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Drawing Conclusions: Is renting a home always a waste of money?

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If you’re ready to put down housing roots and buy a home you can afford, owning has financially speaking worked out well for most Canadians. But despite what your parents may tell you, renting doesn’t always mean you’re just “throwing money away.”

If you’re disciplined with your finances, then renting can be a perfectly good lifestyle choice in the short term, without setting you back financially. For very financially disciplined individuals, renting can even make sense over the long term.

To start to understand when it can make sense, this Preet Banerjee video helps explain some of the variables that can impact your bottom line when it comes to owning, renting and investing.

Video: Drawing Conclusions: Is renting really a waste of

Calgary homeowners and buyers left wondering what’s next as once-sizzling housing market succumbs to chills

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calgary2Calgary’s housing market is the hot topic of conversation these days not only in the city but across the country.

Mortgage firms tighten lending standards in Calgary as housing boom turns sour

The oil that fuelled Calgary’s housing boom has created the conditions for a bust.

Genworth MI Canada Inc., the country’s largest non-government mortgage insurer, said last week it’s preparing for more losses this year and into 2016. Home Capital Group Inc., the largest non-bank mortgage lender, is tightening standards in the oil-rich province of Alberta to reduce the risk to the company of falling housing prices.

“The warning signs are out,” said Gerald Soloway, chief executive officer of Home Capital. “It’s only prudent for everybody who participates in that market to heighten their alertness.” Keep reading. The once-sizzling real estate sector has cooled tremendously thanks to a precipitous decline in oil prices and that has people, from economists to realtors to homeowners and potential buyers, speculating and wondering what that will do to housing prices.

And there is no lack of opinion on the topic, ranging from forecasts of a small increase in average prices for the year to a 10% or more decline. MLS sales are expected to fall dramatically this year – TD recently said by as much as nearly 50% – with new listings rising at a steep pace.

“There is no surprise that the range is so vast. Trying to forecast an average sale price change . . . in today’s market is impossible,” said Don Campbell, senior analyst with the Real Estate Investment Network. “Why? Simply because the most important variable is not known.

“How long oil will stay under $70 and how confident the oil industry is about it levelling at that number. Without that knowledge, real estate market price forecasting is mathematically impossible.”

According to the Calgary Real Estate Board, year-to-date up to and including Saturday there have been 1,758 MLS sales, down 37.17% from the same period last year, while new listings have risen by 24.66% to 5,551. The average sale price has dropped by 2.17% to $463,938.

Related Mortgage risks lingering in the shadows from non-regulated lenders, says CIBC Canadian home sales drop 3.1% as ‘sense of panic’ sweeps western markets Since 1990, the annual average MLS sale price has fallen from the previous year only four times – 1991, by 1.08%; 1995, by 0.47%; 2008, by 2.46%; and 2009, by 4.67%.

The biggest annual hike was recorded in 2006 when prices soared by 39.78% from the previous year to $358,385 and then jumped another 18.25% in 2007 to $423,798.

According to the Conference Board of Canada, the city’s economic growth in 2006 was 7.0% – the second highest rate of growth in the past 25 years behind only the 7.9% recorded in 1997.

Christina Hagerty, a realtor with RE/MAX Realty Professionals, who started in the business in 1991, said real estate in Calgary has always been a good long-term investment.

“In fact, if you look at real estate values over the course of 10 years, all have performed double to triple their value right across the board, not just in the inner core,” said Hagerty, who specializes in that area.

The old-timers like us who have seen a couple of decades of activity aren’t fretting “So the old-timers like us who have seen a couple of decades of activity aren’t fretting.”

Hagerty said the current rental vacancy rate in the city remains low. That combined with some of the lowest interest rates in history and still good overall consumer confidence will keep the real estate market healthy.

“I would say based on this, housing prices should continue to see a slight positive gain. Unless there are reasons for sellers to take a substantial decrease, most would not do so. Why would you want to lose 10% on your real estate value when you can lease out for a premium based on such low vacancy rates?,” she said.

