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Canadians’ debt payoffs rise as mortgage principal payments targeted

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Contrary to all the hype about consumer debt levels, Canadians are actually paying off their debts at a faster rate than the Bank of Canada estimates, says Canadian Imperial Bank of Commerce economist Benjamin Tal.

Indeed, he says consumers are being quite responsible in the face of extremely tempting low interest rates. True, they are still spending a lot, but they’re using less credit than normal.

A prime example is homes. There has been a decoupling since the financial crisis between housing sales and mortgage activity, Mr. Tal found. Unit sales have kept up, but growth in mortgage credit hasn’t.

“Unit sales are still running at a pace of between 35,000 and 40,000 per month,” Mr. Tal writes in a research note released Wednesday. “But if in the past this level of activity required a double-digit rise in mortgages outstanding, today it is supported by less than half that pace.”

Part of the reason for this is that people are increasingly paying back principal. “Taking advantage of low rates, an estimated 30 per cent to 40 per cent of households with mortgages now accelerate payments in a way that de-facto shortens their amortization,” Mr. Tal writes. Between 40 to 50 per cent of borrowers are estimated to face an amortization period of less than 20 years “and it shows,” he adds. “Over the past year principal payments rose four times faster than new mortgages. Today, for every mortgage dollar taken, a record high 90 cents of principal are being paid back.”

The amortization period is important. The Bank of Canada bases its estimate of the mortgage debt service ratio on the assumption that the average amortization period is 25 years. Mr. Tal suggests that in the current environment the average is probably closer to 20 years. If he’s right, that means that Canadian households are making $11-billion more in principal payments per year than the bank’s official estimate.

That could mean that we don’t have to worry quite as much as we have been about the impact of rising interest rates.

“That extra cushion is sufficient to absorb the first 100-basis-point increase in the effective mortgage rate, with households simply re-amortizing to offset the payment increase,” Mr. Tal says.

That certainly doesn’t mean we shouldn’t worry at all, as some people are still vulnerable. And, Mr. Tal notes, there’s still time for the risks to rise between now and a rate hike.

“So far, it appears that not only have many households resisted the temptation of low rates but, in fact, they used those rates to pay down debt at a rate not seen before. But it is not over yet. The Bank of Canada is determined to keep low rates for as long as possible – further testing the willpower of Canadians,” he concludes.

Follow Tara Perkins on Twitter: @taraperkins

Canadian home sales fall for first time in nine months

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OTTAWA — Sales of existing homes cooled in September as they fell 1.4% on a month-over-month basis, the first monthly decline since January, the Canadian Real Estate Association said Wednesday.

The association said sales through its Multiple Listings Service were down in about 60% of all local housing markets last month.

CREA president Beth Crosbie said affordably priced single family homes are in short supply in some of the hottest markets and that contributed to the monthly decline.

“That said, there are other markets with ample supply, but sellers there are holding firm on price,” Crosbie said in a statement.

“There is a lot of variation in housing market trends depending on the type of housing, neighbourhood and price segment.”

Compared with a year ago, sales were up 10.6%. However CREA said September 2013 had five Sundays, considered to be the slowest day for home sales.

The average price for a home sold last month was $408,795, up 5.9% compared with a year ago.

Excluding the Greater Vancouver and Greater Toronto markets, the average price was $325,406, up 4.5% from September 2013.

The aggregate composite MLS Home Price Index was up 5.28% compared with a year ago.

BMO Capital Markets senior economist Robert Kavcic noted that there were large regional differences in house prices with Vancouver, Toronto and Calgary posting strong gains.

“Conditions get decidedly weaker anywhere east of Toronto, with no city reporting average prices up more than 3% year-over-year, and fully half below year-ago levels,” Kavcic wrote in a report.

“The good news is that the wide disparities in Canada’s housing market largely reflect economic, demographic and supply/demand fundamentals at work, all but eliminating any fears of a widespread ’bubble.”’

The number of newly listed homes fell by 1.6% in September compared with August.

CREA said the national sales-to-new listings ratio was 55.7% in September compared with 55.6% in August and within the 40 to 60% range usually described as a balanced market.

The association noted that just over half of all local markets posted a sales-to-new listings ratio in the balanced range.

There were 5.9 months of inventory nationally at the end of September 2014, up slightly from 5.8 months in August.

TD Bank senior economist Randall Bartlett said the lack of listings on the market continued to be a surprise.

“This suggests that home price growth may have more upside room over the next few months,” Bartlett said in a report.

“While the housing market continues to defy expectations in 2014, we still remain of the view that housing activity will eventually cool from current levels. With home prices continuing to rise above incomes, affordability will become an obstacle to housing demand once interest rates do eventually begin to rise.”

Meanwhile, the Teranet—National Bank national composite house price index posted a monthly increase of 0.3% for September.

The increase came as prices rose in six of the 11 metropolitan markets surveyed including gains in Calgary, Vancouver, Toronto, Halifax, Winnipeg and Quebec City.

Prices were flat in Edmonton and down from the month before in Hamilton, Montreal, Ottawa-Gatineau and Victoria.

Could targeted land transfer taxes cool Canada’s hottest markets?

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Ontario’s real estate association has launched an ad campaign to explain why they believe land transfer taxes hurt the economy. But in a hot housing market, could the tax be used to cool particular regions, such as Toronto and Vancouver?

Officials in Ottawa have made it clear they see no need to cool the market right now. Prime Minister Stephen Harper said Wednesday that he doesn’t anticipate a housing crisis in Canada, although he says a small percentage of Canadians are overextended and vulnerable to rate hikes.

