Did OSFI kill the Smith Manoeuvre? Tens of thousands of Canadians employ leveraged investing strategies like the Smith Manoeuvre. They rely on these techniques to magnify their investment gains and pay down their mortgages faster.

The Smith Manoeuvre entails:

• re-borrowing your regular mortgage principal payments
• investing that money in the market
• writing off the investment loan interest, and
• using the resulting tax refunds to prepay your mortgage

You need a readvanceable mortgage (aka HELOC) and at least 20% equity to employ the strategy.

The Smith Manoeuvre hit a roadbump this past June when Canada’s banking regulator, OSFI, officially announced lower HELOC borrowing limits.

As of October 31st, investors with bank-issued HELOCs will be able to borrow only 65% of their home value via a revolving credit line, as opposed to 80% before the changes. Most banks have already implemented this new guideline – impacting the Smith Manoeuvre in the process.

Click here for the more details from CanadianMortgageTrends.com.

A new poll suggests that most Canadians are quite comfortable with using debt as a financial strategy – at a time when debt loads have risen to alarming new highs.

The survey, done for bankruptcy trustees Hoyes, Michalos & Associates, finds nine out of 10 respondents would consider borrowing money to cover an unexpected cost.

The poll by Harris/Decima asked respondents how confident they were about being able to raise $2,000 within a month if an unexpected need arose.

While 55% said they were extremely or very confident they could raise the cash, 92% said they’d consider borrowing to come up with some of the cash.

Click here for the full Globe and Mail article

A visit to the bank of mom and dad is often necessary when buying a home, but it always pays to use a lawyer when lending money between the generations. Having a legal document that clearly outlines the agreement can help protect the parents, the child, and any siblings, spouse or future spouse.

Vancouver lawyer Gail Davies has been doing real estate conveyancing for more than 25 years and she said most often she has clients who are “lending” their children 100% of a home’s purchase price. Usually, they are doing so as an advance on a future inheritance and the money is not expected to be paid back.

But even in that case, having a legal document and probably a mortgage is a good idea, Davies said. A formal mortgage on the property protects siblings, who also stand to inherit from their parents’ estate, and it can also secure the money in the event of a divorce.

“If the child is cohabiting with someone, the person they are cohabiting with could have a claim against the property,” Davies said. If you don’t have a mortgage on the property, you could end up as an unsecured creditor if things don’t work out, Davies said.

Click here to read more from the Vancouver Sun.

 

The new Apple iPhone 5 tells us a lot about why you can’t get your financial act together.

The iPhone is a brilliant device – a deluxe cellphone that has become a cultural icon. So important is the iPhone 5 that the announcement of its features and release date – it’s Sept. 21 – were treated globally as a major media event. Who doesn’t now know that the iPhone 5 is 18 per cent thinner and 20 per cent lighter than its predecessor?

A man talks on a mobile phone in front of an Apple logo outside an Apple store in downtown Shanghai in this September 3, 2012 file photo. Although Apple makes billions from new phones, a significant portion of its sales in recent years have come from dropping the price on older models once a new phone or tablet hits stores REUTERS

Apple could sell 33 million iPhone 5s globally this quarter, a tribute to the company’s gadget-building supremacy. But iPhones are also symbolic of a change in society’s attitude toward money. We now get our gratification through spending money rather than by saving it.

The savings rate in Canada has been falling for decades, more or less in line with the decline in interest rates. Today, savings accounts offer less than 1 per cent in many cases and barely 2 per cent at best. As a result, a lot of us have come to believe that saving is useless, even foolish. And so, we’ve moved on to spending.

The iPhone 5 will sell for a suggested retail price between $699 and $899 (depending on how much memory it offers), but in the past it has been possible to pay much less if you sign up for a multi-year wireless phone plan. If an iPhone sounds like an affordable luxury, ask yourself these questions:

However much the phone costs, have I contributed at least that much money, and preferably much more, to my retirement savings this year?

Have I contributed anything at all to my kids’ registered education savings plan?

Do I have any money saved that I can tap if the car’s “check engine” light comes on, if the basement floods, if the orthodontist says my kid really needs braces or if I lose my job?

If you’re covered on all of this, enjoy your new iPhone. Otherwise, you might want to reconsider that purchase because your spending and saving are out of balance.

