Archive for October, 2007
We are twice the nation we were
Canadians are taking advantage of boom to buy second properties
Garry Marr, Financial Post
To understand why Boomers are investing in real estate simply look at how much prices have gone up. A decade of capital appreciation in the residential market has convinced many middle-aged consumers to make real estate investing not just about the home they are living in, but about a second property.
“In the early to mid-1990s, people had a sense that real estate wasn’t a good investment. It wasn’t going to keep pace with economic growth. People would purchase homes for lifestyle reasons only,” says Peter Norman, a senior economist with Altus Clayton, a real estate research firm. “The tide turned as values started to increase. We’ve had a housing cycle in the last 10 years where house prices have increased at a steady to fast pace. When you see values steadily climb, that appeals to most people. And then you have stock markets go through two undulations: the tech crash and the [subprime] financial crisis.”
The average price of a sold home across the country through the first nine months of this year reached $324,312, according to the Canadian Real Estate Association. A decade ago, the average price of a home sold across the country was $154,606.
What Is A Boomer? The demographic cohort, by the numbers. Born between 1947 and 1964. Boomers are less likely (52%) than either young adults (63%) or seniors (62%) to reject the idea that there is no use worrying because tomorrow usually takes care of itself. Boomers are more likely (11%) than Generation Y (2%) to report not having any savings plan at all. While the tendency to live beyond your means decreases with age, Boomers (20%) land closer to young adults (33%) than to their parent’s generation (8%) in doing so. Boomers are saving for home renovations (30%), followed by a dream vacation (23%). SOURCE: HSBC DIRECT SAVINGS SURVEY FOR HSBC BANK CANADA BY INNOVATIVE RESEARCH GROUP
A Statistics Canada survey shows real estate investing has been on the upswing over the past six years. The federal agency’s Survey of Financial Security found the dollar value of real estate holdings, not including principal residences, rose 80.5% from 1999 to 2005.
The median net worth of the nation’s 13.3 million families was $148,400 in 2005, up 23% from a 1999. The median net value of a principal residence was $87,000. The median value of other real estate was $85,000, but the corresponding figure for debt was $90,000 –an indication many Canadians are financing second properties and hoping for some capital appreciation.
“A significant change in the composition of assets during the six-year period was growth investments in real estate such as cottages, timeshares, rental properties and other commercial properties,” says StatsCan.
Mr. Norman says second-home ownership goes up as people age. On a national basis, only 2% of households headed up by someone under the age of 34 have a second home. It is 7% for people 35 to 45 years old and peaks at 12% for people in their 50s, says the economist. By the time people hit 65, they sell their second properties.
“It’s really hard for surveys to quantify this sort of thing because there is so much diversity of product. Sometimes, you have a family owning a cottage and people using it, other times people have a cottage, use it two weeks of the year and then rent. That’s more of an income property. Then you’ve got timeshares where the investment can be very low,” says Mr. Norman.
The numbers he cited for second-home ownership do not even include investment property and, therefore, the condominium market. Some have suggested as much as 25% of the condominiums in Toronto and Vancouver are owned by investors.
Paul Arn, says he knows who is buying and they are older professionals looking for an investment property. He says the rise of the luxury hotel/condominiums like Trump Tower, the Shangri-La Toronto and the Four Seasons Hotel and Residences — trophy buildings — is being driven by these investors. “They’re in their mid-40s, they’re professionals and they usually have a net worth of $5-million to $10-million,” says Mr. Arn.
A survey on the luxury housing market found 25% of homeowners with $1-million principal residences own a second property. Another 6% own three properties and 2% own more than five properties.
Don Lawby, says he’s noticed the trend of older couples refinancing the mortgage on their principal residences for an investment. “It’s usually a second property that they plan to rent,” says Mr. Lawby. “Sometimes it’s so they can buy recreational property.”
He says second properties can be difficult to finance but if you have plenty of equity in your main residence, it is easy to use that cash for other purposes. “There are a lot of people buying second homes now. It’s not even just recreational properties. It’s investment properties. The real estate market has been good, so they are buying.”
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Contact the Jeffrey Team for more information – 416-388-1960
Now is a good time to lock in a mortgage
By Rob Carrick – Globe and Mail
Mortgage rates have hit multiyear highs, and there could be worse to come before things settle down.
Call it yet another example of collateral damage from the problems in the U.S. subprime mortgage market.
Simply put, it’s costing banks and other lenders more to raise the money they use to finance mortgages, and they’re passing the cost on to people buying homes and refinancing existing mortgages.
That’s why the posted major bank rate for five-year mortgages is as much as 7.44% right now, which is the highest level since May, 2002, and why new variable-rate mortgages are becoming more expensive almost by the day (existing variable-rate mortgages are unaffected).
A discount of 0.9 of a percentage point off the prime rate used to be a good but attainable deal for borrowers. Today, mortgage broker websites – remember, these guys have access to many lenders – are showing best deals of prime minus 0.6 or 0.75 points.
Alex Haditaghi, CEO of Mortgagebrokers.com, said his contacts with bank representatives suggest that fully discounted five-year rates could go as high as 6.5% from their current level around 6%. He also warned maximum discounts on variable-rate mortgages may shrink further. “Two banks have given the heads-up that if you want to lock up your clients, do it now because by Nov. 15 you’re going to see us go to 0.5 below prime.”
If you’re looking for a house or have a mortgage expiring in the next three or four months, you should talk to lenders right now to lock in the best possible rate. A 120-day rate guarantee is pretty common these days and it offers a shield against further rate increases. Shopping around for rates is more important than ever today because lenders are all taking different approaches to the current mortgage-market uncertainty.
