Dreyer Group Mortgage Brokers

Ontario’s housing market remains “modestly” overvalued, and that may be, at least in part, because of “gifting” — baby boomer parents who are helping finance down payments on pricey homes their grown children couldn’t otherwise afford, according to the Canada Mortgage and Housing Corporation.

That’s why the federal housing agency has launched a study, trying to determine how frequently young buyers are making purchases backed by the Bank of Mom and Dad.

CMHC is also trying to determine how much money is being handed down to echo boomers by their baby boomer parents, the wealthiest generation ever thanks to skyrocketing house prices and inheritances from their own parents.

“It may explain some of the gap between what’s fair market value and what people are paying,” especially in the Toronto market where bidding wars and fierce competition continue to drive up house prices, says Ted Tsiakopoulos, CMHC’s Ontario regional economist.

“It’s not data that’s readily available. It’s hard to get at, but it could explain a lot on the overvaluation front.”

CMHC has already compiled some preliminary data from Canada’s banks, which account for about 70 per cent of all mortgage lending.

Lenders are seeing a growing number of applications now accompanied by so-called “gift letters” worth tens or even hundreds of thousands of dollars from parents, outlining how much they are contributing toward the purchase in an effort to ease the monthly payments their grown children will have to carry.

Economists are now trying to factor that wealth transfer into housing models to see if it’s actually skewing house prices and purchases. Traditionally, economists have tended to focus on house prices compared to income, prices compared to rents and the impact of low interest rates to better understand the ups and downs of the real estate market.

“We’ve captured most of the variables we think are important. The missing piece is this wealth and gifting,” says Tsiakopoulos. “Industry people (lenders) have told us it’s happening. What we want to do now is quantify it in our (economic) models to help us understand this modest overvaluation, because we’re missing something.”

Statistics Canada data shows that between 1999 and 2012, Canadians’ net worth grew by 44.5 per cent, and the highest growth was among those over age 55, says Tsiakopoulos.

“That makes the wealth piece more important today versus 20 or 25 years ago.”

The data is critical, says CIBC deputy chief economist Benjamin Tal, because “it could be a market driver we’re not aware of.

“This transfer of wealth may be generating demand that otherwise wouldn’t be there.”

In a market like Toronto’s, where the supply of homes for sale continues to lag demand, it would also explain the bidding war mentality among young buyers armed with all the free money they need from their parents.

Tsiakopoulos mentioned the study Thursday while discussing CMHC’s spring outlook report for 2014 which found the GTA real estate market remains “resilient” and modestly overvalued, but no where near bubble territory or a major correction.

Sales of existing homes are likely to increase over the next two years but price growth ease, says the forecast.

Even the much-watched condo market is holding up well.

“Between 18,000 and 20,000 new condominium units are expected to be sold in 2014 as the pickup which began in late 2013 continues into this year,” says the outlook report.

Rental is expected to be a major growth sector over the next few years, says Ed Heese, senior market analyst for the GTA.

That’s because echo boomers, who average 24 years old, now outnumber their baby boomer parents. Many are expected to remain renters for years to come. That should drive strong demand for rental condos, especially close to the downtown core, with another 10,000 or so likely to come up for rent this year as more units, many bought by investors, come to completion.

Rental rates, however, which have been growing strongly the last few years, are likely to ease, notes CMHC.

Canada Pension Plan Investment Board, the country’s largest pension manager, returned 17 percent in fiscal 2014, its best performance since 2004 as private-equity returns surged.

Assets rose 20 per cent to a record $219.1 billion from the same period last year and generated a record $30.1 billion in investment income for the year ended March 31, the Toronto-based fund manager said in a statement Friday. Private equities returned 30 per cent in Canada, 35 per cent in foreign developed markets and 37 per cent in emerging markets.

Canada Pension Chief Executive Officer Mark Wiseman said the gains were made even with “fairly priced” assets and challenges completing transactions in places such as India and China.

“My view is that in at least my career as an investor, this is probably the toughest market today to operate in as a value investor,” he told reporters.

The board’s 17 per cent return beat the 15 per cent median of Canadian pension funds in the 12 months ended March 31, according to RBC Investor Services.

The fund’s equity holdings in foreign developed markets grew 18 per cent to $75.6 billion from a year ago, and made up 35 per cent of its equity portfolio at the end of March. Its stake in Canadian equities rose 22 per cent to $18.6 billion compared with a year ago, for 8.5 per cent of its equity portfolio.