The roughest rule of saving is that you should be putting away 10 per cent of your take-home pay for the future in a tax-free savings account or a registered retirement or education savings fund. If you’re getting a late start as a saver, your number is higher.

External factors like wage freezes and inflation can affect our ability to save, and today’s low interest rates offer no encouragement. But the biggest impediment is in our own heads. We see more value in spending than in saving.

In a way, spending by consumers is a good thing because it accounts for roughly two-thirds of our economy. But spending takes away from saving in today’s zero-sum economy, where wage growth isn’t strong enough to put us ahead of inflation. The only way to save more is to spend less.

The iPhone and similar devices make that a challenge because of the way they draw you into a web of higher spending. You could buy a cheap cellphone and your wireless phone company would probably give it to you for free if you signed up for a service plan. A basic cellphone would mean simple data needs, so you could probably get away with an inexpensive plan.

With an iPhone, you’ll pay extra to buy the phone and likely face higher monthly plan costs. And then there’s the temptation to upgrade. An iPhone 5 bought this fall could be superseded by something better within 12 months. By then, there will probably be a new iPad and, who knows, but maybe Research In Motion will have turned some heads with the new BlackBerry 10. Every new product is competition for money you could otherwise use to save or pay down debt.

You’re urged to buy things all the time via mass media, but there’s no lobby for saving. Apple had Steve Jobs on its side. Savers are stuck with Benjamin Franklin, who said that a penny saved is a penny earned.

How can we get people saving more, then? By making it automatic, not discretionary. Have money electronically diverted from your chequing account to your RRSP, TFSA, RESP or a savings account every time you get paid. Have some money left over after the bills are paid? Hello, iPhone.

————

How the savings rate has tracked in the past 50 years

(data taken from first quarter from each year)

1962	6.50%
1972	9.80%
1982	21.20%
1992	12.40%
2002	4.80%
2012	2.90%

 

Source: Statistics Canada

The Toronto and Vancouver housing markets have cooled rapidly in the wake of Ottawa’s latest bid to stop a bubble, with many first-time buyers knocked out of the running.

Finance Minister Jim Flaherty put the July 9 changes into effect to curb growing mortgage debt levels and take some steam out of house prices. Among other things, the new rules cut the maximum length of insured mortgages to 25 years from 30.

The changes have sparked a debate in Canada. Some industry players and economists worry that the impact will be so widespread and long-lasting that they want Mr. Flaherty to consider rolling some of them back. But with prices that some still deem overvalued and new fears over consumer debt, others say the changes aren’t enough and must be followed by a hike in rates.

Among the latter is Toronto-Dominion Bank chief economist Craig Alexander, who estimates that national home prices are 10 to 15 per cent too high.

He released a report on Thursday predicting the July changes will shave three percentage points off of prices and five points off of sales by next year.

“Our models suggest that had the government not tightened lending mortgage rules between 2008 and 2011, the Canadian household debt-to-income ratio would have reached 160 per cent this year – the level that households in the U.S. and U.K reached before sending their economies and housing markets into a tailspin,” Mr. Alexander wrote.

While debt burdens are lower than they would have been, they’re still at troubling levels. Moody’s Analytics said in a separate report that economic headwinds will increasingly cause consumers to struggle with their debt loads over the next few years.

And although the mortgage insurance rule changes have curbed house sales and debt levels somewhat, the impact on prices has been relatively fleeting, Mr. Alexander said. Without rate increases, consumers still have a strong incentive to take out large mortgages, fuelling overvalued prices, he argues.

The impact of the changes is predominantly being felt by first-time home buyers because they are typically the ones who require mortgage insurance. Insurance is mandatory in Canada for borrowers who have a down payment of less than 20 per cent, which has traditionally been about 35 to 40 per cent of the market.

Brian Hurley, the CEO of Genworth Canada, the second-largest mortgage insurer, said business slowed in August as a result of the rule changes. He would like Ottawa to revisit the rules later this year, and consider reversing some of the changes.

“These are pretty dramatic changes, and I think they’re getting close to the tipping point,” he said in a recent interview. “We see really qualified first-time home buyers with very high credit scores now not meeting the bar because they can’t afford a 25-year amortization. These people should be getting a home.”

