What a roller coaster ride the last two years have been. In the spring of 2009, Canadian house prices fell across the board and transactions slowed as fears of a global economic downturn spread. But then, as if only pausing for breath, Canada’s real estate market revved up once again and the spring dip looked like nothing more than a good buying opportunity. So why is everyone so nervous? When I talk to Realtors, fears of rising interest rates are among the first concerns raised. There is a widespread assumption that rates can only go up, and a related belief that higher rates will hammer the real estate market. In fact, I don’t think either fear is warranted. Here’s why:
Short-term (variable) rates aren’t going anywhere fast because
* The central bank’s primary reason for raising rates is to control inflation. Our inflation rate (as measured by the consumer price index) was at one per cent as of July 23, well below the central bank’s upper limit of two per cent.
* The effects of higher rates are felt only over time, so raising short-term interest rates gradually allows the central bank time to measure the impact of previous increases before tightening further.
* The real estate market is cooling off. One of the central bank’s main concerns with leaving its overnight rate at emergency low levels was that it would fuel a housing bubble. Today’s more balanced housing market has rendered that concern moot for the time being.
* While the Canadian economic recovery is in full swing, most of the rest of the world is not faring as well. In its recent commentary, our central bank acknowledged that aggressive interest-rate hikes could stifle our momentum, especially against today’s backdrop of global economic uncertainty.
* The U.S. Fed is not expected to increase its short-term policy rate until 2012 at the earliest. If our central bank keeps raising rates independently of the Fed, our dollar will continue to appreciate and this will slow our economy further. Most experts do not believe that Canadian short-term rates can be sustained at much more than one per cent above comparable U.S. rates (and we’re already .75 per cent higher today).
Moderately higher rates won’t hammer the real estate market because
* Contrary to popular belief, there is no strong correlation between rising interest rates and lower house prices. In fact, historical data show that rates and house prices rise together more often than not. Before you say I’m out to lunch, let me elaborate. I readily accept that, all being equal, higher rates hurt affordability and are bad for the housing market. But all is not equal. Rising rates generally occur in an improving economy, and the positive economic momentum that accompanies higher rates creates a net effect that has historically proven more positive than negative.
* Job creation has far outpaced any forecasts and is considered one of the key factors in our rapid economic recovery (it’s dropping a little recently but after a very good run). If you’re looking for indicators that foretell the health of our real estate markets, historical data shows that job creation (and rising incomes) is far more indicative than the direction of interest rates.
* Canadians can afford higher rates. In a 2009 CAAMP survey based on 40,000 loans totalling more than $10 billion to purchase houses across the country, the data showed that we borrowed far less than the maximum we could afford. For example, the highest acceptable GDS ratio that lenders are generally comfortable with is 35 per cent, and in the survey, borrowers averaged only 21.8 per cent. Lenders normally set the highest acceptable TDS ratio at 44 per cent, while in the survey borrowers averaged a TDS of 32.3 per cent. Results like this don’t usually correlate with people lining up at the banks to hand in their keys.
While no one can say with certainty what the future will hold, especially with the world in the midst of a massive credit deleveraging cycle, I think the alarmist rhetoric about dramatically higher rates in the near future is overblown (and I’ve been saying this since April when most of the bank’s economists were sounding the alarm bells). Make no mistake, the central bank would like to continue to raise interest rates to provide some additional breathing room for future monetary stimulus, probably from today’s .75 per cent to about two per cent. But Mr. Carney and his governors at the central bank won’t do this if it risks smothering the green shoots of our economic recovery. Instead of fast, knee-jerk rate hikes, my money is on gradual rate increases over time, which the data shows Canada’s borrowers can comfortably afford. On balance, even with higher rates, the sky should stay more or less where it belongs – comfortably over our heads.
David Larock MBA, AMP, PFPC, CSC is a Toronto-based independent mortgage planner and long-time industry insider who specializes in helping clients purchase, refinance or renew their mortgages. He is an active blogger on mortgage related topics and his posts have been distributed in national media and by Realtors and financial planners. www.integratedmortgageplanners.com
Monday, September 6, 2010
Friday, September 3, 2010
Thursday, September 2, 2010
The truth buried beneath the stats: Buyers are looking for a bargain
How come new low-rise home sales in the GTA in July dropped almost to mid-recession levels?