But federal officials are exploring their options in case they change their minds. Canada Mortgage and Housing Corp. chief executive officer Evan Siddall noted Friday that CMHC has been evaluating further rule changes that it could recommend if house price growth remains strong or picks up.

Former Finance Minister Jim Flaherty tightened the rules that determine which mortgages are eligible for insurance four times, beginning in 2008, in an effort to ease the market. He also took a number of other steps, along with both the banking regulator and CMHC, to achieve that goal.

There are still a wide range of things Ottawa could do, including raising minimum down payments. But one thing has increasingly become clear: The federal government has been using measures that affect Canadians from coast to coast in the same way, but the degree of overvaluation in local housing markets varies tremendously. Price gains in Toronto, Calgary and Vancouver are eclipsing those in much of the country, and some markets are downright sluggish. Could municipalities take the lead, with measures that are tailored to their markets?

Enter the land transfer tax. No one is advocating this as the solution to inflated prices, but the idea of finding policies that zero in on the actual problem markets is worth a discussion.

A number of provinces and cities in Canada already have land transfer taxes, which are paid by real estate buyers. Toronto’s land transfer tax is progressive in that it varies with the value of the property (0.5 per cent on the first $55,000, 1 per cent from $55,000 to $400,000 and 2 per cent over that). The Ontario Real Estate Association says that it amounts to about $4,000 for the average home.

The Ontario Real Estate Association has launched its campaign about the negative impacts of the tax because municipal elections are in about a month.

“Municipalities across Ontario are looking to the province for new revenue tools or taxes,” the association’s president, Costa Poulopoulos, said in a press release. “One of the tools being considered is a second [i.e., municipal, in addition to the provincial tax] land transfer tax on home buyers, similar to the tax imposed by the City of Toronto. This tax carries a huge cost – no Ontario city can afford the kind of job losses Toronto has experienced because of the municipal land transfer tax.”

The association points to a research study done by Altus Group, a real estate consultancy, that argues that Toronto’s land transfer tax, which has been in effect since 2008, has significantly slowed down home sales. It estimates that 38,278 resales didn’t take place between 2008 and 2013 because of the tax. A report by the C.D. Howe Institute has estimated that the tax reduced real estate transactions by about 16 per cent. The city of Toronto imposed the tax purely to raise money – but it sounds like something that would have made that late Mr. Flaherty pretty happy.

“Depending on the size and structure of the tax levied, the LTT would lead to weakening in affordability and cool the housing market,” says Derek Burleton, deputy chief economist at Toronto-Dominion Bank. He added that a challenge for policy makers would be putting in place a tax that cools the market without tipping it toward a dramatic decline. For instance, if Toronto changed its land transfer tax or other cities imposed one at the same time as mortgage rates were rising, it could cause a major correction.

What if the tax were temporary, and would automatically be repealed when mortgage rates hit a certain level?

Canadian Imperial Bank of Commerce economist Benjamin Tal, while noting that he’s neither in favour nor against the idea, says such a tax could soften the impact of any future market correction by making the market more static. “And this is a more targeted way of looking at things,” he says.

The C.D. Howe Institute found that Toronto’s land transfer tax slowed down the lower-priced portion of the market more than the higher end (presumably because people at the lower end of the market are more sensitive to the added cost of the tax). But land transfer taxes could be applied to only a range of the market, for example homes that sell for more than $600,000.

Mr. Burleton notes that “over the longer term, there are concerns that a LTT would reduce mobility of people, which would have a negative unintended consequence on job markets and economic growth.”

Municipalities in Ontario, and generally elsewhere, require provincial permission to levy a land transfer tax, notes Finn Poschmann, vice-president of research at the C.D. Howe Institute.

He also points out that the tax reduces the affordability of homes, making it harder for potential movers to buy a home that they might have otherwise, so it drives down the after-tax price of a home, other things being equal.

“The LTT is a remarkably bad tax,” Mr. Poschmann says. “It keeps people where they are, as opposed to where they want to be, and blocks transactions that should have occurred – by definition, a nasty drag on the economy. And that makes it not a very good tool for dealing with a problem that you don’t and can’t know if you have.”

Follow Tara Perkins on Twitter: @taraperkins

While Toronto’s housing boom rolls on, some of the housing itself is falling apart

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TORONTO — Toronto has more than 100,000 units under construction as developers and investors seek to cash in on condo prices that are up 25.7% in the city over the past five years. The trouble is, many buildings are so poorly constructed that some residents fear that the money-spinners of today could become the slums of the future.

Glass panels have been falling off newly built Toronto condos, including the luxury Shangri-La and Trump towers and a dozen or more lesser-known buildings across the city. New buildings suffer from water leaks and poor insulation, making them ill-suited to Canadian weather.

“Many buildings that went up during the beginning of this condo boom are already facing high repair costs, and in many cases lawsuits, because they are built so shabbily,” said Ted Kesik, a professor of building science at the University of Toronto.

In 50 years these buildings may well become an urban slum “The life cycle is clear. They are okay for the first five years, they gradually deteriorate by year 10 … and don’t even reach year 20 before significant remedial work needs to be done. In 50 years these buildings may well become an urban slum.”

That’s all far in the future for builders and investors who have had little trouble finding tenants, with the city’s rental vacancy rate at 1.8%. Condo prices are rising across the country, up 16.8% in the last five years, according to the Canadian Real Estate Association.

Real estate brokers are dealing mostly with 10-year investors who want to buy from a blueprint, double their equity during the five years of construction, and enjoy rental income and price appreciation for five more years before selling and investing again elsewhere.