Eric Lascelles, chief economist at RBC Global Asset Management, approves of most of the rule changes, but said there is a risk that they are being overdone to compensate for ultra-low mortgage rates.

“I wonder if the drop from 30 to 25 years amortization might be regretted in a decade when interest rates have normalized and 25-year-olds are being told they cannot make mortgage payments past the age of 50, even though they expect to work until 65,” he said in an e-mail.

Traditionally, the banks have applied mortgage insurance rule changes to all mortgages – even those with large down payments that don’t require insurance. But that hasn’t been the case this time, Mr. Alexander said.

“The banks are basically not applying the 25-year limit to the non-high-ratio mortgages,” he said in an interview. “That’s one of the reasons why the mortgage insurance rule changes had a more muted impact on the market, because really the segment that’s being significantly hit is the first-time buyers.”

Jim Murphy, the CEO of the Canadian Association of Accredited Mortgage Professionals, said that while Mr. Alexander’s prediction that the changes will dent sales by five percentage points could be correct, the impact on the insured portion of the market appears to be more like 15 per cent. “It’s having a bigger impact on first-time buyers,” he said.

On Thursday, the Toronto Real Estate Board said sales of existing homes in the country’s most populous city fell almost 12.5 per cent in August from a year ago. But the average price rose by almost 6.5 per cent, to $479,095.

One day earlier, Vancouver’s real estate board said August sales were the second-lowest level for that month since 1998, while the average price of a home in the Greater Vancouver Area was down 0.5 per cent from a year ago.

http://www.theglobeandmail.com/report-on-business/economy/economy-lab/doors-shutting-on-first-time-home-buyers/article4523084/

 

 

A large bubble of people in their prime home-buying years, coupled with an influx of immigrants, is poised to support Canada’s housing market for the next decade, a major bank economist said Thursday.

 

Benjamin Tal of CIBC put out a report on Thursday in which he argued that Canada’s population demographics are working in favour of the country’s housing market.

 

Canada is facing a well-documented demographic pinch over the coming years, as Baby Boomers retire and seek to cash out their homes to finance their retirement. Experts have gotten increasingly concerned on the impact this boomer bulge will have on the job market and the housing market.

 

But beneath the numbers, Tal sees some reasons for optimism. Although the 55- to 74-year-old age group will see the largest population increase in the next decade, the second-largest will come in the 25-44 group. That’s the prime home-buying demographic, with recent research suggesting 18% of that group buys a home in any given year.

 

Click here for the full CBC News story.

 

The Bank of Canada will tone down the hawkish language in upcoming statements and drop talk of a rate hike all together by the end of the year, Capital Economics says.

 

The bank, which releases a policy statement next week, has held its benchmark rate steady at 1% for nearly two years.

 

Bank of Canada governor Mark Carney’s unexpectedly hawkish language earlier this year had economists betting on rate hikes in the first quarter of 2013, but those expectations have since fizzled.

 

Most forecasters now expect the bank to hike rates in the second quarter of 2013, a Reuters poll showed today.

 

Click here to read the Financial Post article.

 

Analysts are suggesting brokers will see little in the way of a rate war for the rest of 2012 as the big banks look to protect interest margins in a slowing market.

 

The analysis came a day before the first of the Big Five trod out earnings reports for the third quarter yesterday. The expectation is those numbers will restate the case for more conservative mortgage pricing as the growth in new mortgages creeps forward.

 

“I expect lending to continue to slow down, especially on the mortgage side, as we move into the latter half of 2012 and into 2013,” Tom Lewandowski, an analyst at Edward Jones, told reporters. “That just creates more of a focus on expenses, given the interest rate environment that we’re operating in currently.”

 

Interest margins are continuing to shrink as the books of all lenders begins to reflect the shift to lower interest rate mortgages. That means that even outside the vagaries of the bond market, banks are taking in less mortgage interest even as the rate they offer depositors remains stable or increases in some cases.

 

Click here for more details from MortgageBrokerNews.ca.

 

Canada’s household debt problem is not quite as bad as we think it is.

 

By some measures, growth in debt has stalled or slowed this year. Take credit cards – outstanding balances are flat on a year-over-year basis. And where borrowing is rising the most – car loans – you can argue that people are making rational economic decisions to replace aging vehicles.

