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Canada’s housing market on course for soft landing, says CMHC – Ask a Vancouver Mortgage broker

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OTTAWA — After consistently bucking predictions that a slowing trend was just around the corner, Canada’s housing market is now showing signs that it is, indeed, headed for a soft landing.

Both prices and construction are still rising, but the pace of construction is expected to taper off over the next two years as homebuyers increasingly turn their attention to excess supply in the market.

Housing starts should total between 179,600 and 189,900 units this year, and possibly increase by as much as 203,200 units in 2015 before building activity begins to ease, according to Canada Mortgage and Housing Corp.

“Recent trends have shown an increase in housing starts, which is broadly supported by demographic fundamentals,” Bob Dugan, CMHC’s chief economist, said Wednesday.

“However, our latest forecast calls for starts to edge lower as builders are expected to reduce inventories instead of focusing on new construction.”

Wednesday’s housing outlook for 2014-15 follows a CMHC report earlier this week that showed only a modest increase in housing starts between June and July, with the agency saying it “continues to expect a soft landing for the new home construction market in Canada.”

The federal mortgage-insurance agency also expects sales to range from 450,800 and 482,700 units in 2014, and between 455,800 to 502,900 units next year. Prices will average $394,700 to $405,700 this year and between $396,500 and $416,900 in 2015.

That works out to an average price increase of 4.5% this year and 1.8% in 2015.

Meanwhile, a separate report Wednesday showed Canadian home prices picked up last month.

The Teranet-National Bank price index rose 4.9% in July from the same month a year earlier, compared to a 4.4% annual rise in June, according to the index, which tracks repeat sales of single-family homes.

On a month-over-month basis, the index increased 1.1% from June.

Calgary led year-over-year gains with a 8.2% jump in house prices, followed by Hamilton with 7.1%, Toronto at 6.6% and Vancouver rising 6.1%.

Benjamin Reitzes, senior economist at BMO Capital Markets, said a soft landing is unlikely to really take hold until interest rates start rising, which many analysts expect will be in mid-2015.

“When that happens, then you’re going to see the housing market roll over a bit and things slow down on the pricing front, on the sales front and on the construction front,” he said.

“But there’s nothing to make us believe that a crash or any kind of significant correction is coming broadly to the market.”

Unlike in the United States, Canada’s housing market has so far avoided a correction. In fact, the housing sector in this country has shown surprising resilience — even as the overall economy struggles to maintain growth.

But given record-low mortgage rates in this country, there have been concerns about the amount of debt that homebuyers are taking on — prompting the federal government to progressively tighten lending rules since the 2008-09 recession.

Still, Finance Minister Joe Oliver also expects a soft landing for the housing market. “We’re aware, of course, that prices keep moving up in a somewhat more moderate way,” he said Tuesday.

“We know that part of the reason for this is low interest rates,” he told reporters ahead of a two-day meeting with private-sector economists and business leaders in Wakefield, Quebec. “We’re monitoring the market carefully but [we] are not alarmed by what we see.”

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Couple in 50s dreams of a holiday home in the sun – Consult with a Vancouver Mortgage Broker

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Lana and Zack’s story is an increasingly familiar one: people in their 50s with well paid but stressful jobs who can barely wait to leave the work force. He is 51, she is 50. They own their house outright and have no debt.

“We are eagerly working toward what we hope will be early retirement,” Lana writes in an e-mail. “We are healthy and take good care of ourselves, but our jobs are very stressful,” she adds. He’s in education, she’s in health care. “So in three to six years, we would like to leave our present jobs behind and move on to the next stage of life.”

The “next stage” they aspire to includes travelling and “living the good life,” spending two or three months each year in a warmer climate. Zack may look for a part-time job.

Luckily for them, they both have defined benefit pension plans.

Zack and Lana have two children, 22 and 25. They’d like to help the younger one through university. Apart from that, their main concern is to save as much as possible in the next five years so they can buy a place down south.

We asked Ross McShane, director of financial planning at McLarty & Co. Wealth Management Corp. in Ottawa, to look at Lana and Zack’s situation.

What the expert says

In preparing his forecast, Mr. McShane assumes Zack retires in June, 2019, and Lana in September, 2018, with lifestyle expenses of about $83,000 a year. The planner allows $30,000 every five years for vehicle replacement starting in 2020. Zack will get a pension of $7,056 a month ($84,672 a year) to age 65, including a bridge benefit that will end when he turns 65 and starts collecting Canada Pension Plan benefits. From then on, his pension will be $5,687 a month, partly indexed to inflation.

