Canadians’ homes are getting less affordable, but we still keep buying

Home ownership has become less affordable for the average Canadian, but that hasn’t stopped many from jumping into what may already be an overpriced market, suggests a new report from the Royal Bank.
 Royal Bank says its housing affordability index reversed course in the second quarter of this year in two of the three categories it measures — bungalows and two-storey homes — after generally improving over the past year.
That means that on average, Canadians were paying more of the pre-tax income to service their homes compared to the first quarter of the year, although the index is still down from a year ago.
The quarterly increase was not spectacular — 0.3 points to 42.7% on a detached bungalow and 0.4 points to 48.4% on a standard two-storey home. The index on a condo was unchanged at 27.9%.
As with past samplings, Vancouver and Toronto continue to stand out as the least affordable cities. During the second quarter, Vancouver’s affordability reading rose 2.2 points to 82.1 on a detached bungalow, while Toronto’s edged up half a point to 54.5.
By contrast, other major municipalities were far more tame and below the national average. On a detached bungalow, Montreal slid slightly to 38.1%, Ottawa was mildly higher at 37.1, Edmonton was at 34.0 despite a 1.8 point gain, and Calgary held steady at 33.0.


The affordability index measures the cost of servicing a home, including mortgage payments, utilities and taxes, in relation to a household’s pre-tax income. The higher the reading, the less affordable is a home to a particular family.
RBC chief economist Craig Wright noted that the deterioration in affordability did not scare many Canadians from jumping feet first into the housing market during the second quarter as sales actually surged by 6.4%, following a general slowdown since last summer’s introduction of stiffer mortgage lending rules.
“We saw a bit of a bounce-back in prices,” said Wright. “We had a series of regulatory changes, but now it looks like the market has adjusted and now seems to be recovering somewhat.”
The report is for the April to June period and does not capture this month’s announced increases of between 0.1 and 0.2% — 10 or 20 basis points— in posted mortgage rates at several major banks. A 20-basis point hike in rates will increase monthly payments up to $100 on a typical $500,000 mortgage.
“Mortgage rates will be the next challenge,” Wright added. “The move upward we’ve seen probably suggests that affordability will be a little more challenging (in the third quarter).”
But he noted that despite what has been a hot housing market in Canada, with prices hitting new highs almost monthly, affordability remains close to historic levels in part because interest rates are so low.
The Bank of Canada has long warned Canadians to take a forward-looking approach to home ownership and calculate what will happen to monthly payments once interest rates begin to rise, which it says is inevitable.
But Wright said the situation of affordability is more complex than simply interest rates. A sharp spike in rates will cause problems, yet most, including the Bank of Canada, currently anticipate the increases will be modest and gradual and won’t likely start occurring until late next year. The central bank has kept its short-term trendsetting rate at 1% for now.
As well, Wright points out that the bank will likely only start a monetary policy tightening phase once the economy starts improving, so the higher rates might be offset by an improvement in employment and in incomes, which could offset the negative impact on household finances. Higher rates might also lead to lower real estate prices, which also improves affordability.

 Julian Beltrame, Canadian Press | 13/08/27 “houses for sale in Toronto”

Toronto home sales jump 13 per cent

Homes were selling at a brisk pace in Vancouver and Toronto last month, while the national average price continued to rise, suggesting Canada’s real estate industry has returned to “average levels” after a decline that began last summer.

The Canadian Real Estate Association’s report on activity for July showed resales edging up 0.2 per cent from June on a seasonally adjusted basis and up 9.4 per cent from July 2012, when tighter rules put the brakes on lenders and buyers.

Despite the recent uptick, the total of 284,865 homes that traded hands in the first seven months of 2013, is 4.6 per cent fewer than the corresponding period last year.

“Canadian home sales have staged a bit of a recovery in recent months after having declined in the wake of tightened mortgage rules and lending guidelines last year, but the numbers for July suggest that national activity is leveling off at what might best be described as average levels,” said Gregory Klump, the real estate association’s chief economist.

