Many homeowners are unaware of the dangers posed by identity thieves when it comes to their real estate investment. Unfortunately, real estate title fraud is on the rise. According to the Canadian Association of Accredited Mortgage Professionals (CAAMP), real estate industry insiders now peg the average case of real estate fraud at $300,000. In comparison, the RCMP estimates the average credit card fraud case in Canada to be $1,200.
Help to protect yourself and your investment with these tips:
1. Check your credit reports (www.equifax.ca, www.transunion.ca), financial and bank statements regularly for inconsistencies, unknown charges and unauthorized credit inquiries.
2. Don't give out personal information in person, over the phone or on the Internet unless you know who you are dealing with, how it will be used and if it will be shared.
3. Protect your mail, be alert to billing cycles and when bills or mail haven't arrived.
4. Shred any documents or materials with personal or financial information prior to discarding them.
5. Seek advice from a real estate expert who is licensed in your area when shopping for a home.
6. Speak to a mortgage professional about how title insurance could help protect your investment.
Monday, September 26, 2011
Friday, September 23, 2011
Sizing up a home - How to look past the home staging
More and more home sellers are turning to home staging to put their property in its very best light. As a buyer, you need to look beyond the décor and any staging tricks such as trendy furniture and take an objective look at how the home will fit your needs.
Pay attention to the floor plan. This will get you thinking about how you and your family will use the space. Your home needs to fit how you live, both now and in the years to come. Don't forget to check for adequate closet space and storage areas.
Look for necessary renos or repairs. For major renovations, you may wish to include the cost in your overall home financing – ask your mortgage broker if this is the strategy for you.
Also, if the seller has completed renovations, make sure the workmanship and materials are good quality. A sub-standard reno won't last for the long term, which means costs for you down the road.
Assess the location carefully. The house may be perfect for you, but the neighbourhood also needs to be a good fit. Schools, restaurants, shopping, transit, and area "walkability" all are factors to consider.
Remember the home inspection. Especially for older properties, a home inspector will examine the main systems of the home, such as electrical, plumbing and heating, as well as the roof and foundation.
Pay attention to the floor plan. This will get you thinking about how you and your family will use the space. Your home needs to fit how you live, both now and in the years to come. Don't forget to check for adequate closet space and storage areas.
Look for necessary renos or repairs. For major renovations, you may wish to include the cost in your overall home financing – ask your mortgage broker if this is the strategy for you.
Also, if the seller has completed renovations, make sure the workmanship and materials are good quality. A sub-standard reno won't last for the long term, which means costs for you down the road.
Assess the location carefully. The house may be perfect for you, but the neighbourhood also needs to be a good fit. Schools, restaurants, shopping, transit, and area "walkability" all are factors to consider.
Remember the home inspection. Especially for older properties, a home inspector will examine the main systems of the home, such as electrical, plumbing and heating, as well as the roof and foundation.
Monday, September 19, 2011
Top tips for moving up
Move up buyers include many types of people: growing families needing more space, couples with grown children who want a smaller home closer to urban amenities, or multi-generational families living together who need a home with both space and privacy.
If you're thinking about whether the time is right for a change, moving up begins with a careful understanding of your needs and wants:
Get an accurate picture of your financial situation.
How much of a mortgage payment can you reasonably afford? Factor in other debts and expenses as well as long- and short-term savings goals like postsecondary education expenses for the kids and retirement for you.
Be realistic...
...about how much you can sell your home for and how much of the proceeds you'll have available for a down payment on your next home.
Know your financing options.
Many mortgages are portable between properties, and may have a "blend and extend" provision allowing you to keep a favourable rate. Also, getting pre-approved for a mortgage means you'll know how much house you can afford.
Be specific about your needs.
If you have two kids with another on the way, be on the lookout for houses with plenty of bedrooms and areas to entertain and raise growing children. Take play and study spaces into account.
Consider the neighbourhood.
If you have kids, check out the reputation of the schools that your children would be attending. And finally, factor in the neighbourhood's proximity to work, shopping, restaurants, and other important places you'll be frequenting.
If you're thinking about whether the time is right for a change, moving up begins with a careful understanding of your needs and wants:
Get an accurate picture of your financial situation.
How much of a mortgage payment can you reasonably afford? Factor in other debts and expenses as well as long- and short-term savings goals like postsecondary education expenses for the kids and retirement for you.
Be realistic...
...about how much you can sell your home for and how much of the proceeds you'll have available for a down payment on your next home.
Know your financing options.
Many mortgages are portable between properties, and may have a "blend and extend" provision allowing you to keep a favourable rate. Also, getting pre-approved for a mortgage means you'll know how much house you can afford.
Be specific about your needs.
If you have two kids with another on the way, be on the lookout for houses with plenty of bedrooms and areas to entertain and raise growing children. Take play and study spaces into account.
Consider the neighbourhood.
If you have kids, check out the reputation of the schools that your children would be attending. And finally, factor in the neighbourhood's proximity to work, shopping, restaurants, and other important places you'll be frequenting.
Thursday, September 1, 2011
Fall Financial Inventory
As our summer holidays wind down, the fall real estate and financial markets tend to go into higher gear. Autumn appears to be a season where we all start paying closer attention to our financial goals.
Real estate values in the GTA keep on rising… moderately, but rising nonetheless despite recent economic woes in the U.S. and Europe. Our housing market has been sustained by recent lower unemployment, steady immigration, and mortgage rates that are expected to stay low for the foreseeable future. Remember that even if rates begin to gradually rise next year, they are still considered low… ask your parents! It appears that a combination of all these factors has created a more "balanced" market where supply and demand seems to be more in sync.
