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Fitch calls for more government action in ‘overvalued’ Canadian housing market

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housing-1The Canadian housing market is 20% overvalued and needs another round of government regulations to cool it, credit agency Fitch Ratings said Monday.

The statement is sure to add more fuel to the fire about what’s next for the next Canadian housing market which has seen a rebound in sales after a slow winter and new records for price set every month.

Fitch points to numbers from Canadian Real Estate Association which show home prices grew 7.1% in May on a year over year basis.

“According to Fitch’s sustainable home price model, which measures home prices relative to long-term fundamentals, Canadian home prices remain approximately 20% overvalued in real terms,” the Chicago-based company said in its statement.

It noted building permits have picked up in recent months along with sales, supported by historically low interest rates and those factors are driving up affordability.

Canadian home prices remain approximately 20% overvalued in real terms

Fitch also said household debt to disposable income, which reached a record high of 164.1% in the third quarter of 2013 before declining the next two quarters, is making the market “more susceptible” to shocks from higher unemployment or interest rate increases.

The federal government has intervened four times to slow the housing market, among the measures being shortening amortization lengths from 40 years to 25 years. It also tightened the rules around eligibility for government-backed mortgage insurance.

Fitch wants more regulation. “The long-term impacts remain unclear, and policy makers may be required to take additional steps over the short term to engineer a soft landing,” the agency said.

But the company’s statement comes as new data suggests the pace of house price gains are slowing on a national basis despite the fact there are still cities that continue to show price growth.

The Teranet Home Price Index increased 4.4% in June from a year ago, down from the 4.6% year over year jump in May.

The composite six index which covers Vancouver, Toronto, Calgary, Montreal, Ottawa and Halifax was up 4.9% in June from a year ago compared to a 5.1% year over year increase in May. Both the overall and the composite index were up 0.9% in June from May.

“With the housing market having now shaken off the winter blues, price are continuing to rise at a solid pace. That said, the continued deceleration in price growth on a year-over-year basis may be an indication that the Canadian housing market is becoming more balanced,” said Toronto-Dominion Bank economist Randall Bartlett.

Canadian consumers appear equally unconcerned about a major correction happening in the market, based on a new survey.

A poll released by Bloomberg and Nanos Research Group shows Canadians have not been this optimistic about the housing market since 2008. The survey found 47% of Canadians predict home prices will rise over the next six months versus 11.6% who said they would drop — the widest gap between the two numbers since 2009.

Long-time housing bear David Madani, an economist with Capital Economics, said those hopes may be unfounded.
He said prices typically move up over the summer season and low interest rates could support further short-term growth in the market.

“The recent declines in existing home sales-to-listings ratios in these markets suggest that further moderation, or outright declines, in the annual rate are likely in the coming months,” said Mr. Madani. “Given the recent drop in mortgage costs, a pick-up in home sales over the next few months might delay this price weakness until next year. But we still believe that the housing market is headed for a major correction over the longer term.”

Housing market skewed by handful of hot cities, Canada Guaranty CEO says – Consult with a Vancouver Mortgage Broker

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fp0718_andy_charles_c_mf2Balanced. That’s the way the head of one of Canada’s two private mortgage default insurers sees the housing market today.

A day doesn’t go buy without some commentator or some media outlet suggesting the housing market is going to crash. But Andy Charles, the chief executive of Canada Guaranty, says much of that view is based on a national average skewed by a handful of hot markets.

“I think we need to keep in mind what is driving house price increases in Canada right now. It’s largely three cities, Toronto, Calgary and Vancouver,” said Mr. Charles. “If you look to eastern Canada, we are seeing price decreases. I hesitate to look at Canada in one national framework when it’s three cities driving the increase.”

Statistics released by the Canadian Real Estate Association bear that out. Nationally, prices rose 6.9% in June from a year ago to $413,215 but if you look at the $21.2-billion in activity for the month, almost half can be attributed to the big three cities he’s talking about. Those cities are driving up the national average.