Lana will get a pension of $2,982 a month ($35,784) to age 65, falling to $2,405 after she begins collecting CPP benefits.

The planner includes $20,000 a year for four years of university education, plus $200,000 for Lana and Zack to buy a vacation home in five years. He assumes a rate of return on investments of 4.5 per cent a year and an inflation rate of 2 per cent.

His conclusion: Yes, they can retire early and enjoy a comfortable lifestyle.

“Pension splitting at retirement will lower combined taxes payable and preserve Old Age Security benefits that will start at age 67,” Mr. McShane says.

Yes, too, to the vacation property. They can pay for it by setting aside cash flow surpluses over the next five years. Over and above contributions to their tax-free savings accounts, Zack and Lana should be able to save up about $150,000. The money for the second property “could be invested within their non-registered account,” the planner says.

Lana could use up her $29,268 in RRSP room and then withdraw the money when they retire for the balance of the property payment, he says. Or they could tap the funds in their TFSAs.

When they buy the second home, their costs will rise. Mr. McShane has not factored this into his analysis, but notes that they do have a growing surplus of capital, and couples typically spend less in their later years.

Zack and Lana also wonder how they should structure their investment portfolio. For their short-term goal of buying a vacation home, preservation of capital should be paramount, he says.

“A portfolio in cash in the form of a daily-interest account, a short-term bond ladder and a small portion in equities is prudent,” Mr. McShane says. If they will be paying U.S. dollars for the second home, they could consider investments denominated in greenbacks, he adds.

As for their long-term goal of saving for retirement, Zack and Lana should take full advantage of their unused TFSA room. “Their RRSPs and TFSAs should focus on equities given the guaranteed nature of their pensions,” Mr. McShane says. When they quit working, their pensions and benefits will more than cover their recurring expenses. “Therefore, their RRSPs and TFSAs should be viewed as longer-term money that is designed to provide additional funds for non-recurring expenses.”

He suggests they avoid holding U.S. dividend-paying stocks inside their TFSAs because there is a non-recoverable withholding tax on the dividend. “Instead, these should be held inside their RRSPs,” he says.

A portion of the registered portfolio may be needed to fund the vacation property and should therefore be invested for the short term.

***

Client Situation

The people: Lana, 50, Zack, 51, and their two children, 22 and 25.

The problem: Can they take early retirement and buy a place down south without sacrificing their lifestyle or financial security?

The plan: Save for the vacation home over the next five years, retire as planned, take advantage of pension splitting and invest their long-term savings mainly in stocks.

The payoff: A road map to a worry-free retirement.

Monthly net income: $13,680

Assets: Cash in bank $11,000; his TFSA $32,000; her TFSA $7,500; his RRSP $39,500; her RRSP $30,300; RESP $27,355; residence $450,000. Total: $597,655.

Monthly expenditures: Property taxes $290; insurance $85; utilities $270; garden $135; Internet $210; food $1,030; clothing $820; personal care $130; life, disability insurance $255; miscellaneous personal $40; entertainment, dining $460; clubs $50; hobbies $80; gifts $240; charitable $75, miscellaneous discretionary $375; travel, vacation $1,390; auto insurance $180; maintenance $175; fuel, oil $425; miscellaneous transportation $200; pension contributions $1,950. Total: $8,865.

Liabilities: None

Read more from Financial Facelift.

Want a free financial facelift? E-mail finfacelift@gmail.com Some details may be changed to protect the privacy of the persons profiled.

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Consider a trust fund for your kids even if you’re not rich – Consult with a Vancouver Mortgage Broker

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Money-losing rental and layoff put retirement at risk for couple in their 50s – Consult with a Vancouver Mortgage Broker

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Situation: Layoff and inability to find a new job plus a money-losing rental property jeopardize couple’s retirement

Strategy: Either get a new job to subsidize the rental or sell it to balance budget. Tidy up cluttered investment portfolio to reduce fees and duplicaton

At their ages of 55 and 51, Dan and Martha, have hit a series of bumps in their road to retirement. A construction manager for a large company, Dan brings home $5,250 a month. Martha, a metallurgist, was laid off from her job last year. Her employment insurance payments, $1,900 a month, just expired. She has been unable to find work in her field.  They are spending $6,127 a month to sustain their way of life, eroding savings they will need for retirement.

