OTTAWA — Canadians are more in hock today than ever before, Statistics Canada said Thursday in releasing fresh data on household debt.

The new report shows household debt to annual disposable income reached a new high at 164.6%, from 163.3% the previous quarter.

Bank of Canada governor Mark Carney has named rising household debt a key risk to the Canadian economy, but noted this week he was encouraged that credit growth appeared to be slowing.

Still, Carney has also said he expects the debt-to-income ratio to keep rising over the next couple of years. That is in part because of a lag in time between purchase decisions — such as a new home — and when the debt gets registered.

In the July-September period, households borrowed $27.3-billion, $18.4-billion of that in mortgages, while consumer credit levels increased by $7-billion to $474-billion.

The high debt-to-income number may surprise Canadians who only a few months ago were told it was just above 150%. But Statistics Canada has recently revised how it calculates the measure to make it more representative of actual household finances.

As well, household net worth rose 1% to $197,800 in the July-September period, mostly due to gains in holdings in stocks, including mutual funds, and increased value of pension assets.

Economist Jimmy Jean of Desjardins Capital Markets said the report is unlikely to change the perception of Canada’s debt problem.

The debt-to-income ratio has been setting new records since 2003, but remains below the peak reached south of the border before the 2007 housing crash. StatsCan says using equivalent measurements, Canada’s ratio is about 10 percentage points below the peak reached in the U.S. prior to the housing crash in 2007.

The Bank of Canada, Jean notes, shouldn’t be shifted from its interest rate stance given “the evolution of debt seems to tie in to its expectations.” He pointed out that the effect of mortgage tightening rules brought in July had only begun to be felt in the third quarter numbers.

But while managing debt doesn’t appear to be a major concern at the moment, thanks to super-low interest rates, the danger signs continue to flash red, economists warned.

“The high level of debt leaves households more vulnerable to a rise in interest rates than they have been in the past,” said TD Bank economist Diana Petramala.

“Given the prospects that interest rates will eventually rise, households must cool their spending and borrowing further.”

On a national accounting level, Canada’s net worth increased by more than $9-billion in the third quarter to $6.8-trillion. That translates to $194,100 per person.

However, an increase in net foreign indebtedness dampened the gain, the agency said.

This higher net foreign debt was largely a result of increased Canadian borrowing abroad, as well as a decrease in the value of Canadian investments denominated in foreign currency because of the rising value of the loonie.

 The Canadian Press

On Thursday, Amanda Lang—co-host of The Lang and O’Leary Exchange—made a comment worth exploring.

While talking with Kevin O’Leary about the risks of variable mortgage rates, she stated:

“Some people can forecast [rates] and arrange their affairs accordingly. Rates won’t…gap up. They will climb in some orderly fashion.

…It’s very rare to see a multi-move up or down with interest rates…People of means…can actually take their time…and then still lock in with plenty of time to get a decent longer-term rate.”

If you’ve studied rate history, however, you know that interest rate behaviour doesn’t cater to these assumptions.

In the modern era of Canadian monetary policy (1991 to today):

Rates have moved swiftly at times

• In 1994, prime rate shot up 425 basis points in 13 months
• In 1997, prime rose 250 bps in 12 months
• In 2000, prime fell 375 bps in 13 months
• In 2005, prime jumped 175 bps in 9 months.
• In 2007, prime dropped 400 bps in 17 months

Rates sometimes climb in leaps, not steps

• Since ’91, there have been four instances where multiple 50+ bps rate hikes occurred over spans of six months or less

There have been periods where today’s fixed rates would have outperformed a variable

• Coming off a cyclical bottom, the average increase in prime rate has been 3.16% (that’s from trough to peak, over the last three major rate cycles)
• After these rate bottoms were made, prime rate was 1.23% higher, on average, over the next five years. Put another way, if you had picked the worst possible time to get a variable-rate mortgage (i.e., right before rates increased), your rate would have averaged 1.23% more over the following five years.

Locking in on time isn’t easy

• Traders sell bonds at the first hint that future inflation could exceed the BoC’s comfort zone. Historically, that selling has occurred anywhere from 1-6 months before increases in prime rate. When bond prices fall, bond rates rise in lockstep, which lifts fixed mortgage rates in the process.
• History has shown that it’s costly for variable-rate borrowers to wait for the first increase in prime rate before locking in. Fixed rates have often risen 50 bps or more leading up to initial rate hikes. Waiting for the 2^nd increase in prime is even more costly.
• Folks also have to remember that conversion rates are almost always higher than regular mortgage rates. Due to breakage penalties, discharge fees and aversion to change/inconvenience, lenders know that variable-rate customers are captive. Lock in today, for example, and you probably wouldn’t get 2.94% on a 5-year fixed. You’d get 3.09-3.19%, if you’re lucky.

