Listings down, prices up…. housing bubble?

Latest housing stats show listings are down, sales are down… but prices are up, only slightly…. and houses aren’t on the market as long.  They are selling faster.   Doesn’t sound like a bubble to me.  More like a soft landing.

This is exactly what the govt had in mind when it changed mortgage rules a few months ago and made it tougher to qualify for a mortgage.  It’s still too early to say if these changes are just right or went too far….. We’ll need another 6 months or so to see the full effect.   Best guesses are that the housing market could slow by 5%.   But I haven’t seen that happen… In the Greater Toronto area, we are still seeing multiple offers and sales go above asking price….  The interesting stat for me is the fewer number of sales… We’ll be watching that stat… fewer sales over an extended period of time will stop any price increases…

This also means we should expect interest rates to remain low.  The Bank of Canada will be under less pressure to raise rates with a flat housing market.   Throw in the U.S. Fed’s announcement last week that they were going to keep rates the same until 2014-15, and we have the perfect setting for low rates.

RECORD LOW INTEREST ARE STILL HERE…. WHY AREN’T WE TALKING ABOUT THIS?

Speaking of low interest rates…  Here’s some advice… before you put your plans to buy on hold, you should remember that we are still enjoying historically low interest rates.  5 year fixed rates at 3.09%… Variable rates at 2.65%..!!   This is a fact that so many of us tend to ignore…. maybe it’s just too boring to talk about.    I’ll make it more exciting…

A $400k mortgage will carry for $1912/mth based on today’s 3.09% 5 yr fixed rate…….Wanna wait for house prices to fall and save some money?  Ok, but you should also expect interest rates to rise… lower house prices are caused by higher interest rates and higher unemployment…  We don’t expect higher unemployment so we must attribute any house price drop to a rise in interest rates……a look back at the last housing crash in 1989 showed interest rates went up to 11% and 12% just before the crash….. make sense so far?

This is where so many of us stop thinking or analyzing…Cashflow and affordability are probably just as important or more important than rate, mortgage balance, purchase price, etc… if you aren’t comfortable with the payment, you will run into problems…. By the way, affordability is still VERY good according the RBC affordability index.

REAL MORTGAGE MATH SHOWS TRUE COST OF WAITING TO BUY

Let’s continue….Let’s say rates go to more normal levels…  we’ll use 5% interest rates..  That same $400k mortgage will cost you $2326/mth.….  and if you wanna adjust the mortgage size by $40k because house prices should fall 10%, okay…  a $360k mortgage at 5% will cost you $2094/mth... That’s still $182/mth more… and let’s also not forget, that you may have lost 1, 2, 3 or more years of not paying a mortgage down….  Did you know you will pay your mortgage down by around $10k per year in the first 3 yrs alone?

Real Estate isn’t always a great investment, but it usually makes more sense to buy, hold and enjoy, than it does not to buy and rent….  And with interest rates at record lows, it’s even easier to make that recommendation.   Stop listening to the pessimist that say the sky is falling or the world is ending…  If we listened to them, we would be renting for the last 10+ years… for that’s how long they have been saying house prices are inflated and need to drop…..

As always, if you aren’t sure where you fit in or what’s best for you, feel free to contact me to discuss…  Your questions and comments are welcome.

Steve Garganis

steve@mortgagenow.ca

416 224 0114

Rent vs Own…which is better?

Rising house prices could make you rethink buying a home.. Could renting be better today?  With the average home price in Toronto around $500k and the National average at $356k, renting might look more attractive.  And for certain situations, like short-term accommodations and retirement living, it does make sense.  But I’m not convinced that renting is right for most of us.

