Tuesday, August 30, 2011
Economic conditions will help Canada's real estate sector stay healthy: CMHC
By Mary Gazze, The Canadian Press
Canada's national housing agency says it expects home sales and construction activity will cool but remain healthy in the second half of the year, due to favourable economic conditions that push up demand for homes.
Canada Mortgage and Housing Corp. said Monday that lower unemployment, a steady level of immigration, and low interest rates are working together to prop up Canada's real estate industry.
"I think the Canadian housing market is healthy at the moment despite the uncertainty we observed in the financial market," Mathieu Laberge, deputy Chief Economist at CMHC said in an interview.
He was referring to the stock market ups and downs earlier this month as investors worried about the European debt crisis and feared the U.S. could slip back into recession.
"Employment is expected to grow at a moderate pace in the next few years," he said.
"We expect interest rates to remain flat for the remainder of the year and increase in 2012, and new immigration is an addition to demand in the housing market."
Laberge said the CMHC predicts the market sales volumes will hold at a stable level next year.
Canada Mortgage and Housing Corp. said low unemployment, immigration and low interest rates led to fewer claims in the first half of the year under its mortgage insurance programs, which protect lenders from defaults by borrowers.
The agency said it expects fixed mortgage rates to stay relatively flat for most of the year, with the five-year posted rate at between 4.1 per cent and 5.6 per cent, then increase slightly in 2012.
CMHC said variable rate mortgages would remain near historically low levels, although some banks recently increased their variable rates to reflect the higher cost of raising money.
Prices of homes shown on the Multiple Listing Service are expected to grow only slightly going forward because the supply and demand for resale homes will likely stay in balanced territory, CMHC said.
A least one analyst agreed that the real estate market should stay fairly healthy for the rest of 2011, but said it's already cooling slowly and home prices may decline in the longer term.
"What you're probably looking at is a period where prices are relatively flat, maybe a little bit lower in the next few years," said Adrienne Warren, an economist at Scotiabank who specializes in the real estate industry.
"Affordability from a price perspective has deteriorated and that's going to have to, over time, come back to more normal levels but it doesn't imply that that has to happen quickly as a type of correction that occurs quickly."
She said interest rates are low and attractive right now and encourage first time home buyers to enter the market, which drives up prices. Once those rates begin to rise — likely in the second half of 2012 — the current price of homes will become unaffordable for many, putting downward pressure on future prices.
In its report Monday, CMHC said changes to mortgage rules introduced by the federal government earlier this year played a part in reducing mortgage interest payments and allowed Canadians to build equity in their homes faster.
Canadians are finding it easier to pay off their mortgages, with arrears levels improving and the volume of mortgage insurance claims lower than expected.
In March, the federal government put through new rules that reduced the maximum amortization period to 30 years and cut the maximum amount Canadians can borrow to 85 per cent of the home's value.
After the changes, refinancing activity fell by nearly 40 per cent, which means fewer Canadians took on more debt. Federal Finance Minister Jim Flaherty and Bank of Canada governor Mark Carney have repeatedly warned of the dangers of the ballooning debt level of Canadian consumers.
Ten per cent fewer Canadians bought mortgage insurance immediately after the new rules began, and the level was five per cent lower than sales before the changes came into effect.
CMHC also reported its net income for the quarter was $383 million, up $61 million from $322 million in the same quarter last year. Revenues were down slightly at $3.3 billion, versus $3.4 billion.
The agency's predictions for the rest of the year echo a revised forecast by the Canadian Real Estate Association released earlier this month. CREA said it expected higher national home resales this year, reversing upward its previous forecast of a one per cent dip.
National average prices will be in the range of $347,700 to $374,300, growing to between $349,500 to $385,000 in 2012, CREA predicted.
CMHC said sales of existing homes should range between 429,500 and 480,000 units in 2011 and between 410,000 and 511,900 units in 2012.
Earlier this month, the CMHC said that national housing starts rose to 205,100 units on a seasonally adjusted basis in July, 11.6 per cent higher than the 188,900 reported in the same month last year and 4.3 per cent more than the 196,600 recorded in June.
The uptick, driven by strong construction on condos and apartment buildings in urban centres, is likely due to builders catching up to robust demand last year rather than expectations of coming growth, it said.
Home building activity has been increasing through the first seven months of 2011, but starts are still down 4.6 per cent from a year ago.
Predictions for the Canadian market were in stark contrast with the most recent figures from the United States, which showed that country's depressed housing market is still trying to get back on track.
The U.S. National Association of Realtors said Monday that its index of sales agreements fell 1.3 per cent in July to a reading of 89.7. A reading of 100 is considered healthy by economists
The association also said a growing number of buyers had cancelled contracts after appraisals showed the homes they wanted to buy were worth less than they bid.
Monday, August 29, 2011
B.C.'s home sales, property values to slow as job growth ebbs: BCREA
VANCOUVER - Slower job growth in British Columbia's economy will mean slower increases in home sales and property values through to 2012, the B.C. Real Estate Association said Thursday.
And by the end of 2012, the association expects the high-flying prices in some of B.C.'s bigger markets to show small declines.
Home sales through the realtor-controlled Multiple Listing Service should hit 74,640 by the end of 2011, which is up four per cent from 2010, and then rise to 80,300 in 2012, association chief economist Cameron Muir said in his report.
However, those estimates are below B.C.'s long-term average for sales and the forecast for 2011 represents reduced expectations from Muir's forecast from earlier this year that B.C. should see 78,200 sales this year.
"Following a decade where unit sales broke all records, consumer demand for the next few years will be relatively moderate," Muir said in releasing the report.
