Carney warns of trouble in overheated housing market once interest rates rise  Keven Drews, The Canadian Press

VANCOUVER – Canada’s housing market is entering overheated territory and many Canadians could be financially hurt once interest rates begin to rise, Bank of Canada governor Mark Carney is warning.

The central banker on took his case for moderation on Wednesday to Vancouver, the epicentre of Canada’s hot housing market where he says home prices are now on par with Hong Kong and Sydney, Australia, as they relate to average incomes.

And some sectors of the market, like condos in big cities, could overshoot because of speculation from foreign investors.

The housing market is still expected to moderate, he said, but recent signals have been mixed.

Carney has been cautioning Canadians for about two year against getting overextended on mortgage borrowing, but Wednesday’s speech to the Vancouver Board of Trade suggested some frustration that his words have mostly fallen on deaf ears.

The governor said he has been expecting the housing market to slow, but besides some stuttering signals, it has picked up again of late along with borrowing and mortgage credit.

Once again, Carney repeated his warning to Canadians about becoming overextended.

“It is important that it’s emphasized, because it can be forgotten, that we are living in extraordinary times with interest rates that are unusually low, that the outlook for the Canadian economy, the strength of the Canadian economy, the expectations both in the medium term and sooner than the medium term, is that rates are not going to stay at these unusually low levels,” he said told a later news conference.

“And so Canadians in taking on debt, or Vancouverites, more specifically, in taking on debt, need to…ensure that they can continue to service those debts comfortably in a higher-rate environment.”

Carney’ speech came on the day the Canadian Real Estate Association released new data showing that average resale home prices rose 8.6 per cent in May from a year ago, and that in Vancouver prices were up 25.7 per cent to $831,555.

At those levels, Carney said Vancouverites are paying 11 times family household income for a home, a multiple similar to global housing hot spots Hong Kong and Sydney, Australia.

When asked if he had any advice to young people who hope to buy a house in Vancouver, Carney responded, “Well, get a good job. That would probably be a good one. Study hard, stay in school and get a good job. How’s that?”

The situation is not as dramatic in the rest of the country, but it’s bad enough, he said.

He noted that it took nearly 12 years for real estate investment to regain its peak after the 1990s recession. It has taken a year and a half this time and, in fact, average home prices are now 13 per cent higher than where they stood before the 2008-2009 slump.

Carney takes some of the blame for the unprecedented run-up in prices, since the key difference between the two eras is that he drove interest rates down to historic lows in order to salvage the economy. The policy succeeded, but at a cost of driving investment from more productive outlets of the economy to housing.

But he also lays some blame on home buyers, who he implies should know better. He said some Canadians are taking on mortgages as if they believe current ultra-low rates will last forever. They won’t, he warns.

“Rates will not remain at their current levels forever,” he said. “(And) the impact of eventual increases is likely to be greater than in previous cycles.”

A four per cent real mortgage interest rate would see home affordability in Canada fall to the worst level in 16 years, he said. The current real mortgage interest rate, which excludes inflation, is about 2.4 per cent.

Other than issuing a general alert, Carney gave few hints what he can do about it and implied that the ball is in the federal government’s court to tighten borrowing requirements again if necessary.

Carney refused to comment when asked whether the government should restrict home ownership to those with Canadian citizenship.

“Obviously, if one restricts demand and takes an important element of marginal demand out of the equation there’s going to be an adjustment to price,” he said.

“But those type of decisions are decisions for communities to make, and they’re complex decisions, and nothing should be read into our commentary about the current environment and housing, whether it’s in Vancouver or across the country.”

“We’re not weighing into that issue at all.”

Finance Minister Jim Flaherty this week also expressed concern with household debt — now amounting to a record $1.5 trillion in the aggregate — and noted he has tightened mortgage requirements three times in the past three years.