The steps the Department of Finance has taken over the years have been prudent and resulted in a much stronger marketplace

Mr. Charles agreed to sit down with the Financial Post and discuss the state of the market in the face of ongoing changes at his major rival, Canada Mortgage and Housing Corp. Mortgage default insurance, which protects the bank in the event you can’t pay, is something every Canadian homeowner with less than a 20% down payment must have.

This week, Chicago-based credit agency Fitch Ratings jumped into the fray, saying the Canadian housing market was 20% overvalued and needed even more government regulation despite four previous moves by Ottawa to cool housing off.

Mr. Charles doesn’t believe the federal government needs to do any more at this point. “The steps the Department of Finance has taken over the years have been prudent and resulted in a much stronger marketplace,” he says.

The chief executive says mortgage insurers are keeping a close eye on the market and people they are insuring to make sure they can stay in their homes in a rising interest rate environment, should that play out.

“Our business is driven by the unemployment rate. People are generally going to stay in their homes, if they are working,” says Mr. Charles. “The unemployment rate is what we monitor carefully and is the significant indicator for our business.”

Some analysts suggest Canada Guaranty has secured as much as 13% of the mortgage default insurance market in the country in the four years since the Ontario Teachers’ Pension Plan Board took it over in 2010 and rebranded it. The share could jump with the federal government signalling it plans to scale back the role of CMHC in the marketplace.

“The changes at CMHC to date have been relatively modest, however the direction of CMHC that is evolving around reducing its exposure to the housing market is obviously a net positive for the private sector competitors,” said Mr. Charles. “CMHC has been a very positive contributor to our industry over the the last 60 years. It just doesn’t need to be the dominate player going forward, particularly when you have well-capitalized private players willing to prudently take on the housing market risk.”

Here is an edited transcript of the interview with Mr. Charles:

Q. Can you ever see a mortgage default insurance market that is totally privatized?

A. I would anticipate the government of Canada through CMHC continuing to be a player in mortgage default, just not at the current levels.

Q. At one point there were as many as six mortgage default insurers either in the Canadian market or planning to enter. Your company was originally owned by American International Group, Inc. before the group led by Teachers’ bought the company out. There are now only three players. Could we see more competition in the future?

A. When the financial crisis hit in the U.S., there was a lot of pressure to repatriate the capital from the Canadian marketplace. I’m not aware of any new competitors entering the marketplace.

QYou are controlled by one of Canada’s largest pension funds. What has that meant to you in terms of market share?

A. We’ve been able to grow being 100% Canadian-owned with the sponsorship of the Ontario Teachers’ Pension Plan and our ownership team, overall we have been well-received by the marketplace. It is a key consideration, having well-known, well regarded ownership.

Q. How much competition is there really in the market? There are some things you insure that CMHC doesn’t, like second homes. But some might point to the fact CMHC increased premiums in May and private competitors were pretty quick to pass on the exact same increase.

A. It’s a fair comment. But you will always see nuances. If you think about it, the government of Canada, through a sandbox, really dictates the type of product offerings in the marketplace. You won’t see a lot of differentiation. You will continue to see some differentiation on some on the peripheral products. The larger question is how does CMHC move from being a dominant player to just a player in the space?

Q. The government backs CMHC insured mortgages 100% but only 90% for the two private companies, how important is that 10 percentage point gap?

A. I believe it’s less of a factor today. There are a number of reasons. One of them is the strength of the ownership team at Canada Guaranty. But the level of capital required [for insured mortgages] continues to increase, so there’s that buffer which is healthy for the housing market. All three mortgage insurers are now regulated by [Office of the Superintendent of Financial Institutions].

Q. Can you ever see a world where the government gets completely out of backing mortgage default insurance for companies like yours?

A. It would be difficult to fathom (as long as the CMHC is still in the marketplace with its government backing). The point I would emphasize is if the private sector competitors take on more of the risk, you are putting private capital in play before the government backstop can be triggered. That’s the important nuance to emphasize, it’s putting private capital at risk instead of public capital.

Q. Can you see mortgage insurance evolving into a more risk-based system where your premium is based more on individual risk factors like your credit score?

A. I don’t anticipate any movement in that direction in the short run. With CMHC being the dominant player, it becomes difficult to have price differentiation in the marketplace.