Emerging markets fell to 5.7 per cent of its equity portfolio at the end of March from 6.7 per cent a year ago.

Bonds made up 25 per cent of the board’s fixed-income portfolio, down from 29 per cent a year ago. Other debt rose to 5.2 per cent from 4.7 per cent while money market securities increased to 8 per cent from 4.8 per cent a year ago.

The fund, which manages the retirement savings of 18 million people in every province except Quebec, said it aims to continue to grow in foreign markets with 69 per cent of the fund invested internationally at the end of March, compared with 63 per cent last year.

“When you look around the world, you don’t see that assets are grossly overpriced, and you don’t see assets that are grossly underpriced,” Wiseman said.

This has forced Canada Pension to be “patient” and “pick its spots” in niche markets where the fund can leverage its long-term investment strategy to find value, like it did with the acquisition of Brazil’s Aliansce Shopping Centers SA, Wiseman said.

Canada’s housing market is showing signs of “fraying” with slowdowns and even downturns already impacting some smaller cities and likely to hit still-booming Toronto and Vancouver in time, says Capital Economics.

In fact, economist David Madani is reviving a prediction he first made three years ago — that what now appears to be a soft landing for Canada’s real estate market is likely to take a turn for the worse.

“We still believe that the housing market is overdue for a longer-term correction of as much as 25 per cent,” Madani says in a note to clients released Friday.

“While the recent strength of Canada’s housing market has been astounding, the regional breakdown reveals that it has begun to fray at the edges,” says Madani.

He points as evidence to Canadian Real Estate Association housing statistics for April, released this week, which appear to show a pick up in house sales, but largely on the back of still-booming Toronto and Vancouver, says Madani.

In fact, sales and prices are already falling in Halifax. Regional markets such as Winnipeg and Victoria “are also experiencing a marked housing slowdown, with prices declining in certain areas,” he says.

Madani cites challenging economic conditions, high prices and tougher mortgage lending rules for what he expects to be an escalating downturn.

The most “troubling to the national picture” is Montreal where prices are on the brink of decline, says Madani.

“Despite low interest rates and a stable unemployment rate, it seems clear that the balance of demand and supply is almost as soft as during the recession in 2009.”

What Madani fails to mention, however, is that that market has seen a marked holdback by buyers who had been fearful the province could be severely impacted by the possible election of a separatist government.

Already, realtors are seeing some pickup in sales, especially of high-end properties, which is being attributed, in large part, to the election outcome.

“In contrast, house prices in the two largest and most overvalued markets, Toronto and Vancouver, are holding up for the time being, though partly reflecting fewer new property listings,” he says.

While the current ratio of sales-to-listings in Toronto points to price growth, at least for a few more months, of about five per cent, the picture doesn’t look so rosy in Canada’s priciest market. The sales-to-listings ratio in Vancouver “suggests that house price inflation will decline materially over the next few months.”

“Overall, with house prices already declining in some smaller regions, it may only be a matter of timing then before prices in other larger and much more overvalued markets begin to fall more sharply.”

Here are some answers to common questions about deposits when you are buying a house.

When must a deposit be paid?

In Ontario, the standard real estate contract gives the buyer two choices; you can pay the deposit immediately when you make an offer, or you can agree to pay it within twenty four hours after the seller accepts it. Most buyers prefer the second option. If you are in a bidding war, you will be encouraged to come up with the deposit immediately, to show good faith to the seller.

Can the buyer get out of a deal by refusing to pay the deposit?

No. Once the deal is accepted, you can’t change your mind. If you do, the seller can sell the property again and if he gets less money than you were going to pay the seller can sue you for the difference, plus legal fees.

What happens if the deposit is paid late?

The seller has the right to cancel the deal. This is because all time limits matter in a real estate contract and if you are late, even by a few minutes, the seller can try and cancel. I have seen this happen many times, especially when the seller knows that there is another buyer out there who will pay more money. If you need more time to come up with your deposit, say so in your offer.

How much should a buyer pay as a deposit?

This is a tough question, and will largely depend on where your home is located. In Toronto, deposits are now usually up to 5 per cent of the sale price. In Brampton, it is closer to 2 per cent. In some areas of Ontario, deposits can be as little as a few hundred dollars.

Why does the deposit go to the seller’s real estate agent and not the seller?