The national average home price was $382,373, 8.4 per cent higher than a year ago, although Klump said that was mostly because sales were concentrated in expensive major markets.

Excluding sales in Toronto and Vancouver, the national average price would have gone up only half as much and sales volume would have been down from June, the CREA report notes.

Vancouver had a 12 per cent increase in sales in July relative to June and a 39.9 per cent increase from the same month last year, while Toronto’s sales were up 4.8 per cent month-month and up 12.9 per cent year-year.

“Toronto has shown some signs of a bit more vigor in recent months, including in July,” said RBC senior economist Robert Hogue.

“Toronto is a big chunk of the overall Canadian market — but when you look at Toronto and Vancouver, both markets seem to be in an upswing,” he said in an interview with the Star. “We’re now seeing a number of successive months of pickup in activity.”

Despite Ottawa’s concerns about a potential overheating of the Canadian housing market, Hogue said these latest numbers “were just right, not too hot and not too cold.”

As well, fears of a slowing market resulting from recent higher interest rates hikes do not appear warranted.

“The number today I think should be seen as pretty good,” Hogue said.

However, Bank of Montreal chief economist Doug Porter said the numbers may also have been inflated by the fact there were five Mondays and Tuesdays during July, traditionally two big days for closing real estate deals.

“The big picture is that the market has proven to be reasonably resilient, but I don’t think it is taking off again in a meaningful way,” Porter said.

He said the July numbers may have been boosted by fence-sitters jumping into the market after mortgage rates rose in June.

“So it’s debatable whether the strength will persist.”

David Madani of Capital Economics — who has previously warned he expects a major contraction at some time in the future — believes many Canadians have pulled forward their home purchases in expectations mortgage rates will rise in future months.

While many economists and industry watchers have said the Canadian housing market was likely to cool for a time after several years of heated sales and above-average price increases, relatively few have predicted a severe decline.

“Higher mortgage rates of late have led to some erosion in affordability ... (and) this should keep a lid on sales growth in the second half of the year,” agreed senior economist Sonya Gulati of TD Bank in a note to clients. “But positive annual sales gains are slated for 2014.”

Canada Mortgage and Housing Corp. reported separately Thursday that the western provinces are helping stabilize construction activity and momentum will build into next year.

However, CMHC has lowered its previous estimate for 2014 to about 186,600 units, down 2,300 units from the June estimate of 188,900.

The Ottawa-based government agency is now estimating that between 177,100 and 188,500 housing units will be started this year.

That’s about 182,800 units at the mid-point, down from 214,827 housing starts last year but about the same as in the previous forecast issued in June.

“CMHC expects single-detached units and housing units built in the western provinces to account for a higher share of total housing starts over the forecast horizon,” said Mathieu Laberge, CMHC’s deputy chief economist.

Toronto Homes for Sale | Toronto Real Estate Agent

By: The Canadian Press, Published on Thu Aug 15 2013

Is seller financing an answer to CMHC restrictions?

As a result of further restrictions announced by CMHC regarding the total number of deals available for insurance, lenders may tighten up their qualification process, which may cause a slowdown in the market, if the number of potential buyers for a home is reduced. Is seller financing an option that could create a win-win situation for both home sellers and buyers?

Seller financing is when the seller offers to take back a loan secured by a mortgage for part of the sale price, which can be anywhere from 70 per cent-90 per cent of the sale price, depending on the deal that is negotiated. Why would a seller do this? The benefits to a seller doing this are as follows:

They will likely get a higher price for their property;

The deal can probably close faster;

The interest rate payable on the mortgage will likely be more than they can earn in any bank investment;

They will attract more potential buyers, as buyers will not have to pay any mortgage fees or the CMHC insurance premium, which can be an additional 2-3 per cent of the mortgage amount.

If it is an investment property, the seller can likely defer some of any capital gain on the sale into the future, when the mortgage is in fact payable.

Why would a buyer pay more for a property or a higher interest rate?