 

To be sure, people are way too comfortable owing money these days. But the level of angst about debt is overly dramatic. It’s even a little hypocritical in terms of what people are saying about debt and what they’re actually doing.

 

A story about rising debt levels was one of the most read on the Globe website last week, and the comments from readers treated indebtedness as the worst sort of personal failing. And then there are the polls the big banks keep doing in which people are asked about their attitudes toward debt. Debt is bad, most of the poll participants keep saying in their answers.

 

Click here to read more from the Globe and Mail.

 

When you buy a new home, lenders like to see proof that you can cover the closing costs.

 

To satisfy this condition you typically have to demonstrate your ability to pay an additional 1.5% of the purchase price at closing, on top of your down payment.

 

But not everyone knows what closing costs entail. TD recently released an interesting survey that touches on this. It found that 13% of first-time buyers “overlooked some of the one-time fees associated with buying a home, such as inspection fees and land transfer costs, and 6% didn’t budget for anything beyond the down payment and monthly mortgage payment.”

 

That’s partly a failing of the mortgage advisers counselling those borrowers.

 

Click here for the full CanadianMortgageTrends.com article.

 

If you’re serious about becoming a successful investor, there are no shortcuts. Whether your portfolio earns 2% or 12% makes no difference if you’re spending more money than you earn.

 

Many people believe that you need a high income to become wealthy – and, sure, a big paycheque certainly helps. But lots of people who pull down big salaries don’t end up wealthy, because they spend all of the money they earn (and then borrow more). Meanwhile, we’ve seen plenty of Canadians with modest incomes build seven-figure portfolios thanks to decades of frugal living and diligent saving.

 

When Thomas Stanley and William Danko wrote their classic book The Millionaire Next Door, they set out to examine the lifestyles of the wealthy. What they learned surprised them: the people who wore expensive suits, drove flashy cars and drank fine wine had high incomes, but they weren’t necessarily wealthy. They fell into the category that Texans call, “Big hat, no cattle.”

 

Most of the millionaires they studied, by contrast, dressed casually, drove Chevrolets and drank Budweiser. The authors summed up their observations like this: “Wealth is what you accumulate, not what you spend.” Your first priority, then, should be determining how much of your income you can put aside for investment.

 

Click here to read more from the Financial Post.

 

As the kids prepare to head back to school and many cottage owners prepare for the final hurrah of the season, I ask a simple question about your summer retreat: Was it worth it?

 

Did you spend as much time there as you wanted? Did you get your money’s worth? Have you done the math?

 

I am often surprised at how much energy and resources go into owning a cottage, compared to the enjoyment that comes from it. At the risk of insulting a large percentage of cottage-loving Canadians, I will jump right in and say that for many owners it just doesn’t make financial sense.

 

I know many people with a cottage who spend no more than 20 or 30 days a year there. I know there are exceptions, but a large percentage will spend a week or two, and then another 4 or 5 weekends, maybe less.

 

Click here for more insight from the Financial Post.

Bank of Nova Scotia agreed to buy ING Bank of Canada for <QL>$3.1-billion in a deal that marries one of the country’s largest financial institutions with an aggressive upstart that built its name on being different than the big banks.

The deal, the largest sale of Canadian banking assets in more than a decade, will see Scotiabank acquire the Canadian operations of Dutch bank ING Groep and operate them as a standalone business.

It is the largest deal by dollar amount Scotiabank has done in its 180-year history and adds <QL>$30-billion of deposits to its operations.

With a total of $175-billion of Canadian deposits when the deal closes by the end of this year, Scotiabank will be the country’s third-biggest bank by deposits. It is already Canada’s third-biggest bank by assets.

The deal will require Scotiabank to sell roughly $1.51-billion worth of shares in a bought deal to help fund the acquisition. The bank is selling 29-million new shares at $52 each.

ING’s assets come with considerable cash on the books, which Scotiabank will absorb. This excess capital means Scotiabank’s net investment will amount to $1.9-billion.

A primary concern for Scotiabank, however, will be retaining ING’s customers, including many who opened an account with the upstart bank because it offered an alternative to the major banks.