A positive note, however, is that weaker global economic growth and uncertainty in world financial markets are signals that interest rates, including mortgage rates, will remain low and "help underpin housing demand."
Across the province, Muir is forecasting that the average home price, which has been heavily influenced by strong sales in the more expensive pockets of Metro Vancouver, to hit $559,179 by the end of 2011.
However, by the end of 2012, Muir is forecasting that the average price will fall back 2.5 per cent to $545,964.
The 2012 price declines, however, are expected to show up primarily in the Lower Mainland Markets, which influence the overall provincial averages.
Muir expects Metro Vancouver's average price to slip 3.5 per cent in 2012 to $742,000. However, that will be a decline off 2011, which Muir predicts will end with the average price having shot up 14 per cent to $769,000.
And Muir is forecasting that the Fraser Valley will see its average price in 2012 dip 1.4 per cent to $498,000. But that follows 2011, where he expects the average price will have gained 12 per cent from the previous year to hit $505,000.
And by the end of 2012, the association expects the high-flying prices in some of B.C.'s bigger markets to show small declines.
Home sales through the realtor-controlled Multiple Listing Service should hit 74,640 by the end of 2011, which is up four per cent from 2010, and then rise to 80,300 in 2012, association chief economist Cameron Muir said in his report.
However, those estimates are below B.C.'s long-term average for sales and the forecast for 2011 represents reduced expectations from Muir's forecast from earlier this year that B.C. should see 78,200 sales this year.
"Following a decade where unit sales broke all records, consumer demand for the next few years will be relatively moderate," Muir said in releasing the report.
A positive note, however, is that weaker global economic growth and uncertainty in world financial markets are signals that interest rates, including mortgage rates, will remain low and "help underpin housing demand."
Across the province, Muir is forecasting that the average home price, which has been heavily influenced by strong sales in the more expensive pockets of Metro Vancouver, to hit $559,179 by the end of 2011.
However, by the end of 2012, Muir is forecasting that the average price will fall back 2.5 per cent to $545,964.
The 2012 price declines, however, are expected to show up primarily in the Lower Mainland Markets, which influence the overall provincial averages.
Muir expects Metro Vancouver's average price to slip 3.5 per cent in 2012 to $742,000. However, that will be a decline off 2011, which Muir predicts will end with the average price having shot up 14 per cent to $769,000.
And Muir is forecasting that the Fraser Valley will see its average price in 2012 dip 1.4 per cent to $498,000. But that follows 2011, where he expects the average price will have gained 12 per cent from the previous year to hit $505,000.
Thursday, August 25, 2011
Fall Home Renovation Projects
Angie Mohr, On Monday August 22, 2011, 12:55 pm EDT
After summer holidays are over and the heat and humidity subsides, it’s a good time to start home renovation and preparation projects before the cold weather sets in. Flower beds can be cut down, lawns fertilized for the last time and windows washed. Here are five projects that are perfect for cool fall days.
Winterize the Deck
Decks get a lot of use during long summer days. By the time fall comes around, they can look worn out and old. Once the deck is cleaned off and all summer chairs and tables are stored away, power-wash the deck with a high-velocity pressure washer. This will dislodge any dirt that is stuck in the wood grain and will take away the gray color that decks fade to over time. Fall is also a good time to reseal the deck if you use a sealant or stain. Choose a warm day that has no chance of rain and start the process in the morning so that the deck has several hours of drying time before nightfall.
Insulate Exposed Plumbing
Uninsulated plumbing lines in unheated spaces are a major cause of power use, as the water heater must work extra hard to heat water. It can also cause pipes to freeze and burst if you live in an area that dips below the freezing mark in the winter. Check all of your plumbing lines to identify those that are outside or underneath the house, or are in an unheated basement or attic. Foam wrap can be purchased at any home improvement store. Wrap all exposed pipes to save on energy when the days start getting colder.
Roof Work
Once all the autumn leaves have fallen, cleaning out the roof gutters will save you from building up ice dams that can damage the roof in the winter. Blow out the gutters with a leaf blower or wash them out with a hose. Check for any holes or other damage to the gutters and repair them before heavy snow makes them worse. It’s also a good time to take a look at the roof itself and fix any shingles that are curling or any flashing around chimneys that has come loose. If your roof is in bad shape, bring in a roofing contractor to assess whether the roof needs to be replaced before winter or can wait until the spring.
Upgrade Doors and Windows
If you have old, single-pane windows, you will lose a significant amount of heat in the wintertime. Replacing old windows with energy-efficient, double-paned upgrades can pay for itself quickly in heat savings. Check all exterior doors to ensure that they are insulated and that there are no gaps or cracks between the doors and the frames that could let heat out. If you have weatherstripping around doors, make sure it is intact and in good shape. If it's not in good shape, replace it before the cold weather sets in.
Interior Painting
Warm fall days are perfect for indoor painting. Summer is often too humid for paint to dry properly and that can cause walls to look splotchy. In winter, the lack of ventilation can make paint fumes hang around and can lengthen drying times. Open up windows to ensure there is a breeze that will both reduce the paint smell and dry it quickly.
The Bottom Line
Fall is an important transition season for home improvement projects. With the cold of winter coming, getting the house and yard prepared will save you money in the long run.
After summer holidays are over and the heat and humidity subsides, it’s a good time to start home renovation and preparation projects before the cold weather sets in. Flower beds can be cut down, lawns fertilized for the last time and windows washed. Here are five projects that are perfect for cool fall days.