Ann-Marie Lurie, chief economist with CREB, said there is a wide range of price expectations for this year because there is a significant amount of uncertainty regarding the duration of lower oil prices and ultimately the impact on employment.

“Regardless if you look at average, median or benchmark prices, annual home prices within city limits declined in 2008 and 2009,” she said. “During that time several global economies were in a recession. In 2009 Calgary saw GDP contract by nearly 4%, net migration fell, full-time jobs were being lost, there was a large amount of newly-constructed product available, and the impact of the financial crises created several changes to the lending industry.

“This year the housing market has seen sales activity fall, likely a result of reduced consumer confidence in the market. At the same time, listings have continued to rise, driving up inventories. If this continues, this will place downward pressure on pricing. However, to reach the double-digit decline rates in housing prices, this would assume that the energy prices would stay low for this year with not much upside prospect into 2016, causing job losses, low levels of migration, and persistent excess supply in the housing market.”

For prices to remain stable, said Lurie, the city would have to see stability in the employment sector and the pace of new listings slow.

“With this much uncertainty I think it is prudent to consider there are several factors that can drive the prices. Based on current expectations, prices are likely to remain at or just below levels recorded near the end of last year,” she added.

Hagerty said Calgary is a young city and many people are not used to the volatility of the oilpatch and its relation to the real estate market.

“So those of us who have been around for a couple of decades aren’t concerned,” said Hagerty. “We aren’t day-trading real estate. We get to live in this tangible asset as it grows in value. Savvy investors are sitting back hopeful the next seller will think the sky is falling so they can seize the opportunity. They know that Calgary’s a sure thing with strong fundamentals that make it a great investment.”

Campbell said real estate continues to be a strong long-term investment and income replacement.

“We have always believed that real estate is a safe long-term play. The numbers don’t lie – since prices have begun to be tracked, they have increased,” he said. “Of course we have seen short-term fluctuation with dips and corrections, but in the long term the arrow has always pointed up.

“Calgarians have hosted many an oil boom party in the past and have learned of these inevitable dips. However, because the province’s population, and the city itself, has grown at record numbers over the last two years, we have a large cohort of the population who have never experienced a Calgary ebb and flow. That has led to an increase in knee-jerk response in the market as shown by the dramatic increase in listings.”

He said it is at about this point that strategic Calgary investors start to hunt for good deals, knowing that when the market recovers – be it in one or two years – that it will prove to be the ultimate buying window.

Calgary Herald

Mortgage firms tighten lending standards in Calgary as housing boom turns sour

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The oil that fuelled Calgary’s housing boom has created the conditions for a bust.

imageGenworth MI Canada Inc., the country’s largest non-government mortgage insurer, said last week it’s preparing for more losses this year and into 2016. Home Capital Group Inc., the largest non-bank mortgage lender, is tightening standards in the oil-rich province of Alberta to reduce the risk to the company of falling housing prices.

“The warning signs are out,” said Gerald Soloway, chief executive officer of Home Capital. “It’s only prudent for everybody who participates in that market to heighten their alertness.”

The warning signs are out More than five years of rising oil prices spurred thriving sales of million-dollar trophy homes in Calgary and a doubling of home prices in the last decade. As the oil crash forces energy firms in Alberta to cancel projects and fire workers, housing sales fell the most on record in December and January, with price declines expected to follow. Home Capital has begun to factor in a 10% drop in Alberta home values when making loans, Soloway said.

Alberta “has gone from the top spot in the economic growth rankings to second from last on the provincial leader board,” said Derek Burleton, deputy chief economist at Toronto-Dominion Bank, in a note to clients. “A significant softening in job markets will set the stage for a second major housing correction in Calgary and Edmonton” not seen since 2008.

Related Mortgage risks lingering in the shadows from non-regulated lenders, says CIBC Canadian home sales drop 3.1% as ‘sense of panic’ sweeps western markets The more than $100 billion invested in the province’s oilsands in the decade to 2012 has transformed Alberta’s biggest city, Calgary. Its population jumped 16% to 1.2 million in the five years to January while the growth in energy, manufacturing and retail jobs kept unemployment below the national average. The provincial revenues from oil allowed Alberta to build a billion-dollar hospital and expand its airport.