Illustration by National Post Graphics

Price surge fuels Canadians’ optimism about housing market to highest since before financial crisis – Consult with a Vancouver Mortgage Broker

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house-salesCanadians are the most optimistic about the country’s real estate market in a more than six years as prices reignite.

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The share of Canadians predicting higher home prices over the next six months rose to 47% last week, according to polling by Bloomberg and Nanos Research Group, the highest level since the survey began in 2008. That figure has risen 10 percentage points since April.

Get the latest data on Canada’s housing market

The data suggest Canadians are brushing off forecasts of a slowdown in a market some analysts have warned is unsustainable. Home prices rose 8.1% through the first five months of the year, according to the Canadian Real Estate Association, compared with a 1.3% gain over the same period in 2013, and prices may be poised for further gains if expectations for rising home values continue to whet demand.

The behavior of buyers today would be “completely ridiculous, unless there’s an implicit assumption that there’s going to be capital gains involved, and that’s a mentality that you see in these long upswings in prices,” Ben Rabidoux, president of North Cove Advisors Inc., a research firm that specializes in housing, said in a phone interview last week.

The survey, part of polling for the Bloomberg Nanos Canadian Confidence Index, is based on phone interviews with 1,000 people, using a four-week rolling average of 250 respondents. The results are accurate to within 3.1 percentage points, 19 times out of 20. The share of Canadians who expect a drop in real estate prices was 11.6%. At 35.4 percentage points, the difference between optimists and pessimists is the widest since 2009.

Confidence Boost

The Bloomberg Nanos Canadian Confidence Index — derived from survey questions on real estate, job security, personal finances and the economic outlook — rose to the highest in more than four years led by stronger expectations for housing, gaining to 60.5 in the week ended July 11.

“Consumer confidence in Canada is being noticeably propelled by views on real estate,” said Nik Nanos, chairman of Nanos Research Group.

The housing market is rebounding from a lull this winter that saw colder-than-usual temperatures put a temporary chill on construction activity and home sales. Buyers are also taking advantage of historically low borrowing costs, with the Bank of Canada over the past year downplaying the likelihood of interest rate increases and lenders this spring lowering five-year fixed mortgage rates to below three%.

Bank Stocks

Regulatory efforts, meanwhile, to keep overly indebted borrowers out of the market have failed to quell gains. A government decision in 2012 to tighten qualification requirements for mortgages led to a temporary slowdown later that year, only to see the market recover in 2013.

Investors have noticed. Canadian lenders, which hold more than C$1 trillion worth of mortgages, have been among the world’s best performers since the middle of 2013. The Standard & Poor’s/TSX Composite Banks Industry Group Index has gained about 22% in U.S.-dollar terms since June 3, 2013, compared with about 5% for the Bloomberg World Banks Index.

Canada’s six largest banks are among the top 10 stock performers among North American banks over the past year, led by Toronto-Dominion Bank’s 30% gain.

The surge in prices, coupled with household debt levels near record highs, has prompted analysts including Dan Werner, an equity analyst at Morningstar Inc., to warn of a retreat.

Within the next five years a correction in Canada is “almost inevitable,” Werner said in a note to investors this month. Prices could fall 25% to 30%, he said.

Biggest Risk

Even at the Bank of Canada, where policy makers have said they see signs that household debt is stabilizing, the issue is still seen as the biggest risk to the Canadian economy.

Outside of a few small corrections, Canadian home prices have been on a steady ascent more than 15 years. They are up 77% over the past 10 years, according to the Teranet-National Bank Home Price Index, roughly 10 times the pace of U.S. housing, according to the seasonally adjusted S&P/Case- Shiller composite-20 home price index.
Bloomberg.com

Ratings agency Fitch says Canadian houses overpriced even as gains slow down- Consult with a Vancouver Mortgage Broker

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housing-1Chicago-based credit agency Fitch Ratings says Canadian housing is still overvalued by 20% and called for additional steps to cool the market.

The company’s statement comes as new data appears to show house price gains are slowing on a national basis despite the fact there are still cities that continue to show price growth.

The Teranet Home Price Index increased 4.4% in June from a year ago, a slower pace than the 4.6% year over year jump in May.