How come the volume of resale home sales in July fell 34 per cent from the same month last year and new listings dropped to the lowest level for the month of July since 2002?
How come the biggest chunk of new high-rise sales moved from the City of Toronto to the 905 communities in July?
And finally, how come, despite all this disturbing news, prices for the average new and resale home – both high- and low-rise – kept ticking solidly upwards?
George Carras, president of RealNet Canada Inc., which tracks the GTA’s housing market, says he doubts if anyone can yet unravel all the factors at play in today’s housing market. There is no easy-to-identify single or multiple factors that can be directly linked to such dramatic swings.
We had a late winter and spring full of bright hope as thousands of people flocked to high-rise and low-rise sites and snapped up product. We had a double-digit jump in resales.
Now just three months later it is all change at Charing Cross.
“The three biggest factors I can see affecting the market are lack of consumer confidence, a continuing lack of understanding about the HST and rising prices,” he says. “But each of those catch-all categories has its own set of factors at play that could keep you talking for weeks,” he says.
Down to the numbers. Low-rise sales in July stood at 678 units, which is just about 100 more than in January when everyone was blaming the recession for poor sales. And yet the average price rose 9.2 per cent from last July to $489,088.
In the resale market the Toronto Real Estate Board says 6,564 homes changed hands in July, 34 per cent fewer than the same month last year. At the same time new listings dropped to 10,825, the lowest level for July since 2002.
The average price for July transactions was $420,482 or 6 per cent higher than the same month last year. Tucked away in the July statistics, however, is an interesting number. July’s average resale price is almost $12,000 down from the average selling price for the first seven months of this year ($432,253).
Finally high-rise sales for the month stood at 1,900 units making July the second worst month for sales after January. But just like low rise, prices were up. RealNet says the average high-rise condo price stood at $430,782 that month, up 10 per cent from the previous month.
Again, however, there is a statistic buried among the facts and figures that is worth noting. While traditionally sales of condos in the 416 area have far outstripped high-rise condo sales in the 905 area, July saw a dramatic turnaround.
That month 905 sales were 63 per cent of the month’s total with those outside major urban concentrations like Mississauga City Centre playing a big role.
So, to finally make a point, what do all these statistics suggest? Kind of a no-brainer really. Affordable homes – new high-rise, new low-rise and resale – are what buyers are looking for.
That is likely why the average resale price in July is well below the seven-month average. That is why 905 condos outside major urban areas are selling. Cheaper land means cheaper condos. That is why builders are able to move their lower-priced detached homes but not their higher-priced ones.
If you need a few examples, Mr. Carras suggests taking a look at Daniels Corp.’s First Home Brampton project north of Sandalwood Parkway, west of Bramalea Road. This is a 150-unit, stacked townhouse project, which went on sale for $251 a square foot and sold out within days.
Park 570, a four-storey midrise by Vandyk Properties north of Dundas Street and west of Mississauga Road had 180 units for sale at the start of July, priced at $328 a square foot. By the end of the month it had sold 137 of them.
In low rise, he cites Upper Village Wismer Commons by Greenpark Homes north of 16th Avenue and west of Markham Road. The company offered detached homes from $466,990 and townhouses from $355,990. Of the 22 sales in July, 17 were the much cheaper townhouses.
“The funny thing is all builders are reporting strong traffic through presentation centres. It is just that people are looking but not buying,” he says.
And if they do buy it is a home well down on the price ladder even if they have to live in an area well away from an urban centre.
Mr. Carras also raises an interesting point. He wonders if builders would have been better off showing prices without HST.
“That way people could clearly see the impact it has on prices and focus any anger where it belongs – on the province and not on the builder,” he says.
Terrence Belford
Globe and Mail ,Sep. 02, 2010
How come the volume of resale home sales in July fell 34 per cent from the same month last year and new listings dropped to the lowest level for the month of July since 2002?
How come the biggest chunk of new high-rise sales moved from the City of Toronto to the 905 communities in July?
