a lot of borrowers suddenly find themselves unable to make their payments? How would such an event impact real estate prices?

The good news for investors is that a major chunk of the riskiest home loans is guaranteed by the CMHC (read taxpayers). That’s great because mortgages represent the lion’s share of consumer debt.

But what kinds of other consumer debt do the banks hold and how much risk does that expose them to?

In the old days the answer would have been a simple ‘not much,’ but in recent years lenders have had huge success with so-called HELOCs, probably the second biggest category of debt after mortgages.

We say “probably” because there is limited public information. Apart from TD which provides good transparency (a total of about $58-billion of HELOCs outstanding) and to some extent Royal, the Canadian banks reveal very little about their HELOC portfolios even when they represent a significant chunk of total assets.

HELOC stands for home equity line of credit, or loan secured by your house. The key to their appeal is the flexibility of not having to make regular principal payments.

Earlier this month the federal government announced plans to stop allowing banks to get CMHC insurance for HELOCs, which came as something of a surprise to the market as it was not generally known that such loans were ever eligible for government guarantees.

Leaving aside the question of why CMHC insures HELOCs in the first place, the obvious question is how many of those outstanding are backstopped by taxpayer?

If, as with mortgages, the majority of risky loans are insured, investors can stop fretting. If, on the other hand, there’s only limited protection maybe it’s time for lenders to shed more light on the issue.

But the answer to that question is not easy to find. The CMHC, hardly a paragon of transparency at the best of times, does not disclose the information. Nor do the banks.


First-time buyers will feel pinch | Toronto Real Estate

First-time buyers will feel pinch

Less purchasing power. Mortgage changes will ‘make it more difficult for people starting out in life’


New mortgage rules announced by the Conservative government yesterday will have a greater effect on the high-priced real estate markets in Toronto and Vancouver than in Montreal, analysts say.

Photograph by: DAVE SIDAWAY GAZETTE FILE, The Gazette

Tougher mortgage rules announced yesterday by the Tory government might not dissuade Montrealers from becoming homeowners, but they will likely force first-time buyers to scale back their purchases, local housing market specialists say.

While Ottawa’s decision to stop backing home loans exceeding a 30-year period may have a greater impact on the high-priced Toronto and Vancouver markets, it will still affect Quebec sales, they say.

TD Bank senior economist Pascal Gauthier said the new rules -which also lower the maximum amount Canadians can borrow against the value of their homes to 85 per cent from 90 per cent – would affect about 20,000 out of 450,000 total resales across the country.

Mortgage brokers, however, say it will make it harder for cash-strapped property owners to refinance their homes.

“This will have an impact on the market for sure, but by how much, we don’t know,” said Pierre Langlois, director of government affairs for the Quebec Federation of Real Estate Boards. “People who are buying homes will have less purchasing power.”

Across the country, record-low interest rates have driven first-time home buyers to acquire property over the last two years. In Montreal, the trend has led to record condo building in 2010, converting thousands of former renters into homeowners.

“I can’t tell you the exact impact,” said Serge Bizien, executive sales director for Groupe Cholette, a developer with projects in Griffintown and in Brossard. “I don’t think it’s going to make a difference between someone buying, or not buying. But it’s just going to make it a little more difficult for the people starting out in life.”

Bizien said he doesn’t believe shortening the amortization period will help reduce debt because most homes are sold within a decade of being purchased.

“It will not help. It’s a measure that is futile,” he said. “Does it really matter whether we pay for the property in 30 or 35 years if the property is sold in five years?”

Among the new rules announced yesterday, buyers must take a 30-year or shorter term to qualify for government-backed mortgage insurance if they can’t make a 20-per-cent down payment on a home.

The previous limit was 35 years.

The longer the amortization period, the lower the monthly payment but the greater the interest payment.

“The 35-year term is pretty common,” said Jason Zuckerman, a mortgage broker with Hypotheca.

“People are looking for the lowest monthly payment possible. They want to try and squeeze as much as they can. When you take a 35-year amortization, you can get more house for your dollar.”

Under the new rules, a buyer with a $1,500 mortgage budget would only be able to buy a home worth $315,000, compared with a $340,000 home under the 35-year term, Langlois said.

Jacques Vincent, copresident of developer Prevel Group, which is building the Seville condo project downtown, said the new rules won’t deter sales, but it might make the difference between a first-time buyer purchasing a 900-square-foot unit, or an 850-square-foot unit. At most, 10 per cent of Prevel buyers ask for a 35-year term mortgage, he said.

Like the government, Vincent said he is also concerned about the level of household debt in Canada and Prevel has actually taken steps to weed out financially weak buyers.