With the price of oil plummeting more than 50% since June, the Alberta economy is grinding to a halt. CIBC said this month that the province may enter a temporary recession. Citigroup Inc. forecasts that West Texas Intermediate crude, which currently trades at around $50 US a barrel, could fall to the $20 range amid a global supply glut.

Suncor Energy Inc., Canada’s largest oil company, said in January it would cut 1,000 jobs and lower its 2015 capital budget, which could limit new hires. Royal Dutch Shell Plc is firing as many as 300 employees from a project in northern Alberta, and Civeo Corp., a Houston-based owner of energy-worker camps, said it had eliminated 30% of its Canadian staff.

Home Capital, which has 5.1% of its $22.6 billion of mortgages in Alberta, is curtailing lending in the province. The Toronto-based company will continue to avoid some areas completely, including Fort McMurray, the heart of the province’s oil industry, CEO Soloway said. The lender will also examine applications from energy industry workers more critically in the wake of the region’s job cuts, he said.

Oakville, Ont.-based Genworth MI said in its fourth- quarter conference call that it’s planning to cut the size of its Alberta portfolio. The insurer said it’s testing more rigorously borrowers’ ability to repay a loan and examining more closely the collateral backing that mortgage.

The insurer expects its costs to cover bad loans to rise, paying 20 cents to 30 cents in claims for each premium dollar earned in 2015, according to the conference call. Last year the company paid 20 cents.

That expense may increase to as high as 34 cents by 2016, according to Bank of Montreal analyst Paul Holden, who adjusted his earnings forecast for the company on higher delinquency and lower sales in Alberta this year and next. Genworth has 24% of its $356 billion of insurance in Alberta, Saskatchewan and Newfoundland, the three regions most dependent on oil.

“We foresee storm clouds on the horizon in the more oily parts of the country, namely Alberta, which we expect will put more significant pressure on the loss ratio,” Holden wrote in a Feb. 11 note. “The housing market fundamentals in Calgary do not look good.”

Genworth MI shares have plunged about 24 per cent since Nov. 6 when its parent company, Genworth Financial Inc., posted a record quarterly loss and its credit was downgraded.

Genworth MI divides Alberta into about 20 economic regions and is monitoring each for sensitivity to oil at $35 a barrel, chief financial officer Craig Sweeney said on the Feb. 11 conference call. The insurer said it’s expecting a three per cent to five per cent drop in house prices in Alberta starting in the middle of this year.

“The likelihood of a regional economic slowdown has increased,” Sweeney said.

Vince Degiuseppe, a real estate agent in Calgary who sells about 20 homes a year, said demand is falling. Degiuseppe listed a home for a couple for $500,000 in November amid oil’s slide, and they’ve cut the price several times to $480,000. At an open house this month, the few offers were all below the listing price.

The number of homes changing hands in the province plunged 44% in December and January, the most for the two-month period since 1988 when the Canadian Real Estate Association began tracking the data. Royal Bank of Canada, the nation’s second-largest lender, lowered its forecast this month and now sees sales of existing homes in the province sliding 16 per cent this year. Toronto-Dominion Bank, the largest bank, said sales in the province would drop 31% this year and forecasts a 5.1% average price cut.

As the housing market declines, demand is rising for rental properties, according to Mainstreet Equity Corp. Alberta was the fastest growing province for rental revenue in the quarter ended Dec. 31, according to the Calgary-based property manager.

Average vacancy on the company’s units in Alberta declined to 5.8% in the quarter from 7.6% in the year-ago period, and rent jumped 10% to $1,022 per month. Mainstreet has about 60% of its properties in Calgary and Edmonton, according to financial documents.

Residents of Calgary recall living through this boom and bust cycle during past swings in oil prices. “We’ve seen this show before,” said Ted Zaharko, a real estate broker who’s been in business for more than four decades. “Albertans are a hearty bunch and we’ll get through this again.”

