The Affordability of Canadian Housing

Once again we have mixed messages in the media about the affordability of Canadian housing.  In March of this year, the Globe and Mail reported that housing affordability is improving in Canada due to house prices softening and low interest rates.

The Royal Bank of Canada’s (RBC) quarterly release found all housing categories became more affordable. This came at a time when there was considerable debate over whether some Canadians are overextending themselves by taking out mortgages they can’t afford – particularly in hot markets like Toronto and Vancouver.

At this point, housing in Canada was as affordable as it was a year prior. Then just last month RBC released its housing trend report and determined that increases in housing prices and mortgage rates have slightly eroded housing affordability in the second quarter of 2012. The report was released in the same week the Canadian Real Estate Association (CREA) predicted average home prices will fall 1.1 per cent this year, to an average of $359,100, before rebounding 0.9 per cent in 2013.

So what happened? Did prices go up or did they fall?

The RBC report found that affordability deteriorated in two of three housing categories – detached bungalows and two-storey homes – while condominiums were flat. The erosion of affordability levels in the first quarter of this year stemmed mostly from dramatic increases in a single market – Vancouver.
The Toronto-area market also deteriorated. Strong activity worsened affordability in Saskatchewan and Manitoba, and Atlantic Canada suffered a modest deterioration. Montreal and Alberta bucked the national trend by showing some improvements in affordability.

When we take a look at the resale market versus new home sales and especially the condo market, we get a much clearer picture of what’s been going on.  At the national level, the resale housing market, on the whole, appears balanced. The ratio of listings to sales stood at 6.1 months this past July and has shown little variation in almost two years. This stability, however, is hiding the recent softening in the Toronto and Montreal condo market and the entire resale market in Vancouver.

The softening in these three major metropolitan areas is also coinciding with a high number of homes under construction. In Toronto, for example, the number of condos unsold, which includes those that are pending construction, has surpassed the previous peak reached at the end of 2008. Clearly developers would like to see some of the supply sold before launching new projects. It’s the reluctance of these developers to move forward that will contribute to a decline in the overall construction of new dwellings across the country.

The unfortunate part is that these reports look at what has already happened, rather than at what is happening right now.  Mortgage brokers and Realtors across the country are reporting different levels of activity in different areas of the country following the overall pattern of activity already described. For example Atlantic Canada has slowed somewhat, yet centres like Halifax have increased activity. Part of Ontario has slowed but other areas have seen increases in sales activity. The one thing that has not happened is the market has not stopped.

We have not yet heard of massive foreclosures, which mean that households continue to pay their mortgages and their debts. House prices are coming down, interest rates are still relatively low and while it’s true that recent changes to the length of amortizations and the amount of equity a homeowner can take out of his or her home has had somewhat of an impact, as long as the economy keeps moving forward, it’s just a matter of playing the waiting game.   It’s not the worst of times.

Brokers can manage mortgage changes

By Mark Kerzner, President, TMG The Mortgage Group Canada Inc.

What a summer it has been so far for the mortgage industry and quite a year overall for both homeowners and those of us who work in it.

Here is a quick recap:

January – BMO’s 5 -year fixed rate dropped to 2.99% and started a mini-rate war.

February - FirstLine Mortgages – a leader in non-bank mortgage -- lending went up for sale.

March – Canada Mortgage and Housing Corporation (CMHC), the country’s leading mortgage default insurer,  starts to approach its $600B debt ceiling and BMO reintroduces 2.99%.

April – Minister of Finance Jim Flaherty says he will not be making additional mortgage changes.

May – The Office of the Superintendent of Financial Institutions (OSFI) now overseas CMHC and recommends credit guideline change.

June - The Minister of Finance surprises us with his announcement of the fourth round of mortgage guideline changes in the last three years.

July - FirstLine Mortgages shuts its doors.

August - It's reported that the Canadian arm of ING is up for sale.

Also in that time the following lender changes have occurred:

•  TD  exits the sub-prime market
•  Laurentien changes to B2B Bank and later it purchases AGF
• Resmor is sold to MCAP, closes and relaunches as RMG Mortgages
•  Lenders quickly change their lending guidelines on self-employed programs, on equity take-outs and New to Canada programs.

Those of us in the industry may feel under fire from lenders and Government, and for good reason. Over the years, the broker rate advantage has slowly eroded as banks start to advertise their own discounted rates. Mortgage brokers no longer have a monopoly on the lowest rates so we differentiate ourselves by offering better service, choice and knowledge. This actually transferred some power from lenders to brokers as lender sales channels and branches only offer single product lines.

When there is less choice and more restrictions, it’s sure to have an impact on the market and the business of mortgages. Perhaps I am naïve but I feel that some bank lenders still don’t understand the broker channel and what we offer. Possibly they feel threatened or maybe they want to support their own proprietary channels first.

Banks have been under intense scrutiny from OSFI and the Minister of Finance over the last few years and costs of capital have increased. With limited amounts of capital, lenders look to put it towards the best risk-weighted returns.

So what does this all mean? It means that lenders are both being selective and increasingly sensitive to their costs. It also means that mortgage brokers must continue to demonstrate the immense value we have among mortgage consumers. There are still approximately $1.2 trillion worth of mortgages outstanding and hundreds of thousands of housing starts and resales each year. Even in the wake of increased guidelines and fewer lenders to choose from, our role as a client's advocate is NOT going away and Canadians still need mortgages.

