Will 2012 be a great time to buy?

Despite the crisis in global financial markets, talks of a Canadian housing bubble and reports that debt loads are too high in relation to income, the Canadian housing market was remarkably resilient through 2011. The country’s economy actually grew in the past year, thanks to the addition of more than 200,000 jobs and slows but steady GDP growth.

And according to ReMax’s Annual Housing Market Outlook published in December, the housing sales market in 2012 should be slightly better than last year with an estimated 460,000 properties expected to be sold compared to 447,000 properties sold in 2011. The reason for this, according the report, is low interest rates along with tight inventory levels and increased urban demand.

This is good news for buyers and sellers. Most of the markets across Canada are predicting an increase in the average property price as well as a slight increase in the number of properties that will be sold. Major centres like Saskatoon, Calgary, Winnipeg, Sudbury, and Hamilton-Burlington all boasted big numbers, with year-over-year gains of between 8% and 13%. The markets in Calgary and Saskatoon are expected to continue to lead the country in sales and the GTA, Moncton, and Regina are also projected to perform well with anticipated gains of 3% each.

The biggest winners will be first-time buyers and move-up buyers. Move-up buyers will benefit from a combination of increased house prices and low interest rates, which will continue to attract a higher number of potential buyers.  And as cities continue to improve their downtowns and pump money into redevelopment programs, living in these urban hubs will attract first time buyers who will put pressure on developers to build affordable accommodation to suit this lifestyle.

So, will 2012 be a great year to buy? The relatively low interest rates, which will likely be here for some time – at least into the latter part of 2012, will continue to attract first time buyers as well as investors. For more information about the housing market, contact your mortgage professional.

Keeping debt to income ratios in perspective

By Mark Kerzner

President, TMG The Mortgage Group

While there have been multiple rounds of credit tightening in the last few years and countless comparisons to the U.S. housing meltdown, it’s important to also look at the underlying health of our lending and credit markets.

This is especially relevant in light of recent news articles again indicating that the amount of household debt is “triggering alarms” (http://www.theglobeandmail.com/globe-investor/personal-finance/household-finances/record-high-household-debt-in-canada-triggers-alarm/article2269210/). While it’s true that our debt to income ratios are at record levels (>150%), it’s also important to keep perspective.

Let’s look at the facts:

1. Serious delinquency rate in Canada is approximately 0.4% versus 4.1% in the U.S. according to economist Benjamin Tal
2. Currently 1.1% of Canadian houses are experiencing negative equity versus approximately 22% in the U.S. (Benjamin Tal)
3. Even though 22% of Canadian mortgages have amortizations greater than 25 years, 36% of all mortgage holders made voluntary supplemental payments in 2011 (CAAMP Fall survey)
4. While total debt (mortgages, lines of credit, credit cards, etc) to income ratios in Canada have hit 150%, average mortgage interest rates this past year were 3.92% (30 basis points below a year earlier.
5. The most common use for funds taken from equity take-outs (refinances) in the past year is debt consolidation and repayment which reduces other forms of debt. Contrary to the concerns of some, by using a mortgage as a debt consolidation tool, total servicing debt costs are often reduced. This gives clients a potential strategy for reducing their total outstanding debt by using excess cash flow to more aggressively pay down that debt.
6. The Government has established a benchmark for qualifying mortgage customers at higher rates if they are taking an Adjustable Rate or a Term less than 5 years. On average that benchmark rate (average 5.38% in 2011) has been 1.46 points higher than the 5-year discounted rates and 238 bps higher than PRIME, which is currently at 3%.  This means clients who have chosen ARMs or terms less than 5 years have built in some buffer in the event interest rates do rise prior to renewal or during the term.

It is widely expected that during the course of present term mortgages, rates are likely to increase prior to renewal dates. Keep in mind that if interest rates rise, it is often correlated to a stronger economy. With a stronger economy comes improved employment levels and earnings.