They don’t have to go through the same rigorous lender approval process, or pay the additional fees;

They will likely be able to negotiate an open mortgage, with no prepayment penalties when they want to pay the mortgage back

It goes without saying that the seller must do a proper credit check on the buyer, to ensure that the buyer can make the mortgage payments. There is also a risk that the buyer will not make the payments. However, if this does happen, the seller will be able to very quickly step in and sell the property if default occurs, under the powers contained in the mortgage.

A further concern against seller financing is that it will likely not be an option if the seller has a mortgage on his property, as this mortgage must be paid off on closing. The seller may not have the extra money available to do this. Real Estate agents have the power to negotiate seller financing terms in the real estate contract, on behalf of buyers and sellers, although the lawyers will prepare and register the documents on closing.

I would also advise sellers to be very cautious before accepting a second mortgage on your property. This is where a buyer obtains part of the financing from a third-party lender, for example equal to 70 per cent of the value of your home, and then asks the seller to take back a second mortgage for an additional 20 per cent of the price.

The risks here are much greater. If the buyer stops payments on the first mortgage, then the lender has the right to step in and sell the property. The seller will then have to make all the payments owing under the first mortgage before they can step in and sell the property under their second mortgage.

Some of the important terms to consider when you negotiate a seller take back mortgage are as follows:

Ensure that post dated cheques or pre-authorized chequing is obtained for all payments to be made under the mortgage;

Include a penalty if any payment is returned NSF, typically $100-$200;

Insert a provision for payment to provide a mortgage statement for discharge purposes; typically $250 plus HST;

Include a clause that at the option of the seller, the entire principal outstanding becomes due if the buyer sells the property at any time during the term of the mortgage;

Determine whether the seller will accept partial payments of principal at any time during the term of the mortgage, with or without a penalty.

Seller financing can be an effective option for some buyers and sellers, provided that everyone is properly prepared in advance.

Toronto Homes for Sale | Toronto Real Estate Agent

  Mark Weisleder
Published on Mon Aug 12 2013
Toronto Star 
 www.thestar.com  

Does Canada have too many homebuyers?

U.S. home ownership rates have reached 18-year lows but don’t expect Canadian levels to follow anytime soon.
Even if Canadian home sales continues to slide — and there are plenty of signs the market might actually be turning around — it could take some time before home ownership rates are actually impacted.
The risk to the Canadian economy is the buyers entering the market today are on the fringe, much the way they were in the United States before the market crashed there.
“High ownership rates are endogenous to an economic cycle, prices are raising and that makes housing look like an attractive investment,” said David Madani, Canadian economist with Capital Economics.
 With that high penetration rate comes the likelihood of people entering the market with smaller downpayments and generally weaker credit ratings. “You might get proportionally more first-time buyers,” said Mr. Madani.
Canadian home ownership levels are not tracked as closely as they are in the United States but it is believed we are now close to having 70% of households in an ownership position — an all-time high. We were at 68.4% based on the 2006 census and the percentage is expected to climb the next time data is released.

Meanwhile in the United States, home ownership levels continue to fall as consumers still face tight credit conditions and an overhang of shattered confidence in housing as an investment still exists. Home ownership rates are now at 65% in the U.S. after reaching 69.2% in 2004.

The Canadian Real Estate Association said last month that home sales were down 6.9% over the first half of the year from 2012 but over the last four months sales have been climbing. It’s still unclear what the effect will be on ownership rates.