Recently, the bond market had generated some "crazy" low five-year fixed rates, as low as 3.25%, which is an all-time historic low. Yet this does not mean we should all stampede to go with a fixed term. Variable mortgage rates are not based on the bond market, but are based on what the Bank of Canada (BOC) feels should be done to keep the economy in balance. The BOC meets eight times a year to address inflation, productivity, and the general health of the economy. In a normal market they usually adjust the Prime rate (which variable mortgages are based on) a couple times a year to either stimulate, or cool off the economy. I think we can all agree that there's no hot economy in sight that needs to be cooled down, and Canadian economic growth is moderate, therefore interest rate reductions are not required. Expect this overnight rate to be flat for a few years to come making a variable mortgage a very attractive choice.
Despite the interest rate, variable mortgages tend to be safer than fixed mortgages because you can change to another mortgage term for free anytime. Conversely, fixed rates lock you down with huge discharge penalties to get out of them early. You likely know someone right now who is upset about the discharge penalty on their fixed mortgage. You also know someone who is absolutely thrilled that they stuck with a variable mortgage and did not waver even though at times interest rates were rising… am I right, or am I right?
The information age has made variable mortgages even more popular than ever. Now anyone can browse online to quickly determine which mortgage may best suit them, where in the past we oddly enough only relied on our Banker's advice… how much sense does that make? The internet has made us all more financially literate, which may not be the best thing for a mortgagee (the lender). I believe where our parents' generation was coached to take a basic five-year fixed mortgage, our children's generation will instinctively choose variable mortgages.
Now that so many borrowers are opting for five-year variable mortgages, the mortgagees (lenders) needed to change their pricing and tactics. To be profitable, all mortgagees have cut back on the discounts they were giving on variable mortgages. Prime less .9% no longer makes financial sense for them, where prime less .5% makes them the profit they need to keep shareholders happy. Generally speaking, mortgagees tend to promote a closed fixed term, which is more profitable for them. A fixed mortgage may be good for you and a variable mortgage may be good for you, but don't let someone else make that decision for you. Do your research and understand where your money is going and why? Having the lowest interest rate does not translate into paying less interest. Usually there's more savings in the mortgage terms, privileges and strategy. A mortgage savvy "independent" Certified Financial Planner could make a significant difference in operating your finances at maximum efficiency. If you don't watch out for your money who will? Leaving that to your Banker is like leaving the monkeys to watch over your bananas.
Real estate values in the GTA keep on rising… moderately, but rising nonetheless despite recent economic woes in the U.S. and Europe. Our housing market has been sustained by recent lower unemployment, steady immigration, and mortgage rates that are expected to stay low for the foreseeable future. Remember that even if rates begin to gradually rise next year, they are still considered low… ask your parents! It appears that a combination of all these factors has created a more "balanced" market where supply and demand seems to be more in sync.
Recently, the bond market had generated some "crazy" low five-year fixed rates, as low as 3.25%, which is an all-time historic low. Yet this does not mean we should all stampede to go with a fixed term. Variable mortgage rates are not based on the bond market, but are based on what the Bank of Canada (BOC) feels should be done to keep the economy in balance. The BOC meets eight times a year to address inflation, productivity, and the general health of the economy. In a normal market they usually adjust the Prime rate (which variable mortgages are based on) a couple times a year to either stimulate, or cool off the economy. I think we can all agree that there's no hot economy in sight that needs to be cooled down, and Canadian economic growth is moderate, therefore interest rate reductions are not required. Expect this overnight rate to be flat for a few years to come making a variable mortgage a very attractive choice.
Despite the interest rate, variable mortgages tend to be safer than fixed mortgages because you can change to another mortgage term for free anytime. Conversely, fixed rates lock you down with huge discharge penalties to get out of them early. You likely know someone right now who is upset about the discharge penalty on their fixed mortgage. You also know someone who is absolutely thrilled that they stuck with a variable mortgage and did not waver even though at times interest rates were rising… am I right, or am I right?
The information age has made variable mortgages even more popular than ever. Now anyone can browse online to quickly determine which mortgage may best suit them, where in the past we oddly enough only relied on our Banker's advice… how much sense does that make? The internet has made us all more financially literate, which may not be the best thing for a mortgagee (the lender). I believe where our parents' generation was coached to take a basic five-year fixed mortgage, our children's generation will instinctively choose variable mortgages.
Now that so many borrowers are opting for five-year variable mortgages, the mortgagees (lenders) needed to change their pricing and tactics. To be profitable, all mortgagees have cut back on the discounts they were giving on variable mortgages. Prime less .9% no longer makes financial sense for them, where prime less .5% makes them the profit they need to keep shareholders happy. Generally speaking, mortgagees tend to promote a closed fixed term, which is more profitable for them. A fixed mortgage may be good for you and a variable mortgage may be good for you, but don't let someone else make that decision for you. Do your research and understand where your money is going and why? Having the lowest interest rate does not translate into paying less interest. Usually there's more savings in the mortgage terms, privileges and strategy. A mortgage savvy "independent" Certified Financial Planner could make a significant difference in operating your finances at maximum efficiency. If you don't watch out for your money who will? Leaving that to your Banker is like leaving the monkeys to watch over your bananas.
Finance Home Upgrades with a Purchase Plus Improvements Mortgage
If you intend to buy a home that needs some immediate upgrades, a "purchase plus improvements" mortgage may be right for you. This type of mortgage covers the purchase price of the home, plus any renovations that would increase the value of the property, such as finishing a basement or redoing the kitchen. For current homeowners, a "refinance with improvements" option may be available.