“It’s all about timing. We advise most clients to get out before that five-year mark,” said Roy Bhandari of Sage Real Estate, which notched nearly C$50 million in Toronto condo sales in 2013, with clients typically from China, Eastern Europe, or the Middle East. “It’s the magic number because after five years the warranties are expired.”

Related Canada’s new housing prices show biggest gains in 7 months, led by Toronto and Calgary Kingston and environs a burgeoning market for first-timers and downsizers The spate of falling glass sheets prompted the Ontario government to improve the building code in 2012 to stipulate that better glass be used for balconies, but the problem continues. In July, balcony glass panels fell off the 65-storey Shangri-La hotel and condominium building in Toronto’s downtown core for the fifth time.

Before you sound the debt alarm, know how much is too much

Canadians have increasingly become more comfortable with debt. Despite the Bank of Canada repeatedly sounding the alarm about household debt levels, calling it the biggest domestic risk facing the Canadian economy, we continue to take on more. But how much debt is too much? Keep reading. Canada’s reputation as a safe haven from global financial storms has driven condo development in Toronto and Vancouver since 2009, attracting investors at home and abroad spooked by stocks, bonds, and foreign banks at risk of failure.

“The first reason they chose Canada is the banking system. It’s the most boring banking system on the planet, but it makes it the safest,” said Bhandari.

Less important are the finer points of the condos, with investors primarily focused on value, location, and amenities.

“Investors never see the suite. They buy it and sell it, and they are not flying in to micro-manage the investment,” Bhandari said.

While there are no numbers on how many of Canada’s condos are being bought by foreign investors, estimates range from 5% to 50%. The Shangri-La in Toronto is part of a chain owned and managed by Hong Kong-based Shangri-La Hotels and Resorts, one of the world’s leading hotel companies.

“It’s almost like the dot-com bubble, in that you have to see it coming and sell, because if not, you’ll get burned,” said building scientist Kesik.

Renters and some real estate agents blame weak provincial regulations for problems with poorly built condominiums.

The Building Code is a joke, the Condominium Act is a joke “The Building Code is a joke, the Condominium Act is a joke,” said David Fleming, a condo buyer turned realtor. “The City of Toronto relies on the permits, the fees for its tax base, and construction and condos are what is carrying the city. You do not kill the goose that lays the golden egg.”

Fleming bought a pre-construction condo in 2005 that was scheduled to be finished in 2007. When he finally got his unit’s keys in 2010, the rest of the building was still under construction, and he saw defects everywhere. He sold his unit within two years.

The Ontario building code, a provincial responsibility, is reviewed every five years, said Conrad Spezowka, a spokesman for Ontario’s Municipal Affairs and Housing ministry. He noted it was most recently amended in June 2012 to address the failing glass problem.

“While the province is responsible for administering the Ontario Building Code, municipalities are responsible for enforcement and inspecting construction and renovation to ensure it complies with the code,” Spezowka said in an e-mail.

In January, a report from Toronto’s Auditor General found enforcement of the building code was lax and in need of a top-to-bottom review. Two-thirds of open building permits across Toronto had no inspection for over a year. Of the 3,735 reported code violations in 2012, only 30% had been inspected, and more violations were issued than closed each year.

Toronto’s building office did not respond to requests for comments for this story.

Tom Hicken for National PostTORONTO, Ont. (10/09/2013) – Glass and blood is seen at the site where a glass panel fell from the Shangri-La Hotel and struck a man at street level on University Avenue and Adelaide Street on Tuesday, Sept. 10, 2013. Most condo owners are reluctant to make a fuss about poorly built condominiums for fear of lowering asset values as they try to offload the unit. Nonetheless, lawyer Ted Charney in September launched his sixth class-action lawsuit against a major Toronto developer, a C$29 million suit over wildly fluctuating water temperatures in a condo high-rise that are being blamed on the installation of improper water valves.

“Our building code is woefully deficient,” said Audrey Loeb, a real estate lawyer dubbed “the Condo Queen” for her focus on condominium owners who were promised one thing when they were buying and got much less when they moved in. “The municipal and provincial governments have not imposed high enough obligations on developers.”

Developers said there are plenty of checks and balances, and that mistakes are corrected quickly.

“There’s a lot of moving parts. It’s not like there is a mistake because we’re trying to provide cheap product. It is the opposite. Everyone is always trying to better themselves,” said Barry Fenton, president and chief executive of Lanterra Developments, which is among those being sued for falling glass at one of its new condo towers.

“The systems that we have in place have worked, they are healthy. There is no question if building inspectors or policies suggest we should make changes, we’re here to listen and make the changes. Change is good.”

© Thomson Reuters 2014

Fixer-uppers not for the faint-of-heart – Ask a Vancouver Mortgage Broker

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When Eileen Muzzin and her partner, Dan Pedersen, were searching for a home in Vancouver, they knew they wouldn’t be buying a place with granite countertops or a peekaboo view. With a modest budget – by Vancouver standards – they ultimately decided on a fixer-upper on the city’s east side.

The couple got a 2,000-square-foot home with walls painted red and gold, a weak electrical system, various objects buried in the backyard and a kitchen that was last renovated in 1961.

“We were digging in our yard and found a rolled-up carpet two feet down,” Ms. Muzzin recalls. “There were really old bricks there too, which we ended up reusing between our garden beds.

“We basically bought the crappiest house in the neighbourhood we wanted to live in,” Ms. Muzzin says.

The two were smart to buy in a community they coveted. There’s truth behind the cliché “location, location, location.”