The impact of four sets of mortgage rule changes in Canada during this housing cycle may have blunted the market to some degree but the effects of such measures as a lowering of amortization lengths from 40 years to 25 years also appear to have been worked through.
Barriers to entry into the Canadian market are still not that great. The minimum downpayment is only 5% and anybody with a 20% downpayment can get a loan backed by the federal government — guaranteeing a rate close to 3% on five-year fixed rate closed mortgage.
Phil Soper, chief executive of Royal LePage Real Estate Services, says the tick up in home ownership can be partially attributed to a social shift which has seen younger consumers set up a home even before they were married.
He doesn’t see the same danger in the marketplace for people entering the housing sector as the United States where he says some mortgages were set up based on “criminal behaviour” in some cases.
“These people were given Ninja-style loans — no income, no jobs or assets,” said Mr. Soper, about the U.S. “I don’t think we are innocents in Canada as it relates to the growth of the subprime mortgage sets, they were the fastest growing segment of loans in 2004-2007 but it just represented a tiny part of our market.”
Mr. Soper said lending standards have tightened around the world and that’s the case in Canada too. “The financial institutions themselves have injected their own conservatism into their lending practices.”
The bottom line is as long as housing prices continue to go up, Canadians will see their homes as a good place to park their money, says Doug Porter, chief economist with Bank of Montreal.
“More Canadians are deciding to take the plunge,” said Mr. Porter, also citing still low interest rates. “Fundamentally, you also have more young people deciding to buy the condo they live in rather than renting.”
Toronto Homes for Sale | Toronto Real Estate Agent
Garry Marr - Financial Post

Toronto real estate sales soar in July

House sales across the GTA reached their highest levels in July for that summer month since 2009, with a 16 per cent surge in sales.

It was the third best July for sales on record, says the Toronto Real Estate Board.

The average selling price also spiked, up eight per cent to $513,246, largely based on sales of low-rise homes, according to figures released Friday by TREB.

Condo apartment transactions, and prices, however, were also up. Sales increased some 10.5 per cent across the GTA over a year earlier – with a healthy increase in transactions in both the 905 and 416 regions.

The average price of condos sold in July was up 3.4 per cent, year-over-year, to $338,854.

“We are forecasting continued average price growth for the remainder of 2013 and through 2014 as well, says TREB senior manager of market analysis, Jason Mercer. “Months of inventory for low-rise homes remain near record lows, suggesting that sellers’ market conditions will remain in place the second half of 2013.”

While surprising on the surface, the sudden surge can be explained by a few factors: This year’s strong July is being compared to last year’s weak sales figures. A year ago the market was softening significantly, especially condo sales, in the wake of tougher mortgage lending rules that had been imposed that month by Ottawa, sidelining many first-time buyers.

As well, July’s sales were pushed upward by a rush of buyers into the market, armed with 90-day pre-approved mortgages at rates often under three per cent, concerned that a slight uptick in mortgage rates in June was just the beginning of what might become a steady upward trend.

Weather may have also be a contributing factor: The spring market was pretty much a wash-out across the GTA this year as the cold, wet weather kept buyers at bay. Many realtors had been anticipating that pent-up demand could see an extension of the spring market into the summer, and perhaps even into this fall.

On the price side, some of the upward pressure in July can be attributed, quite simply, to a lack of inventory for sale, most notably single-family homes, especially in the high-demand City of Toronto.

New listings were up last month just 2.3 per cent from July, 2012.

Highest growth in demand, by far, was for semi-detached homes where sales were up 26.4 per cent in July over the same month of 2012, according to the TREB figures. Sales spiked almost 29 per cent in the City of Toronto and 25.2 per cent in the 905.

Average prices hit $584,499 (up 11.1 per cent) in the 416 region and $416,420 (up 6.5 per cent) in the 905.

Detached home sales were up 20.7 per cent in the 416 and 19.6 per cent in the 905 regions.

The average price of a detached home in the 416 rose 6.5 per cent, to $793,842, in the City of Toronto and 8 per cent in the 905 regions, to an average of $597,404.

Condo sales were up 10.6 per cent in the City of Toronto and 10.2 per cent in the suburbs.

Average sale prices, which had largely flatlined over the last year because of slumping sales and fears the condo market was headed for a crash, rose 4.1 per cent in the City of Toronto to about $362,000.

They were up just 1 per cent in the 905 regions, to an average of $281,044.

First-time buyers appear to have adjusted a year later to the mortgage lending rule changes. They’ve had more time to save up bigger downpayments, seem to have more confidence that the condo market is holding up much better than many observers had expected a year ago, and seem to be out buying again, realtors say.

The TREB(Toronto Real EstateBoard) numbers would appear to reflect some of that.

