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Posted Mortgage News

Doomsday real estate prophecy….enough already!

This pic might best capture the image that comes to mind when I hear the phrase ‘real estate crash’.   Don’t adjust your screen.  This isn’t a hoax.   This 12 story building collapsed in 2009 shortly after it was completed.

Note how the building remained intact after it fell.   That is truly amazing.   Clearly, it was well-built.  But note the hollow concrete piers with no rebar.   This is a great example of how even the best built building will fall if it has a weak foundation.

Our U.S. neighbors to the south learned about weak foundations in 2008.   The U.S. sub-prime mortgage crisis was caused by Banks offering mortgages to anyone with a pulse.   There was little to no qualifying for a mortgage.  You could buy or refinance up 110% of the value of the home!   Mortgages were being given to those that didn’t qualify.  This was the root of the U.S. housing crash.

HOW DOES CANADA STACK UP?

But is this what the future looks like for Canada’s housing market?    We keep hearing reports about the imminent Canadian housing bubble.  It’s coming… soon… no, really.   We’ve heard this continually for the last 5 years.   You just have to wake up and turn on the TV, radio or computer.   It’s full of Doomsday forecasters.   But reality is very different.   Listen to facts and forecasts from proven sources….  Take CMHC’s most recent report released in the 4th quarter of 2012.  They are calling for a stable housing market in 2013.  Average house prices will stop climbing and remain flat.  Rental vacancy rates will stay low.   Click here for CMHC’s Q4 report.

The forecast isn’t calling for any huge price drop as the media would have you believe.  It’s boring news… but that’s good news for us.  CMHC’s historical forecasts have been pretty accurate.  And they probably have more data at their fingertips than any other organization.   The Doomsday forecasters don’t seem to reference this report… but I suggest we give more consideration to accredited reports…

Speaking of Doomsday… I saw a good article in The Financial Post entitled ‘Are we worrying ourselves into a housing crash’?  A great question… and they quote 2 of my favorite Economists and Financial Experts, Moshe Milevsky and Benjamin Tal.   Both believe we won’t see a housing collapse like the U.S. had.  The fundamentals are very different.  But they think that if we keep talking about a crash, then it could  speed up and prolong any housing slowdown.

To me, Canada is like the 12 story building, strong and intact.   The U.S. was like the foundation…hollow and weak.   Let’s make sure understand the differences before we write off our housing market.

As always, I welcome your questions and comments.

Steve Garganis 416 224 0114 steve@mortgagenow.ca

 

Posted 1 Comment on Listings down, prices up…. housing bubble? Mortgage Rates

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

Posted 2 Comments on No housing bubble but possible tighter mortgage rules? Mortgage News

No housing bubble but possible tighter mortgage rules?

Last December, there was a report by CTV that the Federal Government was considering making some changes to mortgage rules if he saw evidence of a housing bubble.  These included increasing the minimum down payment from 5% to 10% and shortening maximum amortizations to 30 years from 35.

Today, the Globe and Mail reported Jim Flaherty, the Minister of Finance, has no plans to tighten Canadian Mortgage Rules.    He sees no evidence of a housing bubble.  The article goes on to say, the Big Six Banks have been putting some pressure on the Government to tighten mortgage rules.   Are you paying attention Mr. or Ms. Homeowner?  This could affect the value of your home.

Anything that makes is tougher for buyer’s to qualify for a mortgage will reduce housing sales and this ultimately will affect the value of real estate.  But probably the bigger and unwelcome effect is that it will make owning a home more difficult for first time homebuyers.

Let’s not forget that our government took action in October 2008 by reducing the maximum amortization to 35 years from 40.    They also abolished $0 money down and brought in a 5% minimum down payment. Is more action needed at this time?  I don’t think so…what troubles me a little is how the government and the Big Six banks are reportedly having secret meetings that concern mortgage rules.

Affordable housing is part of the Canadian dream.   The record low interest rates were brought in as part of the stimulus plan to help us get out of the recession.  We’re not completely out yet… let’s hope the government takes action that will help Canadians, not hinder their ability to own a home.

My suggestion to the government is to flex some muscle and get the banks to cap or standardize how they calculate prepayment penalties on residential mortgages.  We’ve seen far too many borrower’s with job troubles  that tried to benefit from the record interest rates, only to be hit with enormous prepayment penalties of $10,000, $15,000 and even $20,000.  Let’s help these Canadians.