Winterize the Deck
Decks get a lot of use during long summer days. By the time fall comes around, they can look worn out and old. Once the deck is cleaned off and all summer chairs and tables are stored away, power-wash the deck with a high-velocity pressure washer. This will dislodge any dirt that is stuck in the wood grain and will take away the gray color that decks fade to over time. Fall is also a good time to reseal the deck if you use a sealant or stain. Choose a warm day that has no chance of rain and start the process in the morning so that the deck has several hours of drying time before nightfall.
Insulate Exposed Plumbing
Uninsulated plumbing lines in unheated spaces are a major cause of power use, as the water heater must work extra hard to heat water. It can also cause pipes to freeze and burst if you live in an area that dips below the freezing mark in the winter. Check all of your plumbing lines to identify those that are outside or underneath the house, or are in an unheated basement or attic. Foam wrap can be purchased at any home improvement store. Wrap all exposed pipes to save on energy when the days start getting colder.
Roof Work
Once all the autumn leaves have fallen, cleaning out the roof gutters will save you from building up ice dams that can damage the roof in the winter. Blow out the gutters with a leaf blower or wash them out with a hose. Check for any holes or other damage to the gutters and repair them before heavy snow makes them worse. It’s also a good time to take a look at the roof itself and fix any shingles that are curling or any flashing around chimneys that has come loose. If your roof is in bad shape, bring in a roofing contractor to assess whether the roof needs to be replaced before winter or can wait until the spring.
Upgrade Doors and Windows
If you have old, single-pane windows, you will lose a significant amount of heat in the wintertime. Replacing old windows with energy-efficient, double-paned upgrades can pay for itself quickly in heat savings. Check all exterior doors to ensure that they are insulated and that there are no gaps or cracks between the doors and the frames that could let heat out. If you have weatherstripping around doors, make sure it is intact and in good shape. If it's not in good shape, replace it before the cold weather sets in.
Interior Painting
Warm fall days are perfect for indoor painting. Summer is often too humid for paint to dry properly and that can cause walls to look splotchy. In winter, the lack of ventilation can make paint fumes hang around and can lengthen drying times. Open up windows to ensure there is a breeze that will both reduce the paint smell and dry it quickly.
The Bottom Line
Fall is an important transition season for home improvement projects. With the cold of winter coming, getting the house and yard prepared will save you money in the long run.
Wednesday, August 24, 2011
Royal Bank, BMO increase its five-year variable mortgage rates
Sunny Freeman, The Canadian Press, On Tuesday August 23, 2011, 8:01 pm EDT
By Sunny Freeman, The Canadian Press
TORONTO - Royal Bank of Canada (TSX:RY) is raising its variable rate mortgages for homebuyers in a move that reflects higher costs of borrowing in the bond market.
Canada's largest bank said Tuesday it is hiking the rates charged on its five-year variable closed mortgages by a fifth of a point, effective Wednesday.
That will put that rate even with the bank's prime rate of three per cent.
Bank of Montreal later joined Royal in raising its five-year variable closed mortgage to three per cent which, in the case of BMO, represented a 0.15 percentage point increase.
Meanwhile, the Royal's special variable rate mortgage also increased by a fifth of a point to prime minus 0.45 percentage points, making it 2.55 per cent.
In the past when banks raised variable rates without a corresponding increase in the Bank of Canada rate, they were accused of trying to boost profit margins at the expense of borrowers.
But Royal Bank, which is also Canada's largest mortgage lender, said the latest increase reflects higher costs in the bond market, where it raises money to finance its mortgage loans.
Bond interest rates have risen due to growing debt fears in the United States and Europe as lenders want higher rates to part with their money in a riskier global economy.
The increase in market interest rates comes at the same time central banks are keeping their rates low to stimulate the weak economy.
In the U.S., the Federal Reserve Board has said it will keep interest rates flat for another two years to spur growth, while the Bank of Canada is also expected to hold the line on rates well into next year.
Low mortgage rates in recent years have been a big factor in spurring growth in the Canadian housing market, which remains buoyant in most parts of the country.
Although it is unusual for banks to hike their variable rates without a rise in the Bank of Canada's overnight lending rate, it is not unprecedented.
"This is not the first time that the price for variable rate mortgages is changing relative to prime without a corresponding change in the BOC rate," a Royal Bank spokesman said in an email.
"In fact, over the period that BOC increased its overnight rate from 0.25 per cent to one per cent, the bank reduced the pricing levels for new mortgages relative to prime."
The mortgage market is highly competitive in Canada and in the past variable rate mortgages were popular with borrowers when interest rates were expected to remain low and there was little chance of sudden hikes in borrowing costs.
In the last few months, more consumers opted to lock into fixed terms when it looked like the Bank of Canada would begin to push rates sharply higher to fight inflationary pressures in the economy.
But the recent stock market and economic turmoil that has kept central bank rates low could push borrowers back to variable terms in the Canadian market.
Royal Bank said the Bank of Canada's rate is just one of many factors that go into pricing decisions. Banks mortgage costs are also based on changes in the bond markets, where rates have been volatile and banks raise money for their mortgage lending.
Recent global uncertainty over whether the U.S. can come up with a plan to deal with its debt problems, and over fears the debt crises in smaller European economies will spread across the continent, have caused bond rates to rise.
That makes it more expensive for banks to fund their mortgage operations, and led RBC to recoup some of those costs through a higher variable rate.
"Mortgage rates are tied to the banks funding costs which change from day to day," the bank said. "Due to global economic concerns, the funding costs for banks have been increasing.
"While we have held off in passing on these high costs to our clients, it is now necessary for us to increase this mortgage rate."
