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How badly would you be hurt in a housing market price correction?

ROB CARRICK– The Globe and Mail

Help yourself be a smarter homeowner by using The Globe and Mail’s Housing Price Correction Calculator to find out. Housing bulls, don’t self-combust. Our calculator shows the result of both price gains and losses over the next five years. Just plug in the current value of your house price – c’mon, you know you know it – and select from among our preset levels of price gains or declines.

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Houses are a financial asset that can rise and fall in price, just like stocks, bonds and gold. It’s important to remind ourselves of this after a 25-per-cent price gain between 2008 and 2013 on a national basis and a doubling of prices in Vancouver, Calgary and Toronto over the past 10 to 12 or so years.

In fact, there are already signs of market softness in some parts of the country. “The markets that are strong in Canada are very strong,” housing analyst Ben Rabidoux said. “And the ones that are weak are showing weakness that we haven’t seen since the late 1980s and early 1990s.

Ottawa home prices are down 2.5 per cent on a year-to-date basis, according to the Teranet – National Bank National Composite House Price Index. Montreal is off 1.0 per cent, Quebec 1.2 per cent and Halifax 2.6 per cent. “The next markets that will crack are the Prairies outside of Alberta,” said Mr. Rabidoux, president of market research firm North Cove Advisors Inc.

Much larger price declines happened long enough ago that the most recent crop of buyers may not have any recollection of them. In Calgary, troubles in the oil patch caused a house price decline from $107,739 on average in 1981 to $80,462 in 1985, or about 25 per cent. After a few years of rampant speculation in Toronto, the average resale home price fell from $254,197 in 1989 to $195,311 in 1995, or 23 per cent. Vancouver, always a volatile market, plunged more than 25 per cent in a year in the early 1980s and has a couple of times fallen more than 6 per cent in a year.

Want to see what a 25-per-cent decline would look like in today’s market? Our Correction Calculator shows you the numbers for the Canadian market as a whole, as well as the Big Three markets of Vancouver, Calgary and Toronto.

The calculator in no way predicts a downturn in housing prices. It’s only a tool for helping people understand how both declines and increases in house prices might affect them.

Be cautious when viewing how a rising market will increase the value of your home. Interest rates are close to rock bottom levels after a 30-year down cycle and likely to rise in the next couple of years. The impact on affordability will be significant.

“I think it’s going to be a huge shock to the Canadian real estate market,” said Craig Alexander, chief economist at Toronto-Dominion Bank. “I do a lot of real estate presentations from coast to coast and an awful lot of young people think these low interest rates are normal. They don’t see anything abnormal about a 3-per-cent five-year mortgage. I always have to say, can you please have a conversation with the grey-haired gentleman at your table about the normal level of interest rates.”

As you’ll see in a chart included with our correction calculator, five-year mortgage rates reached 18 per cent in the early 1980s. The runaway inflation that drove rates to that height is extinct today, but even a small rise in borrowing costs will have an impact on housing.

Mr. Alexander’s 10-year view is that housing prices will increase by an average rate of inflation plus one to 1.5 percentage points, instead of the real returns of 2 to 3 per cent in the past several years. But he also warns of a “reversion to the mean,” a term that stock market investors should be familiar with.

It means that when a financial asset has a really good run, it’s wise to expect a period of weaker performance that brings the longer-term numbers back to the mean (the midpoint between the high and the low). A period of price stagnation could bring average price gains back to the mean, and so could a price decline.

When you invest in the stock market, you’re supposed to keep your eye on the long term and not worry about upsets along the way. The same applies to housing, although keeping a cool head in a declining market will be hard. A lot of owners have only lived in a world of rising prices.

Canadian real estate and housing boom may be ending, Scotiabank warns – Consult with a Vancouver Mortgage Broker

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Canadian real estate and housing boom may be ending, Scotiabank warns

‘More subdued trajectory’ over coming years could impact jobs, renovation industry and consumer confidence, bank report warns.

CMHC cutting back on what it covers with mortgage default insurance – Ask a Vancouver Mortgage Broker

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Canada Mortgage and Housing Corp., the Crown corporation that controls the vast majority of mortgage default insurance in the country, says it plans to get out of the market for second homes and is adding restrictions for self-employed Canadians.

Effective May 30, CMHC said it will discontinue insuring second homes and will require self-employed Canadians to have third party income income validation.

The Crown corporation said the changes are being made as part of its review of its mortgage loan business. The organization has already said it is raising rates across the board May 1, a move that comes after the federal government last year appointed a new chair for CMHC and brought in a new chief executive.

“CMHC helps Canadians meet their housing needs and contributes to the stability of the housing market and finance system” said Steven Mennill, senior vice-president, insurance, in a release. “As part of the review of its mortgage loan insurance business, CMHC is evaluating its products and services to ensure they are aligned with these objectives.”