Under Phase II of the Seville project, Prevel required buyers to put down a 15-percent down payment on their units instead of the minimum five per cent required with an insured mortgage.

Langlois said Finance Minister Jim Flaherty should be looking at a different target if he is really concerned about the level of debt among Canadians -credit cards.

“If Mr. Flaherty were very serious about reducing debt, he would regulate credit cards.”



Increasing household debt: a problem Canadians can no longer ignore

Increasing household debt: a problem Canadians can no longer ignore

Since the 1980’s, household debt as a share of personal disposable income has almost tripled in Canada, rising from 50 per cent to 146 per cent in 2010. Many organizations, including the Bank of Canada, have expressed concern about the potential consequences of Canadians’ rising debt.

There are several circumstances that have contributed to this increased debt level. First, the increased participation of woman in the labour market created a greater number of double-income households, which contributed to a greater sense of income security and a willingness to carry more debt than single-income households.

In addition, in the early 1990’s, the Bank of Canada introduced a policy that targeted inflation by keeping interest rates low, thus improving debt affordability. Stable inflation reduced the risk of future interest rate volatility, while stable growth in the economy reduced the probability of layoffs; these factors allowed more people to comfortably carry more debt.

Not surprisingly, real estate has also contributed significantly to Canadians’ debt. Over the past 20 years, mortgage lending rules have eased; minimum down payments were reduced from 10 per cent to 5 per cent, and the maximum amortization was increased from 25 years to 40 years, but has subsequently been reduced to 35 years. Relaxing the mortgage lending rules made debt easier to qualify for, and home equity lines of credit allowed households to extract equity from their home for consumption or investment purposes, while offering flexible repayment terms.

Over the past decade, these changes led to steadily increasing home ownership rates, which created greater confidence in the housing market and increased the demand for houses. As a result, the average price of real estate rose across Canada, which, when combined with rising equity markets, created a positive wealth effect, that in turn encouraged further borrowing.

There has also been a cultural shift, as Canada changed from a culture of thrift to a culture of consumerism. This change was driven largely by the baby boom generation (those born between 1946 and1964), who, unlike their parents, did not have their spending tempered by experiencing the Great Depression. As a result, individuals took on debt earlier and maintained debt longer, often into retirement.

While people may be used to cheap credit, the rise in debt is largely unsustainable and will likely be tempered by: increased interest rates; a correction in the Canadian real estate market and reduced home equity; baby boomers exiting their peak consumption years; and increased lending criteria by financial institutions, as they perceive the credit risk rising. The Canadian economy is also likely entering a period of moderate growth, which will cap significant wage growth.

While interest rates are not expected to rise significantly in the near future, it is hoped that the market will gradually correct and lead to an overall, balanced decline in Canadians’ debt.

Rob Radloff is a chartered accountant with The Covenant Planning Group Inc., a Family Wealth Advisor. Investment services are provided by Covenant Capital Management Inc.


Canadian real estate players go shopping in U.S. – The Globe and Mail

Real Estate

Canadian real estate players go shopping in U.S.


From Wednesday’s Globe and Mail

Some of the country’s biggest real estate players, turned off by high prices in Canada, are ramping up their exposure to U.S. commercial properties.

Brookfield Asset (BAM.A-T32.910.150.46%) made the latest move Tuesday, announcing a $1.7-billion deal with a U.S. fund to increase its stake in mall owner General Growth Properties. The transaction bumped Brookfield’s ownership of General Growth to 38 per cent from 27 per cent, a stake it bought during the latter’s bankruptcy restructuring.


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Canadian companies can afford to play in the United States right now because they have access to capital – and they want to make deals because many of the assets are top-quality properties. It’s simply that their current owners are in financial trouble, with some being so distressed that projects are being abandoned, even if they are 90 per cent complete.

The Canadian players are also betting on a U.S. economic turnaround. “Over time, we’re expecting the strong U.S. economy to translate into lower [capitalization] rates and a more robust real estate market,” said Andrew Willis, Brookfield’s communications director.

A capitalization rate is calculated by dividing the annual income generated from a property by its value. (A property that produces $1-million in income and is worth $10-million would have a cap rate of 10 per cent.) Falling capitalization rates means property values are going up, in the same way that falling bond yields means their prices are going up.

RioCan (REI.UN-T22.700.010.04%) is also making waves in the U.S. market, buying up hundreds of millions of dollars worth of U.S. properties in the second half of 2010. The company raised more money earlier this week, quickly selling $100-million in preferred shares and $225-million of debt, in an illustration of how easy it is for some Canadian property owners to get funding.