The composite six index which covers Vancouver, Toronto, Calgary, Montreal, Ottawa and Halifax was up 4.9% in June from a year compared to a 5.1% year over year increase in May. Both the overall and the composite index were up 0.9% in June from May.

“With the housing market having now shaken off the winter blues, price are continuing to rise at a solid pace. That said, the continued deceleration in price growth on a year-over-year basis may be an indication that the Canadian housing market is becoming more balanced&,” said Toronto-Dominion Bank economist Randall Bartlett.

Still, Finch points to numbers from Canadian Real Estate Association which show home prices grew 7.1% in May on a year over year basis.

Related Canadian home prices rise in June, but 12-month inflation slows: Teranet Price surge fuels Canadians’ optimism about housing market to highest since before financial crisis “According to Fitch’s sustainable home price model, which measures home prices relative to long-term fundamentals, Canadian home prices remain approximately 20% overvalued in real terms,” the company said in its statement.

It noted building permits have picked up in recent months along with sales, supported by historically low interest rates and those factors are driving up affordability.

Policy makers may be required to take additional steps over the short term to engineer a soft landing Finch also said household debt to disposable income, which reached a record high of 164.1% in the third quarter of 2013 before declining the next two quarters, is making the market “more susceptible” to shocks from higher unemployment or interest rate increases.

The federal government has intervened in the market four times to slow housing down, among the measures being shortening amortization lengths from 40 years to 25 years. It also tightened the rules around government-backed mortgage insurance.

Fitch wants more regulation. “However, the long-term impacts remain unclear, and policy makers may be required to take additional steps over the short term to engineer a soft landing,” the agency said, in reference to the changes made.

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Calgary’s energy boom is fuelling record surge in luxury home sales – ask a Vancouver mortgage broker

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imageSotheby’s International RealtyThe estate, once owned by the Ford family of Henry Ford heritage, listed for $37.9-million, with views of the Rocky Mountains, comes with four fireplaces, $1 million in mouldings and two garages for six cars.

Twitter Google+ LinkedIn Email Comments More Larry Lindholm made his fortune in Calgary’s booming energy industry, building and selling an oilfield equipment company. Then he bought a $10.4 million mansion.

“This is the big reward,” Lindholm, 52, said from the new home he shares with wife, Kristi, 35, and their four kids. “Calgary’s a neat city to be part of, the opportunities are here right now. It’s amazing how it’s grown, with all the development taking place in the oil and gas sectors.”

The energy patch in Calgary, nicknamed “Cowtown” for its annual rodeo, and low mortgage rates are transforming Canada’s fourth largest city into a hub of luxury housing. Neighborhoods named Tuxedo Park and Hamptons are expanding as energy industry executives from Canada, the U.S. and Europe fuel record sales of Calgary’s most expensive homes.

Related Canada new home prices pushed higher by western gains Royal LePage says Canada’s big city housing markets continue to boom as small centres left behind Canada’s high-end home sales soar in first half of the year: Sotheby’s International Realty Canada

TIRION PROPERTIES LTD. Neighborhoods named Tuxedo Park and Hamptons are expanding as energy industry executives from Canada, the U.S. and Europe fuel record sales of Calgary’s most expensive homes. Lindholm’s 14,500 square-foot (1,347 square-metre) estate, which features an eight-foot Swarovski crystal chandelier, broke the record for the most expensive home sold in Calgary when he bought it last year. That mark was topped by a $11.1 million sale later that year, which in turn may be shattered by a current listing of a $37.9 million home once owned by Henry Ford’s family.

“Luxury demand is growing,” said Corinne Poffenroth, an agent for New York-based auctioneer Sotheby’s, who represented the Lindholms in their home purchase. “Our energy sector is very strong and it attracts top-ranking executives across the country and the world. There’s a lot of young new money.”

Helicopter Tours

While Vancouver and Toronto, Canada’s financial capital, boast the country’s most expensive housing, sales of luxury homes in Calgary are surging. Realtors in the city, known for sprawling suburbs and the tallest office tower in western Canada, sold 404 homes priced above $1 million in the year to June 13. That’s an all-time high for Calgary and more than 10 times the total for an entire year a decade ago, according to Calgary Real Estate Board data.