Let us guide you through the process:
Step 1: Mortgage pre-approval
Arranging a pre-approved mortgage not only protects you if interest rates increase, it also gives you a clear price range for your new home.
Step 2: Obtain cost estimates for upgrades
Once you have found a home, you need to get written quotes from licensed contractors on the renovations you plan. These quotes will be used as the estimate for renovation funds that will be forwarded to you after the projects are completed.
Step 3: Mortgage application
When you are applying for the mortgage, your lender will add the estimated costs of the renovation into the lending agreement. For example, with a 5% down payment, your mortgage broker would apply to a lender for 95% of the "as improved" market value, which will be higher than the actual purchase price.
Step 4: Finalize purchase
Your Realtor and mortgage broker will walk you through this part of the process. The funds for renovations will be sent to your lawyer "in trust" when the mortgage closes.
Step 5: Complete upgrades
The lender will "hold¬ back" funds for the renovations until the work has been completed and inspected, at which time the contractor can be paid.
Thursday, August 4, 2011
Pay down mortgage vs. RRSP - which should come first?
If you have received a salary increase, should you use your extra cash flow to pay down your mortgage faster or to contribute to your RRSP?
It depends on whether your RRSP growth rate can exceed your mortgage interest rate.
You can use an online calculator to project and compare the size of your RRSP at a particular future end date, such as age 65, under two competing scenarios. Suppose, for example, that you are age 40 with a mortgage of $200,000 and a five per cent interest rate. In both scenarios, keep the total amount of your mortgage payments plus RRSP contributions constant at $2,116 per month. That's how much is required to completely pay off your mortgage in 10 years.
In the first scenario, you quickly pay down debt. Make your $2,116 monthly mortgage payments over 10 years and no RRSP contributions. Then, once you're debt-free at 50, you would start depositing the same $2,116 amount to your RRSP monthly for the 15 years to 65.
In the second scenario, you favour RRSP contributions. You'd make only the $1,163 payments required to pay off your mortgage over 25 years. At the same time, you deposit the $953 (the difference between $2,116 and $1,163) monthly to your RRSP over the whole 25-year time frame.
Under both scenarios, you can accumulate an RRSP worth over $500,000 by 65. But the second scenario, with the early start to the RRSP, can give you a significantly larger RRSP at 65 provided that your RRSP growth rate beats your mortgage interest rate.
In the first scenario, you need discipline to make large, voluntary contributions to your RRSP after your mortgage is paid off at 50. Resist the temptation to trade up to a fancier home requiring you to make new mortgage payments.
How do today's mortgage interest rates compare to the average RRSP growth rates?
Mortgage rates are currently around five per cent - or lower for short terms. Mortgage rates could conceivably remain this low for a couple of decades mainly because of the huge age wave of 10 million baby boomers retiring.
When you combine a growing supply of cash to lend with declining demand by borrowers, it is reasonable to expect that interest rates could stay low for several decades.
The question is: Can your RRSP growth rate beat a five-per-cent mortgage rate? If the RRSP growth rate you expect exceeds the mortgage interest rate, you would have more incentive to begin RRSP contributions before paying off your mortgage.
A risk-averse investor probably has an RRSP growth rate below five per cent. Of course, an RRSP investor can beat five per cent by hiring the best investment managers and doing no market timing.
However, generally, unless your RRSP returns exceed the interest rate on your mortgage, it is prudent to pay down your mortgage first. Paying down debt is a risk-free investment.
Terry McBride is a member of Advocis (The Financial Advisors Association of Canada). This article provides general information and should not be considered personal investment or tax planning advice.
© Copyright (c) The Vancouver Sun
It depends on whether your RRSP growth rate can exceed your mortgage interest rate.
You can use an online calculator to project and compare the size of your RRSP at a particular future end date, such as age 65, under two competing scenarios. Suppose, for example, that you are age 40 with a mortgage of $200,000 and a five per cent interest rate. In both scenarios, keep the total amount of your mortgage payments plus RRSP contributions constant at $2,116 per month. That's how much is required to completely pay off your mortgage in 10 years.
In the first scenario, you quickly pay down debt. Make your $2,116 monthly mortgage payments over 10 years and no RRSP contributions. Then, once you're debt-free at 50, you would start depositing the same $2,116 amount to your RRSP monthly for the 15 years to 65.
In the second scenario, you favour RRSP contributions. You'd make only the $1,163 payments required to pay off your mortgage over 25 years. At the same time, you deposit the $953 (the difference between $2,116 and $1,163) monthly to your RRSP over the whole 25-year time frame.
Under both scenarios, you can accumulate an RRSP worth over $500,000 by 65. But the second scenario, with the early start to the RRSP, can give you a significantly larger RRSP at 65 provided that your RRSP growth rate beats your mortgage interest rate.
In the first scenario, you need discipline to make large, voluntary contributions to your RRSP after your mortgage is paid off at 50. Resist the temptation to trade up to a fancier home requiring you to make new mortgage payments.
How do today's mortgage interest rates compare to the average RRSP growth rates?
Mortgage rates are currently around five per cent - or lower for short terms. Mortgage rates could conceivably remain this low for a couple of decades mainly because of the huge age wave of 10 million baby boomers retiring.
When you combine a growing supply of cash to lend with declining demand by borrowers, it is reasonable to expect that interest rates could stay low for several decades.