Carney suggested in his speech that he will use monetary policy, or interest rate setting, to impact the inflation rate and not exclusively the housing market. http://ca.finance.yahoo.com/news/Carney-warns-trouble-capress-560228003.html?x=0

Canadian debt load: $26,000 – excluding mortgages- save yourself on average $800 a month by redoing your mortgage today to include that debt and say goodbye to it

More Canadians are living closer to the edge as consumer debt loads continued to climb in the first three months of the year, a study shows.

Already at record levels, Canadians now owe just under $26,000 on average on their lines of credit, credit cards and auto loans, according to credit rating agency, TransUnion.

That’s an increase of 4.5 per cent, or another $1,000, over the same period last year.

The report comes a day after Bank of Canada Governor Mark Carney warned consumers to curb their spending, saying record low interest rates aren’t going to last forever.

The fear is that higher rates could push more consumers beyond their ability to repay their loans.

“There are going to be a lot of people in the market who are near the edge,” TransUnion vice-president Thomas Higgins said in an interview. “If there’s a drastic change in interest rates or unforeseen unemployment or some other shock from the U.S. or the European Union that throws off a province, or a region, or an industry, the people on the edge have no buffer.”

The news is not all bad.

Debt growth in Canada is slowing from the double-digit pace seen before the recession, Higgins said.

And total borrowing, including mortgages, typically the biggest household loan, is slowing, major Canadian banks said recently in their quarterly reports.

TransUnions’ figures don’t include mortgages, which typically make up two-thirds of a household’s debt.

Finance Minister Jim Flaherty said Tuesday he’s not concerned about a slowdown in consumer spending, as it suggests Canadians are heeding official warnings about spending beyond one’s means.

However, TransUnion said the fact that consumers’ debt load is still rising is a worry.

The Bank of Canada’s trend-setting overnight lending rate is just 1 per cent. But with inflation running at 3.3 per cent, above the central bank’s ideal range, Carney is under pressure to start raising lending rates to dampen demand.

Analysts predict a rate hike could come later this year barring unforeseen circumstances.

Total debt per consumer increased to $25,597 in the first three months of this year, Trans Union said.

Among types of loans, TransUnion said credit card debt, usually the most expensive to carry, barely budged from a year ago, falling $25 to an average of $3,539.

In a sign some borrowers may already be struggling, the national credit card delinquency rate rose 11 per cent. The rate measures the ratio of consumers who take 90 days or more to pay their bill.

The average line of credit, the most popular loans for their low cost and high flexibility, rose 5.9 per cent to $33,762 compared to last year. However, total line of credit debt declined for the first time in five quarters.

One noticeable shift was the decreased use of lines of credit, Higgins said. The category is the largest among consumer loans, making up 41 per cent of the total, and even more in Ontario, at 57 per cent.

But consumers are moving away from these highly flexible, low-cost products in favour of more rigid installment type loans, perhaps in a bid to force themselves to make regular payments, he said.

The average auto loan rose 12.4 per cent to $16,181 compared to a year ago. Total auto debt declined slightly to $45.8 billion.

The study found debt loads rose in all provinces, led by Quebec and Newfoundland and Labrador. British Columbians had the highest load at $36,649.

The average borrower debt on auto loans was also up in the quarter — by 12.4 per cent to $16,189 from $14,402 in the first quarter of 2010. The delinquency rate on auto loans fell slightly to 0.1 per cent from 0.13 per cent a year ago.

Lines of credit are the most popular form of consumer debt, excluding mortgages, accounting for more than 41 per cent of outstanding debt at the end of the first quarter. Debt on lines of credit stood at an average $33,981, up 5.9 per cent from $31,867 in the first quarter of 2010.

The report is based on anonymous credit files of all credit-active Canadians. http://www.moneyville.ca/article/1000720–canadian-debt-load-26-000-excluding-mortgages

Is buying a student condo for my child a good investment?

Sometimes a parent decides to buy a place for their children while they hit the books in university or college. It can be a good alternative to paying thousands of dollars toward residence fees or rent. Just look at the math:

Student rent of $500 a month = $6,000 a year = $24,000 over 4 years of school.

That money could go to your mortgage instead as an investment for you.