He said this downturn won’t be as severe as the one in the 1980s, when the oil services industry suffered from both a global recession and oil price decline. At the time, energy companies folded and unemployment jumped to 11 per cent, while mortgage rates of more than 15% made homes unaffordable.

Today, those rates are at record lows after the Bank of Canada cut its lending rate to 0.75% this year, with the country’s six largest lenders also reducing borrowing costs.

“It’s a little bit like driving through a snowstorm,” said Soloway of Home Capital. “You don’t expect it to be permanent, but it’s going to be around for a while and you just slow down and drive carefully.”

Bloomberg.com

Mortgage risks lingering in the shadows from non-regulated lenders, says CIBC

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OimageTTAWA — The Bank of Canada has made much of the threats to heavily indebted consumers, and the need not to get in over their heads even further — this despite yet more cuts in mortgage rates by commercial banks, fostered by the central bank itself in a weak economic-growth environment. Similar warnings have come from the federal government, which, through the Canada Mortgage and Housing Corp., has tightened lending rules a handful of times since the recession to encourage households to limit their borrowing risks, especially in a still-elevated real estate market. Some of the cajoling appears to have paid off, but only slightly, with the growth rate of household debt slowing — even as the level has crept up to a record household debt-to-income ratio of 162.6%. But there is another area of concern lurking in the shadows: non- or less-regulated lenders offering riskier loans to consumers, a measure of which is more difficult to quantify. The Bank of Canada has already raised the red flag on such lending practices. Related Canadian home sales drop 3.1% as ‘sense of panic’ sweeps western markets Canada’s oil capitals are headed for their first major housing correction since 2008, TD warns “Low interest rates may not only encourage some households to take on high levels of debt, but they may also encourage some financial entities to lend to riskier borrowers,” the bank said in its Financial System Review, published in December. Since then, policymakers have cut their key interest rate to 0.75% from the 1% level set in September 2010. That has led to commercial banks lowering their mortgage lending levels, as well. “The risk we are facing today is that increased regulations on major financial institutions, combined with even lower mortgage rates, may work to widen those shadowy margins,” CIBC World Markets economist Benjamin Tal said Wednesday. There are also concerns that the growing reliance on non-regulated, non-deposit taking institutions — those offering non-prime loans, in other words, above the going rates but with less favourable terms — will stretch consumers’ ability to meet their payments. “If you are a regulator, and you are imposing more and more regulations on those that are regulated, those financial institutions cannot do all the business that they want to do. So, if there’s something left on the table, and somebody else is taking advantage of that — and they’re not regulated,” Mr. Tal said in an interview. ‘To me, this is not a zero-sum game. In many ways, we might actually increase the risk profile in the market because more business is going to the unregulated part of the system.” At present, so-called non/less-regulated lenders represent nearly 5% of Canada’s mortgage market, according to the CIBC study. In Ontario, they account for just over 8% of all new mortgages. “But so far, it [non-prime lending] is not big enough to derail anything, but maybe it will grow,” Mr. Tal said.

Canadian home sales drop 3.1% as ‘sense of panic’ sweeps western markets

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TORONTO — Sales of existing homes in Canada slipped further in January as the drop in oil prices hurt homebuyer demand in western Canada, the Canadian Real Estate Association said on Tuesday, with one analyst saying seller panic has set in.

imageCanada’s oil capitals look set for their first major housing correction since 2008

TD economists say prices are on track to fall as much as 10% in Calgary, Edmonton and St. John’s Newfoundland over 2015 and into 2016 as plunging oil prices turn the nation’s housing market upside-down. Read on The association, the industry group for Canadian real estate agents, said sales activity was down 3.1% last month from December, the third consecutive monthly decline.

The data suggested Canada’s prolonged housing boom may finally be ending after more than five years of rising sales that pushed home prices to record highs.

Canada escaped the U.S. housing crash due largely to more prudent lending standards, but the long boom and high consumer debt levels have raised fears of a U.S.-style collapse. Still, economists expect any corrections will be strictly on a regional basis.