ING Direct Canada launched in 1997, eschewing branches and offering no-fee Internet banking accounts with higher interest rates than the Big Six, branding itself with the slogan “Save your money.” Over the years, ING built up a base of 1.8-million customers.

Aiming to retain those customers, the bank said it will preserve the business model and not cross sell Scotiabank products to ING customers.

“We recognize that success and are committed to keeping this unique platform,” said Rick Waugh, president and chief executive officer of Scotiabank, in a statement.

The ING Direct brand will remain for 18 months before Scotiabank renames the operations.

ING, the country’s eighth-largest bank, came up for sale when Netherlands-based parent company ING Groep NV announced it needed to raise capital to endure the European debt crisis. It’s not a distressed entity – in fact its assets amount to $40-billion – but it needed to be sold to repay aid from the Dutch government, and to help ING Groep meet new capital requirements.

Bank of Nova Scotia has always been strong in international banking, with operations in more than 50 countries. But the perceived weakness of the bank in recent years has been in increasing its Canadian deposits, which this transaction addresses.

The assets are believed to have drawn the interest of several of Canada’s Big Six banks in the early stages of the sale process, since such assets rarely go on the block in Canada.

“Bottom line, the ability to add $30-billion of core deposits in a single transaction is clearly quite rare in the Canadian banking arena,” Macquarie analyst Sumit Malhotra said in a recent research note when ING went on the block.

Royal Bank of Canada holds the most Canadian deposits at $227-billion as of the end of the second quarter, followed by Toronto-Dominion Bank at $209-billion.

CIBC is now fourth at $147-billion, followed by BMO at $105-billion at fifth, and National at $38-billion and sixth.

ING Direct CEO Peter Aceto said in an interview that Scotiabank’s strategy to operate the bank separately gave him comfort in the deal. “All the reasons why our customers came to us in the first place are going to be maintained and continue,” Mr. Aceto said.“It’s because of that view that gives me a lot of optimism about customer retention.”

One of the plans is to introduce a credit card, an offering ING set its sights on prior to the news of a sale. Scotiabank will work to bring a card to market in the near future.

 

August brought some good news for Steve Brouwer and DLC Drake Entrust Mortgage.

Canadian Mortgage Professional (CMP) magazine ranked me (Steve) as one of Canada’s top mortgage professionals on the CMP Top 75 Broker’s List, I placed 29th when compared to all other Canadian mortgage professionals. I also placed fifth in all of Canada for small markets, a category that celebrates mortgage professionals who work in markets where the average home price is $290,000 or less.

I love working in the Fraser Valley and primarily serving the needs of the communities of Chilliwack and Abbotsford, so this award, especially placing fifth in small markets, is very meaningful to me.

And of course I owe my success to the many clients who I have helped to get the best mortgage for their needs. I especially appreciate the return clients who have helped my business to succeed over time, as I have helped them in their residential and business endeavours.

Each year, CMP invites residential mortgage professionals from coast to coast to fill out a survey, and mortgage professionals are then ranked based on their individual total amount of verified funded mortgage volume for the previous year (in this case, 2011).

Although mortgage volume is not the only factor by which the success of a mortgage professional should be judged, it shows that I am dedicated full time to helping my clients obtain mortgage financing to meet all of your unique needs.

It’s difficult to rank people based solely on customer satisfaction and loyalty, as there is no true figure by which this can be measured. But one thing is certain – it’s my goal to continually provide my valued clients with the professional mortgage services they have come to expect.

Thank you for choosing to arrange or renew your mortgage with me upon buying a home, and/or recreational or investment property, and when opting for a refinance. And thank you for your loyalty and continued referrals of friends and family – they’re greatly appreciated!

Canadian banks will come under increased pressure as revenues from key businesses such as consumer lending and capital markets start to decline over coming quarters, Fitch Ratings warned on Monday.

The rating agency said it expects high consumer debt levels, primarily from mortgage borrowing combined with broad-based margin pressure, to weigh heavily on big banks’ financial results going forward.

We expect retail loan growth to decelerate in the second half of 2012 as the housing market cools

“We expect retail loan growth to decelerate in the second half of 2012 as the housing market cools and new regulations aimed at curbing residential lending take effect,” Fitch said.