Not only has their take-home income shriveled to half of what it was a year ago, they have an investment property purchased in 2012 that generates rental income insufficient to cover its mortgage and line of credit. On top of that, their two children, each in the early 20s, are in university. Their RESP has $37,000, which should be sufficient for the kids’ first degrees, for the elder child, 23, is in his last year of undergraduate studies. After that, unless the couple’s fortunes change, the kids will have to earn or borrow whatever funds they need for additional tuition or second degrees.

“I may have to work part-time to support our younger child, now in the second year of university,” Martha says. “With my layoff and the money-losing rental house, how much do I have to earn to sustain our way of life?  We still have a lot of costs with our children living at home.”

They are in a vise now, but if Dan and Martha cut expenses, stop subsidizing their money-losing rental property and cut investment costs, they will be able to have a secure retirement.

Family Finance asked Benoit Poliquin, a financial planner and chief investment officer of Exponent Investment Management Inc. in Ottawa, to work with Dan and Martha. His view assumes that Martha does not go back to work. To make their budget balance, they will have to free up $2,180 each month. In the alternative, if Martha can earn $2,500 to $2,800 a month before tax, then she can subsidize the real estate investment. However, given that the rental house is not paying its way, the simpler course is just to sell it and end the cash drain, he suggests.

The budget problem

Financing the rental property with a mortgage and line of credit costs $2,180 a month. Property tax is $300 a month. Total costs are $2,480 and that does not include any reserve for maintenance. Yet the monthly rent the property generates is just $1,400. The total loss is therefore $1,080 a month, $12,960 a year. That amounts to 20% of Dan’s take home income.

If the mortgage, with a 25-year amortization, and line of credit are broken down into debt service cost separate from repaying capital, the numbers look better. On that basis, the rent, which is being paid by a friend of the family, covers all interest. The remainder of the payments support rising equity.

In time, the property may appreciate enough through rising equity from payments and a bull market to catch up to the loan balance. But this is speculative.  There is no guarantee that property prices will rise sufficiently to cover the debt at the time Dan and Martha want to sell. Moreover, the rental property subsidy means the couple cannot make regular contributions to their RRSPs or TFSAs.

With the rental house eliminated, the family budget will be $3,650 a month. When their children establish their own lives and incomes, the family’s $500 a month bill for running three cars will drop. Dan and Martha will be able to save perhaps $1,000 a month.

Retirement income

Dan and Martha have a complex portfolio. Their RRSP, TFSA and other accounts add up to $759,300. If they shed the rental property add $12,000 a year for 10 years to these various savings and obtain a 3% return after inflation, then the portfolio will have a value of $1,162,000 on the eve of their retirement. If paid out on an annuity model which expends all income and capital in the next 30 years, they would have annual income of $57,550 before tax, Mr. Poliquin estimates.

Dan should get an annual CPP benefit of $12,460 in 2014 dollars. He will also have an annual job pension of $21,332. Martha should receive Canada Pension Plan benefits of $10,740 a year at her age 65 and both will get Old Age Security of $6,704 at their respective ages of 65 and 67. At that point, their retirement income should add up to $115,220 a year. If eligible pensions are split, they should have a 20% tax rate. That will give them about $7,700 a month in retirement income, far more than they have now.

They might do even better if they rationalize their various portfolios.  They have 50 positions in various mutual funds, ETFs and individual stocks. There is duplication in funds which hold similar assets. There are high-cost funds as well as low-cost ETFs. Most of all, there is a management problem, for tracking four dozen stocks, bonds and indices is challenging at the least.  Martha is an active investor in her own right. It would be helpful to reduce the number of holdings and cut fees, Mr. Poliquin says. A fee reduction of just 1.5% would add $11,400 to the annual return of the portfolio.

A restructured and simpler portfolio able to provide income and a health measure of asset stability would have about 70% stocks and 30% bonds. The usual rule is to match the bond allocation to age, but with bond yields low and the probability that the three-decade-old bull bond cycle will end within a few years, cutting back on bonds in favour of stocks able to pace inflation makes sense, Mr. Poliquin says.

Eight to 10 assets, including exchange traded stock and bond funds, perhaps in new variations such as equally weighted stocks that eliminate the winner’s curse of recent high fliers taking up too much space could cover stocks while bond funds that overweight investment grade mid-term corporate issues that have some resistance to rising interest rates would be appropriate as a counterweight to the equities, Mr. Poliquin suggests. The couple could also use a professional portfolio manager for perhaps 1.0% of the value of assets under management.

“This couple has done everything right,” Mr. Poliquin says. “Their problems are Martha’s layoff and the cost of carrying their rental property.   Martha could add income from another job to keep the rental unit afloat, but that would be working to subsidize a bad investment. The alternative, which I favour, is to sell it and increase the security of their retirement cash flow. The decision is theirs, of course.”