And finally, how come, despite all this disturbing news, prices for the average new and resale home – both high- and low-rise – kept ticking solidly upwards?
George Carras, president of RealNet Canada Inc., which tracks the GTA’s housing market, says he doubts if anyone can yet unravel all the factors at play in today’s housing market. There is no easy-to-identify single or multiple factors that can be directly linked to such dramatic swings.
We had a late winter and spring full of bright hope as thousands of people flocked to high-rise and low-rise sites and snapped up product. We had a double-digit jump in resales.
Now just three months later it is all change at Charing Cross.
“The three biggest factors I can see affecting the market are lack of consumer confidence, a continuing lack of understanding about the HST and rising prices,” he says. “But each of those catch-all categories has its own set of factors at play that could keep you talking for weeks,” he says.
Down to the numbers. Low-rise sales in July stood at 678 units, which is just about 100 more than in January when everyone was blaming the recession for poor sales. And yet the average price rose 9.2 per cent from last July to $489,088.
In the resale market the Toronto Real Estate Board says 6,564 homes changed hands in July, 34 per cent fewer than the same month last year. At the same time new listings dropped to 10,825, the lowest level for July since 2002.
The average price for July transactions was $420,482 or 6 per cent higher than the same month last year. Tucked away in the July statistics, however, is an interesting number. July’s average resale price is almost $12,000 down from the average selling price for the first seven months of this year ($432,253).
Finally high-rise sales for the month stood at 1,900 units making July the second worst month for sales after January. But just like low rise, prices were up. RealNet says the average high-rise condo price stood at $430,782 that month, up 10 per cent from the previous month.
Again, however, there is a statistic buried among the facts and figures that is worth noting. While traditionally sales of condos in the 416 area have far outstripped high-rise condo sales in the 905 area, July saw a dramatic turnaround.
That month 905 sales were 63 per cent of the month’s total with those outside major urban concentrations like Mississauga City Centre playing a big role.
So, to finally make a point, what do all these statistics suggest? Kind of a no-brainer really. Affordable homes – new high-rise, new low-rise and resale – are what buyers are looking for.
That is likely why the average resale price in July is well below the seven-month average. That is why 905 condos outside major urban areas are selling. Cheaper land means cheaper condos. That is why builders are able to move their lower-priced detached homes but not their higher-priced ones.
If you need a few examples, Mr. Carras suggests taking a look at Daniels Corp.’s First Home Brampton project north of Sandalwood Parkway, west of Bramalea Road. This is a 150-unit, stacked townhouse project, which went on sale for $251 a square foot and sold out within days.
Park 570, a four-storey midrise by Vandyk Properties north of Dundas Street and west of Mississauga Road had 180 units for sale at the start of July, priced at $328 a square foot. By the end of the month it had sold 137 of them.
In low rise, he cites Upper Village Wismer Commons by Greenpark Homes north of 16th Avenue and west of Markham Road. The company offered detached homes from $466,990 and townhouses from $355,990. Of the 22 sales in July, 17 were the much cheaper townhouses.
“The funny thing is all builders are reporting strong traffic through presentation centres. It is just that people are looking but not buying,” he says.
And if they do buy it is a home well down on the price ladder even if they have to live in an area well away from an urban centre.
Mr. Carras also raises an interesting point. He wonders if builders would have been better off showing prices without HST.
“That way people could clearly see the impact it has on prices and focus any anger where it belongs – on the province and not on the builder,” he says.
Terrence Belford
Globe and Mail ,Sep. 02, 2010
Wednesday, September 1, 2010
Housing bust unlikely, says think-tank
A U.S.-style housing crash is unlikely in Canada, says a study by the C.D. Howe Institute.
A decline in underwriting standards played an essential role in the American housing boom and subsequent bust. That has not been the case in Canada, says the study released Tuesday.
Canadian housing policies, which avoided the sharp declines in underwriting standards seen in the U.S. “worked well in reducing the possibility of a housing bust in Canada,” said the report.
The C.D. Howe report comes on the heels of one from the Canadian Centre for Policy Alternatives, which said the Canadian housing market is a bubble ready to burst. It also shows the debate that economists are having over the direction of the market.
