Friday, January 15, 2010

Financial Post - Mortgage shoppers opt for caution

Garry Marr and Paul Vieira, Financial Post

Published: Thursday, January 14, 2010

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A survey commissioned by the country's mortgage brokers suggests Canadians are exhibiting prudence when borrowing from a home.Peter J. Thompson/National PostA survey commissioned by the country's mortgage brokers suggests Canadians are exhibiting prudence when borrowing from a home.

The housing industry fired back yesterday at comments from Ottawa that the sector might be overheated with a new report that shows Canadians have become conservative in their mortgage choices, leaving little chance for delinquencies.

The Canadian Association of Accredited Mortgage Professionals surveyed its members, who issued more than 40,000 mortgages totalling $10-billion during 2009, and found 86% of loans went into fixed-rate mortgages. Of those, more than 70% had fixed rates for longer than five years.

Jim Murphy, chief executive of the Toronto-based group, said the report's results show the risk in the marketplace "is clearly manageable." He left little doubt about one of the reasons his group compiled the research.

"It was done in response to some of the musings at yearend by first the Finance Minister and then governor of the Bank of Canada," Mr. Murphy said.

Mark Carney, the Bank of Canada governor, has warned about rising levels of household debt, which is reaching record levels. He has said consumers may be failing to account for higher interest rates in the foreseeable future, leaving households "increasingly vulnerable" to any economic shocks.

Shortly after Mr. Carney's remarks, Jim Flaherty, the Minister of Finance, was asked by reporters whether he was considering tightening mortgage requirements.

"If we had to we could, and it is something that we are watching and monitoring. But so far there's relative stability in the sector," Mr. Flaherty said.

The CAAMP survey addressed the overall debt concern and found "the vast majority of people who took out their first mortgage last year borrowed less than they could afford to, as their gross debt service ratios are far below allowed maximums, even at the higher interest rates that are used to qualifying them for their mortgage."

Mr. Murphy said his group's report has been forwarded to the Minister's office which continues to look at whether it should apply any brakes to the housing market. About 18 months ago, the government did limit the maximum amortization period to 35 years and demand consumers have 5% down on all government-backed loans.

Stephen Dupuis, chief executive of the Toronto-based Building Industry and Land Development Association, said the study by the mortgage brokerages confirms conservatism is still ruling the housing market. He said first-time buyers, the most vulnerable to any change in rates, continue to overwhelmingly get long-term fixed-rate mortgages. While rates may be much higher in five years, he said the income of first-time buyers tends to climb by the time they get their second mortgage. "There has been a massive overreaction," Mr. Dupuis said, about calls to shorten amortization periods and increase down payments.

Mr. Dupuis added that while 2009 purchases in the Toronto area rebounded sharply from 2008 lows, sales are still well off levels reached in 2007. The same is true for much of the country. There is little doubt any move to tighten regulations will have negative consequences on the market, said Benjamin Tal, senior economist with CIBC World Markets. He estimates at least 25% of the new purchases would be affected by a change in the down payment.

"The industry is fighting back and asking the government to look at the data before making any decision," Mr. Tal said, referring to the latest salvo fired by the mortgage brokers.



- Eighty six per cent of these home buyers chose fixed rate mortgages.

- Among borrowers who chose fixed rates, a significant number opted for longer terms

- less than 5% chose terms of two years or less.

- Twenty per cent took three year terms, 5% four years, leaving 70% with a fixed rate for five years or more.

- The vast majority of people who took out their first mortgage last year borrowed less than they could afford to, as their Gross Debt.

Source: CAAMP

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david said...

On a related note I saw this on CBC which is basically the same article.

The interesting part is the comments below. Lots of people seem to agree with comments saying history shows that people going varriable saved money over fixed. What they fail to mention is that interest rates have been falling (more or less) for almost 30 years.

Fixed rates are more expensive when rates drop, but will probably be better when rates rise. Since rates are at rock bottom, it is only logical to assume rates will rise at some point. It seems most people buying homes have figured this out, but the commenters on CBC still dont quite get it.