“You can fix a home but you can’t fix a neighbourhood,” says Vancouver real estate agent Kel Parry.

What the home also had was good bones. The trick to purchasing a fixer-upper without ending up with buyer’s remorse is distinguishing between a home that has “potential” and one that could turn out to be a disaster.

To do that, a home inspection is a must. But that’s just the starting point, says Mr. Parry, who himself bought a fixer-upper with his wife many years ago in North Vancouver.

Hire a contractor to give you estimates on fixing problems. “If you can, get two or three quotes. Once you start getting those numbers down, tack on another 30 per cent for contingency,” he says.

“The first thing I tell clients when they’re considering a fixer-upper is, whatever you’ve budgeted, make sure you have more than that,” he adds. “There are always hidden costs.”

Aside from using savings, credit cards or lines of credit for HGTV-style projects, buyers can secure financing at the time of purchase through mortgages such as the CMHC Improvement program or Genworth’s Purchase Plus Improvements program.

Fixer-uppers typically need expensive renovations of kitchens and washrooms. Other common and costly jobs include repairing or replacing the roof and windows as well as upgrading the electrical and plumbing systems.

Some repairs are deal-breakers, with structural and foundation problems typically falling in that category.

“If you’re looking at a property that will continue to cost you money in the long run, and will cost you a lot of money right out of the gate, you want to get a professional opinion on that,” Mr. Parry says, adding that it’s important to do a property-information search with the city or municipality. “Structural and foundation issues are big.”

An oil tank buried in the yard is another red flag, says Vancouver home inspector Tom Munro, founder of Munro Home Inspections.

“Oil tanks are the ultimate deal-breaker,” says Mr. Munro, who claims to be the only inspector in the Greater Vancouver area who scans for buried tanks using a magnetic sensor. “The tank needs to be disposed of properly. You need to get an oil-tank-removal certificate, and then you need an independent soil-sample analysis.”

Aside from the environmental impact, cleanup can be costly. One North Vancouver homeowner had to spend $85,000 on the removal of a tank and the ensuing decontamination of her property in 2012.

Mr. Munro has found other buried treasure during home inspections. He discovered a Volkswagen Beetle in one backyard where the swimming pool used to be. In the fixer-upper he bought himself recently, a previous owner had deposited all of the old appliances under a few feet of dirt.

Then there’s the accompanying stress of renovations. They can take a toll on relationships as well.

“If you anticipate a number of projects, you have to be prepared to live in that situation with dust, with tarps, with all the things that come with living in a construction zone,” Mr. Parry says. “It’s very disruptive, especially if you have young children. If you can get renos started before you move in or even stay with relatives or in a hotel for a short period, those are worth considering. Some people don’t mind it, but it’s not for everyone.”

Mr. Munro says with a laugh: “I’m a marriage counsellor as much as a home inspector.”

For Ms. Muzzin and her partner, living amid the mess has so far been worth it. They enjoy working on their home and going to salvage lots for unique finds.

They installed a beautiful claw-foot tub with polished chrome feet in the main bathroom they renovated themselves. They hired professionals to replace the roof and upgrade the electrical system. Next up is that 1961 kitchen, with its linoleum floors and teal-coloured everything.

“I love having my own home to work on,” Ms. Muzzin says. “But it’s not for the faint-hearted.”

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Applying for a fixed-rate mortgage? Why you need to do your homework

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Imagine you’ve applied for a five-year fixed-rate mortgage. Then, before you close, the lender drops its best five-year fixed interest rate. You’d expect that new lower rate, right?

Most people in this position would. But with some lenders, that’s not the way it works.

If you’re going mortgage shopping, take a minute to understand your lender’s rate-drop policy before you send in your application. Too many people don’t and it ends up costing them.

MORE RELATED TO THIS STORY

BOOK EXCERPT When it comes to home buying, smaller is better DECODING THE MORTGAGE MARKET Should you get pre-approved for a mortgage? Ten things to know Five-year mortgages holding firm, but just wait The government-backed Canada Mortgage and Housing Corp. is raising its prices for home mortgage insurance. CARRICK TALKS MONEY Video: Carrick Talks Money: Don’t get stuck in the mortgage penalty box Your Personal Investor Dale Jackson looks at the cost of longer amortization periods. VIDEO Video: If you choose lower mortgage payments now, you may regret it later Homeowners may be feeling nervous after the Bank of Canada’s recent talk of changes to interest rates. Canadian Press business reporter Romina Maurino looks at what this could mean for your mortgage. MONEY MONITOR Video: How would an interest-rate hike affect your mortgage? How rate drops normally work Typically, if you’ve been approved for a mortgage and the lender drops its rates before your closing date, the lender will lower your rate as well. Every lender has its own policies, though. For instance:

· Some lenders allow you only one rate drop. Others allow multiple. · Some lenders only permit rate reductions up to seven days before you close. Others give you their best rate right up until your closing date. · Some lenders automatically lower your rate. Others require your banker or mortgage broker to manually request the rate adjustment. In this latter case, you better have a reliable mortgage adviser or keep tabs on rates yourself.

The best-case scenarios are those lenders with “look-back” policies. This means they’ll look back and give you their lowest rate from the time you applied until the time you closed. Those lenders are few and far between but any good broker knows who they are.

How other lenders operate More and more lenders are adding “no-float-down” clauses to their fixed mortgage rates. This is particularly true with certain non-bank lenders.

“No float down” means your rate cannot be adjusted lower if that lender comes out with a better deal. Those lenders make those lower rates available for “new business only.”

