January 15, 2013

Unintended Consequences Of An Unprecedented Period

The Winnipeg Free Press reports from Canada. “While the days of double-digit house-price increases may be over, analysts are still expecting the Winnipeg market to hold its own. A new report from Royal LePage is predicting a one per cent rise as demand weakens, while Canada Mortgage and Housing Corp. is expecting increases closer to four per cent. And while Winnipeg Realtor’s residential-market analyst won’t be releasing his 2013 forecast until next Wednesday, Peter Squire said his initial thought is the Royal LePage forecast is too conservative.”

“Squire noted Winnipeg has enjoyed 17 straight years of rising house prices, including double-digit gains in seven of the eight years between 2003 and 2010, a six per cent increase in 2011 and a five per cent hike in 2012. ‘We’ve had a good run,’ he said, ‘and I’m certainly not ready to declare it over.’”

The Montreal Gazette. “Condo resales may be down more than 20 per cent in Greater Montreal, but you’d never know it from the pace of sales at the Tour des Canadiens project. Developer Canderel Group has already sold out the Bell Centre project’s more than 500 units in about a month, with additional floors being put up for sale this weekend. And that was during the hockey lockout.”

“Real estate industry observers attributed the Tour’s rapid sales to a combination of marketing, a sales strategy that targeted buyers across Canada and the success of a similar Toronto condo project at Maple Leaf Square. Others argue that the strong interest in the Tour des Canadiens has spilled over to other downtown project, where thousands of units are under construction, or have been announced.”

“Toronto real estate broker Brian Persaud recalled how buyers at Maple Leaf Square made significant returns on their investments, even though the condos cost more per square foot than neighbouring projects. ‘I think word got out that people who bought at Maple Leaf Square were making at least $100,000,’ said Persaud, author of the book Investing in Condos.”

The Globe & Mail. “It would seem that regulators want to dissuade Canadians from buying homes with nothing down. When buying a home, you generally need at least 5 per cent of the purchase price as a down payment. Yet despite all of the recent changes, buyers can still get into the real estate market with little cash on hand. You’re free to borrow your down payment from a line of credit, personal loan or even a credit card.”

“In many provinces, lenders that aren’t federally regulated (like credit unions) can still offer cash-back down payment mortgages. The few that actually do will give you 5 per cent cash to use for your down payment. You then need to cough up only your closing costs, which include legal and inspection fees, the land transfer tax and so on.”

“Various provinces and municipalities provide down payment assistance grants. These programs are typically for people with low or moderate income. Despite these borrowers being higher risk, in some cases, they’re permitted to buy a home with nothing down. There are also specialized programs at individual lenders. For example, Canada’s biggest credit union, Vancity, currently finances an affordable condo project in Vancouver whereby it lends 90 per cent of the purchase price while the developer provides a 10 per cent second mortgage with no interest and no payments.”

“All of these down payment alternatives have one thing in common. They all come with some degree of added risk. It’s curious how Ottawa encourages people to have their own skin in the game, yet sanctions various substitutes to the traditional 5 per cent down payment.”

The Toronto Star. “Canada’s housing ‘bubble’ is more likely to develop a slow leak than actually burst, some of Canada’s top chief economists predict. But a cooler residential real estate market poses other kinds of risks to the economy, the Economic Club of Canada heard Friday. Slowing residential sales means fewer jobs in construction and lower prices will cut the value of most households’ key retirement asset, the club heard.”

“Even if Canada doesn’t see a U.S.-style wave of mortgage defaults, which few economists are predicting, a slowdown in sales will mean a slowdown in new residential construction, the club heard. The construction slowdown could come as soon as mid-summer, said Warren Jestin, chief economist with Scotiabank. It hasn’t shown up yet because so many condos are presold, he said. ‘By the time we get into the second half of this year you’re likely to see housing construction down very substantially,’ Jestin predicted.”

“A prolonged period of little or no growth in house prices could also hurt Canadians’ retirement savings, especially if interest rates also remain relatively low, Jestin cautioned. It’s one of the unintended consequences of an unprecedented period of record low interest rates, the panel said. While the Bank of Canada’s decision to lower its trendsetting rate helped the country survive the worst of the financial crisis of 2008 and the Great Recession that followed, it may have also created other more far-reaching problems down the road, Jestin cautioned.”

“‘Low interest rates are a gift to borrowers, but they’re a penalty to people trying to save for retirement,’ Jestin said.”

The Guardian. “To hear George Osborne tell it when he announced his selection of Mark Carney as the next governor of the Bank of England, Canada is doing very well. It ‘is acknowledged to have weathered the economic storm better than any other major western economy, bank bailouts have been avoided, sustained growth has returned,’ Osborne told the House of Commons.”

“It’s probably time to let you in on a secret. While it’s true that as a nation, Canada learned some sound policy lessons from its own financial and economic meltdowns in the latter decades of the 20th century, a lot of us are now personally up to our eyeballs. In fact, when it comes to mortgage debt, we’re not doing much better than Spain.”

“‘Canadian ‘household debt as a percentage of disposable income has risen by almost 60 percentage points to 165% today,’ Tiff Macklem, the senior deputy governor of the Bank of Canada told an audience at Queen’s University. Here’s the kicker: ‘The bulk of this rise in debt – 66%, or $636 bn – has been in the form of mortgage debt, putting Canadians in an uncomfortable neighbourhood between Spain and the United States in the ranking of household mortgage debt,’ Macklem said. ‘Thanks in part to low interest rates, it’s generally been our policy to become indebted. Just like everyone else in the world.’”

The Financial Post. “A couple we’ll call Tiff and Sandy turned their long-time friendship into a union when they bought a house in British Columbia and combined their fortunes in 2008. Each had a house with a mortgage. Then they bought a new residence and used a line of credit to add a rental apartment to the new house. Their $1.5-million of debt is 12 times their gross employment income. Revenue from the income properties barely covers their total costs — mortgage and line-of-credit interest, taxes, utilities, insurance and maintenance. Add in falling prices in the sliding B.C. housing market and the couple is subsidizing losing investments.”

“They started with 25% conventional down payments, but now find themselves with about 10% equity in the rental units as a result of falling property prices and debt-financed buyouts of former partners. Their return after paying all interest costs, utilities, insurance and taxes is negligible. Unless they can raise rents drastically or realize future capital gains, the investments are flops. They have just $2,000 in cash. If interest rates rise by 1% or 2%, they would be forced to refinance, but they already have 30-year amortizations.”

“Family Finance asked Adrian Mastracci, a portfolio manager and financial planner at KCM Wealth Management Inc. in Vancouver, to work with the couple. ‘The couple’s problems are far too much debt, especially for properties that are poor investments, and an excessive concentration in real estate, for each unit is within just blocks of the others,’ he says. ‘By selling their non-performing income properties, Tiff and Sandy can raise their standard of living, create savings, add to RESP and other registered savings, and increase their financial security.’”

Bits Bucket for January 15, 2013

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