Borrowing costs for mortgages track rates in the bond and money markets, which in turn are a reflection of sentiments about where the economy and inflation are headed. Today, inflation is contained in Canada and recently there have been economic forecasts that call for slower but still solid growth in 2008. Add it all up and you have an environment where rates should be holding tight, not rising.
The reason why this isn’t happening is related to the same junk mortgages in the United States that helped pushed the stock market into its summer slump. These mortgages were packaged into investments that were widely purchased by banks, investment dealers and other institutional investors who are now a lot more risk-sensitive than they were before.
One way for investors to manage risk is to demand higher returns, and that’s in fact what Canada’s lenders are running into when they issue the short-term securities they use to finance variable mortgage loans. If the banks have to pay more, they have to charge more to keep up their profit margins. So it is that we have the incredible shrinking variable-rate mortgage discount in Canada.
Fixed-rate mortgage rates have jumped recently in what can best be described as a catch-up to this past summer’s financial market troubles. You’ll see this not only in the five-year rate, but also in posted big bank one-year rates that are as high as they’ve been since early 2001.
Benjamin Tal, senior economist at Canadian Imperial Bank of Commerce, said lenders held mortgage rates steady through August and September, and even cut them a bit at one point. Then, with bond yields on the rise earlier this month, a decision was made to bump up five-year rates significantly. “You might say that consumers got an extra two months of relatively cheap rates,” Mr. Tal said.
The biggest victims of the U.S. subprime mortgage situation here in Canada are people with poor credit histories, new immigrants and the self-employed. Their mortgage applications are being scrutinized more carefully than six months ago, and some people are being offered loans at higher rates or are being rejected.
Tighter lending rules are going to be a fixture for a while, but higher mortgage rates may prove temporary. CIBC’s Mr. Tal said the factors making variable-rate mortgages more expensive will slowly die away, and he argued that the state of the economy in both Canada and the United States doesn’t suggest much risk of rising rates. “Over the next six months, it’s very reasonable to think that rates will be stable, with a bias downwards.”
If you’re in the market for a home, get a rate guarantee and then keep an eye on the real estate market. It’s been hot, like, forever and high rates are just the sort of thing to cool things down.
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Contact the Jeffrey Team for more information – 416-388-1960
CMHC eases down payment rules for properties
Move risks overheating already hot real estate market
Garry Marr, Financial Post
You have to wonder what David Dodge will be thinking this time. Just over a year ago, the Bank of Canada governor met with Canada Mortgage and Housing Corp. because of his fears exotic mortgages were juicing an already robust Canadian housing market. Now CMHC has decided it is going to let Canadians buy investment properties with no down payment.
The Crown corporation, which controls about 70% of the mortgage insurance market in Canada, has quietly introduced changes that lower the down-payment threshold for an investment property. Instead of needing 15% down, Canadians will be able to buy a second property — not to mention a third and fourth and fifth — with no money down.
“These enhancements will ensure continued supply of affordable rental accommodations across Canada,” said Pierre Serre, vice-president of insurance products with CMHC.
Critics charge CMHC once again has moved into risky territory, the last time being its decision to allow Canadians no money down on a principle residence. “Look at the fee, anytime it’s that high, you know there is a lot of risk,” said one senior mortgage industry observer.
The mortgage insurance fee for the new product is 7.25% of the total amount of the loan. So a $300,000 mortgage would have a $21,750 mortgage insurance fee.
Instead of paying the fee up front, CMHC will allow that fee to be added to the overall mortgage which can be amortized over as many as 40 years. Based on 5.8% interest, the current discounted rate for a five-year term, it would cost just over $1,700 a month to carry that $321,750 mortgage.
By law, any consumer with less than a 20% downpayment must buy mortgage insurance if they are borrowing money from a financial institution covered under the Bank Act.
None of CMHC’s competitors are coming close to this new offer. Genworth Financial Canada — the other dominate player with about 30% of the mortgage insurance market — requires investors to have at least 10% down.
Back in July, 2006, Mr. Dodge demanded a meeting with the federal crown corporation. He was concerned about products like interest-only mortgages which give consumers the option of not making a principle payment for the first 10 years of a mortgage.
Mr. Serre said CMHC did consider the issue of whether the changes could overstimulate the market. “We look at those kind of considerations all the time,” he said, adding that to get a loan consumers will have to meet certain criteria in terms of their overall debt load. “We’re not trying to get people into situations they can’t manage.”
Some question whether there was any need for the latest change, given how strong the market in Canada remains.
The Building Industry and Land Development Association said this week condo sales in Toronto – the largest market for new high rises in North America — were up 31% over the first nine months of the year from a year earlier.
“I’m not sure why CMHC is relaxing the rules, the logic escapes me,” said Stephen Dupuis, chief executive of BILD. “The market is strong. I look at what is happening in the United States and wonder if there is a need to be so free with credit.”
The real reason for the new program, suggest some commentators, is CMHC trying to fend off competitors in the marketplace. In a constant battle with Genworth, CMHC is also facing up to four new mortgage insurers who have applied to do business in Canada or are already licenced to do so.
“There are competitors in the marketplace that didn’t exist before. They are reacting to competition that hasn’t even materialized yet,” said Mr. Dupuis. CIBC World Markets senior economist Benjamin Tal said the latest changes by CMHC are probably just the beginning. “The genie is out of the bottle, this mortgage market is starting to move. Over the past 16 months we’ve seen more changes than the past 30 years,” said Mr. Tal.
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Contact the Jeffrey Team for more information – 416-388-1960