Homebuyers are buying homes they can’t afford!

September 30th, 2013

Canadian mortgage borrowing jumped in the second quarter, pushing household indebtedness to a new high, according to Statistics Canada.

At the same time, Canadian household net worth climbed in the quarter, boosted by rising home prices.

Statistics Canada said Friday the ratio of household credit market debt to disposable income increased to a new high of 163.4 per cent in the second quarter compared with 162.1 per cent in the first three months of the year.

That means Canadians owe just over $1.63 for every $1 in disposable income they earn in a year.

During the second quarter, Canadians borrowed $25.9 billion including $18 billion in mortgage borrowing. Housing sales picked up in the period from April to June, as prospective buyers raced to beat expected rate hikes.

In the previous quarter, Canadians had borrowed $3.8 billion for mortgages — the lowest level in four years — and reduced other loans and consumer credit. Tighter mortgage rules implemented a year ago by Ottawa in an attempt to cool the market led to a downturn in number of house sales, yet house prices continued to rise.

The higher value of homes helped push up household net worth — it rose 0.7 per cent in the second quarter, led by a 1.6 per cent gain in the value of houses.

Total mortgage debt stood at just over $1.1 trillion and consumer credit debt reached $500 billion at the end of the quarter. Financial experts say the levels of consumer debt in Canada are troubling, with some people carrying debt into retirement.

The increase in household net worth was held back by a weak quarter on the Toronto Stock Exchange, which saw its benchmark composite index fall 4.9 per cent in the quarter.

Statistics Canada said household net worth was $205,900 in the second quarter on a per capita basis.

Posted by Kevin Somnauth, CFA (via the CBC)
First Toronto Mortgage

Finance Minister To Leave Mortgage Rules Alone Going Forward

September 16th, 2013

Finance Minister Jim Flaherty appears to be backing away from further interference with the mortgage industry, sharing his satisfaction with the housing market and addressing a call for higher interest rates.

“I’m comfortable with the way the housing situation has evolved,” Flaherty said at a news conference on Monday. “I tightened the rules on mortgage insurance four times in the past several years, and OSFI has also taken some action, the superintendent of financial institutions, and I’m comfortable with what I’ve seen.”

The most recent of Flaherty’s changes were made last summer and include lowering the maximum amortization period for insurable mortgages from 30 years to 25 years.

The statement came as the minister responded to a suggestion from Scotiabank CEO Rick Waugh, calling for increased interest rates as the best way to further slow the market.

“It’s not an underwriting or credit problem, it’s the fact that (low) interest rates do cause bubbles,” Waugh told reporters in Toronto last week. “I do not think there is a bubble, but if you’re really concerned — and you’re a policy maker — you know what the right thing to do is? Raise interest rates.”

Fixed interest rates have been increasing, though the Bank of Canada’s refusal to increase the overnight rate has held variable rates steady.

Speculation is also growing that OSFI — whose changes thus far have satisfied Flaherty – will make further changes to underwriting rules. However, a representative told MortgageBrokerNews.ca last week that no decision to implement changes has yet been made.

“If we decide to revise Guideline B-20 we will undertake public consultations,” Annik Faucher of OSFI told MortgageBrokerNews.ca. “No decisions have yet been reached.”

Posted by Kevin Somnauth

TD Canada Trust Forecast

September 3rd, 2013

In just a few short months, long-term mortgage rates have burst higher by almost ¾ of a percentage point.

People naturally want to know if the hikes are sustainable, and how they’ll affect the overall housing market.

TD Economics weighed in on these points in a report last week. Here’s a quick overview of the implications TD foresees, and some observations of our own…

Future Rates: TD projects a 2.25 percentage point jump in 5-year bond yields by 2017. That would peg 5-year fixed rates at roughly 5.74%. Given economists’ poor forecasting record, this number is a pure shot in the dark. But it’s still a worthwhile number to use when stress testing your mortgage. That aside, one TD assertion that most would agree with is that future rate “increases are expected to be…gradual.”

Securitization: The report notes that, “…The recently-announced changes to the amount of mortgage backed securities that will be guaranteed by CMHC will…lead to somewhat higher costs in funding for financial institutions.” As we wrote on August 6th, this impact won’t be extreme for most lenders (and consumers).

The Variable Advantage: TD concludes that even if one assumes an abnormally high variable rate like prime + 1.00%, a variable-rate mortgage has still “yielded a lower average interest rate over a five year term (than a 5-year fixed) since the late 1990s.”

The Best Rate Forward: According to TD’s analysis and rate projections, “…Locking into a 5-year mortgage rate would yield the lowest average interest rate over the next five years.” But TD analyzes just four other term scenarios including a 5-year variable and five consecutive 1-year terms. TD’s report does not touch on options like the 4+1 strategy (i.e. choosing a 4-year fixed and renewing into a 1-year fixed).

The 4+1 is a decent play today with 4-year fixed terms near 3.09% (i.e., 30 bps below most five-year fixed offers). If you do the math, one-year rates would need to be above 4.80% at renewal for a 5-year fixed to beat the 4+1 strategy. That’s over two points higher than today, which makes it a good gamble given how modest inflation and growth have been (and are projected to be).

Rate Impact on Housing: TD’s research finds that “every 1 percentage point increase in interest rates leads to an immediate increase in sales of 6 percentage points as buyers rush to take advantage of lower rates, followed by a 7% decline in the months that follow. Hence, the net impact is a 1 percentage point permanent decline in existing home sales due to every 1 percentage point increase in interest rates.” By our calculations that’s about 4,500 lost sales a year per 1 point of rate hikes (based on CMHC’s sales projections). That is not catastrophic by any stretch, and frankly it seems like an underestimate, if anything.

Income Gains: TD expects that 3-4% income growth will “help offset much of the impact of gradually rising rates”

Mortgage Affordability: The report states, “…Affordability using the 5-year posted rate (is) at the worst it has been in almost 13 years. And, if 5-year interest rates were at more normal levels of around 7%, housing would be unaffordable to the average Canadian household.” There’s just one caveat. That statement is based on posted rates (i.e. those rates that no one pays). “Using the 5-year special mortgage rate, housing affordability in this country is actually at its most favourable level since early 2000’s,” TD says. How long it remains that way is another question. Complacency can be devastating to one’s budget, so mortgage stress testing is once again key here.