The big Canadian banks usually move in tandem when there is a variable rate change along with a change in the Bank of Canada's overnight lending rate, but its unclear whether the rest will follow this time.
Competitive pressures could force some banks to keep variable rates low to attract customers.
Royal Bank will report its third-quarter results on Friday.
By Sunny Freeman, The Canadian Press
TORONTO - Royal Bank of Canada (TSX:RY) is raising its variable rate mortgages for homebuyers in a move that reflects higher costs of borrowing in the bond market.
Canada's largest bank said Tuesday it is hiking the rates charged on its five-year variable closed mortgages by a fifth of a point, effective Wednesday.
That will put that rate even with the bank's prime rate of three per cent.
Bank of Montreal later joined Royal in raising its five-year variable closed mortgage to three per cent which, in the case of BMO, represented a 0.15 percentage point increase.
Meanwhile, the Royal's special variable rate mortgage also increased by a fifth of a point to prime minus 0.45 percentage points, making it 2.55 per cent.
In the past when banks raised variable rates without a corresponding increase in the Bank of Canada rate, they were accused of trying to boost profit margins at the expense of borrowers.
But Royal Bank, which is also Canada's largest mortgage lender, said the latest increase reflects higher costs in the bond market, where it raises money to finance its mortgage loans.
Bond interest rates have risen due to growing debt fears in the United States and Europe as lenders want higher rates to part with their money in a riskier global economy.
The increase in market interest rates comes at the same time central banks are keeping their rates low to stimulate the weak economy.
In the U.S., the Federal Reserve Board has said it will keep interest rates flat for another two years to spur growth, while the Bank of Canada is also expected to hold the line on rates well into next year.
Low mortgage rates in recent years have been a big factor in spurring growth in the Canadian housing market, which remains buoyant in most parts of the country.
Although it is unusual for banks to hike their variable rates without a rise in the Bank of Canada's overnight lending rate, it is not unprecedented.
"This is not the first time that the price for variable rate mortgages is changing relative to prime without a corresponding change in the BOC rate," a Royal Bank spokesman said in an email.
"In fact, over the period that BOC increased its overnight rate from 0.25 per cent to one per cent, the bank reduced the pricing levels for new mortgages relative to prime."
The mortgage market is highly competitive in Canada and in the past variable rate mortgages were popular with borrowers when interest rates were expected to remain low and there was little chance of sudden hikes in borrowing costs.
In the last few months, more consumers opted to lock into fixed terms when it looked like the Bank of Canada would begin to push rates sharply higher to fight inflationary pressures in the economy.
But the recent stock market and economic turmoil that has kept central bank rates low could push borrowers back to variable terms in the Canadian market.
Royal Bank said the Bank of Canada's rate is just one of many factors that go into pricing decisions. Banks mortgage costs are also based on changes in the bond markets, where rates have been volatile and banks raise money for their mortgage lending.
Recent global uncertainty over whether the U.S. can come up with a plan to deal with its debt problems, and over fears the debt crises in smaller European economies will spread across the continent, have caused bond rates to rise.
That makes it more expensive for banks to fund their mortgage operations, and led RBC to recoup some of those costs through a higher variable rate.
"Mortgage rates are tied to the banks funding costs which change from day to day," the bank said. "Due to global economic concerns, the funding costs for banks have been increasing.
"While we have held off in passing on these high costs to our clients, it is now necessary for us to increase this mortgage rate."
The big Canadian banks usually move in tandem when there is a variable rate change along with a change in the Bank of Canada's overnight lending rate, but its unclear whether the rest will follow this time.
Competitive pressures could force some banks to keep variable rates low to attract customers.
Royal Bank will report its third-quarter results on Friday.
Monday, August 15, 2011
Shall I rent or shall I own?
Mark Wahlberg buys a Toronto condo despite real estate bubble
Golden Girl Finance, On Thursday August 11, 2011, 10:00 am EDT
Donnie Wahlberg may have been a New Kid on The Block, but his cutie-boy brother Mark Wahlberg, (Marky Mark to those who remember the 90s) has become a new kid on a block in Toronto…in the form of a $12 million penthouse condo. The posh bachelor pad is close to Wahlberg's usual digs at The Hazelton Hotel, where rooms run between $500 to $2400 a night. Given that the star of Boogie Nights, The Fighter and former leader of hip-hop group The Funky Bunch spends an increasing amount of time filming movies in the city and hanging out at the Toronto International Film Festival, it seems he's decided to quit forking over money in hotel room rentals and instead buy his own place.
Wahlberg probably has the advantage of owning his new condo outright, giving him full equity ownership. For the rest of us mortgage-carrying mortals, however, now is not an ideal time to be investing in a condo in Toronto. According to Ben Rabidoux, financial adviser, real estate expert and author of the website The Economic Analyst (www.TheEconomicAnalyst.com), in most Canadian cities right now (but certainly not all), the house price versus rent ratio and the house price versus income ratio are at or near their all-time highs. This suggests that, overwhelmingly, it makes better financial sense to rent in these markets and invest your equity elsewhere.
There is no free equity
Building equity is undeniably a wise financial move. The mistake many people make is equating equity with a mortgage. A mortgage doesn't give you equity; equity is only as much as you pay. A down payment is equity. Anything you pay toward the principle of your mortgage is equity. Paying interest to the bank is as useful to your financial situation as paying rent to your landlord.
If you start out with a very small down payment and arrange for a long future of low monthly payments, your ability to build equity before selling your home becomes seriously limited. With less than 15 per cent equity, you may end up merely trading one mortgage for another. If there is a drop in the housing market, the value of your home could fall to the point that if you were to sell it, you would owe more on your mortgage than the actual selling price of the house. Once it's sold, you'd have to write the bank a cheque to make up for the difference. This is called a 'negative equity' situation and while it's a worst case, it happens more often than you might realize.