Now, you may be thinking, “I’m a good client, why should a new customer get a better rate than me?” The answer, lenders say, is profitability. When you get a fixed mortgage, the company funding your mortgage generally “hedges” that rate, meaning it pays for an expensive form of rate insurance. This ensures the lender doesn’t lose big if rates jump and it has to honour the lower rate it promised you.

If rates fell and the lender didn’t have a “no float-down” clause, it would incur the cost of that rate hedge and have to give all of that rate savings back to you, the customer. But with mortgage competition so fierce and margins so tight, some lenders can’t afford to do that anymore.

When rate drops matter If fixed rates are rising or going sideways, “no-float-down” policies shouldn’t hurt you. If fixed rates are in a downtrend, however, it pays to have that rate-drop option, other things being equal.

I say “other things being equal” because float-down privileges are rarely the deciding factor when choosing a mortgage. A lower upfront rate or better mortgage features can often negate the disadvantage of no-float-down restrictions.

Moreover, the odds of rates dropping decline the closer you are to your closing date.

In case you’re curious, fixed mortgage rates drop from one month to the next about 38 per cent of the time. That’s been the case since 1951 at least, according to Bank of Canada data.

Historically when rates have dropped – versus the prior month – the average decrease has been 0.23 percentage points. Even if you ignore 1973 to 1993, a volatile period of surging and plunging rates, the average decrease was still 0.17 percentage points. On a $200,000 five-year mortgage, a 0.17 percentage point rate drop would save you about $2,500 in interest.

If your mortgage does come with a rate-drop feature, contact your mortgage adviser about 10 days before you’re scheduled to close. Don’t take it for granted that someone will notify you automatically if rates are lowered. Ask if your lender has offered cheaper rates since you applied for your specific term and rate hold period. (Those last three words are important because lenders generally don’t let you have their lowest 30-day “quick close” rate if you originally applied for a 60, 90 or 120-day rate.)

Make it a point to understand your lender’s rate-drop policy. Every tenth of a per cent matters and you never know when interest costs will dip.

There are 300-plus lenders to choose from in this country. If you pick one with a “no-float-down” policy, be sure the rest of the mortgage terms make up for it.

Robert McLister is a mortgage planner at intelliMortgage Inc. and founder of RateSpy.com.

Follow Robert McLister on Twitter: @RateSpy.com

First-time homebuyers are feeling the weight of Canada’s housing boom

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Many times over the last few years, John Norquay has been stricken with pangs of anxiety over not being a homeowner.

Should you rent or own your home?

Bank of CanadaPeople say that when you grow up, you buy a home. But owning doesn’t make sense for everyone and in some cases, it might be more financially beneficial to rent. Find out more They strike when he attends housewarming parties for friends. They hit when he hears that friends bought in the condo building where he is renting and the value of the unit has already shot up.

But the 35-year-old Toronto immigration and refugee lawyer graduated in 2005 with $75,000 in student debt and while he tackled his loans ahead of saving for a down payment, home prices have only climbed. “I decided to wait but I don’t know if I’ll end up regretting that,” he says. “It seems like every other month there’s an article about the condo market bubble bursting; I kind of gambled there and I think I lost.”

It used to be a rite of passage for young people, a way to announce your adulthood to the world by buying your first home. But fewer young people today are able to achieve this dream. A recent CIBC report showed that the home ownership rate among first-time homebuyers (25 to 35) fell from 55% in 2012 to the current 50%.

With the rise in housing costs, many first-timers are locked out of the market, unable to save the gargantuan down payment or qualify for a mortgage.

Related From $99,999 to $1-million plus: Here’s what Canadians can buy in Florida real estate Renewing your mortgage? Here’s why you should pick up the phone Outside of Toronto, Vancouver and Calgary, Canada’s housing market is ‘mediocre at best’ According to a BMO report released in March, first-time homebuyers plan to spend an average of $316,000 on their first home, up from $300,000 in 2013. (Those in Vancouver expect to spend $506,500 while those in Montreal plan to pay $237,900.) Respondents to the study expect to put an average down payment of 16% or $50,576.

Now, considering that the average home price in Canada was more than $416,000 in May, if you wanted to put 20% down, you’d need $83,200. That’s a daunting figure for anyone.

Six in 10 hopeful homeowners say their home-buying timeline has been delayed, with 39% citing rising real estate prices as the main reason for delay.

“You’ve been in the workforce for a few years and you don’t have a lot of assets; it can take several years to break into the financial market,” says Penelope Graham, an editor at Ratesupermarket.ca.

As tuition fees rise and students graduate with more debt, many find that they’re devoting funds to debt repayment versus saving for a down payment. (Mr. Norquay’s debt payments amount to $750 a month.)

And if graduates don’t find steady employment right away, accumulating a lump sum is even harder; more young people today compared to previous generations opt to return to school when they have trouble breaking into their fields.

The youth unemployment rate in 2012 was 2.4 times that of adults — marking the biggest gap since 1977, a Statistics Canada report said.

“If you look at youth unemployment and underemployment, that’s definitely another factor. The ability of young people to earn has been compromised,” says Benjamin Tal, deputy chief economist with Canadian Imperial Bank of Commerce.

He calls today’s young adults “the lost generation” — a group that is falling behind economically.

A new report by the Conference Board of Canada echoes his findings: the average disposable income of Canadians between the ages of 50 and 54 is now 64% higher than that of 25- to 29-year-olds. That’s up from 47% in the mid-1980s.