The agency said it’s the first set of changes resulting from the review of its operation. The Financial Post reported this month that Evan Siddall, a former investment banker brought in as CEO, has been asked about the possibility of a risk-based method of assessing mortgage default insurance. Sources say the new CEO has told people he doesn’t disagree with the principal of risk-based insurance.

The changes announced Friday affect a small portion of the market. CMHC said its second home and self-employed without third party income validation business account for less than 3% of CMHC’s insured business volumes in units.

“Given the limited use of these products, their discontinuation is not expected to have a material impact on the housing market,” the agency said in a release.

CMHC first introduced the program for self employed people in 2007 in response to “industry competition” which at its peak saw some U.S. players enter the market and encourage changes that created amortization lengths as long as 40 years. The government has since restricted loans to 25-year amortizations.

The second home product was introduced in 2005 and applied when purchasing an owner-occupied second home anywhere in Canada.

CMHC said it will limit the availability of homeowner mortgage loan insurance to only one property (one to four units) per borrower/co-borrower at any given time.

Benjamin Tal, deputy chief economist with CIBC, said the announcement was not “a big surprise given the mandate of providing more stability. That might not be the end of it. We might see more coming from CMHC.”

Finn Poschmann, vice-president of research at the C.D. Howe Institute, said the requirement for validation seems reasonable.

“What is interesting is the question of whether the change will tend to shift risk away from CMHC and toward the private insurers. Whether that is the outcome will be determined by the private insurers’ responses,” he said, in an email.

gmarr@nationalpost.com
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How lower interest rates are making variable mortgages more tempting – Ask a Vancouver Mortgage Broker

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Consumers facing record housing prices are probably increasingly tempted to go with a floating rate mortgage and all the risks that come with an interest rate linked to prime.

The lure is right in your face on every mortgage rate comparison site. The five-year fixed-rate mortgage has dropped as low as 3.09% with discounters and the major banks aren’t too far off that rate, most of them offering special deals. All this comes as yields in the bond market have dropped, sending fixed rates down.

Floating rate mortgages are as low as 2.35% with the discount off the prime lending rate 65 basis points. Better yet, it has never been easier to get a variable rate mortgage since the government changed the rules in April 2010 so anyone applying for a variable rate can qualify based on the five-year posted rate.

The qualifying rate is based on an average of the six big banks’ posted rate for a five-year closed mortgage. Declining bond yields have lowered that qualifying rate to 4.99%.

The decline may not sound like much but Rob McLister, editor of Canadian Mortgage Trends, says it means a consumer with a $300,000 home and 5% down needs 2% less income than they did just a few months ago.

Ottawa changed the rules about four years ago to tilt the playing field in favour of locking in your mortgage. When you lock in your mortgage for a term of five years or longer, you are able to use the rate on your contract for determining how much you can borrow. Go variable and you must use qualifying rate which is still almost 50% higher.

“There has been talk of changing it, speculation that the [Office of the Superintendent of Financial Institutions] will mandate the banks use the qualifying rate for five years terms and longer,” said Mr. McLister, noting nothing has happened yet.

The federal government tends to like the idea of consumers locking in their mortgages because it offers protection from a sudden jolt in the prime rate — even as the Bank of Canada looks poised to go a record five years without moving its overnight lending rate.

Consumers are probably lured more by deals than anything else and the past year saw well-advertised rate wars over five-year fixed rate mortgages with the rate dropping to 2.99% for the term.

The Canadian Association of Accredited Mortgage Professionals said in a recent study that 82% of purchasers in 2013 went with a fixed rate product. The tide clearly turned last year because CAAMP says 67% of  consumers with a mortgage are in fixed. The percentages are climbing for locking in.

Mr. McLister says the general rule is when the gap between the five-year fixed and variables reaches 100 basis points or one percentage point, people start to shift to a floating rate.

We don’t know what a good interest rate is anymore, we really don’t

“You’re talking about somebody who lent money at 21%,” said Laura Parsons, a Calgary-based mortgage specialist with Bank of Montreal, about the difference in rates. “We don’t know what a good interest rate is anymore, we really don’t.”

Ms. Parsons says fixed remains as popular as ever because the rate is still very low by historical perspectives. She suggests if you do pick a variable mortgage, take the savings compared to fixed rate and apply it to the principle.

“You set your payment higher in case the interest rate does change,” says Ms. Parsons.

There is a fair bit of money to be saved, as long as the variable rate is at 2.35%. Consider a $500,000 mortgage with a 25-year amortization.

Based on monthly payments, you pay $54,333.66 in interest over the five years of your mortgage at 2.35%. Raise that rate to 3.09% and the interest comes to $71,472.09. That savings could be pumped back into your mortgage, lowering the principle owed and further reducing interest costs.