“Canada’s housing market is cooling notably, largely because of the sudden deep chill in the previously hottest cities. However, there is still plenty of regional variation churning below the surface. We suspect that with borrowing costs still plumbing the depths and many provincial economies holding up, any housing correction will be a specific regional affair,” said BMO chief economist Douglas Porter.

Prices, which lag sales, remained 5.2% higher than a year earlier, according to CREA’s home price index.

Actual sales for January, not seasonally adjusted, were down 2.0% from the same month in 2014, the first year-over-year decline since April 2014.

Related Canada’s oil capitals are headed for their first major housing correction since 2008, TD warns The economist realtors love to hate: David Madani stands by 2011 prediction of Canadian housing ‘day of reckoning’ Edmonton housing sales down nearly 26% in January from a year ago Calgary’s housing market under pressure as new listings, inventory soar

A sharp and sustained drop in oil prices has sideswiped the economy in the resource-rich provinces of Alberta and Saskatchewan, where homeowners are trying to sell their houses before values drop further.

“What is interesting to note about the housing measures is that there is a clear sense of panic,” Mazen Issa, senior Canada macro strategist at TD Securities, said in a research note.

Issa said Alberta and Saskatchewan were the epicenter of housing-related weakness in January, with sales down 24% in Calgary, 10% in Edmonton, 7% in Regina and 18% in Saskatoon.

“While national new listings were up by a modest 0.7% in January (after a 1.3% increase in December), the regional breakdown reveals a rush of homeowners looking to obtain top dollar before their respective regional housing market nosedives on the price,” Issa said.

Calgary’s drop extended December declines that have made the last two months the worst for the city’s realtors since at least 1988.

Since November, home sales in the city have fallen 44%, according to Bloomberg calculations based on figures dating from 1988 provided CREA.

The national sales-to-new listings ratio dipped to 49.7% as the number of newly listed homes rose faster than sales. It’s the first time the measure dipped below 50% since December 2012, CREA noted. At the same time, months of inventory rose to 6.5 months, its highest since April 2013.

Gary MacLean, realtor with RE/MAX Real Estate Central in Calgary, said the housing downturn has taken place faster than any he has witnessed in his 28 years in the industry.

“It is, of course, linked directly with the speed at which oil crashed,” said MacLean. “There are layoffs happening everywhere which is taking buyers out of the market. If they have not lost their jobs, they are afraid they might lose theirs, so they have put on hold their buying plans.

“These layoffs or potential layoffs are also hitting homeowners with large mortgages, lines of credit and credit card debt,” he said. “I believe that a large percentage of the rush to market may be caused by this group of people trying to sell their homes.”

MacLean said many people know someone who has been laid off and that causes a ripple effect in the economy, resulting in consumers becoming very cautious about spending. This reduces the number of potential buyers in the marketplace.

“When we have a market like last year with a shortage of inventory for the number of buyers out there, prices are driven up,” he said. ” It is the law of supply and demand. Well, we have started this year with a huge number of homes on the market, up over 100% from this time last year — and with sales down 40%, the same law applies here only in the opposite direction.

“This is a market in which there are a few buyers compared to the number of homes for sale. Sellers have to be aware of this and that they have to price their home competitively.”

According to Mike Fotiou, associate broker at First Place Realty in Calgary, there were only 580 MLS sales in the city between February 1-14. That’s a 35.8% drop from the same period in 2014. Sales are also off by 35% from the 10-year average and by 25.7% from the five-year average.

Fotiou said it’s the lowest February level month-to-date going back to 1996.

The average MLS sale price is down close to 5% so far this month to $465,861.

Fotiou said the Calgary luxury market has also slowed significantly, with only 15 homes selling for $1 million or more, compared with 36 for the same period last year.

Overall, new listings have risen by more than 14% so far this month.

The national average price, not seasonally adjusted, for homes sold in January 2015 was up 3.1% from a year earlier to $401,143, the smallest year-over-year gain since April 2013. With files from Postmedia News

© Thomson Reuters 2015

Canada’s oil capitals are headed for their first major housing correction since 2008, TD warns

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Home prices in Canada’s oil capitals will suffer a correction this year as plunging oil prices turn the nation’s housing market upside-down, say TD economists.image

Prices are on track to fall as much as 10% in Calgary, Edmonton and St. John’s Newfoundland over 2015 and into 2016 as the collapsing oil industry hits growth, incomes and employment.