The jump in sales has been powered by oil, the most important commodity in the western province. Investment in Alberta’s oil sands may reach a peak this year of more than $30 billion, according to investment bank Peters & Co. That’s generating high-paying jobs in Calgary, Alberta’s biggest city, whose population expanded to 1.2 million last year.

Calgary has the highest concentration of millionaires in any of Canada’s major cities, according to Calgary Economic Development, a nonprofit group. Some of the city’s wealthiest residents and foreign buyers flock to tours of highly priced homes by helicopter. Sotheby’s International Realty Canada added a private helicopter service for its real estate clientele in Calgary in June, a first for the firm in Canada.

Oil Prices

“It’s a boom-bust economy that lives and dies by oil prices, and the housing market is the same,” said Robert Kavcic, Bank of Montreal senior economist in Toronto. “If you were to say what’s going to drive luxury real estate in Calgary, I’d say just oil prices.”

West Texas Intermediate, the U.S. benchmark crude, has averaged more than US$90 a barrel over the past five years, the longest stretch at that price. That stability is unusual for a volatile commodity whose price sank to US$33.87 a barrel in December 2009 from a record of almost US$150 six months earlier.

Low mortgage rates have also helped drive housing sales. Posted rates for a five-year loan have been at a record low of 4.79% since April 9. And some lenders are offering three- year variable-rate mortgages for as low as 1.99%.

Sotheby’s International RealtyThe former estate of Henry Ford’s family is guarded by a security gate and surrounded by 242-acres of pastures and several lakes in Millarville, a 45-minute drive south of Calgary. Millionaire Mortgages

Millionaires are taking home loans because a lot of their assets are tied up in investments they don’t want to liquidate, said Martin Reid, president of Home Capital Group Inc., Canada’s largest alternative mortgage provider. Lenders often offer smaller loans for luxury homes because the prices are susceptible to big fluctuations. Reid said about 5% of the homes for which his company provides mortgages across Canada are priced above $1 million.

“We’re not going to give as much of a loan on a percentage basis as you get into that luxury space,” Reid said. “If it’s a $500,000 dollar house, we loan 75% of the value. If it’s a $2 million house, we’ll likely lend 60% of the value.”

Calgary, which sprang up in 1875 as a fort town for the North-West Mounted Police along the banks of the Bow and Elbow rivers, now has at least four neighborhoods where the average house price is $1 million or higher, according to the city’s real estate board.

Sotheby’s International RealtyOn the 242 acres are two houses with mountain views, one of Alberta’s only covered bridges, horse barn, pasture, paddocks, storage and riding areas, outbuildings and several large lakes. Henry Ford

Those communities include older areas like Mount Royal. It was developed by the Canadian Pacific Railway, which owned most of the land in Calgary in the early 20th century. Bel Aire, one of the established million-dollar areas, has a view over the city’s largest reservoir and is bordered by its oldest private golf course.

The former estate of Henry Ford, the founder of Ford Motor Co., is now listed for $37.9 million, the highest in the province. The 5,000-square-foot home is guarded by a security gate and surrounded by 242-acres (98-hectare) of pastures and several lakes in Millarville, a 45-minute drive south of Calgary. The home, with views of the Rocky Mountains, comes with four fireplaces, $1 million in mouldings and two garages for six cars.

Sotheby’s International RealtyThe home, with views of the Rocky Mountains, comes with four fireplaces and $1 million in mouldings alone. Energy Executives

“Oil and gas is definitely fueling the market,” said Sam Corea, a real estate agent with Re/Max Holdings Inc. in Calgary, who’s busiest during the energy industry’s bonus season in late winter.

Corea’s typical client is a professional in the oil and gas sector between the ages of 35 and 50 who wants expensive amenities including top-tier appliances and granite countertops.

“Calgary is a much more sophisticated market than it was 10 or 15 years ago,” said Corea, who last year sold 128 homes at an average price of $943,000 each.

Corea said the city’s housing could begin to lose its glow as supply catches up to demand.