The question is: Can your RRSP growth rate beat a five-per-cent mortgage rate? If the RRSP growth rate you expect exceeds the mortgage interest rate, you would have more incentive to begin RRSP contributions before paying off your mortgage.
A risk-averse investor probably has an RRSP growth rate below five per cent. Of course, an RRSP investor can beat five per cent by hiring the best investment managers and doing no market timing.
However, generally, unless your RRSP returns exceed the interest rate on your mortgage, it is prudent to pay down your mortgage first. Paying down debt is a risk-free investment.
Terry McBride is a member of Advocis (The Financial Advisors Association of Canada). This article provides general information and should not be considered personal investment or tax planning advice.
© Copyright (c) The Vancouver Sun
Thursday, July 14, 2011
Average House Prices a Misleading Gauge of the Health of the Canadian Real Estate Market: CIBC
Detailed analysis shows a highly segmented market that will see prices drop over time, but preconditions for a market crash don't exist
TORONTO, July 7, 2011 /CNW/ - The Canadian housing market is becoming highly segmented and multi-dimensional which is making traditional measures, like average prices, increasingly irrelevant in gauging the health and state of the sector, finds a new report from CIBC World Markets Inc.
"Glancing at popular metrics such as the price-to-income ratio or the price-to-rent ratio, it is tempting to conclude that the housing market is already in clear bubble territory and a huge crash is inevitable," writes Benjamin Tal, Deputy Chief Economist at CIBC, in his latest Consumer Watch Canada report.
"Tempting, but probably wrong. When it comes to the Canadian real estate market at this stage of the cycle, any statement based on average numbers can be hugely misleading. The truth is buried in the details—and there the picture is still not pretty, but much less alarming."
He notes that while the average house price in Canada rose 8.6 per cent on a year-over-year basis in May, that number slows to 5.6 per cent if you take Vancouver out of the picture. Remove Vancouver and Toronto and the average price increase drops to 3.7 per cent.
By digging into the details on the high profile Vancouver market he found that the gap between average and median prices is reaching an all-time high. While the average house price climbed 25.7 per cent on a year-over-year basis to more than $800,000 in May, he found that by removing properties that sold for more than a $1 million there was a much more moderate price appreciation in the market. It also reduced the average sale price by $220,000 to just over $590,000.
"What makes Vancouver abnormal is the high end of its property market," says Mr. Tal. "And in this context many, including Bank of Canada Governor Mark Carney, point the finger at foreign—mainly Asian wealth—as the main driver here."
Data on the extent of the role that Asian investors have played in Vancouver housing prices is quite limited. Mr. Tal's analysis of data obtained from Landcor Data Corporation suggests that only 10 per cent of the nearly 4,500 transactions involving foreign money over the past five years were above the $1 million mark, with an average purchasing price of just under $600,000.
According to the information provided by Landcor, foreign money accounted for only 2.6 per cent of all sales during the same period. However, Mr. Tal believes that could be a serious underestimate, as it is based on where property tax assessments are mailed, and would exclude offshore buying on behalf of children or other local proxies. "There are many reasons to believe that a significant portion of what is perceived to be buying by offshore investors is, in fact, driven by Chinese immigrants that are integrated into the community but still maintain strong links to mainland China, with many residing and working in China while their family establishes roots in B.C."
"Looking beyond the average price numbers reveals a highly segmented and multi-dimensional market that is probably influenced by different forces," says Mr. Tal. "But even a multi-dimensional market can overshoot—and the likelihood is that prices in the Canadian market and its sub-segments are higher than what can be explained by factors such as income growth, rent and household formation. Given that, the housing market will eventually correct. The only question is what will be the mechanism of that correction."
Mr. Tal feels the price correction in Canada will be gradual as the two key triggers for a price crash - a significant and quick increase in interest rates and/or a high-risk mortgage market that is very sensitive to changes in economic factors - are not at play in Canada.
"In Canada, a sharp and brisk tightening cycle is unlikely. The market expects a gradual increase in short-term rates in the coming years. The rising number of mortgage holders that carry a variable rate mortgage will be the first to feel the pain. But if history is any guide, they will return quickly to the comfort of a five-year fixed rate the minute the Bank of Canada starts hiking."
He also believes that the country is in relatively good shape when assessing the two sub-segments of the mortgage market that traditionally account for most defaults: mortgage holders that carry a debt-service ratio of more than 40 per cent and those with less than 20 per cent equity in their house.
Just over six per cent of households have a debt service ratio of more than 40 per cent—a number that has risen by a full percentage point since 2008. "However, this ratio is still well below the ratio seen in 2003, when the effective interest rate on debt was more than a full percentage point higher, and no correction in house prices ensued," adds Mr. Tal.
"All other things being equal, even a 300-basis-points rate hike by the Bank of Canada would take this ratio to only just over eight per cent. Not surprisingly, Vancouver has the highest ratio of households with high debt-service ratio, followed by Toronto."
A little more than 17 per cent of the Canadian residential real estate pool is in properties with less than a 20 per cent equity position, a number that has been rising over the past few years. More than 80 per cent of households with less than a 20 per cent equity position are first time buyers.
"Digging deeper and looking at the households with both low equity positions and high debt-service ratios, we found that this fragile segment of the market accounts for only 4.6 per cent of total mortgages—a number that has been on an upward trend over the past few years," says Mr. Tal. "Shock the system with a 300-basis-points rate hike and that number would rise to a still-tempered 6.5 per cent. Historically, even in that group, the default rate has been well below one per cent. Thus, short of a huge macro shock, there does not appear to be the risk of large scale forced selling that would typically be the trigger for a precipitous plunge in the national average house price.