“A significant softening in job markets will set the stage for a second major housing correction in Calgary and Edmonton since 2008,” TD economists Derek Burleton and Diana Petramala write in their report Thursday.

It’s a dramatic turnaround in a national housing story that saw Calgary leading price gains last year. Calgary homes prices climbed 9.8% year over year in 2014, the biggest increase among big cities.

Related The economist realtors love to hate: David Madani stands by 2011 prediction of Canadian housing ‘day of reckoning’ Low rates seen fuelling Toronto’s surging housing market as Alberta markets stall Calgary’s housing market under pressure as new listings, inventory soar But the 50% drop in oil prices since June is already taking its toll. By January, Calgary and Edmonton house sales had slumped 45% and 35%, respectively, from last year’s peaks.

Oversupply will further pull down prices. Listings have spiked in Calgary and Edmonton and record home building (up 50%) in those two cities last year will put more pressure on prices.

TD expects Alberta will narrowly avoid a recession, but the hit to incomes and rising unemployment will make it feel like one. The outlook for Newfoundland is much worse, with the province headed for recession this year.

TD Economics Unlike the west, Newfoundland’s housing market was already in trouble, with prices down 35% from the 2012 peak. The oil shock will extend what is now a three-year housing downturn.

While the oil capitals battle these headwinds, other parts of the country are expected to hold up well, despite repeated calls for a national housing crash over past years.

Housing markets in British Columbia are expected to be the best performers in 2015. A mild correction in 2011 and 2012 slowed home construction and the resale market has rebounded. TD says the market will be driven this year by solid economic growth, an influx of people from Alberta and the continued confidence of foreign investors.

Vancouver and Toronto housing markets are expected to see moderate increases, while Montreal and Ottawa are expected to be flat. LATEST NEWS VIDEOS

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Canadian new home prices rose 0.1% in December from the previous month, led by gains in the nation’s largest city, government figures showed.

Toronto prices rose 0.2% froimagem November, and by 2.5% for all of last year, Statistics Canada said Thursday from Ottawa. Prices rose 1.7% nationally from the same month a year earlier.

New homes in Calgary, the corporate hub of Canada’s energy industry, were up 0.1% in December, the smallest gain in a year, the agency said. Even with the December slowdown, Calgary’s annual home-price gain of 6.5% was the fastest in the nation.

Related Alberta home resales to slide 16%, RBC says The economist realtors love to hate: David Madani stands by 2011 prediction of Canadian housing ‘day of reckoning’ Low rates seen fuelling Toronto’s surging housing market as Alberta markets stall Calgary’s housing market has weakened early this year as energy companies fire workers and cancel investments after a plunge in crude oil prices. Regulators have also warned that record debt loads among Canadian consumers that have built up after years of low mortgage rates are a threat to the financial system.

Today’s report also showed housing prices fell by 0.1% in December in Montreal and Vancouver, the country’s second and third largest cities. For all of last year, Montreal prices declined 0.2% and in Vancouver they fell 0.6%.

Prices across the province of Quebec fell 0.1% last year, the first such decline since 1997, Statistics Canada said. Bloomberg.com LATEST PERSONAL FINANCE VIDEOS

Alberta home resales to slide 16%, RBC says

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Sales of existing homes will slide 16% in Alberta this year as a plunge in oil drags down the provincial economy, according to Royal Bank of Canada.image

Oil prices are making housing forecasts a tough call in Alberta

Plunging oil prices have made it almost too difficult to predict what will happen in the Calgary housing market, according to a new real estate forecast.

“Continued uncertainty in the oil market will impact Calgary real estate over $1 million, however, the degree of influence is still unknown. If employment and migration into the city remain at expected levels, sales are expected to remain on pace into early 2015,” said Sotheby’s International Realty Canada in a report on what it calls top-tier housing.