Some simple rules of thumb to remember when buying real estate:

  • you should plan on owning the home for at least 7 years.  This will amortize or spread out any associated expenses with the purchase or sale of your home.
  • buying for investment should be a long term play.. again, 7 years is usually long enough to take us through any economic cycle of ups and downs.
  • forgot buying for a quick flip.  Unless you are a professional renovator with a deep pockets, don’t try to imitate people on HGTV (yes, it’s another 4 letter word we shouldn’t repeat in public).
  • don’t buy at your maximum debt servicing ratios…. stretching yourself thin when interest rates are at record lows isn’t smart.
  • speaking of interest rates…. make sure to qualify yourself with an interest rate of 5.00% or higher.. this is a more realistic rate than today’s 3.09%… just plan for rates to go up… when they do, you’ll be prepared…
  • we won’t get into buying a rental property here… it requires more explanation.. but for many, it’s an even better investment than buying your principal residence… a topic we will discuss at a later date.

Type in Rent vs Own or Rent vs Buy on google, and you’ll find several recent articles on the subject.   This one, from the Financial Post, stood out…. it’s against owning.   The article explains that you will be better off, financially, if you rent…  They even give an online calculator to prove the point…. Okay, let’s take a closer look at this calculator…   Ah, there’s where we have a difference of opinion…. Their calculator assumes you can earn an annual 7.00% Return on Investment outside of Real Estate…   And they are using annual house appreciation rate of 2.00%.

Hmmm, how many people have made an average annual return of 7.00% in stocks, bond, mutual funds over the past 5, 10, 15 or 20 years???   Most the people I know are still looking to match the stock market highs of 2000 or recover their investments from the 2008 crash.    And using a 2.00% annual appreciation rate for real estate?  Come on, let’s get real!   Try typing in more realistic numbers like 5.00% investment return and 5.00% house appreciation and see what you get…   And that 5.00% investment return is being generous.    Real Estate becomes the winning choice…

We also have to factor in the intangibles.   Not having to worry about moving because your landlord is selling… and not having to move the kids…. and just plain pride of ownership… There is something to be said for owning your home..  People tend to care a little more about the home they own.

Here’s another article from the Globe and Mail that isn’t against owning but is advocating you save up a larger down payment.   I like the philosophy.   Wait and save… but don’t wait for house prices to go down… that just hasn’t worked… Timing the market is always a tough thing to do…So even if house prices fall over the next few years, you’ll probably end up spending more on your mortgage as these record low interest rates are expected to go up over the next few years..    Here’s a calculator I found through The Star’s Moneyville.   I typed in some numbers using today’s averages… rents, house price, mortgage rate, inflation rate, etc…. the results showed buying would save you over $400,000 over a 25 year period.    Try it out.. see how it would fit your situation.

Let me know when I can help.

Steve Garganis steve@mortgagenow.ca

416 224 0114

Mortgage Broker vs. Mortgage Specialist

Getting calls on this topic once again so I thought I’d clear the air on this very important topic.   So what’s difference?   They both arrange mortgages…. and both can offer advice and product select, right?  WRONG!!!.   The differences are a plenty….I’ll cover the more relevant ones here.

I’ll start with the a quote from a recent Bank of Canada study that tells the story very clearly: “… borrowers who use a mortgage broker pay less, on average, than borrowers who negotiate with lenders directly.”   click here for the entire study.

I can probably stop writing after that statement but I wanted to point out a few more things:

  • A Specialist works for one Bank or a single Lender.    They are employees of the Bank or Lender.   They can only offer you one brand of products.
  • A Broker is independent.  They are not employees of any Bank or Lender.  They can offer products from several different Lenders.
  • More Lenders competing for your business means betters terms and rates.
  • A Specialist isn’t required to be licensed to arrange mortgages.   There are no standards for educational requirements (although most Lenders do provide some in-house training).   
  • A Broker must successfully complete a Provincially regulated Broker course and continue to maintain their good status to keep that license.
  • A Broker can provide unbiased advice.  They work for you, the borrower.

Look, you wouldn’t ask Burger King who makes the best burgers and expect them to say Harvey’s?   So why would you ask a Bank Mortgage Specialist to tell you which Lender has the best mortgage product for you?   Enough said.

Banks and Lenders are great suppliers of money, but they can’t give unbiased advice.  They can only offer you their products…and they will try to charge the highest rate possible…  but that’s okay.  They are a business.  And they will always try to maximize the profit for their employer, the Bank.