“Given the sheer size of the consumer loan book on Canadian banks’ balance sheet, continued earnings improvement in commercial lending may not offset the slowdown on the retail side. Furthermore, earnings from capital markets and wealth management activities are expected to trend downward as heightened global uncertainty, mostly related to Europe, started eroding investor confidence in April.”

The comments come a week before the banks begin to report third quarter results.

 

Lenders performed well over the first half of the year, largely on the back of higher consumer loan volumes and stable provisions for bad loans. But household debt-to-income is sitting at a record 154.3%, according to Statistics Canada. That has left the economy vulnerable to adverse shocks such as a spike in unemployment, which would have significant negative implications for lenders.

While the banks have mostly protected themselves from the risk of mortgage default through Canada Mortgage and Housing Corp. insurance, they continue to have significant uninsured mortgage exposure.

The Canadian real estate industry is in a tight spot these days.

With home-ownership rates headed for record levels and the federal government tightening lending rules to cool the market, the question now is whether we have reached the saturation point.

Bank of Nova Scotia economist Adrienne Warren says that when the latest census figures come out next month she expects us to be in the elite company — depending on your view — of countries with more than 70% of households owning their own homes. Based on the 2006 census, we were at 68.4%. “It’s similar to the U.S., U.K. and Australia when they came up with the mid-decade census,” Ms. Warren said.

The government is saying you should not be a homeowner if you cannot afford it

Some countries, like Italy and Spain, could be as high as 80% while in others with expensive real estate, like Switzerland, home-ownership rates are more like 30%, she said.

Ms. Warren said the biggest jump in home-ownership rates going into the 2006 census was among young people buying condominiums. Do we need another census to tell us that that group expanded or can we just look up at the cranes across the country? “It was people in their early 20s buying as opposed to waiting until they got older. It probably continued,” Ms. Warren said.

 

Interestingly enough, the United States is believed to have cracked that 70% threshold before the bottom fell out of its housing market.

Already Ottawa has stuck a pin in the housing balloon with new rules, including a restriction that limits amortizations to 25 years, which ultimately increases monthly payments for consumers and limits how much they can borrow.

The Office of the Superintendent of Financial Institutions added its own rules tightening up regulations for financial institutions.

“The government is saying you should not be a homeowner if you cannot afford it,” said Benjamin Tal, deputy chief economist at CIBC World Markets Inc.

The Canadian Real Estate Association released data last week that showed home prices across the country had actually slipped 2% from a year ago to an average of $353,147.

“We are at the peak of home ownership in Canada,” Mr. Tal said. “In fact, we are probably too high and it will probably go down.”

It’s not that 70% is some type of threshold we can’t break through but renting is becoming that much more attractive as the gap between home ownership and renting costs widens.

It’s impossible to argue against the emotion of owning your home or the advantage of forced savings that comes with a mortgage — a clear edge for people with no financial discipline.

The principal advantage is you can leverage your investment by putting only 5% down because the government will back your mortgage with the bank. But leverage means nothing when your investment is decreasing in value — it just compounds your losses.

If you consider that average $353,147 home with a 5% down payment, it will cost you close to $1,600 in monthly mortgage costs, even at today’s 3% interest rates with a 25-year amortization. Canada Mortgage and Housing Corp. said in June the average two-bedroom apartment in new and existing structures was $887 a month. Add in other home-ownership costs like taxes and the gap widens.

Beyond the current expansion, there’s no arguing against the long, steady price appreciation of housing, which has been going on for decades, but there is an alternative to home ownership if you want upside exposure to the market.

Michael Smith, an analyst at Macquarie Equities Research, has published a report for the past five years comparing condo returns to apartment real estate investment trusts.

“REITs win,” said Mr. Smith, adding in a report in January the REITs would have returned 31.5% over the past year compared to a condo return of 12.4% in Toronto and 6.1% in Calgary. Going back another four years, the numbers are even more in favour of the public vehicles.

“What I would say now, since I did the last study, is if anything the outlook for the REIT versus the condo is even more compelling given where the condo market seems to be correcting,” Mr. Smith said.

Sam Kolias, chief executive of Boardwalk Real Estate Investment Trust, Canada’s largest apartment owner, says he is already seeing the push back into apartments.