“The market is starting to feel a bit like the spring of 2007 just before it stalled,” he said. “The market edge is starting to slip away.”

Supply Grows

Homes listed at more than $500,000 jumped 42% to 1,359 units in June over the same time last year, according to the city’s real estate board. Single detached homes will be constructed this year at the highest pace since 2007, according to forecasts by Canada Mortgage and Housing Corp.

“As this market has moved into more balanced conditions, and if inventories continue to rise, price growth should ease throughout the remainder of the year,” said the board’s chief economist Ann-Marie Lurie.

Lindholm, the oil entrepreneur who drives a red Ferrari, said his father gave him a warning after he bought his castle-like home.

“My dad says, ’Nice house. You’re never going to be able to sell that’,” said Lindholm, who moved his family from a home in the city that they sold for $2 million. “I think he’s right. Maybe not now because there’s a small market for this size house — but it’s growing.”

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Can you afford a home in these cities? – Ask a Vancouver Mortgage Broker

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gi-carrick03rb1Housing affordability is a national disaster that begs further investigation.

The average national resale home price in May: $416,584.

The annual gross income needed to afford that price based on a 5-per-cent down payment and a five-year mortgage: $89,363.

The estimated median family employment income: $68,692.

In that $20,671 shortfall is the considerably, but not entirely, depressing story of Canada’s housing market at midyear. The bad news: Vancouver and Toronto are deserts of affordability, and Calgary’s starting to look troublesome. The good: National data obscure the fact that affordability is still reasonable in some cities.

We hear plenty about housing affordability from banks and real estate people. Now, the Personal Finance column weighs in with some analysis focused on this question: What income does it take to afford a house on a national basis and in eight cities?

For answers, a hypothetical mortgage was set up for these markets using average May resale prices as shown by the Canadian Real Estate Association, a 5-per-cent down payment and a five-year, fixed-rate mortgage at 2.99 per cent. To calculate how much income is needed to support the resulting mortgage payments, we’ll refer to the gross debt service ratio, or GDS.

It’s a standard affordability measure used by lenders, and thus is by no means a definitive guide to how well a house will fit into your life in a financial sense. To use my Real Life Ratio, click here. Still, GDS offers a rough guide to how much house you can handle. You’re considered to be onside with a house if your monthly mortgage, property tax and heating costs account for no more than 32 per cent of your gross household income.

For that average-price home on a national basis, the mortgage payment would be $1,930. Add an estimated $333 in property tax per month and $120 in heating and you end up with $2,383, which on an annualized basis is 32 per cent of $89,363. That’s the minimum income you’d need to afford a house at the national average price.

Statistics Canada’s most recent numbers are from 2011 and they show that median family employment income was $64,730. To bring that up to 2014 levels, three years of 2-per-cent income increases were factored in. That brings the median family employment income to $68,692, which is still short of the minimum income needed to buy the average national home.

Toronto and Vancouver have a big influence on this shortfall, partly because of high prices and partly because their median incomes trail other cities. Vancouver’s median family employment income is less than half of what’s needed to afford the average house, and Toronto’s is well under, too. Calgary’s estimated income levels are a little below where they need to be for a family to afford the average home, but not by nearly as much.

The affordability picture is brighter in cities such as St. John’s, Halifax, Winnipeg and Saskatoon because the cost of carrying an average home is much better aligned with incomes. Montreal’s a trouble spot, with actual household income well below the estimated income required to carry the average house.

Something to consider if you’re relating these numbers to your own situation is that they show the minimum household income needed to buy an average home. To carry a home and be in a position to afford other living costs, strive for a GDS of 25 per cent or less.

In the more expensive cities, notably Toronto and Vancouver, it’s time to acknowledge that some people will never be able to afford a house. Borrowing costs are close to as low as they can go, and the long-term outlook is for them to rise. Scratch lower borrowing costs as an affordability aid.

Falling prices would help some prospective home buyers, but it’s not as big a factor as you’d expect. In fact, average prices could drop a very sharp 20 per cent in both Toronto and Vancouver and still be well beyond the grasp of families with median income levels. The alternatives to owning a house in these cities: Buy a condo and resolve to live in it indefinitely, even with kids; buy a home in the suburbs and commute; move farther afield and relocate to a more affordable real estate market; or, give up and rent.

