By The Canadian Press
Referencing RBC Study.
TORONTO - Recent first-time homebuyers say they felt pressure to enter the market as they contended with jitters about rising home prices and higher mortgage rates.
The Bank of Montreal says as many as one-third of respondents in a homebuyers survey believe their expectation that housing prices would increase, and interest rates would soar, left an impression on their decision to make a purchase in the short term.
"There's definitely a sense of urgency among home buyers," said Lynne Kilpatrick, senior vice-president of personal banking at BMO.
"While we encourage Canadians to pursue their home ownership dreams we recognize it's easy to get caught up in the emotions of the purchase and this can lead to stretching one's budget too thin."
The results come as Royal Bank released its own homeownership survey on Wednesday which showed that a majority of Canadians expect to see higher mortgage rates over the next year.
RBC's annual homeownership survey said 64 per cent of Canadians expect high rates, with about the same number of mortgage holders concerned about higher rates.
Economists expect the Bank of Canada to raise interest rates by between half a percentage point and a full point over several months beginning this summer to fight inflationary pressures in the economy.
With many Canadians taking on larger and larger mortgage debt in expensive markets across the country, higher rates could create financial problems for some homeowners.
In the Royal Bank survey, three-quarters, or 73 per cent of homeowners, feel strongly that homebuyers need to think ahead to ensure they will still be able to make their mortgage payment if rates rise.
The bank says six-in-10 mortgage holders say they have taken advantage of current low interest rates to pay more principal on their loans.
Eighteen per cent of homeowners say they've made a lump sum payment on their mortgage and 16 per cent have doubled their payment to reduce their principal.
While 84 per cent of mortgage holders believe they are doing an excellent or good job of paying down their mortgage, 49 per cent say their mortgage is larger than they thought it would be at this stage in their life.
Marcia Moffat, RBC's head of home equity financing, says the best advice for homeowners is to review their mortgage holdings with a financial adviser to position themselves for any changes.
BMO's senior economist Sal Guatieri added that a cooler housing market is "just around the corner."
Wednesday, March 24, 2010
Sunday, March 21, 2010
Housing Bubble - - Yes or No
Canadian Housing Bubble by Alexandre Pestov at York University's Schulich School of Business.
Here is the abstract, click on the above link for the full meal deal.
The cause of the housing bubble associated with the sharp run-up and the subsequent drop in home prices in the US over the period of 1999-2008 has been the focus of significant research attention. Despite numerous similarities, the Canadian housing market escapes the same level of interest, mostly due to the seemingly stable housing prices.
This paper explores the subject of a possible housing bubble in Canada. It examines a diverse array of factors that may have contributed to the rise in house prices in Canada. The paper evaluates each factor individually and determines the health of the Canadian housing market using common valuation techniques.
Results suggest that economic fundamentals in Canada provide little explanation for the Canadian house price dynamics. Market fundamentals have become insignificant in affecting house prices, and the price-momentum conditions characteristic of a bubble now exist. The extreme decoupling of the market prices from the underlying fundamentals suggests an upcoming correction in housing prices in Canada.
Wednesday, March 17, 2010
Recommended Reading
I recommend you read this and heed the implicit warning.
The idea that Canadians are fiscally prudent is a farce to anyone in-the-know. Most Canadians live paycheque to paycheque, have no savings, overuse their credit cards and HELOCs and are overleveraged on their real estate assets. The collective 'we are better than the US' mentality is a joke since the average Canadian's personal balance sheet looks just like their American cousin's balance sheet from 3 years ago.
The only thing fiscally prudent about Canada is that our banking system was never 'transformed' to the US / European model back in the 90s, with no small protest from the banks. Because of the high reserve ratios that the banks are required to maintain and with no small help of taxpayer backed mortgage loan guarantees via CMHC, it is not surprising that Canadian banks are phenomenally profitable. Mind you, in a credit contraction, bank earnings will be far from stellar.
In a related note - Canadians need to save more - according to David Dodge
Canadians need to save between 10 per cent and 21 per cent of their pretax incomes each year – if they save consistently for 35 years – to have comfortable retirement incomes, according to a new report by former Bank of
The report says many Canadians are unaware of the high savings levels they need for their retirement years, and may believe they are saving adequately when they are not.