E-mail andrew.allentuck@gmail.com for a free financial analysis.

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Condo choices not always an apples to apples comparison

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Will an apple a day keep the condo investor in play?

A Toronto developer trying to bring the concept of urban growing to Calgary thinks an apple orchard in the middle of two towers might be the next amenity condo buyers appreciate.

“I don’t think people will buy a condo to be next to an apple orchard but I think what happens on the ground is as important as what happens in the air. There is just not enough leisure space in any city,” says Brad Lamb, chief executive of Lamb Development Corp.

The one-acre apple orchard, which will include 66 apple trees, will be situated between two 31 storey towers between 12th Ave SE and 5th St. SE. in the oilpatch. Ground is expected to be broken in 18 months.

Mr. Lamb is going to set up the orchard to avoid condo board fights over who can pick and keep the apples. “We’re going to get a shepherd to manage the orchard and harvest the apples. A percentage will go towards the building and some could go to a market or be given to a shelter,” he says.

The developer commissioned a survey that found 93% of Canadians want more green space downtown, while 90% of Canadians support the idea of growing food in the city.

“The idea of bringing agricultural to the city is a revolutionary,” says Mr. Lamb, who admits it is more amenity than a plan for people to feed themselves off the land. ‘I don’t think you can do this on a level than eliminates the need for farms outside cities. I don’t expect hundreds of acres of apple orchards in any city.”

He’s open for other types of fruits and vegetables, but apple trees were chosen because it was felt they would grow well in the Calgary climate.

For now there will be a few limitations on what he’s willing to grow on a condo site. “Marijuana could be next but you’d have to legalize it first,” he said, with a laugh.

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Canada’s most expensive housing market not headed for crash, says credit agency DBRS

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A leading credit rating agency says Canada’s most expensive housing market may not be all that affordable for the average family, but despite that no major correction is coming Vancouver’s way.

DBRS looked at 39 markets in Canada, the United States and Australia, releasing its focus feature on Vancouver Wednesday.

“Based on historical data, the Vancouver market does not appear to be significantly overheated,” said DBRS, in the report. “Therefore, a correction of any magnitude may not be justified given the strong fundamentals in the market.”

Related CMHC turns up scrutiny of condo investors as concerns of overheated market grow Housing market skewed by handful of hot cities, Canada Guaranty CEO says Ratings agency Fitch calls for more government action in ‘overvalued’ Canadian housing market This month the real estate board of Greater Vancouver said June competition among homebuyers was as strong as it had been since 2011.

Property sales in the region were up 28.9% in June from a year ago while the average sale price of detached home reached $1,200,539.

DBRS acknowledged there are affordability issues and said home prices continue to rise faster than disposable income, “threatening the affordability of housing for many Canadian families” in the market.

DBRS says given the stable economy and the low interest rate environment that could persist for the foreseeable future, it’s hard to envision a correction.

“It is difficult to foresee catalyst that could create a significant price correction in the Vancouver housing market over the medium term,” said DBRS.

In its study, DBRS noted from 1994-1998, Vancouver did have a correction and prices dropped 9% from peak to trough. From 2008-2013, prices increased 1.7% annually through this post recession period. It is over the last year that prices have rebounded with a 9% gain, said DBRS.

The ratings agency also stressed Vancouver has natural barriers that limit development in the city and controlled supply.

At the same time, DBRS says the quality of living in Vancouver is not a factor to be ignored in continued long-term demand.

“Vancouver’s status as one of the Canadian cities with the highest quality of living helps ensure continual population growth, says DBRS. “The city’s diversity and year-round mild weather help attract immigrants, thus keeping demand for housing high.

The agency offered shorter comment on other Canadian cities.

In Calgary, it says a well-paid work force has kept the housing market strong as the city has avoided a worldwide economic recession with its oil and gas economy. DBRS said continued development of new home supply has keep prices stable and it expects more of the same even if the Alberta economy slows down.

In Montreal, DBRS noted its housing price index saw declines from 1990-99 but is up 150% since then. “Housing prices haven’t been strongly impacted by the financial crisis and exhibit a stable, upward trend,” the agency said.

In Toronto, DBRS say restrictions on development allowing it to “expand up but not out” have helped maintain upward pressure on prices.

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Not so fast kids, you may not get the family cottage – ask a Vancouver mortgage broker

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Children hoping to inherit the family cottage may be in for a surprise, says a British Columbia financial institution.