Another option, at least for millennials – one I’m starting to hear more about – is to move back home with your parents or your spouse’s parents and save until it hurts to build a big down payment. Or, rent a small apartment and cut discretionary spending to a bare minimum. In mid-2014, heroic savings measures are needed to own in some cities.

Globe app users click for a table showing housing costs across Canada

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Can you afford a home in these cities?

St. John’s Halifax Montreal Toronto Winnipeg Saskatoon Calgary Vancouver
Most recent average price ($) 337,822 290,587 335,937 585,204 287,026 338,195 465,579 814,418
5% downpayment ($) 16,892 14,530 16,797 29,261 14,352 16,910 23,279 40,721
Monthly mortgage payment ($)* 1,565 1,346 1,556 2,711 1,330 1,567 2,157 3,773
Monthly property tax and heating costs ($)** 453 453 453 453 453 453 453 453
Total monthly housing costs ($) 2,018 1,799 2,009 3,164 1,783 2,020 2,610 4,226
Minimum annual gross household income needed ($)*** 75,675 67,425 75,338 118,650 66,863 75,750 97,875 158,475
Estimated median family income from employment ($)**** 82,222 73,977 65,296 69,934 72,088 82,509 91,826 66,527

Household debt worries ease as pace of mortgage borrowing slows in May: study – Consult with a Vancouver Mortgage Broker

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homesRoyal Bank says Canadians have been slowing down the amount of debt they are taking on to buy real estate, easing concerns about household vulnerability.

The RBC paper notes that overall household debt accumulation remained flat-lined at 4.2 per cent growth in May, about the same level as the previous three months.

Outstanding mortgage debt stood at $1.23-trillion as the annualized growth slowed slightly to five per cent from 5.1 per cent in April.

But households increased their pace of non-mortgage borrowing, the bank says, to 2.2 per cent from two per cent in April.

RBC says the steady pace of debt accumulation overall should give some comfort to the Bank of Canada, which has called household debt the No. 1 risk to the financial system and economy.

With the housing market expected to moderate further, the vulnerability posed by overly indebted households is easing, RBC says, clearing the way for the Bank of Canada to move toward higher interest rates by mid-2015.

Meanwhile, business borrowing continued to strengthen in May, with short-term debt rising to 10.6 per cent from 9.6 in April.

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Even economists say they continue to be surprised by Canada’s housing market – Consult with a Vancouver Mortgage Broker

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soldRecord low interest rates have have forced Toronto-Dominion Bank to boost its forecast for the Canadian housing sector.

Economist Diana Petramala said in an economic report that TD’s forecast in January was banking on an increase in interest rates that has not materialized.

“Interest rates, unexpectedly, reversed course beginning in March. Five-year mortgage rates currently sit at their lowest record on level,” Ms. Petramala wrote, noting that existing home sales in May were well above their 10-year average.

More strength may be bubbling under the surface

The demand for housing pushed May average resale price growth to 7.1% on a year over year basis which is well above income growth. The home price-to-income ratio is at a new high.

Now the economist is suggesting the housing market may have some more strength in 2014 although the general view is the market will cool over the medium term.

“More strength may be bubbling under the surface,” said Ms. Petramala, noting reports of bidding wars may point to very strong demand for single family homes.

On the condo side, lower interest rates combined with prices has made affordability of condos “more favourable” than ever. “First-time homebuyers who were pushed out of the market due to the past tightening in mortgage insurance regulations may find it easier to jump back in,” she wrote.

TD is forecasting that the “moderate” overpriced and overbuilt housing market will not be impacted until 2015 when interest rates start to rise. The bank is predicting condo prices will fall by 2% in 2015.

Single family home prices will also feel the pinch after rising by 8% this year, according to the forecast. In 2015, single family family home prices are expected to rise by 2%.

Ms. Petramala emphasized that housing will continue to be a regional story, even as it turns into a buyer’s market in 2015.