The report, co-authored by Alexandre Laurin and Colin Busby and published by the C.D. Howe Institute, calculates various savings scenarios based on assumptions that Canadians aim to have annual retirement incomes between 50 per cent and 70 per cent of their preretirement incomes.
“Our findings provide Canadians with a ‘reality check' about the saving rates required to meet their retirement goals,” Mr. Dodge said in a release Thursday.
Wednesday, March 10, 2010
Upcoming CMHC rule changes
There has been much ado about the upcoming CMHC changes to requirements for qualifying for mortgage insurance. Some basic math has been done by local bloggers here and here.
For some speculative investors, the upcoming changes will have significant impact as they are required to carry a higher downpayment. In addition homeowners cannot carry higher than about 90% LTV for refinancings and be insured. This does not mean that this part of the market is cut out, only that people borrowing with higher leverage face significantly higher financing costs in the way of non-government-backed loans.
The important change for owner-occupiers comes in the form of changing the requirement that qualification be based on, at minimum, meeting the standards for a 5 year fixed rate mortgage instead of a 3 year fixed rate mortgage. Here is where the confusion starts. First, we are unsure if CMHC requires banks qualify customers at their posted or "discounted" rates. A quick perusal of CMHC's website yielded no definitive answer though perhaps a reader can let me know what they do now. (I will save the rant on CMHC's lack of transparency for another day.) I am assuming, for now, that they use some semblance discounted rates, only because some lenders advertise close to fully discounted rates anyways. The change from 3 to 5 year, I assume, would follow the same general policy. (Update: apparently they will use 5 year posted. See mohican's link in the comments.)
Second, a quick look at posted rates shows 3-5 year spreads as high as 2% and as low as 1%. Taking the spread to be 2%, the amount for which a borrower is maximally qualified drops by just over 20%; at a 1% spread this drops to about 10%. If we assume the entire market is comprised of buyers maxing out what they can afford, we would expect the market to drop by 10-20% on this change alone. The market of course is not solely comprised of people leveraging themselves so as to require mortgage insurance and/or people maximising their affordability limits. While we do know many are taking on high levels of debt to become homeowners there is not much publicly available data to show the finances of those who are buying. You can bet the banks have these data. (Related, banks were the ones openly calling for the government to tighten its mortgage insurance qualification rules.)
Third, an interesting point is that spreads between 3 year and 5 year mortgages are extremely high compared to even 2 years ago when the spread was no more than a few hundred basis points. This is a product of the low end of the yield curve clamped near zero by the Bank of Canada.
When the Bank raises rates, as experts are expecting later this year, we expect the 3-5 year spread to narrow. In other words, while the changes to CMHC policy will have some advanced impact on demand, the longer-term impact in and of the policy change itself will be muted by 3 year rates eventually climbing closer to 5 year rates anyways. There is also no rule that says that 5 year rates cannot fall to the current 3 year rate but I don't have a good feeling for how likely this is.
How will the CMHC changes affect the market? A fringe of able investors will be cut out -- most markedly in the buy-to-let investment arena -- and this has real potential to be a catalyst for what this blog believes is an eventual return to lower price-to-rent and price-to-income ratios. Taking a step back, higher debt levels, rising unemployment, government spending cuts, dwelling under-utilisation, and a reliance on relative (not absolute) pricing by marginal buyers all indicate marginal pricing is unsustainable. The CMHC policy changes do not and can not change this blog's thesis one iota.
For some speculative investors, the upcoming changes will have significant impact as they are required to carry a higher downpayment. In addition homeowners cannot carry higher than about 90% LTV for refinancings and be insured. This does not mean that this part of the market is cut out, only that people borrowing with higher leverage face significantly higher financing costs in the way of non-government-backed loans.
The important change for owner-occupiers comes in the form of changing the requirement that qualification be based on, at minimum, meeting the standards for a 5 year fixed rate mortgage instead of a 3 year fixed rate mortgage. Here is where the confusion starts. First, we are unsure if CMHC requires banks qualify customers at their posted or "discounted" rates. A quick perusal of CMHC's website yielded no definitive answer though perhaps a reader can let me know what they do now. (I will save the rant on CMHC's lack of transparency for another day.) I am assuming, for now, that they use some semblance discounted rates, only because some lenders advertise close to fully discounted rates anyways. The change from 3 to 5 year, I assume, would follow the same general policy. (Update: apparently they will use 5 year posted. See mohican's link in the comments.)