Jim Murphy, chief executive of CAAMP, says the easier qualification and low rate might push a few people back into variable but a fixed rate of 3% is tempting to lock down.

“You look at the news and it just seems the Bank of Canada is unlikely to raise rates,” said Mr. Murphy, who doesn’t think overnight rates will go up this year or possibly next year.

“That’s a year where you can have these rates,” he says, referring to savings from a variable rate product.

With house prices still at all-time highs, it’s easy to see why consumers would be tempted by the savings.

Canada housing correction could trigger another recession, BMO report says – Consult with a Vancouver Mortgage Broker

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OTTAWA — A sudden and sharp correction in the housing market could have a devastating impact on the Canadian economy overall, enough to trigger another recession, says a new Bank of Montreal report.

The analysis by senior economist Sal Guatieri finds that even a 10% correction — what many would call a soft landing — could sap as much as one percentage point from gross domestic product growth, or basically halve the current growth rate.

The findings stems from an analysis on the contribution of the brisk housing market on the Canadian economy between 2002 and 2007, when prices rose five percentage points faster than incomes.

According to the BMO, the rapid escalation in home prices and construction added 0.56 percentage points to annual growth during those six years, and “lifted household wealth, confidence and borrowing ability.”

But now, with home values at or near record levels throughout the country and many economists predicting some kind of correction, the opposite scenario would unfold from a price and accompanying construction drop.

“This suggests a moderate correction could have a meaningful slowing effect,” Guatieri says in a report issued Friday.

“Based on our model, a 10% decline in prices and construction reduced annual growth by one percentage point, with the two channels contributing equally. Given underlying growth of just over 2%, prices and construction would need to fall more than 20% to spur a contraction.”

Guatieri adds that given the record levels of household debt accumulated by families, the negative impact of a correction could even be worse than the bank’s models project.

On Wednesday, Bank of Canada governor Stephen Poloz said while a housing correction remains a risk to the economy, the most likely outcome was for a “soft landing.”

The central bank took comfort in the fact price increases had moderated and that household debt levels had stabilized — while remaining elevated — at 164% of disposable income.

The BMO report does not suggest a major correction is in the offing, as some economists have predicted. In fact, it argues the opposite. Guatieri says the so-called “bubble” in housing is exaggerated and that Canada is not in the same position the U.S. found itself prior to the 2007 crash.

He notes that while the run-up in housing prior to the recent recession may have been similar in both countries, the boom was smaller in Canada and had been preceded by years of below average homebuilding, so was in part a response to pent-up demand. That was not the case south of the border.

He also points out that with the exception of Toronto, Calgary and a few other hotbeds, Canada’s housing boom essentially ended in 2008. Since then, price increases have risen only moderately more than incomes.

Still, Guatieri’s findings agree with the central bank’s contention that housing remains a key vulnerability to the economy as a whole.

“This speaks to the need for households to manage their debt prudently,” he said.

The Canadian Press

Cash-back mortages: A deal from your bank that regulators are not keen on – Ask a Vancouver Mortgage Broker

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It’s the last refuge of those who don’t have money, but still want to own a home.

The banks have long used the offer of giving cash back as a lure to attract customers, many of whom can’t come up with the minimum 5% down payment demanded by government-backed mortgage insurance rules.

Whenever I withdraw money from my bank’s cash machine I  get this offer of instant money, if I take out a mortgage. “Cash Back Mortgage: you can get the cash you need to help pay your land transfer tax, lawyer’s fees, moving costs, closing costs and other expenses,” one bank website brags.

The deal is simple. The bank gives you cash up front to use however you want, except as the down payment.

The price of the upfront cash is a much higher interest rate — usually the posted rate, which may be almost two percentage points higher than you might get negotiating.

It’s a costly move when considered over a five-year mortgage term. My bank says you can get $20,000 up front on a $400,000 mortgage, based on a 5% cash-back mortgage. Based on monthly payments at the current posted rate of 4.99%, that mortgage will cost you $93,422.91 in interest over five years. The same mortgage will cost you $55,288,48 in interest at 2.99% — the going rate in the discount market.

You are paying almost $40,000 in interest — the difference between the posted and discount rate — to get $20,000 today. Even when you consider the money is in present-value dollars, it’s pretty clear why this type of offer is not a great deal for the consumer and is being discouraged.

You’re not supposed to use it for a down payment, but it finds its way there anyway, according to many people in the industry.

This past week the Office of the Superintendent of Financial Institutions reiterated it doesn’t like the practice at all, recommending mortgage default insurers not underwrite loans that use cash back for a down payment.

Draft guidelines on residential mortgage insurance underwriting practices issued by OSFI included a section on down payment.

“Incentive and rebate payments (ie. cash back) should not be considered part of the down payment,” said the regulator. In cases in which people don’t use their own equity and opt for non-traditional sources as a down payment, the regulator seems to want federally regulated mortgage insurers to consider that risky and charge a larger premium.