Overall I am pretty shocked at the lack of knowledge the commenters have on things like the CMHC and interest rates. I usually agree with the "most agreed" comment on CBC articles, but all the ones getting thumbs up on this article seem way off to me.

Village said...

I'm not convinced the numbers aren't massaged in some way, or aren't telling the whole truth. Anybody with a bit of common sense should opt to lock in for 5yrs at the current ridiculously low rates. But it doesn't take a crystal ball to see that at current prices, and rates when resets happen. If the rates move a mere 1% we could be looking at massive defaults. When the average SFH is $500k (at least around these parts) we aren't going to require 18% rates to cause problems. 6%-8% rates on renewels should be more then enough to break the banks of many.

Of course, rates could stay low for a long time. The economy doesn't look stable enough to handle a rate raising cycle and I don't believe citizens are either.

M- said...

I wonder if the recent warnings from the feds on the possibility of rising rates wasn't really intended to create caution, or plausible deniability that they were responsible for the bubble.

Instead, I'm beginning to suspect that the recent warnings have all been intended to get buyers to sign onto more-profitable fixed-term mortgages, thereby improving the banks' profitability prior to the next freeze-up...

jesse said...

Village, I tend to agree. They are concentrating on the mortgage term but fail to mention DTI ratios, and how sensitive those ratios are to changes in rates.

With prices high compared to incomes, it doesn't pass the smell test.

JimTan said...

Hmmm! I can't agree with Village. Apparently, the sample is taken from all new mortgages isussed in 2009. So, the sample seems relevant.

Anyway, here's a 'bubble' topic at RE talk forum. Enjoy.

JimTan said...

It keeps getting worse for the bears. Total risk (of all borrowers) has actually declined because existing mortgages are being renewed at low interest rates. As you would expect of rational borrowers.

Low interest rates doesn't necessarily represent a bubble. It means a massive transfer of income from savers to borrowers. Therefore, borrowers (FTB and upgraders) can afford to pay more!

“CAAMP’s Fall 2009 survey of mortgage consumers found that VARIABLE/ADJUSTABLE RATE MORTGAGES ARE MOST COMMONLY USED BY PEOPLE RENEWING THEIR MORTGAGES. Their current interest rates are far below what they previously were able to afford, and EVEN IN THE EVENT OF A LARGE INCREASE IN THE RATES, THEIR MANDATORY PAYMENTS WOULD BE NO HIGHER THAN THEY PREVIOUSLY COULD AFFORD. Among those who had renewed an existing mortgage during the past year, 30% took a variable rate mortgage...

Data from the Canadian Bankers Association – which covers 7 major banks – shows that there has been a rise in mortgage arrears during the recession. Prior to the recession (during mid-2004 to mid-2008), the arrears rate was very low, with less than 0.30% of mortgages in arrears (for three months or more). During the winter of 2008/09, however, the arrears rate increased rapidly. The most recent data (as of October 2009) shows an arrears rate of 0.44%. While the increase is indicative of increased financial difficulties, it remains lower than was seen during most of the 1990s (when the average arrears rate was 0.50%).”

patriotz said...

Lots of people seem to agree with comments saying history shows that people going varriable saved money over fixed. What they fail to mention is that interest rates have been falling (more or less) for almost 30 years.

That really doesn't have anything to do with it. Hardly anyone gets a term of over 5 years anyway. So the people with fixed terms have seen falling rates too.

The reason why shorter term borrowing costs less over the entire amortization (and variable rate has a term of zero) is that the shorter the term is, the more risk the borrower is taking and the less risk the lender is taking. Borrowers taking longer terms pay more for getting the lender to assume more risk. That's the case whether the bank is the lender or borrower, i.e. it's the same for savings accounts vs GIC's.

That's in aggregate, of course, if the market is wrong about future rates at any given time the long term borrower may end up paying less. Like in the 60's.