Second, a quick look at posted rates shows 3-5 year spreads as high as 2% and as low as 1%. Taking the spread to be 2%, the amount for which a borrower is maximally qualified drops by just over 20%; at a 1% spread this drops to about 10%. If we assume the entire market is comprised of buyers maxing out what they can afford, we would expect the market to drop by 10-20% on this change alone. The market of course is not solely comprised of people leveraging themselves so as to require mortgage insurance and/or people maximising their affordability limits. While we do know many are taking on high levels of debt to become homeowners there is not much publicly available data to show the finances of those who are buying. You can bet the banks have these data. (Related, banks were the ones openly calling for the government to tighten its mortgage insurance qualification rules.)
Third, an interesting point is that spreads between 3 year and 5 year mortgages are extremely high compared to even 2 years ago when the spread was no more than a few hundred basis points. This is a product of the low end of the yield curve clamped near zero by the Bank of Canada.
When the Bank raises rates, as experts are expecting later this year, we expect the 3-5 year spread to narrow. In other words, while the changes to CMHC policy will have some advanced impact on demand, the longer-term impact in and of the policy change itself will be muted by 3 year rates eventually climbing closer to 5 year rates anyways. There is also no rule that says that 5 year rates cannot fall to the current 3 year rate but I don't have a good feeling for how likely this is.
How will the CMHC changes affect the market? A fringe of able investors will be cut out -- most markedly in the buy-to-let investment arena -- and this has real potential to be a catalyst for what this blog believes is an eventual return to lower price-to-rent and price-to-income ratios. Taking a step back, higher debt levels, rising unemployment, government spending cuts, dwelling under-utilisation, and a reliance on relative (not absolute) pricing by marginal buyers all indicate marginal pricing is unsustainable. The CMHC policy changes do not and can not change this blog's thesis one iota.
Sunday, March 07, 2010
Housing starts and under construction
Just had a look at the CMHC Housing Now publication with the January starts/completions data. Completions exceeded starts by 2115 in January 2010--which is the most for a single month since 1981 (and the data in 1981 is really wonky so I don't know what to make of that). Correspondingly, under construction is 'cliff diving' as they say over at Calculated Risk. Straight downhill.
The 12 month total of starts tweeked up in January 2010, but it is still at a deep low. How deep? Check the data back to 1948 below.
The 12 month total of starts is in the neighbourhood of the lows hit in 1967, 1983, and 2000. That's right, lower than the depths of 1967--when Vancouver's population was much smaller. That is not a lot of starts.
What do I see happening over the rest of 2010?
About a year ago, I predicted 10% unemployment by June 2010. We're at 8.1% now. I don't know if we'll make it to 10% in the next 4 months, but it's not a crazy prediction to hit 10% sometime in 2010 as the Olympic workforce gets laid off and the construction workers join them.
We see the next labour market data point this Friday. That data comes from the middle of the Olympics, so we won't start to get a real glimpse of the post-Olympic period until the March numbers come out in April.
The 12 month total of starts tweeked up in January 2010, but it is still at a deep low. How deep? Check the data back to 1948 below.
The 12 month total of starts is in the neighbourhood of the lows hit in 1967, 1983, and 2000. That's right, lower than the depths of 1967--when Vancouver's population was much smaller. That is not a lot of starts.
What do I see happening over the rest of 2010?
- It is unlikely that starts will stay so low. Look at the green line--it has never rested at the bottom before (but perhaps we've never had such a speculative glut before!).
- Completions will continue to chug along at the current pace for the rest of the year, still exceeding starts.
- Under Construction will drop below 10K and might touch historic lows close to 5K if starts don't pick up as much as I think they might.
About a year ago, I predicted 10% unemployment by June 2010. We're at 8.1% now. I don't know if we'll make it to 10% in the next 4 months, but it's not a crazy prediction to hit 10% sometime in 2010 as the Olympic workforce gets laid off and the construction workers join them.
We see the next labour market data point this Friday. That data comes from the middle of the Olympics, so we won't start to get a real glimpse of the post-Olympic period until the March numbers come out in April.
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