“If you wanted to be hedged against housing [going up], you could rent and buy stock in our company,” said Mr. Kolias, who added that occupancy rates have climbed close to 99% as house prices have risen steadily. “We’ve never been as full as we are now.”

While this may all be bad news for housing, Phil Soper, chief executive of Royal LePage Real Estate Services, still sees room for expansion.

“There is nothing magical about 70%. The U.S. rate fell from this rate because of a collapse in their financial system,” said Mr. Soper, who points out home ownership in the U.S. is still about 66%, even after “one of the worst meltdowns.”

He said one key driver of the housing market that has not changed is the rule that allows consumers in with just a 5% down payment.

“We have public policy in place that supports home ownership,” Mr. Soper said.

Okay, you can probably still get into the housing market. But with prices falling and the gap between renting and carrying a home widening, the question is do you really want to make that investment?

 

If you asked 100 recent home buyers if they were satisfied with the size of their down payment, as many as 60 of them would say no. That’s what TD Canada Trust found in a recent survey of first time home buyers.

This finding is hardly surprising: A bigger down payment means less interest paid, easier refinancing, lower mortgage insurance fees, and a bigger equity buffer if home prices slide.

The challenge, in a world of record-high debt ratios, skimpy investment returns and towering home prices, is saving a sizable deposit. Frustrated by the long, slow process, some new buyers would rather throw in the savings towel and get the keys to their new home faster. In fact, 55 per cent of first-timers surveyed by TD said they would buy sooner if they had a chance to do it all over again.

The problem is it takes time to save up a down payment.

The minimum price of admission to home ownership is currently set at 5 per cent. (This ignores 100 per cent financing – also known as cash-back down payment mortgages – because they’re usually ill-advised and they may not be around for long.)

People who responded to the TD poll estimated that it takes an average of “two years or less” to save a 5 per cent down payment and “one to four years” to save a 10 to 20 per cent down payment.

If that strikes you as optimistic, you’re not alone.

For today’s highly leveraged consumer, saving a down payment isn’t as easy as it was in the early 1980s when personal savings rates exceeded 20 per cent.

The national average purchase price for a first-time buyer has soared to roughly $295,000, according to a May estimate from mortgage insurer Genworth Financial Canada. That means the average first-time buyer would need to save more than $16,000 to cover the minimum 5 per cent down payment and closing costs.

For a 10 per cent down payment and closing costs, he or she would have to save at least $31,000.

How long does it take young people to scrape together that kind of money?

Doug Porter, deputy chief economist at BMO Capital Markets, says the rate of savings has been trending near 4 per cent and the median family income is just shy of $70,000. “The median family would, by this measure, be saving about $2,800 annually,” he adds.

The annual cash savings of first-time buyers – who are on average 34 years old, according to CMHC – would be somewhat less than the median family. And understandably, socking away a good chunk would be even harder for a single person.

“I would suspect that on a median basis, just to get in the housing market (with 5 per cent down), would take about four to five years of saving. Cobbling together a down payment is a big challenge for first-time buyers,” Mr. Porter says.

“Frankly, I think that’s one of the reasons why the government hasn’t raised the minimum down payment. It’s almost a nuclear option.”

None of this is meant to discourage saving for a down payment. Saving longer gives you a bigger cushion if home prices tumble and you need to sell. The last thing anyone wants is to owe more than their home is worth.

It also gets you a better entry price if the market sells off before you buy. According to surveys of housing forecasters, a price correction in the next few years is the most likely scenario.

In terms of mortgage costs, buying with 10 per cent equity, versus the 5 per cent minimum, can save the typical entry-level buyer up to $80 a month in payments, plus almost $2,400 in default insurance premiums. These savings, however, can easily be overshadowed if home values march higher. Buying today also lets you lock in abnormally low fixed mortgage rates for up to a decade.

But as a first-time buyer, you’ve got other things to consider, including:

• Your rental costs. (Are they higher or lower than your potential ownership costs?)

• Alternative uses for your down payment money. (Can you get a better return by investing down payment funds elsewhere?)

• The size of your emergency fund. (Home ownership comes with a laundry list of unexpected expenses.)

• Your economic stability and future earning power.