Renting space or renting money?
Most likely, everyone from your father to your banker has drilled the idea into your head that renting is a waste of money and buying a home is the only prudent way to build equity. According to Rabidoux, this is not always the case, especially in markets that are currently overvalued and highly vulnerable to a real estate crash, such as Vancouver, Victoria and the Toronto condo market.
"There is a very unfortunate stigma attached to renting," Rabidoux says. "This is dangerous and damaging to many people's finances. The reality is that the majority of new home 'owners' are still renters; they've just gone from renting space to renting money." With rents in large cities exceptionally cheap compared to owning, home ownership becomes a very steep tax on those unwilling to crunch the numbers or who give into the societal pressure to buy. Don't be that girl!
Comparing the costs
Rabidoux suggests wannabe-homeowners start by figuring out the monthly costs of owning a home. Calculate the mortgage principal and interest, taxes, insurance and any additional monthly payments such as condo fees. Also add the often ignored but very necessary maintenance costs — two per cent of the cost of the house per year is a good rule of thumb — then divide by 12 to get a monthly cost.
Next, figure out what it would cost you to rent a similar property in the area. Kijiji and online classifieds are a good place to start. Realtors can also help with rent statistics. Remember that rent is often negotiable, particularly if you don't have pets or kids, if you do have a stable job, are a non-smoker and have good references. Landlords often give steep discounts to 'good tenants' they believe will care for their property.
Most importantly, consider the lost opportunity cost of your down payment: what you could be earning by investing your equity in something other than real estate. With stocks or bonds, for example, you can earn a minimum of three to four per cent with a very conservative, low-risk investment. If you have a $20,000 down payment, that means you are foregoing at least $600-$800 a year that this money could be earning you.
You may be tempted to think that you can easily earn that kind of return on the value of a home, as house prices climb to teetering levels and buyers engage in wild bidding wars for the luxury of overleveraging themselves to buy their dream home. Yet, the definition of a housing 'bubble' is an unreal, overly inflated market where people expect prices to rise forever. Depending on the market where you live, you must consider the risk of when the bubble may burst and how you might safely build equity elsewhere. This needs to be factored into the 'true' cost of ownership.
Save the difference
If you find a substantial cost difference between owning and renting and choose to rent, you have a great opportunity to have the best of both worlds — rent the place you want and bank the difference. Of course, there is no financial benefit if you end up using the cost savings to splash out every month on Frette linens, Fall & Barrow paint and a fabulous home theatre system. The wise renter is disciplined enough to invest her monthly cost savings and therefore build that equity that everyone has told you can only come from home ownership.
The long-term view
If you plan to buy a home and live in it for many years or even decades, you will likely ride out numerous market fluctuations, will be more likely to sell at a profit and less likely to find yourself in a negative equity situation. As for Marky Mark, he's probably not in it for the profit; he has his movies for that. We do hope, however, that his foray into Canadian real estate means that he and his "Good Vibrations" will be here for a very long time.
Golden Girl Finance, On Thursday August 11, 2011, 10:00 am EDT
Donnie Wahlberg may have been a New Kid on The Block, but his cutie-boy brother Mark Wahlberg, (Marky Mark to those who remember the 90s) has become a new kid on a block in Toronto…in the form of a $12 million penthouse condo. The posh bachelor pad is close to Wahlberg's usual digs at The Hazelton Hotel, where rooms run between $500 to $2400 a night. Given that the star of Boogie Nights, The Fighter and former leader of hip-hop group The Funky Bunch spends an increasing amount of time filming movies in the city and hanging out at the Toronto International Film Festival, it seems he's decided to quit forking over money in hotel room rentals and instead buy his own place.
Wahlberg probably has the advantage of owning his new condo outright, giving him full equity ownership. For the rest of us mortgage-carrying mortals, however, now is not an ideal time to be investing in a condo in Toronto. According to Ben Rabidoux, financial adviser, real estate expert and author of the website The Economic Analyst (www.TheEconomicAnalyst.com), in most Canadian cities right now (but certainly not all), the house price versus rent ratio and the house price versus income ratio are at or near their all-time highs. This suggests that, overwhelmingly, it makes better financial sense to rent in these markets and invest your equity elsewhere.
There is no free equity
Building equity is undeniably a wise financial move. The mistake many people make is equating equity with a mortgage. A mortgage doesn't give you equity; equity is only as much as you pay. A down payment is equity. Anything you pay toward the principle of your mortgage is equity. Paying interest to the bank is as useful to your financial situation as paying rent to your landlord.
If you start out with a very small down payment and arrange for a long future of low monthly payments, your ability to build equity before selling your home becomes seriously limited. With less than 15 per cent equity, you may end up merely trading one mortgage for another. If there is a drop in the housing market, the value of your home could fall to the point that if you were to sell it, you would owe more on your mortgage than the actual selling price of the house. Once it's sold, you'd have to write the bank a cheque to make up for the difference. This is called a 'negative equity' situation and while it's a worst case, it happens more often than you might realize.
Renting space or renting money?
Most likely, everyone from your father to your banker has drilled the idea into your head that renting is a waste of money and buying a home is the only prudent way to build equity. According to Rabidoux, this is not always the case, especially in markets that are currently overvalued and highly vulnerable to a real estate crash, such as Vancouver, Victoria and the Toronto condo market.