If you would like to compare mortgage products and rates, call your Mortgage Broker.

Don’t have one?, then call me.  I’d be happy to help.

Steve Garganis

416 224 0114

HELOC’s capped at 65% but some exceptions still apply..

Earlier this month marked the beginning of the end of 80% loan to value HELOCs.   Several Banks and of the Financial Institutions began to cut back the maximum LTV from 80% to 65% as per OSFI’s regulations.   But there are a few loopholes in the new rules….

  • The good news is that existing HELOC clients don’t have to worry.. these changes don’t apply to them.  OSFI is allowing them to keep their HELOCs at 80%….
  • Only OSFI regulated Financial Institutions are affected… Provincially regulated FI’s aren’t affected… Credit Unions don’t fall under OSFI’s rule…  there are still some Credit Unions offering HELOCs to 75% and even 80% loan to value.
  • Some of the Banks are still offering a combination of a HELOC and a mortgage of up to 80% ltv as long at you have at least 15% of your balance in an amortized payment schedule, and not interest only payments.

There is more good news… The BIG SIX BANKS can’t offer you an 80% LTV HELOC but the credit unions can… Maybe Canadians will start to seek other Lenders……They may finally discover that there much better options out there.   Watch for the Credit Unions to take a chunk out of the BIG SIX BANK mortgage pie.

Not sure where you fit in?   Call me for details.

Steve Garganis

416 224 0114

Bank of Cda doesn’t change rate…U.S. Fed not to raise rates until 2015?

Bank of Canada announced they were keeping the Target Rate unchanged today, during their 6th of 8 regularly scheduled meetings for 2012.  (This is not a recording..Lol!)

A more interesting topic is the U.S. Fed.  There was an article last week that caught my eye.   The article quotes the San Francisco Federal Reserve Bank president as saying he doesn’t believe the U.S. Fed will raise rates until 2015.  And even if you don’t agree with that forecast, we must acknowledge that US Fed Chairman Ben Bernanke has stated he doesn’t forecast any increases until 2014.

Why is this important for Canadians to follow?  They say when the U.S sneezes, Canada catches a cold.   There’s a lot of truth to that statement.  The U.S. is our biggest trading partner.   History tells us we follow U.S. economic policies and trends.

CANADA MAKES IT’S OWN PATH

But something changed in 2008.   The U.S. had a financial meltdown.  The entire world was impacted and pushed into a global recession.   Somehow, Canada came out of this with minimal damage.   No housing crash.  No Bank failures.  No meltdown.   In fact, many sectors our industry have flourished including our housing industry.   We don’t have any mortgage default problem.   Our unemployment rate is 7.3% compared with the 30 yr average of 8.4%.   And our Banks are reporting $billion quarterly profits.    We are the envy of the world….financially speaking.

CDA GOVT CONTINUES TO FOLLOW US GOVT

Still, the Cda govt continues to follow the U.S. Fed with regards to any rate increases or decreases.  After all, we are still a very small economy compared with the U.S. and the rest of the world.  The Bank of Canada has not increased the Target Rate for 24 months.  Bank Prime currently sits at 3.00%.   And many economists believe we won’t see any increase until late 2013 or even 2014.   This leads me to believe mortgage rates will remain low for some time to come.

BUT WHICH MORTGAGE TERM SHOULD YOU CHOOSE?

The big question is which mortgage term to choose today… short or long?  fixed or variable?   The answer depends on you…. your goals, plans, financial strategy, risk tolerance, etc.   Each of us has different needs… Product selection is very different today.   There is an interested Variable rate product at Prime less 0.35% that has my attention.  5 yr fixed at 3.19% and 3.09% are still available… not a bad option for most of us…. My best advice is to get some advice.   Speak with a qualified, unbiased professional.  Speak with a Mortgage Broker.   A Mortgage Broker doesn’t work for any one Bank.. they can offer a wide variety of products from a large number of Lenders….

As always, if you have any questions or comments, feel free to contact me.

Steve Garganis

steve@mortgagenow.ca

416 224 0114

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