With young workers facing lower wages, rising home prices and tighter mortgage restrictions (reducing total amortization to 25 years, capping maximum debt ratios for households to qualify for a mortgage loan), the goal of home ownership moves further away for many.

So what are people doing instead? They’re spending more time living with mom and dad. They’re renting. Renting often suits a younger demographic who might appreciate mobility and fewer responsibilities. Plus, home buying comes with maintenance costs and upkeep and each time you buy a home, extra funds are needed to cover things such as lawyer fees, land-transfer taxes, and other transaction expenses that typically add 10% to the purchase price.

Some experts argue that investing one’s savings in assets with higher potential returns is a better option than sinking everything into the housing basket, especially if you might be planning to move anytime soon.

“The one compelling argument I have seen in support of renting is that if someone is wisely investing, it can be a bigger payout in the end,” Mr. Norquay says. “I am not at all the saver type, and those articles have only increased my desire to want to own. Basically it would be a way of forcing myself to invest.”

Why is he a bad saver? “I like to go out and have fun and I like to travel.” More than two-thirds of Gen X Canadians told a TD survey that they wanted enough flexibility to be able to afford things like travel after paying their monthly mortgage.

Mr. Norquay now rents a $1,950 two-bedroom condo unit with a roommate near his downtown legal aid clinic. Three years ago, he hoped to buy a home with a friend and got pre-approved for a joint mortgage; but they couldn’t find the right property.

Though some say people should take advantage of the record low mortgage rates and get into the housing market as soon as possible, Sadiq Adatia, chief investment officer at Sun Life Global Investments, suggests first-timers should continue to wait.

“First-time home buyers should wait to buy as the market is quite frothy at the moment and it is only a matter of time before we see a pullback,” Mr. Adatia says.

“Though rates will also go up at some point, our belief is that housing values will decline prior to that, giving buyers a great opportunity to take advantage of lower prices, but also lower rates. Those opportunities do not come often.”

As it stands today, houses are becoming less affordable, according to RBC’s most recent affordability index which measures the percentage of pre-tax household income that is needed to service the cost of owning a home (including mortgage payments, utilities and property taxes). In Vancouver, 82.4% of household median pre-tax income is needed to service the cost of owning a bungalow at current prices. That compares with 56.1% in Toronto and 34.5% in Calgary.

In places like Toronto and Vancouver, competition is steep so first-timers could face bidding wars which ratchet up prices and prompt some buyers to drop important conditions such as a home inspection.

“Without having a bit of help from friends and family or being able to sell something, it’s very difficult for a first-time homebuyer even on two incomes,” says Mike Bone, a 31-year-old account manager at a marketing consulting firm. He and his wife are looking to buy a home in Toronto for $550,000 to $700,000 but have found that bidding wars inflate all of the prices.

“We’re trying to balance getting in there and not making a stupid decision. It’s frustrating but we understand the high demand and the low supply of single-family homes. Lately, we’ve been looking at new builds and low-rise condos.”

Mr. Bone says he hopes that they’ll have some luck as the weather cools and in the interim, they’ll continue to build up their savings.

But how do you even start saving up that big chunk of money, especially if you’re doing it alone?

The majority (61%) of first-timers told a BMO survey that they’ve made cutbacks to their lifestyle in order to save for their first home. Meanwhile, 30% expect parents or family to assist in their purchase; this percentage rises to 40% in Montreal and Vancouver.

The minimum down payment for a home is usually 5%, says Jeff Cody, managing partner of Mortgage Brokers City Inc. in Ottawa. “But if you put less than 20% down, the mortgage has to be insured against default,” he adds. The more you put down, the lower your insurance premium, which start as high as 3.15%.

You need a strategy.

Mr. Norquay will finish paying off his student loans in October; then, he’ll start accumulating more for his future home. He also has savings in an registered retirement savings plan and wants to take advantage of the home buyers’ plan. Under the home buyers’ plan, Canadians can take $25,000 out of their RRSP and pay it back over the next 15 years without incurring any penalty.

Save as much as you can before taking the plunge, Ms. Graham says. “Aim to pay more than a 5% down payment,” she says. “No one wants to hear this but if you go into your first home purchase with more capital up front, it means you’re going to take out less of a mortgage and over the long run, you’re going to pay less interest and you’re going to build your equity faster.” • Email: mleong@nationalpost.com

CMHC could force banks to pay deductibles on mortgage insurance

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The Canada Mortgage and Housing Corp. is looking at a new formula to push some of its losses on to financial institutions, essentially forcing them to pay a deductible on mortgages insured with the Crown corporation before claims are paid, according to sources.

Thinking about a move-up buy? Forget it, new study says you can’t afford it

You’re likely stuck in your current home because of new tougher mortgage regulations and ever-rising prices in the Canadian real estate market The Financial Post has learned the Office of the Superintendent of Financial Institutions is involved in discussions with CMHC, which it oversees, while the Canadian Bankers Association is said to be against the measure.

“The CBA has ongoing discussions with CMHC about a variety of issues in the mortgage and housing markets,” said Maura Drew-Lytle, a spokesperson for the CBA, in an emailed statement. “The International Monetary Fund made a really vague reference to the notion of a mortgage insurance deductible in its Financial Sector Assessment report on Canada, but you would have to speak to CMHC about whether or not it is an idea that they are considering,”

A spokesman for CMHC would not comment. OSFI could not be reached.

“The idea is being floated around right now,” said a senior industry source, who asked not to be identified. “What they are trying to do is make sure lenders have some skin in the game.”

Any implementation might not happen for at least a couple of years while the amount of the deductible is still open to consideration. It’s likely to be in a range of 5% to 10% of a mortgage.