While many are predicting an eventual increase in interest rates the current consensus based on Canadian economic forecasts and the European economic crisis is that rates are likely to stay low here in Canada for some time.  That is the dilemma. What is needed is more spending and less saving but not via increased credit which is difficult to achieve. The bank will have to run the risk that credit growth will continue so long as interest rates stay at these low levels.

Growing the Canadian Economy

When Bank of Canada governor Mark Carney made his inaugural speech as head of the banking industry’s global regulator on November 8 he said the world economy is getting hurt by a slump in liquidity, meaning banks are less willing or less able to lend money. And because global liquidity has fluctuated over the past five years, Carney said that Europe is already in a recession.


He used the 2008 collapse of the U.S. investment bank Lehman Brothers as an example. The impact of that was that banks shied away from lending to both companies and consumers. That helped plunge the world economy into a major recession.


Clearly, if banks stop lending, consumers stop spending and businesses stop spending. For an economy to function, money needs to keep moving.


There has been talk recently that Carney might lower the prime interest rate to keep inflation in check. Carney has also said that the Canadian economy won’t fully recover until well into 2013. Currently the prime rate is sitting at 1%. Inflation is approximately 2.7% and is predicted to slow to 1% in the second quarter of 2012. The Bank of Canada likes to keep the inflation rate between 1 and 3%.


So what does that all mean for Canadians?


So far, the credit crunch hasn’t hit Canada. While mortgage lending has tightened up a bit, banks are still lending money to businesses. The federal government has been making slight concessions to make sure Canada continues to grow:

·         For example, on November 27, Finance Minister Jim Flaherty eliminated $32-million in manufacturing tariffs. This will allow businesses to lower their costs, enhance their ability to compete globally, which will help stimulate growth and job creation.

·         On November 23, Mark Carney said he would stay flexible on interest rates. Despite the fact that inflation has been creeping higher, Carney said that although it may take longer to return inflation to target, being flexible with the rates will protect the country from any economic and/or financial shocks.

·         The federal government is also moving ahead to change the laws that govern financial institutions, adding more oversight to protect consumers. “Canada has been ranked as having the soundest banks in the world by the World Economic Forum for four consecutive years,” said Jim Flaherty, Minister of Finance in a statement released on November 23. "The Financial System Review Act will ensure our financial system continues to be secure for Canadians and a fundamental strength for our economy.”

These changes likely won’t have a direct impact on most Canadians but the after effects will. They include more jobs, higher profits for all businesses, access to low cost money for home buying and investing, stable housing markets and a strong and healthy banking system.


All of this makes Canada a growing, stable economy that can weather short term fluctuations for a strong and prosperous future.

Making sense of conflicting news headlines

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

Let’s face it. We live in a world of “sound bites”.

My wife and I went for coffee before work and actually had a conversation - one we really enjoyed. Usually throughout the workday we communicate with quick e-mails. Whether it’s deciding on dinner or who will be picking up the kids, because we are both busy people, our Monday to Friday (8am to 7pm) life needs to be efficient.

We are not alone. I’ve been hearing the same laments from my friends and colleagues. The unfortunate result is that sometimes things get lost in translation. And quick e-mails or text messages can be taken out of context.

This can also cross over into our business lives. Lately, there have been many conflicting messages in the news about the economy and about debt. And when our attention span only offers us 140 characters of space we become more influenced by headlines.

Consider the following headlines:
Mark Carney sees more than a year of soft growth: Globe and Mail, October 26, 2011

Compared with
Canadian economy rebounds, Globe and Mail: November 30, 2011
Has our economy really come full circle in one short month?
------------
Canadians fall deeper in debt, National Post, September 13, 2011

Compared with,
Canadians rein in debts amid uncertainty, Globe and Mail, November 29, 2011 
Given that the economy was supposedly weak just a couple of short months ago is it possible that we, as a nation of consumers, have already mitigated our high debt concerns?
-------------
TSX lower on continuing debt fears, Toronto Star, November 21, 2011

Compared with,
Stocks surge on debt crisis hopes, Toronto Star, November 28, 2011 

This headline seems to be driving the stock markets lately but are just as volatile as the markets themselves

With all this "noise" in the marketplace, it’s no wonder consumers are confused.
A recent survey released in November 2011 by The Canadian Association of Accredited Mortgage Professionals (CAAMP) itself highlighted market confusion amongst Canadians.