Victoria, Toronto and Victoria are “flagged” as markets more vulnerable to a cool down because of recent strength while Calgary and Edmonton are poised for continued expansion based on employment and populations.

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Canada building permits spike 13.8% in May – Ask a Vancouver Mortgage Broker

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housingstarts_getty3OTTAWA — Statistics Canada says municipalities issued building permits worth $6.9 billion in May, up 13.8% from April.

The agency says the increase in May resulted primarily from higher construction intentions for commercial buildings in Ontario and Manitoba, as well as multi-family dwellings in British Columbia.

It says the total value of permits has been on a slight upward trend since the beginning of 2014.

Gains were posted in every province in May, except Quebec and Nova Scotia, with the largest increases recorded in Ontario, British Columbia and Manitoba.

Construction intentions for residential dwellings rose 9.5% to $4.1 billion in May, the third consecutive monthly increase.

In the non-residential sector, the value of permits rose 20.8% to $2.8 billion.

China’s shadow banking system could bring down the world’s hottest property markets – Consult with a Vancouver Mortgage Broker

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Chinese investors are major players in the international real estate markets.

shadowThe country’s outbound property investment totaled US$2.1 billion in Q1 2014, according to Jones Lang LaSalle.

And now there are concerns about the quality of the loans that have fed into international property markets.

“Will China’s capital flight fuel property bubbles overseas or cause a collapse when China’s liquidity dries up?” wrote Andrew Collier, managing director, Orient Capital Research.

In an email titled “Will China’s Shadow Banking Kill the International Property Market?” Collier writes that the US$2.1 billion figure most likely understates true outbound Chinese property investment because it is hard to track shadow lending.

“Shadow lending is about 40% of total loans so the figure for property investment could easily be double US$2.1 billion — or more,” writes Collier. “More important, the funds are targeted in just a few places; just three cities, Chicago (who knew?), London and Sydney account for 50% of investment. No doubt, Los Angeles and New York will catch up soon.”

China saw US$464 million in outbound real estate investment Q1 in 2014 into Chicago. US$38 million into London, US$242 million into Sydney, US$150 million in Melbourne and US$144 million into Los Angeles. From Collier:

“Let’s say overseas property investment reaches US$10 billion in a year or so due to capital flight. How much of that will be backed by bad loans? What will the default rate be? This is an important question of you are a hedge fund buying up hundreds of properties in key areas. If the wind is sucked out of the market by defaulting Chinese buyers, it will impact property values significantly.

Official Non-performing Loan (NPL) ratios for Chinese banks are less than 1% (0.93% for Bank of China in 1H 2013). But much of the cash invested in foreign real estate will come from the shadow market. We don’t have good data for NPLs in shadow loans, partly because there are many different lender including Trusts, banks through wealth management products, pawnshops etc. But a ballpark figure of 10% would be realistic. If we assume 10% of US$10 billion, that’s US$1 billion in defaulting property loans. Half of those, or US$500 million alone, will be in a few cities such as Sydney, London and Chicago.”

Australia raises the alarm

We’ve already seen concerns about this in Australia. In late June, local media reported that Ed Husic, Labor MP in Australia, said that shadow banking in China is a cause for concern for Australia’s property market.

“With the rise of the shadow banking system in China, where people are going outside of the banking system to be able to finance investment, there are some concerns about the quality of the loans and whether or not they will actually be durable,” Husic told the ABC.

In late June, local media reported that Ed Husic, Labor MP in Australia, said that shadow banking in China is a cause for concern for Australia’s property market.

“With the rise of the shadow banking system in China, where people are going outside of the banking system to be able to finance investment, there are some concerns about the quality of the loans and whether or not they will actually be durable,” Husic told the ABC. Husic was concerned about the quality of the loans.

“…If those loans are being used to finance development in Australia, and if they fall over, what is the exposure of the Australian banking system to that?” “I think these are things we are very keen to pursue and we will be looking to talk to the Reserve Bank further about that in due course.”

Chinese regulators have been moving to curb shadow banking, but it’ll be interesting to see how this plays out in the international property market.

Read more: http://www.businessinsider.com/china-shadow-banking-hurt-foreign-property-market-2014-7#ixzz36nie2PQR


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