BlueShore Financial surveyed 498 of its clients between July 7 and 14 and found among those who own cottages 61% don’t plan on passing the property on to their children.

Chris Catliff, the president and chief executive of BlueShore, acknowledges the poll only considers B.C. residents and, of the total responses only 160 people own cottages. But he thinks there is an important message in his firm’s findings.

“When you mix family, money and cottage, it equals emotion. The biggest problem is there are a lot of assumptions,” says Mr. Catliff, noting there can be dangerous consequences.

His firm found that of those who own cottages, 47% listed ‘me or my spouse’ as owners, 16% had shared ownership with other family members, 14% had parents as owners and 23% reported other ownership situations.

The survey also found that 56% of cottage owners don’t have a plan for transferring ownership, while 54% have not discussed a plan with their children for what will happen to the cottage upon their death.

“Sometimes the parents just assume the kids love it, like it like they do and will run it like they do,” said Mr. Catliff.

Related Fractional cottage ownership all the fun you can handle with much less work $7.4-million cottage shows Canada’s housing boom is feeding surge in vacation homes He said part of the problem with assumptions being made is that many parents will be forced to sell the cottages to help fund their retirement. “The kids just assume they are getting it, but parents need [the money],” he said.

Cottages represent a decent chunk of the net worth of Canadians, according to a survey released from Statistics Canada in February.

Based on 2012 data, the median net worth of families was $243,800. The main asset of most Canadians was their principal residence, which accounted for 33% of the total value of assets. But other property including cottages, timeshares, rental properties and commercial real estate, amounted to 9.9% of total assets held in 2012. StatsCan said about 20% of Canadian family units owned other property with the median value $180,000 in 2012. The median more than doubled since 1999.

“A lot of parents expecting to give property to their kids [don’t do so] because they see long-term affordability will be an issue for their kids,” said Mr. Catliff. “The long-term sense is this might be a luxury. Emotion is with the cottage but the reality is most people want to keep their city home first.”

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How a homebuyers’ ‘bellwether’ is buoying optimism in Canada’s housing market

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Genworth MI Canada Inc. and Home Capital Group Inc. reported profits that beat analysts’ estimates as low interest rates drive demand for Canadian homes.

Genworth, the country’s largest private mortgage insurer, reported July 29 that loan losses slid to the lowest level since its initial public offering in 2009 and premiums jumped 17%. Home Capital Wednesday boosted its dividend as net income rose 20%.

“The mortgage insurers are a bellweather for consumers — particularly Genworth is a bellweather for first-time homebuyers,” Nick LeBlanc, a financial analyst at DBRS Ltd., said by phone Wednesday. “The continued strength of the housing market, stable economic conditions, and low interest rates, have helped out the Canadian consumer.”

Canada’s residential housing market has drawn concern from regulators and economists who say it may be 20% overvalued and that consumers are taking on too much debt. The low losses at Genworth show Canadians aren’t having trouble paying off their mortgage debt, while the increased origination highlights strong demand.

Home Capital, the country’s largest alternative mortgage provider, also beat analysts’ earnings estimates and increased its dividend to 18 cents a share. First National Financial Corp., the largest non-bank mortgage lender and underwriter, increased originations 12% over last year to $4.7 billion.

Genworth’s profit excluding some items was $1.04 a share, the Oakville, Ontario-based company said, beating the 93-cent average estimate of nine analysts surveyed by Bloomberg. Loan losses declined to 12%, a record low. Genworth forecast that loss ratio will rise to a range of 15% to 25% for the year.

Stable Market

Bank of Montreal analyst Tom MacKinnon raised his rating on Genworth to an outperform from market perform after the results were announced.

“The housing markets are performing well,” Genworth Chief Executive Officer Brian Hurley said in an analyst conference call. “The interest rate environment is stable and looks to stay that way for a while.”

Genworth Chief Operating Officer Stuart Levings cited Vancouver and Toronto as cities that are facing affordability pressure. Toronto’s home prices soared more than 76% in the last 10 years and Vancouver prices rallied 4.4% in June over the previous year to $800,689.

“The Canadian consumer has been able to service their debt,” LeBlanc said. “Even though debt levels in Canada are increasing, we’re seeing really low defaults. You’re not seeing strain there.”

Genworth rose 0.9% to C$39.60 at 10:34 a.m. in Toronto. First National fell 1.8% to C$23.42. Toronto- based Home Capital climbed 0.9% to C$51.93, after earlier reaching a record high.
Bloomberg.com