On the one hand Canadians largely agree with the proposition that "as a whole, Canadians have too much debt" with respondents scoring that nearly 8 out of 10.  Yet only a few of those who actually have mortgages "regret taking the size of the mortgage [they] did."

With respect to the housing market, Canadians indicated with a score of 6.07 out of 10 that Canada's housing market is in a bubble, yet when asked if real estate in Canada is a good long-term investment, respondents gave that a score of 7.27 out of 10

Clearly there are divergent views among Canadians. What is interesting is when those differences are segmented among those who owe the money and those who hear about those who owe the money. For the most part, Canadians with mortgages are comfortable with their levels of debt.

A good broker stays on top of market and can filter through the conflicting messages and get you the right information to you to make an informed decision. They can offer you the right product and terms that meets your unique financial situation.

A Variety of Housing Market Predictions for 2012

All indicators suggest that the Canadian housing market will be stable in 2012. Low interest rates will prevail, with a couple of economists suggesting that the prime rate will drop from its current 1% up to .50 basis points. The bond market seems to be stable and will probably continue that way given the current European economic woes.

Canada Mortgage and Housing Corporation (CMHC) released its Fourth Quarter market update recently and reported that housing starts will stay near current levels and resale values will hold steady. So, for market watchers, 2012 may be a boring year. Or maybe not? 

Depending on what part of the country you’re in, those working in the industry – mortgage brokers, real estate lawyers and Realtors – are telling a different story. In the Golden Horseshoe area of Southern Ontario, sales have been brisk and industry insiders have been busy. Realtors are predicting increases in resale prices for the Spring of 2012.

Housing market insiders in Saskatchewan and Nova Scotia are predicting a busy Spring in 2012. In Alberta, the Calgary market is hot.

With the wide range of predictions out there, what can consumers believe?  It really comes down to one major factor – employment. If we can predict employment growth, then we can safely predict housing sales, no matter the interest rates. Back in the early 80s, when interest rates were in double digits, consumers were still buying houses in areas where employment was high. In other areas of the country with low employment rates, the housing market was soft.

Nova Scotia’s housing market will be busy in 2012 because Halifax just recently signed a billion dollar ship building contract, which will create jobs. The employment rate in the Golden Horseshoe is bucking the national trend and creating more jobs.

Looking at the employment outlook for 2012, there are some upsides. Statistics Canada released its Labour Force Survey on November 4, 2011 and found the following:

·         Over the past 12 months, employment in Ontario has grown by 1.5% (+101,000)

·         Since October 2010, employment in British Columbia has grown by 0.9%, slower than the national rate of growth (+1.4%)

·         In Nova Scotia, (survey conducted prior to ship building contract announcement) employment fell by 3,900, and in Prince Edward Island it decreased by 1,300

·         Newfoundland and Labrador experienced notable employment gains. Employment in the province grew 0.9% compared with 12 months earlier

·         Employment in Alberta edged up in October, and the unemployment rate declined 0.3 percentage points to 5.1%. Compared with October 2010, Alberta has had the fastest rate of employment growth of all provinces, with an increase of 4.3%

Adding the possibility of a stronger economic recovery in the US, which would boost employment growth in Canada, perhaps the housing market insiders, who work every day in the field, have predicted correctly that 2012 will indeed, be a busy year for real estate.

The Disappearing Variable Rate Discount

The days of deeply discounted variable rates seems to have disappeared. Over the past month lenders have been slowly reducing their discounts from as low as P-.80% to now prime and prime plus. There are still a few holdouts -- lenders who most likely see an opportunity for some quick deals -- but it probably won’t be long until those gaps are totally closed.