"As a result, while house prices are likely to adjust as interest rates eventually climb, the national pace of any correction is likely to be gradual. That could still entail a period in which housing under performs other assets as an investment class, until rising incomes and a tame price trajectory bring the market back to equilibrium."
TORONTO, July 7, 2011 /CNW/ - The Canadian housing market is becoming highly segmented and multi-dimensional which is making traditional measures, like average prices, increasingly irrelevant in gauging the health and state of the sector, finds a new report from CIBC World Markets Inc.
"Glancing at popular metrics such as the price-to-income ratio or the price-to-rent ratio, it is tempting to conclude that the housing market is already in clear bubble territory and a huge crash is inevitable," writes Benjamin Tal, Deputy Chief Economist at CIBC, in his latest Consumer Watch Canada report.
"Tempting, but probably wrong. When it comes to the Canadian real estate market at this stage of the cycle, any statement based on average numbers can be hugely misleading. The truth is buried in the details—and there the picture is still not pretty, but much less alarming."
He notes that while the average house price in Canada rose 8.6 per cent on a year-over-year basis in May, that number slows to 5.6 per cent if you take Vancouver out of the picture. Remove Vancouver and Toronto and the average price increase drops to 3.7 per cent.
By digging into the details on the high profile Vancouver market he found that the gap between average and median prices is reaching an all-time high. While the average house price climbed 25.7 per cent on a year-over-year basis to more than $800,000 in May, he found that by removing properties that sold for more than a $1 million there was a much more moderate price appreciation in the market. It also reduced the average sale price by $220,000 to just over $590,000.
"What makes Vancouver abnormal is the high end of its property market," says Mr. Tal. "And in this context many, including Bank of Canada Governor Mark Carney, point the finger at foreign—mainly Asian wealth—as the main driver here."
Data on the extent of the role that Asian investors have played in Vancouver housing prices is quite limited. Mr. Tal's analysis of data obtained from Landcor Data Corporation suggests that only 10 per cent of the nearly 4,500 transactions involving foreign money over the past five years were above the $1 million mark, with an average purchasing price of just under $600,000.
According to the information provided by Landcor, foreign money accounted for only 2.6 per cent of all sales during the same period. However, Mr. Tal believes that could be a serious underestimate, as it is based on where property tax assessments are mailed, and would exclude offshore buying on behalf of children or other local proxies. "There are many reasons to believe that a significant portion of what is perceived to be buying by offshore investors is, in fact, driven by Chinese immigrants that are integrated into the community but still maintain strong links to mainland China, with many residing and working in China while their family establishes roots in B.C."
"Looking beyond the average price numbers reveals a highly segmented and multi-dimensional market that is probably influenced by different forces," says Mr. Tal. "But even a multi-dimensional market can overshoot—and the likelihood is that prices in the Canadian market and its sub-segments are higher than what can be explained by factors such as income growth, rent and household formation. Given that, the housing market will eventually correct. The only question is what will be the mechanism of that correction."
Mr. Tal feels the price correction in Canada will be gradual as the two key triggers for a price crash - a significant and quick increase in interest rates and/or a high-risk mortgage market that is very sensitive to changes in economic factors - are not at play in Canada.
"In Canada, a sharp and brisk tightening cycle is unlikely. The market expects a gradual increase in short-term rates in the coming years. The rising number of mortgage holders that carry a variable rate mortgage will be the first to feel the pain. But if history is any guide, they will return quickly to the comfort of a five-year fixed rate the minute the Bank of Canada starts hiking."
He also believes that the country is in relatively good shape when assessing the two sub-segments of the mortgage market that traditionally account for most defaults: mortgage holders that carry a debt-service ratio of more than 40 per cent and those with less than 20 per cent equity in their house.
Just over six per cent of households have a debt service ratio of more than 40 per cent—a number that has risen by a full percentage point since 2008. "However, this ratio is still well below the ratio seen in 2003, when the effective interest rate on debt was more than a full percentage point higher, and no correction in house prices ensued," adds Mr. Tal.
"All other things being equal, even a 300-basis-points rate hike by the Bank of Canada would take this ratio to only just over eight per cent. Not surprisingly, Vancouver has the highest ratio of households with high debt-service ratio, followed by Toronto."
A little more than 17 per cent of the Canadian residential real estate pool is in properties with less than a 20 per cent equity position, a number that has been rising over the past few years. More than 80 per cent of households with less than a 20 per cent equity position are first time buyers.
"Digging deeper and looking at the households with both low equity positions and high debt-service ratios, we found that this fragile segment of the market accounts for only 4.6 per cent of total mortgages—a number that has been on an upward trend over the past few years," says Mr. Tal. "Shock the system with a 300-basis-points rate hike and that number would rise to a still-tempered 6.5 per cent. Historically, even in that group, the default rate has been well below one per cent. Thus, short of a huge macro shock, there does not appear to be the risk of large scale forced selling that would typically be the trigger for a precipitous plunge in the national average house price.
"As a result, while house prices are likely to adjust as interest rates eventually climb, the national pace of any correction is likely to be gradual. That could still entail a period in which housing under performs other assets as an investment class, until rising incomes and a tame price trajectory bring the market back to equilibrium."
Saturday, July 2, 2011
Are we headed for rapid rate rises?
Financial Post Staff OTTAWA — Consumer prices were up 3.7% in May from a year earlier, the biggest leap since March 2003, Statistics Canada said Wednesday.