Virtually all major economists have already said that a U.S.-style meltdown will not happen in Canada. And the Canadian Centre for Policy Alternatives report also says a U.S.-style housing bust is the most extreme scenario, and the unlikeliest to happen.
However, they agree that some kind of correction is overdue. The TD Bank has estimated that average prices are 10 to 15 per cent too high while CIBC has said 14 per cent. The Canadian Centre for Policy Alternatives says it could be anywhere from 9 to 21 per cent.
“Many of the concerns about the Canadian housing market are motivated by recent U.S. experiences,” says economist Jim MacGee, author of the report and an associate professor of economics at the University of Western Ontario.
“A comparison of housing market policies in Canada verses the U.S. suggests that there is a little likelihood of a U.S.-style surge in foreclosures or a collapse of house prices in Canada.”
From 2000 to 2006 U.S. house prices climbed twice as much as in Canada. Prices then declined by 30 per cent over the next three years from 2006 to 2009, according to C.D. Howe.
The decline in Canadian house prices lagged the U.S. and was more muted, as prices continued to appreciate until 2008, then declined by 9 per cent between August 2008 and April 2009. The decline was followed by a sharp bounce upward, with house prices returning to their pre-recession high.
“After another surge of pricing this year, buyers and sellers remain on tenterhooks about the future path of prices,” says MacGee.
The key to Canada’s relative strength to the U.S. is that federal government policy meant that banks north of the border did not engage in the same volume of risky loans. Low documentation, interest only and adjustable rate mortgages were driving sales in many markets.
“During the U.S. housing boom, both private insurers and government sponsored enterprises facilitated looser underwriting standards” said the report.
“It will be in the interest of all Canadians if policy makers recall the lessons of the 2008 to 2009 experience should pressures to relax underwriting standards reoccur in the future.”
August 31, 2010 Tony Wong
A decline in underwriting standards played an essential role in the American housing boom and subsequent bust. That has not been the case in Canada, says the study released Tuesday.
Canadian housing policies, which avoided the sharp declines in underwriting standards seen in the U.S. “worked well in reducing the possibility of a housing bust in Canada,” said the report.
The C.D. Howe report comes on the heels of one from the Canadian Centre for Policy Alternatives, which said the Canadian housing market is a bubble ready to burst. It also shows the debate that economists are having over the direction of the market.
Virtually all major economists have already said that a U.S.-style meltdown will not happen in Canada. And the Canadian Centre for Policy Alternatives report also says a U.S.-style housing bust is the most extreme scenario, and the unlikeliest to happen.
However, they agree that some kind of correction is overdue. The TD Bank has estimated that average prices are 10 to 15 per cent too high while CIBC has said 14 per cent. The Canadian Centre for Policy Alternatives says it could be anywhere from 9 to 21 per cent.
“Many of the concerns about the Canadian housing market are motivated by recent U.S. experiences,” says economist Jim MacGee, author of the report and an associate professor of economics at the University of Western Ontario.
“A comparison of housing market policies in Canada verses the U.S. suggests that there is a little likelihood of a U.S.-style surge in foreclosures or a collapse of house prices in Canada.”
From 2000 to 2006 U.S. house prices climbed twice as much as in Canada. Prices then declined by 30 per cent over the next three years from 2006 to 2009, according to C.D. Howe.
The decline in Canadian house prices lagged the U.S. and was more muted, as prices continued to appreciate until 2008, then declined by 9 per cent between August 2008 and April 2009. The decline was followed by a sharp bounce upward, with house prices returning to their pre-recession high.
“After another surge of pricing this year, buyers and sellers remain on tenterhooks about the future path of prices,” says MacGee.
The key to Canada’s relative strength to the U.S. is that federal government policy meant that banks north of the border did not engage in the same volume of risky loans. Low documentation, interest only and adjustable rate mortgages were driving sales in many markets.
“During the U.S. housing boom, both private insurers and government sponsored enterprises facilitated looser underwriting standards” said the report.
“It will be in the interest of all Canadians if policy makers recall the lessons of the 2008 to 2009 experience should pressures to relax underwriting standards reoccur in the future.”
August 31, 2010 Tony Wong
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