Canadians with less than a 20% down payment on a home must get mortgage default insurance when borrowing from a financial institution regulated by Ottawa. Those consumer loans, which are insured and ultimately backed by the federal government, are often securitized and then sold to investors.

The insurers guarantee the full and timely payment of principle and interest. If say a $100,000 loan in a securitized pool goes bad and, ultimately the bank can only recoup $70,000 of that loan, the insurer is responsible for the remaining $30,000.

Related CMHC sees amount of mortgages it insures shrinking this year amid tighter housing market rules CMHC cutting back on what it covers with mortgage default insurance How to invest in real estate — no matter what the market does “They are structured so the lender is compensated for missed principle and interest and any legal and settlement costs,” says Finn Poschmann, director of research of with C.D. Howe Institute, about the current situation. He says the average recovery rate on defaults is usually about 70% of the mortgage.

“The idea is you could design a mortgage insurance product that has a deductible in it,” said Mr. Poschmann.

CMHC, which controls a majority of the market, has been reviewing its operations since new chief executive Evan Siddall, a former investment banker, took over last year. The Crown corporation has been scaling back its in-force insurance while it no longer insures second homes.

Mr. Poschmann says like any other sort of insurance, a higher deductible could mean a lower premium. But mortgage insurance premiums on high-ratio loans in Canada are paid by the consumer.

“There is nothing in principle wrong with having a range of mortgage insurance options in the marketplace. We should be clear if a deductible were a standard feature of residential mortgage insurance, the terms will tighten from a lender’s point of view but there would be downward pressure on premiums,” he said.

Peter Routledge, an analyst with National Bank Financial, said any move to charge a mortgage deductible would fit in with the overall tone CMHC has taken in recent months.

What they are trying to do is make sure lenders have some skin in the game “It would be consistent with reducing the CMHC’s tail risk,” said Mr. Routledge, noting it would only be possible to implement with future policies.

He questioned whether consumers would see any reductions in premiums even though the banks would be paying a deductible.

All of the mortgage insurers, including private entities Canada Guaranty and Genworth Canada, raised fees May 1. For those consumers with a 95% loan to equity, the fee jumped from 2.75% to 3.15% of the value of a mortgage. CMHC said the increase reflected the need for it to reach higher capital targets.

Mr. Routledge said the changes would drive up the costs for the banks because they would have to keep more capital on hand and that could mean higher mortgage rates for consumers to cover the shortfall. “But it’s a very competitive marketplace, so it’s plausible the market could absorb that,” he says.

Rob McLister, editor of Canadian Mortgage Trends, wondered whether investors buying securitized paper with a deductible would demand higher rates.

“You have the risk of the lender going bad versus the government of Canada,” said Mr. McLister, noting CMHC is backed 100% by Ottawa while the deductible would have to be covered by a private bank.

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Joe Oliver says Canada won’t make major changes to CMHC, housing finance

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Canada won’t make any sudden changes to the country’s system of housing finance, even as the government looks at ways to reduce its role in the market, Finance Minister Joe Oliver said.

Canada’s finance minister is urging European countries to consider taking quick action to repair their flagging economies by following stimulus programs similar to the one that pulled this country out of recession. Read on Oliver said that while he’s studying proposals, such as the idea of the government passing on more risk to lenders, these are longer-term issues that don’t require immediate action. The government guarantees about $710 billion worth of Canadian mortgages through state-run Canada Mortgage & Housing Corp. and private mortgage insurers.

“We’re looking at things, but we’re not going to be doing anything dramatic,” Oliver said in an interview in Cairns, Australia, where he was attending a meeting of finance ministers and central bankers from the Group of 20 countries. “We don’t see the need for it.”

Related CMHC chief says housing agency considering passing on mortgage risk to banks CMHC could force banks to pay deductibles on mortgage insurance Canada’s housing market on course for soft landing, says CMHC Evan Siddall, chief executive of CMHC, said in a Sept. 19 speech his organization is looking at ways to better manage the government’s exposure to the housing market.

In the speech, Siddall outlined how his organization is “re-examining” its role to ensure the government isn’t distorting the housing market by assuming too much risk. Possible steps could include risk-sharing with banks, higher capital requirements or smaller regulatory measures to curb over-borrowing by some households, Siddall said.

Nothing Precipitous

“We certainly aren’t going to do anything precipitous,” Oliver said. “You don’t want to cause the very thing you are trying to prevent.”

On the risk-sharing proposal, Oliver said the government hasn’t made any decisions.

“Obviously it’s one of the things one looks at, but I don’t want to signal we’re doing anything,” he said.

Canadian housing has so far defied predictions of a correction with recent data showing an acceleration in resales, starts and prices. Policy makers have downplayed worries the market is at risk of a collapse, forecasting instead a soft landing. Oliver reiterated he doesn’t see a housing bubble.

In his speech, Siddall said that his organization’s research shows that even with some overvaluation, “there are no immediate problematic housing market conditions at the national level.” If prices don’t moderate as predicted though, Siddall said, it will strengthen the case for additional measures to cool the market.

Additional Measures

“Our educated opinion is that growth in house prices in Canada will moderate,” Siddall said. “If we are wrong, and price growth remains strong or accelerates, we may need to look to macro-prudential counter-weights to avoid excesses.”

Until now, the agency has been taking smaller measures to remove some of excesses from the market and reduce the amount of insurance it has in force, which is capped at C$600 billion. In June, it announced it would no longer insure financing for condominiums. In February, the agency said it will increase premiums on mortgage insurance by an average of 15 percent. In 2012, the government gave the country’s banking regulator new to oversee CMHC.