Economists polled by Bloomberg expected 3.3% annual inflation in May.
Gasoline prices were cited for the main reason for such a high inflation rate last month.
The core inflation rate, which factors out volatile items such as energy and certain foods, was 1.8%. Economists anticipated 1.5%.
The Canadian dollar firmed to a session high of $1.0280 after the data was released.
Bloomberg News Central banks need to start raising interest rates to control inflation and may have to act faster than in the past, the Bank for International Settlements said.
“Tighter global monetary policy is needed in order to contain inflation pressures and ward off financial stability risks,” the BIS said in its annual report published Sunday in Basel, Switzerland. “Central banks may have to be prepared to raise policy rates at a faster pace than in previous tightening episodes.”
While policy makers in Asia and Latin America are already raising borrowing costs to damp price pressures, rates remain near record lows in the world’s largest developed economies. Central banks in the U.S., U.K. and Japan have signalled they intend to keep that stimulus in place for some time, with only the European Central Bank moving to gradually tighten credit as inflation risks increase.
“Global inflation pressures are rising rapidly as commodity prices soar and as the global recovery runs into capacity constraints,” said the BIS, which acts as a central bank for the world’s central banks. “These increased upside risks to inflation call for higher policy rates.”
With U.K. inflation running at 4.5%, more than double the Bank of England’s target, the BIS said “one wonders how long its current policy can be sustained.” The pound rose half a cent in early European trading to $1.5985 before retracing to $1.5931 at 9 a.m. in London.
Crude oil prices have gained 20% in the last 12 months, putting pressure on companies to increase wages and pass on higher costs to consumers.
“The price pressure is there,” said Carsten Brzeski, chief European economist at ING Group NV in Brussels. “One of the lessons of the financial crisis is that you shouldn’t leave rates too low for too long. Now is the time to remember that lesson.”
BIS General Manager Jaime Caruana said global headline inflation has risen a percentage point to 3.6% since April 2010. At the same time, short-term interest rates adjusted for inflation “have actually fallen in the past year, from minus 0.6% to minus 1.3% globally,” he said in a speech in Basel Sunday.
“The world economy is growing at a historically respectable rate of around 4%,” Caruana said. “The resurgence of demand has put concerns about deflation behind us. Accordingly, the need for continued extraordinary monetary accommodation has faded.”
The ECB in April raised its benchmark interest rate from a record low of 1% and has signalled another quarter-point step is likely in July.
By contrast, the Federal Reserve last week repeated a pledge to keep its policy rate close to zero for an “extended period,” while the Bank of Japan this month held its benchmark near zero and kept credit and asset-purchase programs in place.
Minutes of the Bank of England’s last policy meeting this month, at which the key rate was held at 0.5%, show some officials see the potential to extend bond purchases to boost a faltering recovery.
The BIS said that in “some advanced economies” policy tightening still needs to be balanced against the “vulnerabilities” associated with balance-sheet adjustment and financial sector fragility.
Still, “undue delay in the normalization of the monetary policy stance entails the risk of creating serious financial- market distortions,” it said. Furthermore, a “timely tightening” of policy in both emerging-market and advanced economies will be needed “to preserve a low-inflation environment globally and reinforce central banks’ inflation- fighting credibility.”
The BIS said central banks should reduce the size of their balance sheets, though it would be “dangerous” to cut them “too rapidly or too indiscriminately.”
In response to the financial crisis, the Fed and the Bank of England “sharply” increased their total assets from about 8% of gross domestic product to just below 20%, while the ECB expanded its assets from 13% of GDP to more than 20%, according to the BIS.
“Balance-sheet policies have supported the global economy through a very difficult crisis,” it said. “However, the balance sheets are now exposed to greater risks — namely interest-rate risk, exchange-rate risk and credit risk — that could lead to financial losses.”
The BIS also urged governments to pursue fiscal consolidation, saying the biggest risk is “doing too little too late rather than doing too much too soon.” In Europe, policy makers must fix the region’s debt crisis “once and for all,” it said.
“Nowhere is the link between fiscal sustainability and financial health more apparent than in parts of Europe today,” Caruana said. “There is no easy way out, no shortcut, no painless solution.”
The BIS warned that a failure of the U.S. to tackle its budget deficit could become a source of instability, with potentially “far-reaching ramifications for the global economy” should a rapid depreciation of the dollar result.
“The current ability of the United States to easily finance its deficit cannot be taken for granted,” the report said.
The BIS holds currency reserves on behalf of its members and provides policy makers with a forum for discussion. Attendees at the annual general meeting in Basel Sunday included ECB President Jean-Claude Trichet, Fed Chairman Ben S. Bernanke, Bank of Japan Governor Masaaki Shirakawa and Bundesbank President Jens Weidmann
Economists polled by Bloomberg expected 3.3% annual inflation in May.
Gasoline prices were cited for the main reason for such a high inflation rate last month.
The core inflation rate, which factors out volatile items such as energy and certain foods, was 1.8%. Economists anticipated 1.5%.
The Canadian dollar firmed to a session high of $1.0280 after the data was released.
Bloomberg News Central banks need to start raising interest rates to control inflation and may have to act faster than in the past, the Bank for International Settlements said.
“Tighter global monetary policy is needed in order to contain inflation pressures and ward off financial stability risks,” the BIS said in its annual report published Sunday in Basel, Switzerland. “Central banks may have to be prepared to raise policy rates at a faster pace than in previous tightening episodes.”