There are several ways to piece together a bigger down payment. You can:

• Cut your spending. “If you are saving for a house you might be a little more aggressive than the average saver,” Mr. Porter says.

• Tap into the bank of mom and dad. Gifts from parents get a lot of young people started as home owners.

• Borrow from your RRSP under the Home Buyers’ Plan (HBP).

• Apply tax refunds and bonuses.

• Receive an early inheritance.

• Get rid of one car in a two-car household.

• Postpone a vacation for 18 months or more.

• Use municipal first-time home buyer grants when applicable (like this one in Winnipeg, this one in Surrey, BC, or this one in Saskatoon).

People need to pay some sort of shelter cost, either in the form of a mortgage or rent, says TD Canada Trust’s director of mortgage advice, Farhaneh Haque. “As long as people have gone through the exercise of understanding what money they have coming in, asking is my job stable, will my income increase or decrease, looking at their financial strength…and building in a cushion for potential interest rate increases,” then a decision to buy a home sooner often makes sense.

TD’s advice for first-timers is to aim for 20 per cent down. But simple math shows that a 20 per cent down payment could take some people over a decade to accumulate.

The reality is, waiting that long is not in the game plan for most young people.

Canada Mortgage and Housing Corp. revised its forecasts on Tuesday, saying Canadians should watch for the housing market to “moderate” as both home sales and new construction start to slow.

But while many industry watchers agree that a softening is on the way, they are divided about how supple the housing market will get, and how serious the consequences might be.

Finance Minister Jim Flaherty, for one, believes the market’s coming slowdown is a good thing. He said in an interview Tuesday that sources in the financial industry, as well as developers, have told him that “the situation was evolving where expectations by purchasers were excessive with respect to single family dwellings, and ultimately unaffordable when mortgage rates go up.”

CMHC’s third-quarter national market review predicts that after “sustained activity levels,” growth will become measured. The Ottawa-based Crown corporation expects this cooling trend to extend through this year and into next.

“I’d rather see some softening in the markets, particularly in Toronto and Vancouver, than have a rapid decline,” Mr. Flaherty said.

Craig Alexander, chief economist at Toronto-Dominion Bank, agrees that Canada is heading toward a modest correction but said: “I think the debate is over what the definition of ‘modest’ is.” He noted that while his own calculations might indicate a slightly more significant downturn than those of CMHC.

“We need to keep in mind that a 10- to 15-per-cent drop in sales and prices over the next three years sounds quite dramatic, but when you think about the real estate market … there have been years where we’ve had have 10-per-cent sales growth and 10-per-cent price gains,” Mr. Alexander said in an interview.

This is not an economic threat, he added, but “a natural outcome of the strength we’ve had in real estate in Canada for more than a decade.”

But Ben Rabidoux, an analyst with M Hanson Advisors, sketches a more troubling image. “I don’t think the economists at CMHC are appreciating just how significant the effects of rising house prices have been on the Canadian economy and the labour market,” he said.

He said there are several distressing trends that could cause significant problems. First, there is the high portion of the labour market employed in residential construction, and the significant contribution of construction and renovations to gross domestic product.

As well, he argues that when people feel their house is of a high value, they feel wealthier, save less for retirement and tap their home equity more often. When they change their behaviour, it can cause a serious drag on the labour market and the economy.

“I’m not saying it’s impossible we’ll see a soft landing,” Mr. Rabidoux said. “But rising house prices and high demand for new homes have an impact on the job market, and it’s difficult to see how we can move back to long-term trends without it meaning, frankly, a recession.”

The rising unemployment seen in Canada’s July jobs report was a reflection of weak consumer spending, he said.

Mr. Alexander does not agree that the national real estate market is crumbling. Hot markets such as Vancouver and the Greater Toronto Area might have to come down a few degrees (Vancouver’s July sales were down significantly), but it would take a shock such as a dramatic rise in interest rates, or unemployment, to cause a significant downturn, he said.

“The Federal Reserve in the U.S. has told us they’re not planning on changing interest rates until the end of 2014. And if the Fed is on hold, the Bank of Canada can’t raise interest rates too much,” Mr. Alexander said. “Unless the global economy goes back into a recession, there doesn’t appear to be a catalyst on the horizon to cause a severe increase in unemployment.”