Wednesday, February 2, 2011

Flaherty tables new rules to curb household debt

OTTAWA – The federal government Monday tabled a series of new rules aimed to curbing what it sees as the growing problem of household debt.
Finance Minister Jim Flaherty is changing the maximum length of most mortgages to 30 years from 35 years; cutting the maximum that can be borrowed against a person’s home and eliminating government-backed default insurance of home equity lines of credit. Prime Minister Stephen Harper said Friday his government was “concerned about growth in the level of household debt."

Bank of Canada Governor Mark Carney has also been warning of the dangers of rising debt levels.
The key tool the federal government uses to control the mortgage market is the Canada Mortgage and Housing Corp. (CMHC). Banks typically will not provide a mortgage to anyone with a down payment of less than 20% of the purchase price unless the CMHC is willing to backstop the loan.

The CMHC will now no longer insure any mortgage with a term longer than 30 years. Until the change, it was insuring 35-year mortgages. Flaherty also instructed the CMHC it can no longer insure home equity lines of credits (HELOCs). That means individual banks will be on the hook for any HELOC defaults.

Because banks will assume all of the risks of default, banks are expected to tighten up eligibility requirements for HELOCs. Finally, a person who wants to take out a loan against their home will be able to borrow a maximum of 85% of the value of their home, down from 90%.

Bank of Canada Announcement - Rates Remain Unchanged

Slow and steady wins the race was the message today from the Bank of Canada. As expected- stability was the order of the day in Tuesday’s interest rate announcement.  Rates will remain unchanged- which will keep the status quo in terms of monetary stimulus.
The overnight rate will maintain its’ position at 1%. The Bank Rate is correspondingly 1 1/4 % and the deposit rate is 3/4%.

This maintenance plan is attributed to global economic recovery carrying ahead at a healthier pace than had previously been forecast. In the U.S., domestic demand has increased- and it expected to increase more with new stimulus to be offered soon. In Europe, growth has outpaced forecasts as well- although the region is the source of uncertainty- from a global perspective. These markets have begun to introduce measures to rectify this, so there is hope for stability.

On the domestic front, the Canadian economic recovery is continuing on much as had been expected. There are concerns, that have been voiced recently by various government agencies, about the overextension of household consumer debt, but the thinking is that the combination of low interest rates coupled with newly introduced lending restrictions will create a favourable environment for continued modest growth.
The Bank of Canada predicts for 2011 growth at a rate of 2.4% and 2.8% in 2012- with an expectation to return to full economic capacity by the end of 2012.

Inflation has not been a major factor as of yet, with prices remaining subdued, likely because of “considerable slack in the Canadian Economy.” Inflation is forecasted to reach a manageable 2% by 2012.

TREB Releases GTA Resale Housing Figures

2011 is starting off just under the shadow of 2010, at least in terms of resale housing figures according to the REALTORS of the GTA. For the first two weeks of January 2011, there were a reported 1,563 sales – which marks an 11 % decrease compared to the first two weeks of January 2010.

“While off the record pace experienced last January, sales remain high from a historic perspective and market conditions remain tight enough to support a sustainable rate of price growth," said Toronto Real Estate Board (TREB) President Bill Johnston.
In looking at the average transactional price, there was an increase however. The average price for transactions in the first 14 days of January was $413,565- up 5% from this time in 2010.
"Average price growth continues to be supported by a positive affordability picture. A household earning the average income can afford mortgage payments associated with the purchase of an average priced home," said Jason Mercer, TREB's Senior Manager of Market Analysis.
In looking at  sales numbers for housing type, compared to the same period in 2010, sales for detached houses and semi detached were both  down by 10%; townhouses fell by 20%, and condominiums registered in a 9% lower.
In terms of prices for the same period, for detached homes, there was an increase of 4%; semi detached also went up by 4%; townhouse prices only went up 1%, while condo prices saw an increase of 8%.

Affordability A Big Issue In The Canadian Property Market, According To New Study

Home ownership continues to be just out of reach for many Canadians, as home prices in some centres have grown exponentially, far outpacing income growth.
A new study released by the Frontier Centre for Public Policy that covers 325 markets, incuding Canada, Australia, Hong Kong, Ireland, New Zealand, the United Kingdom and the United States, indicates that affordability has become an issue, in particular in Canada.

In order to fall under the “affordable” category, the ratio of price to income cannot be more than three to one; tellingly, only half of all the 35 Canadian markets surveyed fell within those guidelines. They call this calculation the “Median Multiple.” 
In general terms, across the country, Canadian home prices were at 4.6 times the average annual salary of just less than $43,000. And when you do the math- that is just plain out of reach for many.
According to the survey, historically, median multiples have been similar in markets in Canada, Ireland, New Zealand, the United Kingdom and the United States, with “median house prices having generally been 3.0 or less times median household incomes in the principal affordability indexes.”
However, there have been deviations from this trend over the last decade- with home prices rising swiftly in Australia, Ireland, New Zealand, and the United Kingdom and in some markets of Canada and the United States.
Contuining on that trend, the most unaffordable markets were found in the United States and Canada. The United Kingdom, Australia and New Zealand.
According to the survey, for all markets, “Among all 325 markets surveyed, there were 115 affordable markets, 106 in the United States and 9 in Canada. There were 94 moderately unaffordable markets, 74 in the United States, 17 in Canada and 3 in Ireland.
There were 42 seriously unaffordable markets and 74 severely unaffordable markets. Australia had 27 severely unaffordable markets, followed by the United Kingdom with 21 and the United States with 15. Canada had 6 severely unaffordable markets, while
New Zealand had 4. China's one included market, Hong Kong, was also severely unaffordable.”
Breaking it down for Canadian cities, there was great variance from region to region.  Affordable cities include Windsor, where average home prices were $145,000, which is only 2.1 times the average median income of $68,900.
On the other end of the spectrum, is Vancouver, where the average home costs $602,000- which works out to 9.5 times the $63,100 median income.