In Ottawa, for example, you can buy an older one-bedroom condo for about $195,000. Or, buy a 2-bedroom for $240,000 and let your child’s roommate help cover the mortgage by paying rent. Let’s assume you pay 20 per cent down. Here’s an example of what your monthly costs could total when mortgage rates are low:

Think about it: if your child rents a place, your money is helping the landlord pay his or her mortgage and other costs. If you buy a place instead and rent it to them, you have a real estate investment with a guaranteed tenant: your child. If the investment goes up in value, you will make money. Just remember that those gains will be taxed.

Also remember, mortgage rates and other costs change, and these changes will impact the numbers and your decision.

Things to consider before you decide:

You can buy the property in your name, in your child’s name, or both. If you buy the property in your name, you should consider:

• The rental income you charge can pay a lot of your costs. Just remember you have to declare that income on your tax return.
• As a landlord, you can also claim many of your expenses, including mortgage interest. Assess your costs carefully before you buy. They will vary with the local real estate market, mortgage rates and other factors.
• Plan for some vacancies. Your child (or their roommate) may not stay in the condo over the summer break. Are you really going to ask them to pay rent if they are living somewhere else for a few months?
• Remember that you will own a greater share of the equity as you pay off the mortgage. And, the value of the condo may rise over time. This can offset your costs. But whether you do more than break even depends on what happens to housing prices in the area.

There are other benefits, too. Your child won’t need to look for a different place to live each year. They also won’t have to worry about subletting every summer. And their furniture won’t be coming back with them if they live at home over the summer break. Not a bad deal.

Remember: you may not make money if you buy a student condo.
But there are other reasons you may decide to go ahead. At the very least, you can provide your child with a nice place to live in a good neighbourhood while they go to school.

http://ca.finance.yahoo.com/news/Is-buying-student-condo-child-getsmarteraboutmoney-2800756642.html;_ylt=Ak.Gk2aT_bWOvnX0IMVfDRTg2ppG;_ylu=X3oDMTFkYzZwc2o2BHBvcwM0BHNlYwNuZXdzSHViQXJ0aWNsZUxpc3QEc2xrA2lzYnV5aW5nYXN0dQ–?x=0

Please note this example uses very high end of the scale, with the products our team has access to the options are much more in your favor. Please contact us to review your options

Angela Calla Mortgage Team 604-802-3983

Good Morning,

As suspected rates have held steady this morning, meaning no change to variable rate mortgages or lines of credit with the current payments. Lenders appear to be minimizing the discount avaliable on variable rate mortgages which has been one of the most benifical options to help borrowers over the last decade pay there mortgages off faster. With timing being a key componet to financial freedom we encourage you to ensure that anyone with a renewal or shopping for a home has a rate held in for as long as possible to have the most amount of options moving forward. If anyone you care about is paying over 4.5% it’s best to review the mortgage now instead of waiting for renewal. Should you have any questions, require a rate hold for you or someone you care about, or ensure you have the mortgage to result in the most savings please email us today at acalla@dominionlending.ca.

Some key points from this morning’s press release are below

Have a good week.

The global recovery is proceeding as expected at a modest pace, limited by household balance sheets.

Growth in Europe is gaining momentum, but risks have increased with Japan effecting supply chain disruptions.

Commodity prices have declined recently but are expected to remain at elevated levels. Those high prices and exess demand pressures are contributing to inflationary pressures. Despite the challenges financial conditions remain stimulative.

In Canada the economy grew 3.9% in the frist quarter reflecting a strong business investment, smaller contributions from goverment and a modest drag from net exports. Although disripted slighlty this is expected to be made up in subsequent quarters.

High energy prices and changes in provincial taxes are expected to keep CPI inflation at 3% short term and converge to 2%by middle of 2012 while supply is absorbed

Greater momentum in household spending represents an upside risk to inflation. On the other hand a higher dollar will put downward pressure through weaker than expected net exports.

Reflecting these factors the Bank had left rates and is carefuly watching excess supply with absorbtion and the withdrawl of monetary sitimulus with careful consideration.