Like Brookfield, RioCan has been buying shopping centres, which means both companies’ investments are tied to U.S. consumers, who have been reluctant to spend coming out of the recession. Mr. Willis acknowledged this, but pointed to the latest Christmas stats that show the consumer is finally coming back.

The big names aren’t the only players getting in on the action. Private equity players like Second City Capital Partners, which is in the midst of raising money for its second fund, are also finding U.S. deals. The Vancouver-based firm recently closed its $17-million acquisition of an office tower in St. Petersburg, Fla. Managing director Jamie Farrar said there will be more opportunities as banks auction off reclaimed properties and private equity funds sell off assets they no longer want.

In Brookfield’s case, the company isn’t simply making a play on the U.S. commercial market. It also likes General Growth’s fundamentals. Mr. Willis said few companies have assembled as extensive a collection of malls. General Growth recently installed a new CEO, Sandeep Mathrani, who was last with New York real estate giant Vornado Realty Trust.

General Growth can also take advantage of a U.S. restructuring rule that allows it to refinance all of its mortgages at current rates. The company is now going through its portfolio and doing that one-by-one. “GGP has the ability now to redo its balance sheet, redo its mortgages, property by property, at very attractive rates, and those savings fall right to the bottom line,” Mr. Willis said.

The fund that sold its stake in General Growth to Brookfield, Fairholme Fund, will hold $907-million of Brookfield shares, amounting to 4.5 per cent of the company. The rest of the deal’s value will be paid in cash.


Mortgage rules: A macro perspective – Everybody’s Business

Here’s my column on the new federal mortgage rule changes


One of the main responsibilities of the Bank of Canada is to ensure a low and stable rate of inflation. This objective has been put to the test by the federal government’s economic stimulus program and strong consumer spending, largely financed by household debt. The rising value of real estate has created a “wealth effect”, inciting consumers, who feel richer than they are, to take on debt to buy the goods and services they want.

With debt now representing 148 per cent of personal disposable income, Bank of Canada governor Mark Carney and federal Finance Minister Jim Flaherty are worried that deterioration of household balance sheets poses a risk to the broader Canadian economy.

Equally, there are concerns that the “wealth effect” will lead to inflation expectations, which could become a self-fulfilling prophesy.

Against this backdrop, Flaherty has tweaked the mortgage rules ostensibly to prevent a housing bubble and slow the increase in household debt. The changes announced Monday include lowering the maximum amortization period to 30 years from 35 years for mortgages insured by Canada Mortgage and Housing Corp., reducing the maximum amount of borrowing for refinancing a mortgage to 85 per cent of the value of a property from 90 per cent, and withdrawing government-backed insurance on home equity lines of credit.

But there’s another reason for the changes. From a macroeconomic point of view, the mortgage amendments give the central bank some breathing room. The central bank was inclined to raise interest rates to curb excessive borrowing and keep inflation within its target range.

However, higher interest rates could be an even greater threat to the recovery than household debt.

For a start, they would discourage business investment, which is key to a sustained recovery. They would also drive up the Canadian dollar, which reached parity with the U.S. dollar last week, with many analysts predicting a strong dollar throughout 2011.

Canada’s exports become more expensive when the value of the Canadian dollar soars, making them less competitive in global markets. Since exports still account for more than 30 per cent of gross domestic product, and 73 per cent are destined for the United States, a Canadian dollar at parity with the U.S. dollar, or above, could hamper economic growth.

If Flaherty can dampen the demand for debt without resorting to monetary policy tools, he’ll be able to sustain the economic lift provided by low interest rates while tapping the brakes on the borrowing binge and minimizing the risk of inflation.

Some analysts anticipate a slowdown in consumer spending this year in any case as the pace of job creation is expected to lag that of 2010. Moreover, CIBC World Markets sees a softening in the housing market in the second half. Given that the increase in household net worth this year will probably not match the eight-percent gain in 2010, consumer spending, being closely tied to net worth, will be subdued.

Although the federal moves have been described as prudent, sensible and even wise, home buyers may be in for a shock. Shortening the amortization period to 30 years from 35 years on a $300,000 mortgage at four per cent would increase the monthly payments by $104. The mortgage rule changes affect mainly high-ratio mortgages that require CMHC insurance, those with down payments of between five and 20 per cent.

Buyers who have the wherewithal to put down 20 per cent of the purchase price or more can still write their own ticket on amortization and many other mortgage terms.

If the new mortgage rules help revive the notion that people should save in order to buy a house, that would be a most significant achievement.