"There is a very unfortunate stigma attached to renting," Rabidoux says. "This is dangerous and damaging to many people's finances. The reality is that the majority of new home 'owners' are still renters; they've just gone from renting space to renting money." With rents in large cities exceptionally cheap compared to owning, home ownership becomes a very steep tax on those unwilling to crunch the numbers or who give into the societal pressure to buy. Don't be that girl!
Comparing the costs
Rabidoux suggests wannabe-homeowners start by figuring out the monthly costs of owning a home. Calculate the mortgage principal and interest, taxes, insurance and any additional monthly payments such as condo fees. Also add the often ignored but very necessary maintenance costs — two per cent of the cost of the house per year is a good rule of thumb — then divide by 12 to get a monthly cost.
Next, figure out what it would cost you to rent a similar property in the area. Kijiji and online classifieds are a good place to start. Realtors can also help with rent statistics. Remember that rent is often negotiable, particularly if you don't have pets or kids, if you do have a stable job, are a non-smoker and have good references. Landlords often give steep discounts to 'good tenants' they believe will care for their property.
Most importantly, consider the lost opportunity cost of your down payment: what you could be earning by investing your equity in something other than real estate. With stocks or bonds, for example, you can earn a minimum of three to four per cent with a very conservative, low-risk investment. If you have a $20,000 down payment, that means you are foregoing at least $600-$800 a year that this money could be earning you.
You may be tempted to think that you can easily earn that kind of return on the value of a home, as house prices climb to teetering levels and buyers engage in wild bidding wars for the luxury of overleveraging themselves to buy their dream home. Yet, the definition of a housing 'bubble' is an unreal, overly inflated market where people expect prices to rise forever. Depending on the market where you live, you must consider the risk of when the bubble may burst and how you might safely build equity elsewhere. This needs to be factored into the 'true' cost of ownership.
Save the difference
If you find a substantial cost difference between owning and renting and choose to rent, you have a great opportunity to have the best of both worlds — rent the place you want and bank the difference. Of course, there is no financial benefit if you end up using the cost savings to splash out every month on Frette linens, Fall & Barrow paint and a fabulous home theatre system. The wise renter is disciplined enough to invest her monthly cost savings and therefore build that equity that everyone has told you can only come from home ownership.
The long-term view
If you plan to buy a home and live in it for many years or even decades, you will likely ride out numerous market fluctuations, will be more likely to sell at a profit and less likely to find yourself in a negative equity situation. As for Marky Mark, he's probably not in it for the profit; he has his movies for that. We do hope, however, that his foray into Canadian real estate means that he and his "Good Vibrations" will be here for a very long time.
Wednesday, August 10, 2011
Housing could get boost from market chaos
The upside in a global stock market rout may ironically be a healthier housing market – at least in the short term, say economists.
“The housing market has nine lives. Every time interest rates are supposed to go down, something happens and it helps to keep the market going,” said Benjamin Tal, senior economist at CIBC World Markets.
Interest rates were supposed to be headed up before the crisis of terrorist attacks in New York on 9/11, and the last crash in 2008. But that didn’t happen. And it looks like rates will be staying down for a while, says Tal.
The market is already betting that Bank of Canada Governor Mark Carney’s plans to hike interest rates as soon as September will have to be put off until the end of next year.
South of the border, the Federal Reserve said Tuesday that it expects “exceptionally low levels of the federal funds rate at least through mid-2013.”
And ironically, while the U.S. has experienced a downgrade in its credit rating from Standard & Poors, investors have continued to pile into the Treasuries market.
The U.S. dollar remains the global reserve currency as investors head for shelter as they find few safe haven options out there.
The demand for treasuries means that yields have gone even lower. Which means there is downward pressure on longer-term interest rates. Long-fixed term rates are affected by a variety of factors such as competition for funds in financial markets and to prices in the bond market. Short-term rates are more affected by the key overnight central bank rate.
“The interest rate environment will continue to be very attractive for homebuyers for both short term and longer term borrowing costs. With the safety of U.S. bonds that’s keeping longer term rates low,” said Scotiabank economist Adrienne Warren.
Industry groups are warning, meanwhile, that during an already tough recovery, any sudden move upward in rates could have dire consequences on real estate sales.
“The very recent global economic news demonstrates the Bank of Canada needs to consider any future rate hikes with extreme caution, as the recovery may be more fragile than believed,” said Ontario Home Builders’ Association President Bob Finnigan.
Some investors may also be looking at real estate assets for a place to park their money because of the volatile stock market, said Tal.
Lance Dore, a member of the U.S.-based Royal Institution of Chartered Surveyors, says investment in real estate may be a beneficiary from those looking for safe haven.
“The sell-off of stocks is a clear signal that people are not confident in the future and want safety now. What has also happened in the past declines in the stock market is a flight to quality,” said Dore. “Real estate tends to be the recipient as part of this flight. Real estate values are at all-time lows with returns at all-time highs. The convergence of excess cash due to stock sell-off and corporations flush with cash for investment will push these excess funds into the inevitable diversification to real estate.”
While the future for the stock market looks shaky, the real estate sector is improving due to improving fundamentals based on increasing rents, absorption of distressed supply and increased interest for diversification, said Dore.
However, if the stock market continues on a downward path, housing will not escape unscathed. While lower interest rates are a huge mitigating factor, the losses on the market may eventually translate into job losses.
For one thing, it takes confidence to plunk down that down payment for a home. It usually means that you’ve got a job, some savings, and hope for the future.
But confidence is not in abundance in global stock markets this week as concerns over sovereign debt have panicked investors. Without confidence, the housing market – the biggest ticket item on the consumer checklist will suffer no matter how low rates go, say economists.