The next announcment will be July 19th 2011

Angela Calla, AMP

Dominion Lending Centres-Angela Calla

Mortgage rules to push housing lower: CMHC

Housing starts and sales will fall more into line with “demographic fundamentals” this year and next, according to the latest housing outlook from the Canadian Mortgage and Housing Corporation.

The crown agency said it expects housing starts will range between 166,600 to 192,200 units in 2011, with a point forecast of 179,500. That’s a slight dip from 2010 numbers, when Canada saw 189,930 housing starts.

“Modest economic growth, in conjunction with relatively low mortgage rates, will continue to support demand for new homes in 2011 and 2012,” Bob Dugan, chief economist for CMHC, said in a release. “Nonetheless, we are expecting new and existing housing markets to fall in line with demographic fundamentals, as changes to mortgage rules take hold.”

CMHC expects housing starts to grow again in 2012, with a forecast of between 163,200 to 207,000 starts, and a point forecast of 185,300 units.

The crown agency also expects home prices to start moderating later this year, and to end up lower next year. In its forecast, CMHC said prices this year will still record an overall increase due to monthly gains seen in the first half of 2011, but moderating prices will take hold in the the second half and continue throughout 2012.

CMHC does expect existing home sales to climb this year and in 2012, however. The crown agency forecasts a range of between 429,500 to 480,000 units in 2011, with a point forecast of 452,100. That’s compared to the roughly 447,010 homes that traded hands over the Canadian MLS System in 2010.

For 2012, CMHC forecasts existing home sales to range between 410,000 to 511,900 units, with a point forecast of 461,3000.

This week on an abbreviated Big Picture podcast (co-host John Shmuel is off in parts unknown): If you’ve been in the market looking for a home the past few years, you’ve likely griped about how seemingly far out of whack prices have become. This is especially true if you happen to live — or want to live — in certain neighbourhoods in Vancouver that have suddenly shot out of your price range.

Phil Soper, chief executive with real estate firm Royal LePage, joins the podcast to explain why the West Coast is the best coast at more than just hockey at the moment (Go Canucks, for some of you out there) and imparts some sage advice to both buyers and sellers thinking about taking the plunge.

http://business.financialpost.com/2011/05/27/podcast-why-is-housing-so-hot-in-canada/

The Bank of Canada released a special issue of its Review, “Lessons from the Financial Crisis,” which examines the recent research on the role of liquidity in the financial system, and the public policy responses that aimed to restore stability to the financial system during the crisis and foster economic recovery.

The Globe and Mail’s Rob Carrick asks Jeff Schwartz of Credit Counselling Services of Canada how Canadians can prepare for bigger mortgage payments. Click here to watch the short video.

Australia is seen as having the best quality of life among industrialized countries, one ranking ahead of second-place Canada, according to a report from the Organisation for Economic Co-operation and Development.

However, it appears the clincher for Australia could be its high voter-turnout rates, which policymakers in that country agree are largely the result of mandatory voting laws.

Canada scored at or near the top in areas such as housing, education, health and life satisfaction among the 34 major industrialized countries that make up the OECD. Sweden ranked third, the US was seventh and Turkey was dead last.

The Better Life Initiative survey marks an attempt by the OECD – an economic and social policy think-tank funded by its members – to provide a broader measure of a country’s success than gross domestic product figures.

Click here for the National Post article.

No matter how many stories I read about housing price bubbles and rising interest rates, there’s no way I would go back to renting, and most Canadians feel the same way. 

For three long, miserable years, my husband and I rented a unit attached to our landlord’s sprawling house in northeastern Toronto. Every time the landlord lit a cigarette, the stench filled our apartment. Every time we took a shower, someone would flush a toilet and scald us. The owner kept two cats but didn’t allow us to have pets, so the mice that infested the place took refuge on our side of the house. 

Perhaps the worst part was knowing that our monthly rent cheque was paying off our landlord’s mortgage. As soon as we had a down payment saved up for our own house, we moved out and never looked back. 