Even the condo sector is seeing a firming up of prices, which largely flatlined as of a year ago, although the number of units for sale remains high.

By: Susan Pigg Business Reporter, Published on Fri Aug 02 2013 

The Toronto Star

CMHC moves to take steam out of housing market

Ottawa is taking new steps to cool the country’s housing market. (Toronto Real Estate)
Canada Mortgage and Housing Corp. is limiting guarantees it offers banks and other lenders on mortgage-backed securities. The measure comes amid the federal government’s efforts to protect taxpayers from financial risks in the housing sector, further cool lending and add upward pressure to mortgage rates.
The Crown corporation has notified banks, credit unions and other mortgage lenders that they will each be restricted to a maximum of $350-million of new guarantees this month under its National Housing Act Mortgage-Backed Securities (NHA MBS) program. The decision comes in the wake of “unexpected demand” for the guarantees, a spokeswoman for CMHC said in an e-mailed statement.
The conversion of loans into securities with CMHC backing has become a popular way for lenders to tap funds from a broad range of investors, enabling banks to issue more mortgages and at a lower cost.
Federal Finance Minister Jim Flaherty, concerned that Canada’s housing market might overheat and infect the economy, has been taking steps to cut back the flow of mortgage credit. This spring, he went as far as to publicly chastise some banks for dropping their mortgage rates too low.
He is also taking steps to reduce the degree to which taxpayers backstop the housing market.
This year, he announced he would restrict the ability of banks to buy bulk insurance from CMHC, and he curtailed the use of government-backed insurance in securities sold by the private sector. Ottawa released a legal framework for covered bonds, another type of bond backed by pools of mortgages, last year. It said banks could not use insured mortgages in such securities.
In addition to removing fuel from the housing market, these moves force banks and other lenders to take on more of the risk of mortgage defaults, rather than offloading that risk to Ottawa.
Canada’s housing market slowed in the wake of the government’s moves, namely Mr. Flaherty’s decision last summer to tighten mortgage insurance rules. Still, prices in most areas continued to climb, and sales have begun to bounce back.
“The government is attempting to tighten credit conditions for home loans, for example the changes to CMHC’s underwriting standards last year, and this is the latest iteration of that effort,” said National Bank analyst Peter Routledge.
He said that the four largest mortgage underwriters, Royal Bank of Canada, Toronto-Dominion Bank, Canadian Imperial Bank of Commerce and Bank of Nova Scotia, had made good use of the NHA MBS program “and I expect that their funding strategies will change as a consequence.”
“Given the differentials in funding costs via NHA MBS or unsecured long-term funding, I could see [an additional] 20 to 65 basis points in the cost of funding mortgages for the larger banks,” he said. “All else equal, we could see mortgage rates start to move up in unison.”
At the start of this year, after consultations with CMHC, Mr. Flaherty said the Crown corporation could guarantee a maximum of $85-billion worth of new NHA MBS this year. By the end of July, lenders had already issued $66-billion worth of the securities, compared to $76-billion during all of 2012. As a result, CMHC is imposing the $350-million cap on each issuer effective immediately, while it comes up with a formal allocation process this month that it will put in place for the final four months of the year.
The Crown corporation guarantees timely payment of interest and principal to investors in both types of securities, and charges the banks a fee for the service.
On its website, CMHC states that “MBS [have] helped to ensure a ready supply of low-cost funds for housing finance and to keep mortgage lending costs as low as possible for homeowners.”
Mr. Routledge said that smaller mortgage lenders don’t create enough NHA MBS to be materially affected by the new $350-million cap.
The amount of NHA MBS being issued shot up during the financial crisis, as banks sought cheaper sources of funds to continue lending mortgages. The securities are backed by pools of insured mortgages, and investors receive monthly principal and interest payments that stem from the payments homeowners make on the underlying mortgages. Banks sell the securities to investors, or to be used in the Canada Mortgage Bond program.

  Toronto Homes for Sale | Toronto Real Estate Agent

TARA PERKINS

The Globe and Mail

Published Tuesday, Aug. 06 2013,