In the United States, where more than a quarter of borrowers have negative equity – meaning they owe more than their homes are worth – this could mean another setback for the already beleaguered market.
In Canada, where markets have been stable, and have been forecast to cool down next year, this could mean that sales and valuations may come down to earth quicker than expected.
“Assuming the volatility and uncertainty continues in the markets it will have negative implications for both potential home buyers and for builders,” said Scotiabank economist Warren. “There is still a big difference between Canada and the U.S. But it certainly reinforces our view that growth in Canada and internationally will be on the soft side.”
So far, economists have not changed their outlook on the Canadian housing market. Most expect the market to flatline or correct slightly by next year. But that could change if the rout continues.
“If this is the precipitation of a larger more protracted slowdown for the economy it will certainly affect housing,” said Peter Norman, chief economist real estate consultancy Altus Group.” If we get into a soft patch with slower employment growth then we will see slower home sales. For investors who are speculating on future events this adds another layer of uncertainty in the market. So this would cause them to sit on the sidelines.”
In separate reports on Tuesday, Canadian housing starts surprised by rising unexpectedly in July, climbing to a 15 month high, up 4.3 per cent to 205,100 units according to the Canada Mortgage and Housing Corporation. And U.S. home values actually had the smallest drop in four years in the second quarter according to figures released by Zillow Inc.
But this was before the impact of the stock market drop which will affect confidence as consumers suffer from a declining wealth effect. During a recession, the high end of the market, of purely discretionary purchases such as cottages and luxury condos might be the first to feel the impact. But a lack of confidence will affect all sectors of the market.
“We continue to hold that new home construction will start to cool in the second half of the year, but this may come more slowly than anticipated as rates remain low for longer,” said Arlene Kish, principal economist for IHS Global Insight. “On the other hand, if the recent slide in financial markets remains persistent, consumers will become less optimistic and will likely stay away from home purchases.”
“The housing market has nine lives. Every time interest rates are supposed to go down, something happens and it helps to keep the market going,” said Benjamin Tal, senior economist at CIBC World Markets.
Interest rates were supposed to be headed up before the crisis of terrorist attacks in New York on 9/11, and the last crash in 2008. But that didn’t happen. And it looks like rates will be staying down for a while, says Tal.
The market is already betting that Bank of Canada Governor Mark Carney’s plans to hike interest rates as soon as September will have to be put off until the end of next year.
South of the border, the Federal Reserve said Tuesday that it expects “exceptionally low levels of the federal funds rate at least through mid-2013.”
And ironically, while the U.S. has experienced a downgrade in its credit rating from Standard & Poors, investors have continued to pile into the Treasuries market.
The U.S. dollar remains the global reserve currency as investors head for shelter as they find few safe haven options out there.
The demand for treasuries means that yields have gone even lower. Which means there is downward pressure on longer-term interest rates. Long-fixed term rates are affected by a variety of factors such as competition for funds in financial markets and to prices in the bond market. Short-term rates are more affected by the key overnight central bank rate.
“The interest rate environment will continue to be very attractive for homebuyers for both short term and longer term borrowing costs. With the safety of U.S. bonds that’s keeping longer term rates low,” said Scotiabank economist Adrienne Warren.
Industry groups are warning, meanwhile, that during an already tough recovery, any sudden move upward in rates could have dire consequences on real estate sales.
“The very recent global economic news demonstrates the Bank of Canada needs to consider any future rate hikes with extreme caution, as the recovery may be more fragile than believed,” said Ontario Home Builders’ Association President Bob Finnigan.
Some investors may also be looking at real estate assets for a place to park their money because of the volatile stock market, said Tal.
Lance Dore, a member of the U.S.-based Royal Institution of Chartered Surveyors, says investment in real estate may be a beneficiary from those looking for safe haven.
“The sell-off of stocks is a clear signal that people are not confident in the future and want safety now. What has also happened in the past declines in the stock market is a flight to quality,” said Dore. “Real estate tends to be the recipient as part of this flight. Real estate values are at all-time lows with returns at all-time highs. The convergence of excess cash due to stock sell-off and corporations flush with cash for investment will push these excess funds into the inevitable diversification to real estate.”
While the future for the stock market looks shaky, the real estate sector is improving due to improving fundamentals based on increasing rents, absorption of distressed supply and increased interest for diversification, said Dore.
However, if the stock market continues on a downward path, housing will not escape unscathed. While lower interest rates are a huge mitigating factor, the losses on the market may eventually translate into job losses.
For one thing, it takes confidence to plunk down that down payment for a home. It usually means that you’ve got a job, some savings, and hope for the future.
But confidence is not in abundance in global stock markets this week as concerns over sovereign debt have panicked investors. Without confidence, the housing market – the biggest ticket item on the consumer checklist will suffer no matter how low rates go, say economists.
In the United States, where more than a quarter of borrowers have negative equity – meaning they owe more than their homes are worth – this could mean another setback for the already beleaguered market.
In Canada, where markets have been stable, and have been forecast to cool down next year, this could mean that sales and valuations may come down to earth quicker than expected.
“Assuming the volatility and uncertainty continues in the markets it will have negative implications for both potential home buyers and for builders,” said Scotiabank economist Warren. “There is still a big difference between Canada and the U.S. But it certainly reinforces our view that growth in Canada and internationally will be on the soft side.”
So far, economists have not changed their outlook on the Canadian housing market. Most expect the market to flatline or correct slightly by next year. But that could change if the rout continues.