If the seller goes bankrupt or disappears with the deposit, the buyer is not protected. When the deposit is held by the real estate brokerage, it is in trust and is also protected by insurance so even if the brokerage goes bankrupt, the buyer can get their money back.

If the buyer is unhappy with their home inspection, can the seller refuse to return the deposit?

This happens more than you think. A deposit cannot be released unless both the buyer and seller agree. If a seller believes the buyer did not act in good faith in trying to satisfy their condition, whether it is a home inspection, financing or a condominium status certificate review, they can refuse to release the deposit. This means it stays in the broker’s trust account until a judge decides who gets it, which can take years. As a precaution, buyers should consider making two deposits in their offer, a small one of say one per cent when the offer is accepted, and a second larger deposit once the condition is satisfied.

Understand the rules about deposits before you sign any real estate contract. It is expensive to change your mind later.

Related:

Buyers out $10,000 as house deal falls apart

More real estate columns by Mark Weisleder

Mark Weisleder is a Toronto real estate lawyer. Contact him atmark@markweisleder.com

Brian Hyytiainen bought a house and took out a five-year mortgage in 2011. Things have changed in his life, forcing him to put the house up for sale.

“I’m unable to continue to afford the house on my own,” he says. “I’d heard there would be a prepayment fee, but I had no idea the bank would take advantage of an already difficult situation and charge $13,000.”

He was dealing with RBC, Canada’s largest bank, which charged him an interest rate of 3.79 per cent. That was what he saw on the first page of his mortgage agreement.

Only on the third page – in fine print – did he find out that he had received a rate discount of 1.55 per cent.

“Pretty sneaky if you ask me,” he says. “Everyone is given a rate discount. No one would take a closed mortgage at five per cent when rates have been lower for several years.”

Most of the Big Five banks start with a high posted rate and offer discounts to customers who ask for one. It’s a game that has gone on for many years. However, the high posted rate can come back to haunt customers who decide to break a closed mortgage at a time when rates are falling.

Hyytiainen learned how much the inflated rate hurt him after speaking to a client care manager at the branch.

“We calculated the breakage without a discount and it was about $5,000, which is much more reasonable. I tried to challenge the amount.”

RBC client care said there was nothing that could be done. Though he was selling the house because of financial setbacks, he still had to pay the $13,000 penalty when his deal closed.

His appeal to the RBC ombudsman didn’t help. He then filed a complaint with ADR Chambers Banking Ombuds Office (ADRBO), which reviews decisions of participating banks when customers are dissatisfied.

“This has been a frustrating situation,” he says. “I will likely withdraw all my accounts from RBC and tell others about my experience in the hopes they may go elsewhere.”

Mortgage brokers help clients get the best rates from a variety of lenders. Many prefer to use smaller banks that post their best rates and don’t offer discounted rates.

“If you’re going for a fixed-rate mortgage, I’d suggest using a Big Five bank as a last resort,” says Calum Ross, a Toronto mortgage broker.

“As long as the big banks play the rate discount game, consumers will never have fair mortgage lending.”

Related: Why loyalty doesn’t pay when it comes to mortgage renewals

Luckily, you can find more disclosure than before. Federally regulated banks must show customers how they calculate their mortgage prepayment charges – including rate discounts – using examples that can be easily understood.

However, the banks’ calculators include lots of numbers and technical terms – and don’t always provide a definitive answer.

“Note: This example is based on a formula for estimating the cost of prepaying a mortgage before the end of the term,” says RBC’s website.

“RBC Royal Bank uses a more complex calculation that will result in a lower charge than the estimate. You will have to contact us for your exact prepayment charge.”

How can you avoid getting hit with a mortgage prepayment charge that eats up your home equity when you sell?

Here are some tips:

• Did you receive a rate discount? You may not see it shown prominently on your mortgage documents. Ask the bank how much the discount was and how it will be used in the calculation.

• Have you used your prepayment privileges? The bank should deduct the prepayments you are allowed to make each year from the balance on which the penalty is calculated. Speak up if this is not done.

• Do you need help figuring out the penalty or negotiating a lower one? Consult a mortgage broker with the Accredited Mortgage Professional (AMP) credential. Mortgage brokers can run the numbers at no cost and help you find a way to cut the cost.

• Can you weight the costs and benefits of breaking your mortgage? Check the Financial Consumer Agency of Canada’s online guide to renewing and renegotiating your mortgage.

Ellen Roseman writes about personal finance and consumer issues. You can reach her at eroseman@thestar.ca or www.ellenroseman.com