CMHC also is planning to increase its capital holdings to protect from insurance losses and has done stress testing that shows it would have survived a U.S.-style downturn in the housing market, Siddall said in the speech.

CMHC insures mortgages against default, and its insurance is fully backed by the federal government. By law, Canadian mortgages with less than a 20 percent downpayment must be insured.

Housing Vulnerability

Bank of Canada Governor Stephen Poloz said Sunday that while housing remains a “vulnerability” for Canada, “we don’t see the housing market as particularly hazardous and we certainly don’t consider it to be a bubble.”

‘We’re not overly concerned but monitoring it very carefully,’’ Poloz told reporters in Cairns. “Over the course of the summer there was no perceptible reduction in household imbalances, while during the first half of the year we had seen a modest constructive trend.”

While no major policy changes are planned, Oliver said there could be similar smaller steps that can be taken if warranted. “That doesn’t mean we’re not going to take further steps,” Oliver said. “A lot of things as you know that have happened, they call it the sandbox policies, we believe moderated the growth.”

In a conference call with reporters from Sydney Sunday, Oliver reiterated the government wants to gradually reduce its involvement in the mortgage market. “Anything that we might consider would be of a marginal nature, like some of the steps that have been taken,” he said.

Dramatic Exit

There have been calls for a more dramatic exit from the market by the government. In a June report, the Organization for Economic Cooperation and Development said Canada should consider lowering the amount of mortgage insurance CMHC can write, and eventually get out of the business completely to limit taxpayer risk.

“Right now, government takes practically all the risk,” OECD Secretary-General Angel Gurria said in a June 11 interview. “This is a contingent liability of the taxpayers of Canada. There has to be some risk borne by the intermediary institutions and the borrowers themselves.”

Tax Inversions

Oliver also told reporters on the conference call he spoke to U.S. Treasury Secretary Jacob J. Lew at the Cairns meeting about U.S. companies that seek to reduce taxes by relocating abroad, a practice known as inversion.

Lew said Saturday his department is finishing work on measures that would limit inversions.

Oliver said it’s not clear whether the changes will be retroactive, a move that might affect Burger King Worldwide Inc.’s takeover of Canadian coffee and doughnut retailer Tim Hortons Inc. “We don’t know just how far that might go, whether there would be an attempt at retroactivity,” Oliver said.

He said Canada hasn’t been targeting companies for potential inversions. “The reason that we have pursued a low- tax policy on the corporate side is to attract and retain capital, which results in economic growth and employment.”

Bloomberg.com

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Renewing your mortgage? Here’s why you should pick up the phone

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Twitter Google+ LinkedIn Email Comments More It is mortgage renewal time in my house.

Freedom 58? How Canadians are shaving thousands off the cost of their mortgage

More than half of Canadians in a new survey are putting extra effort into repaying their mortgages — saving tens of thousands in interest payments. Find out more I am one of those debt loving people who believe I can do more with my money by carrying a big debt at 3%, than by paying off my house and using up all that cheap capital – but that financial idea is a story for another column.

So, even though my mortgage comes due in October, I decided to lock in a rate four months earlier at a different institution at 2.79% for 5 years fixed. I was thrilled to have another five years of cheap money.

Even though I had already locked in elsewhere, I was interested in what my current mortgage lender would provide. I waited and I waited. Just four weeks before it was due for renewal they sent me a mortgage renewal notice. They could have sent it to me two or three months before my mortgage came due, but they may prefer to leave consumers less time to shop around and more inclined to just renew.

Related CMHC could force banks to pay deductibles on mortgage insurance Thinking about a move-up buy? Forget it, new study says you can’t afford it ‘I felt really trapped’: Tiny houses big with U.S. consumers seeking economic freedom Here is where it gets interesting. “Please indicate which option you are accepting by signing your initials in the appropriate area indicated and return your signed agreement,” the letter stated.

I could just initial the 5-year fixed rate — for the princely rate of 4.79%.

Further on in the letter under a section called “Get the best rate,” it offered to extend to you our special interest rate hold guarantee provided if I signed by my renewal date. But all this says is that if the rate went down between now and about three weeks from now, I would get the lower rate.

This is a full 2% higher than what I am actually going to get somewhere else. If I had a $500,000 mortgage, this would cost me $47,600 more over 5 years by ‘just signing here’ vs. going to a mortgage broker three months in advance.

Just to be sure that I wasn’t missing something I called to make sure that I had the correct instructions and rate on my renewal. An interesting thing happened when I called. In about 30 seconds they said “I can actually get you a rate of 2.99% for 5 years.” I asked why my rate was 4.79%, and they said that this is the standard rate, but I can get this better special rate.

Doing the math, that phone call, using the same $500,000 example, would have saved me $42,800 over 5 years. That was a pretty valuable phone call.

I asked the kind sir on the phone how often people just sign the renewal form, and he said ‘quite a few.’

If a bank gets 5,000 people in the same $500,000 example to sign the renewal, that adds $42.8-million in profit to their bottom line each year.

Please do not automatically sign the friendly mortgage renewal form. At a minimum call to negotiate or call a mortgage broker to get the best deal for you. If you feel some sort of loyalty to your current mortgage provider, then be sure to see someone in person and ask for the very best rate that they give their very best customer. Your future net worth will be glad that you did.

Ted Rechtshaffen is president and wealth advisor at TriDelta Financial, a boutique wealth management firm focusing on investment counselling and estate planning. tedr@tridelta.ca