“If this is the precipitation of a larger more protracted slowdown for the economy it will certainly affect housing,” said Peter Norman, chief economist real estate consultancy Altus Group.” If we get into a soft patch with slower employment growth then we will see slower home sales. For investors who are speculating on future events this adds another layer of uncertainty in the market. So this would cause them to sit on the sidelines.”
In separate reports on Tuesday, Canadian housing starts surprised by rising unexpectedly in July, climbing to a 15 month high, up 4.3 per cent to 205,100 units according to the Canada Mortgage and Housing Corporation. And U.S. home values actually had the smallest drop in four years in the second quarter according to figures released by Zillow Inc.
But this was before the impact of the stock market drop which will affect confidence as consumers suffer from a declining wealth effect. During a recession, the high end of the market, of purely discretionary purchases such as cottages and luxury condos might be the first to feel the impact. But a lack of confidence will affect all sectors of the market.
“We continue to hold that new home construction will start to cool in the second half of the year, but this may come more slowly than anticipated as rates remain low for longer,” said Arlene Kish, principal economist for IHS Global Insight. “On the other hand, if the recent slide in financial markets remains persistent, consumers will become less optimistic and will likely stay away from home purchases.”
Tuesday, August 9, 2011
v
Harper urges calm as stock markets tumble on financial woes
BRASILIA - Don’t panic.
That was Stephen Harper’s message today as the Toronto stock market plunged to its lowest point in almost a year on the first day of trading after the United States had its credit rating bumped down a tier.
“To date, this doesn’t change our overall assessment,” the prime minister said during a visit to the Brazilian capital.
“Notwithstanding the fragility of the economy and the headwinds that are there, we believe that a gradual recovery can continue. Our policies have been achieving that in Canada.”
The Toronto Stock Exchange and Wall Street’s main market both fell 300 points in afternoon trading, while the price of gold soared as investors looked for shelter in a rout sparked by the historic downgrading by Standard & Poor’s.
At a signing ceremony with Harper for several modest bilateral deals, Brazilian President Dilma Rousseff criticized the credit-rating agency for an “incorrect assessment.”
“We do not agree with the rushed evaluation, a little bit too quick evaluation, and I would even say incorrect assessment made by Standard & Poor’s which reduced the credit rating of the United States.”
The Prime Minister’s Office later clarified that Rousseff was speaking on behalf of Brazil, not Canada.
Harper opened a four-country tour of Latin America by announcing agreements with Brazil on air transport, social security, Olympic co-operation and international development aid effectiveness.
Harper and Rousseff also announced a business leaders’ forum that would see Canadian and Brazilian executives meet on the margins of high-level diplomatic talks.
“Brazil is a major global economic player and a key priority market for Canada,” Harper said in a press release.
“These agreements will benefit both countries by promoting greater two-way flow of people, goods and services, enhancing our competitiveness and further strengthening our partnership in key areas of shared interest.”
Canada is seeking bilateral free trade deals with a number of countries, placing a special emphasis on the countries of Latin America and the Caribbean.
The Conservative government is eager to make inroads with Brazil in particular, the world’s seventh-largest economy and expected to rise to No. 5 within a few years.
But doing a deal with Brazil is tricky. Brazil needs the consent of Argentina, Paraguay and Uruguay — members of a common South American economic bloc called Mercosur — to enter into such an agreement.
Harper said Canada has begun exploratory talks with Mercosur on a free-trade deal.
Harper’s trip takes him to Brazil, Colombia, Costa Rica and Honduras.
BRASILIA - Don’t panic.
That was Stephen Harper’s message today as the Toronto stock market plunged to its lowest point in almost a year on the first day of trading after the United States had its credit rating bumped down a tier.
“To date, this doesn’t change our overall assessment,” the prime minister said during a visit to the Brazilian capital.
“Notwithstanding the fragility of the economy and the headwinds that are there, we believe that a gradual recovery can continue. Our policies have been achieving that in Canada.”
The Toronto Stock Exchange and Wall Street’s main market both fell 300 points in afternoon trading, while the price of gold soared as investors looked for shelter in a rout sparked by the historic downgrading by Standard & Poor’s.
At a signing ceremony with Harper for several modest bilateral deals, Brazilian President Dilma Rousseff criticized the credit-rating agency for an “incorrect assessment.”
“We do not agree with the rushed evaluation, a little bit too quick evaluation, and I would even say incorrect assessment made by Standard & Poor’s which reduced the credit rating of the United States.”
The Prime Minister’s Office later clarified that Rousseff was speaking on behalf of Brazil, not Canada.
Harper opened a four-country tour of Latin America by announcing agreements with Brazil on air transport, social security, Olympic co-operation and international development aid effectiveness.
Harper and Rousseff also announced a business leaders’ forum that would see Canadian and Brazilian executives meet on the margins of high-level diplomatic talks.
“Brazil is a major global economic player and a key priority market for Canada,” Harper said in a press release.
“These agreements will benefit both countries by promoting greater two-way flow of people, goods and services, enhancing our competitiveness and further strengthening our partnership in key areas of shared interest.”
Canada is seeking bilateral free trade deals with a number of countries, placing a special emphasis on the countries of Latin America and the Caribbean.
The Conservative government is eager to make inroads with Brazil in particular, the world’s seventh-largest economy and expected to rise to No. 5 within a few years.
But doing a deal with Brazil is tricky. Brazil needs the consent of Argentina, Paraguay and Uruguay — members of a common South American economic bloc called Mercosur — to enter into such an agreement.
Harper said Canada has begun exploratory talks with Mercosur on a free-trade deal.
Harper’s trip takes him to Brazil, Colombia, Costa Rica and Honduras.
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