While policy makers in Asia and Latin America are already raising borrowing costs to damp price pressures, rates remain near record lows in the world’s largest developed economies. Central banks in the U.S., U.K. and Japan have signalled they intend to keep that stimulus in place for some time, with only the European Central Bank moving to gradually tighten credit as inflation risks increase.
“Global inflation pressures are rising rapidly as commodity prices soar and as the global recovery runs into capacity constraints,” said the BIS, which acts as a central bank for the world’s central banks. “These increased upside risks to inflation call for higher policy rates.”
With U.K. inflation running at 4.5%, more than double the Bank of England’s target, the BIS said “one wonders how long its current policy can be sustained.” The pound rose half a cent in early European trading to $1.5985 before retracing to $1.5931 at 9 a.m. in London.
Crude oil prices have gained 20% in the last 12 months, putting pressure on companies to increase wages and pass on higher costs to consumers.
“The price pressure is there,” said Carsten Brzeski, chief European economist at ING Group NV in Brussels. “One of the lessons of the financial crisis is that you shouldn’t leave rates too low for too long. Now is the time to remember that lesson.”
BIS General Manager Jaime Caruana said global headline inflation has risen a percentage point to 3.6% since April 2010. At the same time, short-term interest rates adjusted for inflation “have actually fallen in the past year, from minus 0.6% to minus 1.3% globally,” he said in a speech in Basel Sunday.
“The world economy is growing at a historically respectable rate of around 4%,” Caruana said. “The resurgence of demand has put concerns about deflation behind us. Accordingly, the need for continued extraordinary monetary accommodation has faded.”
The ECB in April raised its benchmark interest rate from a record low of 1% and has signalled another quarter-point step is likely in July.
By contrast, the Federal Reserve last week repeated a pledge to keep its policy rate close to zero for an “extended period,” while the Bank of Japan this month held its benchmark near zero and kept credit and asset-purchase programs in place.
Minutes of the Bank of England’s last policy meeting this month, at which the key rate was held at 0.5%, show some officials see the potential to extend bond purchases to boost a faltering recovery.
The BIS said that in “some advanced economies” policy tightening still needs to be balanced against the “vulnerabilities” associated with balance-sheet adjustment and financial sector fragility.
Still, “undue delay in the normalization of the monetary policy stance entails the risk of creating serious financial- market distortions,” it said. Furthermore, a “timely tightening” of policy in both emerging-market and advanced economies will be needed “to preserve a low-inflation environment globally and reinforce central banks’ inflation- fighting credibility.”
The BIS said central banks should reduce the size of their balance sheets, though it would be “dangerous” to cut them “too rapidly or too indiscriminately.”
In response to the financial crisis, the Fed and the Bank of England “sharply” increased their total assets from about 8% of gross domestic product to just below 20%, while the ECB expanded its assets from 13% of GDP to more than 20%, according to the BIS.
“Balance-sheet policies have supported the global economy through a very difficult crisis,” it said. “However, the balance sheets are now exposed to greater risks — namely interest-rate risk, exchange-rate risk and credit risk — that could lead to financial losses.”
The BIS also urged governments to pursue fiscal consolidation, saying the biggest risk is “doing too little too late rather than doing too much too soon.” In Europe, policy makers must fix the region’s debt crisis “once and for all,” it said.
“Nowhere is the link between fiscal sustainability and financial health more apparent than in parts of Europe today,” Caruana said. “There is no easy way out, no shortcut, no painless solution.”
The BIS warned that a failure of the U.S. to tackle its budget deficit could become a source of instability, with potentially “far-reaching ramifications for the global economy” should a rapid depreciation of the dollar result.
“The current ability of the United States to easily finance its deficit cannot be taken for granted,” the report said.
The BIS holds currency reserves on behalf of its members and provides policy makers with a forum for discussion. Attendees at the annual general meeting in Basel Sunday included ECB President Jean-Claude Trichet, Fed Chairman Ben S. Bernanke, Bank of Japan Governor Masaaki Shirakawa and Bundesbank President Jens Weidmann
Monday, June 20, 2011
Toronto condo sales set May record
The Greater Toronto Area condo market set a sales record for the second month in a row, with May sales up 37% compared to a year ago.
Realnet Canada Inc. said there were 4,289 new homes and condos sold in May in the Greater Toronto Area, with sales of low-rise housing up 25 per cent and high-rise condos up a “whopping” 50 per cent.
Sales this year are 12 per cent ahead of where they were last year.
BILD Toronto attributed the boost to “relative affordability (compared with low-rise here and high-rise globally), low interest rates and, to give the builders their due, some great building and suite designs in some great locations.”
The Toronto Real Estate Board recently released its market update for the first two weeks of June, and said the average resale price for a condo in the GTA was $326,750, up six per cent from a year ago. A detached home, meanwhile, sold for an average $599,208 up 11 per cent from a year ago.
How may I help you today? Direct line: 416-564-9937
Realnet Canada Inc. said there were 4,289 new homes and condos sold in May in the Greater Toronto Area, with sales of low-rise housing up 25 per cent and high-rise condos up a “whopping” 50 per cent.
Sales this year are 12 per cent ahead of where they were last year.
BILD Toronto attributed the boost to “relative affordability (compared with low-rise here and high-rise globally), low interest rates and, to give the builders their due, some great building and suite designs in some great locations.”
The Toronto Real Estate Board recently released its market update for the first two weeks of June, and said the average resale price for a condo in the GTA was $326,750, up six per cent from a year ago. A detached home, meanwhile, sold for an average $599,208 up 11 per cent from a year ago.