Led by Canada Mortgage and Housing Corp., the Crown corporation that has the largest position in the market, all mortgage default insurers will be raising their premiums come May 1.

It’s not mentioned very often, that even though you supposedly need to have 5% down, you are allowed to add the cost of mortgage insurance premium to your loan. Premiums are as high as 3.15% for a mortgage with 5% down, but not to worry, you can still add that to your loan which will take you to 98.15% of the value of your home.

Lenders have been giving cash back, it’s kind of a loophole to the 100% financing rule prohibition

“I think you want to have some savings mechanism in place to make sure you have some sort of down payment,” says Calum Ross, a Toronto-based mortgage broker, who is not a supporter of cash-back mortgages. “I think it’s a fundamental risk to the system if you don’t have any skin in the game.”

The cash-back market is a small percentage of the overall market, but it’s well known that people work around the so-called rule that is supposed to prevent you from using it for the down payment.

Rob McLister, editor of Canadian Mortgage Trends, says there’s not much banks or insurers can do if consumers are coming up with their 5% through other means, such as borrowing from family or putting it on a credit card.

“Lenders have been giving cash back, it’s kind of a loophole to the 100% financing rule prohibition,” Mr. McLister says, referring to a previous rule change that demanded the minimum 5% down. “But you can still get that down payment by borrowing at 18% on your credit card, if you want to.”

He wonders if during the comment period on the OSFI guidelines, there will be suggestions for even more restrictions on sources of borrowed down payments. Mr. McLister says credit unions, which have been allowed to do 100% financings because they are not federally regulated, will no longer be able to provide those loans if they are to be covered by government-backed mortgage insurance.

All this squirming happens over a minimum 5% down payment. Imagine if it went up 10% — something that scares everybody in real estate.

“Nodody wants to see that in the lending industry. It depends what it is — 6% is not a big deal, but 10% will be a major deal,” Mr. McLister says, adding he doesn’t think OSFI is pushing for a larger down payment.

Phil Soper, chief executive of Brookfield Real Estate Services, says people having trouble getting the 5% for a home are generally unsophisticated buyers.

“It makes sense, it’s hard to argue against more transparency in mortgage financing,” says Mr. Soper, about trying to get rid of cash-back programs. “People talk about it being used to cover closing costs or initial furniture or renovations and there are sources of credit for that.”

Benjamin Tal, deputy chief economist with CIBC, says some people will always find a way around rules and the cash-back stipulation from OSFI is no different.

“You can get a loan from a parent and call it a down payment [and then pay it back]. You can never underestimate the creativity of people,” says Mr. Tal.

Consumers should think twice about this offer. The national banking regulator seems to be saying as much.

Illustration by Chloe Cushman, National Post

Costly housing has more Canadians turning to renovations – Consult with a Vancouver Mortgage Broker

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The never-ending strength of the Canadian housing market has homeowners switching to renovations at a record pace, according to a new report.

Andrienne Warren, an economist with Bank of Nova Scotia, says the boost in the reno market has been “fuelled by rising home prices, tight resale market conditions, attractive financing costs and government tax credits.”

She says renovation spending has been the fastest growing segment of the market with real renovation outlays increasing at an annual rate of 6% from 2000-2012. This increase was double the 3% of new construction.

The spending on renovation has helped pushed housing prices because it increases the quality of the housing, said the report. That housing is eventually sold at a higher price.

Overall, Ms. Warren says the housing market may finally be turning. “Residential investment stalled last year, as affordability tempered home sales, and builders scaled back the number of new developments,” she said, adding Scotiabank expects a more “subdued trajectory” for housing over the next several years which will have a modest drag on the economy.

She estimates the housing sector contributed $128-billion to the economy last year when including residential investment, new construction, renovations and owner transfer costs such real estate commissions, legal and appraisal fees.

It has proven to be an important part of the economy with residential investment expanding at an annual rate of 4.2% from 2000-2012, almost double overall gross domestic product during the period. The sector contributed 0.3% annual to real GDP over the period.

The reports says a downturn, even if it’s just a softening market as opposed to a crash, will impact many industries.

“Apart from construction, industries most affected by a housing slowdown include manufacturing, retail and wholesale trade, finance, insurance and real estate professional and technical services,” says Ms. Warren.

Be careful before you break that mortgage – Consult with a Vancouver Mortgage Broker

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Low mortgage rates tempt, but penalties for breaking can be high

What to look for on your 2013 income tax return – Ask a Vancouver Mortgage Broker

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What to look for on your 2013 income tax return

It’s another good year for do-it-yourself tax filers. There aren’t too many tax changes and one really lucrative new tax credit.

Three key questions about Canada’s new mortgage insurance rules – Ask a Vancouver Mortgage Broker

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