We are incredible partners for lenders.  We represent distribution as well as quality control.  We must continue to offer feedback on clients’ wants and needs so customers are well-served, which is a positive reflection on mortgage brokers as a whole. We MUST support those who support us.
So what can we do? We can be proud of the work we do with our customers. We can be proud of our profession. We can be willing to work a little harder and a little smarter and continue to offer real value to our customers and to our lenders.

Can Canada have it all?

Bank of Canada (BOC) Governor Mark Carney made a bold statement in an interview with the British Broadcasting Corp. (BBC) recently. He said that he has done all he can to boost Canada’s economy and it is now up to business and politicians to increase economic growth. And who could blame him? It was his monetary policy that has kept Canada from succumbing to the financial woes experienced in other countries. The record-low prime rate has helped boost the domestic economy and has kept us chugging along while we wait for global economies to catch up. But we are nearing the end of what the BOC can do. It is, indeed, up to us.

The BOC can lower interest rates to spur more spending, mortgage lenders can lower fixed rates and discount variable rates (spreads permitting), but it may not be the prudent thing to do anymore because the economy needs reviving in other areas– namely infrastructure, small business investment and tackling the trade deficit.

Let’s take a look at infrastructure. Imagine yourself as the CEO of your country. Your bridges are starting to crumble. Your air-traffic control system doesn’t use GPS. Your advisers estimate that you will need to make more than $2 billion in repairs and upgrades.  But there’s good news, too. Because of the global slow-down, construction materials are cheap. So is labour. And your borrowing costs have never been lower. That means a dollar of investment today will go much further than it would have five years ago -- or than it’s likely to go five years from now. So what do you do? If you’re thinking like a CEO, the answer is easy: you invest. It’s a fast way to create jobs, keep the manufacturing industry happy and “stimulate” the economy.

In an interview with CTV, Carney said Canadians should quit worrying about the European debt crisis because it’s out of their control. “Canada has relatively little exposure to Europe, and the country’s banks are solid enough to withstand a worst-case scenario.” He went on to say that Canadians need to focus on growing the economy themselves and business, especially, needs to look at the long-term by developing economic relationships with major emerging markets.

“We can’t solve the euro crisis for the Europeans. We can’t fix the U.S. fiscal situation. What we can change is how productive our businesses are. We can change the markets into which we sell,” he said.
Bassett & Walker International (BWI) out of Toronto, Ontario is a good example of how Canadian business can tap into the surging growth in developing countries. BWI is one of only about 100 agricultural product brokers who collectively do half a trillion dollars in trade every year. Companies in other sectors are doing the same thing – there is enormous potential in emerging markets worldwide.

Carney also said that inbound capital flows are stronger because international investors see Canada as a safe place to park their money. But Canada isn’t taking advantage of that windfall, he said.

“Our challenge as a country is how do we use that capital that comes in? We can use it to grow our economy, invest in new productive assets in industries, or we can build houses,” he said. “Our view is we should do the former.”

Perhaps we can do both. As the economy grows, through investment by business and through infrastructure investment, more money flows, there are more jobs and consumers start looking at purchasing homes. Can Canada have it all? I think so.

Why do interest rates continue to fall?

What can we make of the low interest rate environment we are now seeing? Fixed rates are dropping and one lender has dropped its variable rate. Will more lenders follow suit?

When the five-year fixed rate fell to under 3% earlier this year, Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney cautioned consumers and warned lenders to be careful with debt loads. Clearly it didn’t slow the robust housing market – purchases and refinances continued at a pace not seen since 2007.

Then Flaherty announced some changes to the mortgage rules to slow down the pace of rising debts. So what happened? We had a couple of weeks of quiet as the summer was also upon us.

It appears both lenders and investors are not comfortable with a lull. They have been taking advantage of lower bond yields, which accounts for lowered fixed rates. Even the seven and 10-year rates are looking very good. At the time of this writing a seven-year rate can be had for 3.69%. The spread between the posted rate on a five-year mortgage of 5.24% and a government of Canada five-year bond is almost 400 basis points — the highest it’s been since the financial crisis in 2008.

Also, a few monoline lenders – lenders who specialize in mortgage lending only -- are now offering their variable rate under prime --something we have not seen consistently since last Fall. Clearly, these lenders have an appetite for funding right now. It will be interesting to see if this initiates a mini-price war in the variable rate market. But there is always the threat that the government will step in and introduce even tougher rules.

These rates continue to tempt consumers. This may be the best time to consolidate even if it’s only to 80% of the value of your property.  On the other hand, the challenge is the increasing debt loads that a low interest rate environment can create.

Craig Alexander, chief economist at Toronto-Dominion Bank suggested in a recent news article that consumers should not abuse this opportunity by taking on new debt but should take advantage of it.

The Canadian Real Estate Association had previously forecast housing sales in 2012 and 2013 that were roughly on par with the 10-year average for annual activity. The updated forecast now predicts activity slightly above the long term average. The national average price is also forecast to rise modestly in 2013, edging up two per cent to $378,200.

It’s hard to heed the warnings from government when the economy, the job market and the housing market seem to be doing so well.