Continue reading. The number of homes changing hands will drop to 60,500 from 71,800 in 2015, according to a forecast Monday from the Toronto-based lender. The bank predicted in a Jan. 15 note Alberta home sales would fall 6.5%. The decline would be the biggest since a 21% drop in 2008.

“We’re in for some kind of a correction in the province,” Robert Hogue, senior economist at Royal Bank said by telephone from Toronto. “Whether this will translate on the pricing side remains to be seen. We’ve seen in the numbers in the past few months a change in psychology in the province.”

Royal Bank predicts prices will fall 0.5% to an average $370,600, the most since a 6.5% drop in 2009.

Crude oil’s 50% drop since June is already affecting the Alberta housing market. Calgary, its largest city, reported a 25% drop in home sales in December from November, the biggest monthly drop since October 2008.

Saskatchewan is forecast to have the biggest drop in resale house prices this year, with a 3.2% decline to $344,200 projected by Royal Bank, the second-biggest lender by assets in Canada.

Gains of 4.7% in Ontario, and 10.5% in British Columbia, fuelled mostly by lower interest rates, are set to pull housing resales up 1.7% nationwide to 489,500, according to Royal Bank’s forecasts. Royal Bank forecasts all provinces will face declining resales in 2016 while home prices will only gain in Manitoba.

Related Calgary’s weakening housing market provides first sign of Alberta economic slowdown Low rates seen fuelling Toronto’s surging housing market as Alberta markets stall Bloomberg News LATEST PERSONAL FINANCE VIDEOS

Why more Canadians are turning to non-traditional lenders for mortgages

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ACE73D11-F331-4DDB-B517-E1856A46AE1COTTAWA — Squeezed out by stricter bank regulations, a growing number of mortgage-hunting Canadians have been turning to non-traditional lenders to overcome borrowing hurdles like bad credit.

The proportion of mortgages given out by alternative institutions, other than banks or credit unions, remains small at roughly 2.2% of the entire market, said a recent analysis by CIBC.

But their share of the overall mortgage market has grown from 0.8% during the 2008-09 recession and is now expanding at a rate of about 25% per year, says Benjamin Tal, deputy chief economist of CIBC World Markets.

Tighter government regulations have opened things up for alternative lenders to fill an important void. They provide options for a range of potential borrowers, from people saddled with wobbly credit, to the recently divorced, to the self-employed who draw a smaller income from their business for tax purposes, says Jason Scott, a broker with the Mortgage Group in Edmonton.

“They play a niche role in the market,” Scott said.

Related If you don’t get the full Bank of Canada rate cut, what good is prime? Bank of Canada cuts key rate to 0.75% as oil plunge takes toll on economy He said, for example, these lenders can give someone whose credit kept them from qualifying for a bank mortgage the chance to rebuild their rating, although at a higher interest rate.

Scott said they can also fill a need for the recently self-employed who don’t have a long-enough income record for bank approval, or business owners who don’t take home a large enough salary.

He estimates about 10% of his clients acquire mortgages from alternative lenders, sometimes called “B-lenders” or “C-lenders.”

“There’s a growing segment of the population where it’s harder for them to get qualified with A-lenders,” he said.

“So, we need these alternative lenders to provide solutions while we’re getting them into a position where they can then go back and get the best rates.”

Gordon Hone, the president of Armada Mortgage Services, a small private lending firm in Maple Ridge, B.C., said his service is usually a short-term solution where his clients try to improve their credit ratings to eventually earn a lower rate, sometimes with a bank.

“That’s ultimately what we try to do — is help the client get back on their feet,” Hone said.

For those considering a mortgage through a non-traditional lender, Hone suggests would-be borrowers consult at least one experienced, reputable broker to find out more about the available options.

He said borrowers should also inform themselves as much as possible and, with increasingly heated competition in the private-lending market, Hone said it doesn’t hurt to shop around.

Elie Melki, a Montreal-area broker for Dominion Lending, recommends borrowers be vigilant and to always read the fine print.