For people like me, no amount of facts, figures or common sense can sully the home ownership dream. A recent survey by Genworth Financial indicates that 92% of Canadians, both homeowners and non-owners alike, would rather own than rent and feel there are benefits to homeownership that go beyond financial value, including a greater sense of well-being and security. Of the 1,500 people surveyed, 40% own a home with a mortgage, 29% have paid off their home, 26% rent and 6% don’t own their home, but don’t pay rent. 

Click here for more from the Globe and Mail.

Home prices continue climb

Garry Marr Financial Post  May 17, 2011 –

Canadian home prices continued their upward march in April, driven by strong investor demand in Vancouver, as cracks in the Toronto condominium market may be starting to appear.

The Canadian Real Estate Association said yesterday the average price of a home sold in April in Canada was $372,544, up 8% from a year ago. It was the third straight month that the average price rose 8% on a yea-over-year basis but the Ottawa-based group cautioned that the figure was skewed due to “surging multimillion-dollar property sales in selected areas of Greater Vancouver.”

The group also shrugged off slow April sales, which dipped 4.4% from March on a seasonally adjusted annual basis and 14.7% on an actual basis from a year earlier. The slow sales are said to have been driven by new mortgage rules that came into effect April 19 and made borrowing tougher, leading people to rush into purchases in March.

The same sort of impact was felt in April 2010. Purchases moved forward to avoid mortgage rule changes, higher interest rates were feared and the harmonized sales tax loomed in two provinces.

“This makes it difficult to compare,” said Gregory Klump, chief economist of CREA. “Changes to mortgage regulations that took effect in April 2011 likely sidelined a number of first-time homebuyers. By contrast, higher-end homes sales in Greater Vancouver and Toronto had their best April ever.”

Worries about the sustainability of the housing market could be stoked by a report from Urbanation Inc., which monitors the Toronto condominium market. The group says more than 50% of condominiums purchased in the last year were by buyers who do not intend to occupy their units and plan to rent in many instances.

Condominium rents in Toronto in the first quarter of 2011 were $2.11 per square foot compared to $2.09 a year earlier, a 0.8% increase. Condominiums being registered now and ready to be occupied are priced for sale at $450 per square foot range while newer units are going for $550 per square foot.

“What happens when these newer units hit the market?” said Ben Myers, executive vice-president of Urbanation. “At $550 per square foot a 750 square feet [condominium] is $413,000. You put 25% down and you have a mortgage of $310,000. Take a five-year variable rate mortgage at 3% with 25-year amortization and you get $1,475 a month mortgage. Your condo fee is $345, property tax is another $345 and you are up to $2,200 in carrying costs. That’s a huge [operating] loss [given the average rental rate would bring in just under $1,600/month]. People are buying these for capital appreciation.”

Don Lawby, chief executive of Century 21 Canada, says the housing market has been affected by foreign investors — notably Chinese — who have reacted to tougher tax rules in their home country by investing abroad.

“They are buying investment properties and not just in Vancouver but to some degree in Ontario and Calgary,” said Mr. Lawby, adding many of those investors are not concerned with carrying costs. “They are not afraid to offer above price and they are not afraid to get into a bidding war.”

Nevertheless, Mr. Lawby says while these investors are skewing national averages, he maintains the overall numbers are small and the impact on the larger market minimal.

Toronto-Dominion economic analyst Leslie Preston said while April numbers present a market with falling sales and rising prices, she agreed market conditions were exaggerated by some one-time issues.

“I think the effect in April was a little larger and I would expect to see a bit of bounceback in May because of the decline,” says Ms. Preston. “But we have been calling for awhile now for a mild softening in Canadian housing markets overall this year, particularly as interest rates rise.” http://business.financialpost.com/2011/05/17/home-prices-continue-climb/

A variety of factors can keep you from qualifying for a mortgage. 

The big ones include a low credit score, insufficient income for the size of the loan you want, insufficient down payment and excessive debt. All of these factors are within your control, however.

Click here to read the Globe and Mail’s five steps to scoring a mortgage.