Fixed rates, on the other hand, can be had for as low at 3.39% on a 5-year term (at the time of this writing). When spreads are this tight, it’s no wonder that industry insiders are reconsidering all the research suggesting that variable rates are the way to go.

Variable rates have been the most popular choice among homeowners between the ages of 35 and 44 according to a report from Canadian Association of Accredited Mortgage Professional (CAAMP). While there is always a risk that interest rates will fluctuate, there are other factors to consider. The greatest advantage is the long-term savings on interest costs. Research has shown that people have saved money on variable-rate mortgages more than 80 per cent of the time.

Online mortgage news source Canadian Mortgage Trends recently interviewed Benjamin Reitzes, Senior Economist for BMO capital Markets who said borrowers won't see the same advantage to variable rates as they have in the past 25 years because the prime rate, which is sitting at 1%, can’t drop 1% -- there is room for a slight cut, which some economists say may happen in 2012, but the stronger likelihood is that rates will start to slowly climb in the latter part of next year.

Much of the reasoning for preferring variable over fixed is, of course, the interest savings. When we take a look at the spreads between fixed and variable rates between 1970 and 1995, there is a difference of 126 basis points compared to the average difference today of 50 basis points. That translates into a lot of savings.

Although the spreads have been reduced and discounting is disappearing, what hasn’t changed is a home owner’s decision-making process. When variable rates were historically low and fixed rates were substantially higher, many home buyers opted for fixed because they knew exactly how much principal and interest they paid on each regular mortgage payment throughout the term. And for some, having that peace of mind is the determining factor.  

So the question of whether going fixed or variable still comes down to what makes a home owner comfortable. However, it’s really a win/win for home owners -- with fixed rates so low, and with the prime rate increasing some time in 2012, the fixed rate may indeed outperform the variable rate, but even if it doesn’t, the extra interest costs on fixed rates will be far less than in past years. 

Global economic crisis may have a silver lining in Canada

The ongoing financial woes in the US and in countries in Europe are one of the contributing factors to Canada's stable housing market and historically low interest rates, and these rates will continue right into mid-to late 2012.

The variable rate, which is based on the Bank of Canada's Prime rate is sitting at 3% and is likely to stay there right up until mid-to-late 2012. The main reason for this is the very slow economy in the US. The Federal Reserve there has already announced that their prime interest rate will not increase until 2013, hoping that it will create a more fertile ground for economic growth. By keeping the rates low, they hope to stimulate borrowing from businesses and consumers. Because the US is a major trading partner, it forces us to keep our rates low to keep our economy growing while we wait for the US and for Europe to catch up.

Fixed rates will start moving up earlier than the variable rate but without major jumps. Benjamin Tal, deputy chief economist for CIBC said in an exclusive interview with TMG The Mortgage Group that fixed rates, which depend on bond markets, will remain relatively stable, with small increases, over the next six to eight months.

"It is interesting that, here in Canada, when we believe there will be a slowdown, something happens in the world that helps us and makes our economy stronger," he said. "And because there is uncertainty in world markets, the Bank of Canada won't raise rates until those markets stabilize, which will take some time."

Currently, the Canadian housing market and the economy is stable and balanced. Consumers have been listening - they have slowed the pace of their borrowing and have been working on paying off their debts. It is, indeed, an ideal time, when rates are low, to do that. Tal cautions, however, that low interest rates may fuel an increase in borrowing, which has not happened yet, and this could be worrisome in the long-term.

"Credit is not a bad thing - it is the electricity of the economy," he said. "We want banks and consumers to be responsible with their borrowing."

Low interest rates are attractive but borrowing like there's no tomorrow is dangerous. Eventually those rates will go up and if you're stuck with large lines of credit it may be more difficult to pay them off and could burden the household budget.

There is a window of opportunity now to reduce debt loads and pay them outright. If you would like to discuss your options, please contact me.

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