Melki said he knows of people who were surprised with a 10% penalty because they hadn’t paid everything back after one year.

“You have to watch out who you deal with because some of them are not always honest,” said Melki, who added there are many companies with excellent services.

Last month, the Bank of Canada warned of the pitfalls associated with increased lending by less-regulated lenders to clients who are considered to have lower capacity to repay debt.

Tal said at just 2.2% of the market, non-traditional mortgage lending remains too small to pose a threat to economic stability.

However, he said it could become an concern if it were to climb to 5% of the market.

“We don’t want to kill this market because it’s a market that is part of a healthy system,” he said.

“We just have to make sure that it’s not being abused.” LATEST PERSONAL FINANCE VIDEOS

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9775E94E-8A53-4774-A0F7-DFA128320A80Certified financial planner Jeanette Brox says young Canadians still have a good reason to withdraw from their retirement plan to buy a house: current prices.

Ms. Brox, who works for Investors Group, says taking money out of an RRSP is the only way some first-time buyers can scrape together enough for a down payment.

“I think it’s a great idea, because one of the hardest things to do is get a big down payment. If you’ve got a couple with substantial amounts in their RRSP, you can take out 50 grand,” Ms. Brox says.

Canada’s Home Buyer’s Plan allows a first-time purchaser a one-time chance to withdraw up to $25,000 from their RRSPs, with the condition that the money be repaid in 15 years.

“When the program first came out, I wasn’t all that in favour of it,” says Ms. Brox. But when you see the prices of houses, it is getting that much tougher to buy.”

Dipping into an RRSP can help first-time home buyers avoid costly mortgage default insurance, which is required by Ottawa if you have a down payment of less than 20%. That insurance premium can run as high as 3.15% of the value of your loan if you only have 5% down, the minimum amount of equity required by a regulated financial institution.

Ms. Brox says borrowing requires discipline, because suddenly you’re not just saving for retirement, you’re also paying back a loan to your RRSP.

Related RRSPs can house a mortgage Feeding the debt monster is killing our RRSPs Should you raid your RRSP to pay debt? “I think most of my clients are [paying it back], but the bottom line is you are going to have to make some sacrifices. Do you need that extra car?” she says.

Repayment has become a problem for some Canadians, with up to one-third of first-time buyers never getting around to it, said Phil Soper, president of Royal LePage Real Estate Services.

Repayments are due in the second year following the year you made the withdrawal. (If you made a withdrawal sometime in 2015, your first payment would be due sometime in 2017.) Generally, you repay 1/15 of the total amount you withdrew every year until the loan is repaid.

The penalty for not making a repayment for a year is that the amount will be included in your income for that year. Even bankruptcy won’t get you out of repayment; you still have to make the annual repayment.

Mr. Soper says one reason the federal government has probably been loathe to increase the $25,000 withdrawal limit, even in the face of rising prices, is the repayment problems. But he’s still a proponent of the plan because it gets people to that 20% down payment threshold. That makes a $250,000 home, even if it’s a high-rise condo, attainable in most markets in Canada.

Mortgage broker Calum Ross says that at this time of year people have a unique opportunity if they are thinking about buying a home in the near term and have RRSP room. He suggests making a major contribution to your RRSP and simply withdrawing the money shortly thereafter — there is a 90-day period during which it must stay in your account — to buy a home.

“Even if you have to borrow, your debt-servicing numbers will still work,” says Mr. Ross, noting that the borrowing money is just being used for an RRSP contribution. “There are a lot of high-income professionals [who], because of a high barrier of entry into the market in some high-value markets, are still not homeowners.”

Royal LePage’s Phil Soper says he expects the housing market to slow down a bit, which could mean more activity from first-time buyers who see more affordability and are willing to access their RRSPs.

While people are increasingly using the tax-free savings account to save for a home, Mr. Soper says it shouldn’t be compared with the RRSP because it doesn’t allow people to reduce their tax burden and use that contribution to buy a home.

“The TFSA is money you’ve already paid tax on, so you’re not saving anything. It’s just a handy place to have money appreciate,” he says.

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