How may I help you today? Direct line: 416-564-9937
Monday, June 6, 2011
The Big Picture
Recently both the U.S. Federal Reserve (the Fed) and the Bank of Canada described the economic picture as “unusually uncertain.” And this was before the unrest in the Middle East and Africa and before the devastating development in Japan. Add to this scenario the recent downgrading of Spain and Portugal by Moody’s, and you have a world that is even more uncertain than “unusually uncertain.”
If the real measure of intelligence is what you do when you don’t know what to do, then the next few months will test the economic IQ of both the Fed and the Bank of Canada. Given the increased uncertainty, it is reasonable to assume that both banks will be extremely conservative when it comes to monetary policy.
While short-term volatility will continue to influence markets in the near term, the focus should be on the big picture, which is much more predictable. And this big picture is changing. The great recession gave birth to a dramatic shift in the engines of economic growth in North America, and any successful investment strategy must incorporate this information.
The near 3% growth rate projected for gross domestic product (GDP) in 2011 masks the dynamics of powerful economic forces pulling in different directions. A vibrant business sector will gradually take over an exhausted consumer and restrained government.
Government spending was a buffer for economic activity during the downturn, but with ongoing gains in business activity, the coming years should see the government hand the reins of growth back to the private sector. Significant reductions in spending will come by late 2011, when infrastructure stimulus projects wrap up. Additional cuts to program spending should see compensation expenses drop on wage restraint, employment attrition and select job cuts.
On the other side of the scale, corporate Canada is doing much better. By any measure, the current recovery in capital spending is impressive. The rate of return on capital employed is back to its mid-2008 level, and despite the surge in investment, corporate Canada’s cash position is at a record high (in relation to both equity and sales). Large corporations can still raise funds relatively cheaply, and cash-starved small- and mid-sized firms can now borrow more easily, with overall credit outstanding to this sector starting to show signs of life after being in negative territory for the past two years.
In fact, the manufacturing sector is already positioned to start expanding — with its current capacity utilization reading of 81%, it stands above its long-term average and a record six points above that of the rest of the economy. The last time the utilization gap approached this level was in 1995, and manufacturing investment advanced by an average annual rate of more than 10% for the following three years. With relatively elevated capacity use and rates of return on capital employed in the manufacturing sector approaching a 10-year high, look for business investment in manufacturing to rise strongly in 2011, joining the upswing in western oil sands projects.
While current economic uncertainty will continue to influence markets and lead to sharp swings in commodity prices and related equities, the new mix clearly suggests that investors should focus on the improving the conditions of corporate Canada, in general, and the manufacturing sector, in particular. With supply-chain opportunities arising south of the border as a result of the U.S. manufacturing sector’s increased exposure to emerging markets, look for growing opportunities for high-end Canadian exporters in the coming years with positive implications for their valuations.
Another opportunity in this environment is the dividend-paying segment of the market. The recent increase in risk aversion will benefit this sector directly, as it tends to attract conservative money, and indirectly as increased uncertainty will limit any potential upward pressure on interest rates
If the real measure of intelligence is what you do when you don’t know what to do, then the next few months will test the economic IQ of both the Fed and the Bank of Canada. Given the increased uncertainty, it is reasonable to assume that both banks will be extremely conservative when it comes to monetary policy.
While short-term volatility will continue to influence markets in the near term, the focus should be on the big picture, which is much more predictable. And this big picture is changing. The great recession gave birth to a dramatic shift in the engines of economic growth in North America, and any successful investment strategy must incorporate this information.
The near 3% growth rate projected for gross domestic product (GDP) in 2011 masks the dynamics of powerful economic forces pulling in different directions. A vibrant business sector will gradually take over an exhausted consumer and restrained government.
Government spending was a buffer for economic activity during the downturn, but with ongoing gains in business activity, the coming years should see the government hand the reins of growth back to the private sector. Significant reductions in spending will come by late 2011, when infrastructure stimulus projects wrap up. Additional cuts to program spending should see compensation expenses drop on wage restraint, employment attrition and select job cuts.
On the other side of the scale, corporate Canada is doing much better. By any measure, the current recovery in capital spending is impressive. The rate of return on capital employed is back to its mid-2008 level, and despite the surge in investment, corporate Canada’s cash position is at a record high (in relation to both equity and sales). Large corporations can still raise funds relatively cheaply, and cash-starved small- and mid-sized firms can now borrow more easily, with overall credit outstanding to this sector starting to show signs of life after being in negative territory for the past two years.
In fact, the manufacturing sector is already positioned to start expanding — with its current capacity utilization reading of 81%, it stands above its long-term average and a record six points above that of the rest of the economy. The last time the utilization gap approached this level was in 1995, and manufacturing investment advanced by an average annual rate of more than 10% for the following three years. With relatively elevated capacity use and rates of return on capital employed in the manufacturing sector approaching a 10-year high, look for business investment in manufacturing to rise strongly in 2011, joining the upswing in western oil sands projects.
While current economic uncertainty will continue to influence markets and lead to sharp swings in commodity prices and related equities, the new mix clearly suggests that investors should focus on the improving the conditions of corporate Canada, in general, and the manufacturing sector, in particular. With supply-chain opportunities arising south of the border as a result of the U.S. manufacturing sector’s increased exposure to emerging markets, look for growing opportunities for high-end Canadian exporters in the coming years with positive implications for their valuations.
Another opportunity in this environment is the dividend-paying segment of the market. The recent increase in risk aversion will benefit this sector directly, as it tends to attract conservative money, and indirectly as increased uncertainty will limit any potential upward pressure on interest rates
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