Of course, 22 years of rate history doesn’t tell us what will happen next year, or the year after. The message here is more of a reminder not to overestimate our rate timing ability.

A strategy based on locking in after the first BoC rate increase is usually counterproductive. When the difference between fixed and variable rates is as tight as today’s 39 basis points, most rate-lockers would be better off with a low fixed rate from the get-go.

It also doesn’t help to use rising bond yields as a signal to lock in. The problem there is that the bond market creates more fakeouts than Barry Sanders in his prime. A 75-basis point upmove in the 5-year yield could easily be followed by a 75-basis point drop, leading you to lock in for nothing.

********

For the record, our sense is that rates won’t rise materially for several months—and when they do, it should be a gradual incline. But that is more of an educated guess than a useful conviction.

When inflation threats eventually appear, they could surprise the market and force bond traders to rapidly reverse their positions. When investors rush to dump bonds, fixed rates can climb like an F-35 on takeoff. And if this were to happen in the next year or so, fears of a deflating “bond market bubble” could intensify this selling.

In short, believing we can lock in “at the right time” is overoptimistic, to put it mildly. Variable and short-term mortgages are indeed the best fit for some borrowers, but anyone with visions of saving ½ point in a variable and then converting to a fixed should get acquainted with history.

Julia Thomson hasn’t won the lottery. She hasn’t been reunited with a long lost, fabulously wealthy, and remarkably generous uncle. And she hasn’t discovered oil in her backyard. All of which is surprising, considering this declaration: “We paid off our mortgage in four and a half years.”

When Thomson and her husband were approved for their first mortgage, they didn’t have any assets, but they did have a desire to be mortgage-free as soon as possible. According to her, as well as experts from banks and consumer agencies, first-time homebuyers can take a few steps to ensure that their mortgage is manageable.

Tip #1: Buy the house you can afford

Don’t confuse your budget with your bank’s budget, says Thomson.

“Going in for our mortgage, I was astounded at how much we were approved for. The bank approved us for an amount high enough that it scared us.”

Julie Hauser, of the Financial Consumer Agency of Canada, confirms that homebuyers need to budget realistically. “Make the right decision for your own needs,” she advises.

Eventually, Thomson and her husband decided to buy a house far less expensive than what the bank would have allowed, and their decision meant they could sacrifice less and pay the mortgage off faster.

Tip #2: When budgeting, consider flexibility on amortization, monthly expenses and financial goals

This year, the maximum amortization on high-ratio-insured mortgages was reduced from 30 years to 25. Colette Delaney, executive vice-president of Mortgage, Lending, Insurance and Deposit Products at CIBC, notes that while this will increase the monthly payment on a mortgage, it will also help homeowners pay it off sooner.

“You can give yourself added flexibility on your amortization by establishing a 25-year mortgage, and then increasing your regular payments to help you reduce that amortization as you begin paying down your mortgage. Should you later need to reduce your payment temporarily – for example, as you welcome a new baby into the family – you can reduce your payment while remaining within your 25-year amortization,” she says.

And, of course, don’t forget to calculate your monthly expenses, possibly with the help of a financial advisor, to make sure that your payments stay within your comfort zone.

“Your mortgage payments should fit your life – you shouldn’t have to fit your life into a mortgage payment,” Delaney says.

Tip #3: Take the time to get pre-approved

Now more than ever, it’s important to get pre-approval before you even start house hunting. Delaney explains how preapproval will ensure you’re within the ratios for an insured mortgage:

“A pre-approval gives you a guaranteed rate before you begin the process of looking at properties, and allows you to uncover any items that could be an issue for you later in the process,” she says. “For example, if you need some additional documentation to support your income or need to finalize arrangements for your down payment, a pre-approval conversation would identify those issues and give you the time to address them before you make an offer on a property.”

Finally, if new homeowners are looking for tips after they’ve secured their mortgage, Thomson has a big one: “Prioritize it.

“It hurt, but we did it,” she says, remembering large lumps of cash leaving her bank account the week after Christmas. She doesn’t have as many pairs of shoes as she would have otherwise, she admits. “But we weren’t paupers – because we prioritized our mortgage.”

And at least she has bragging rights to having paid it off in four and a half years.

Canada’s financial regulator will release new guidelines for mortgage insurers early next year, including the government’s Canada Mortgage and Housing Corp. – but they won’t drag down the housing market as much as the guidelines for banks have, says the country’s banking watchdog.

The Office of the Superintendent of Financial Institutions will outline what standards it expects the country’s three mortgage insurers to follow when they underwrite a policy on a home. Ottawa has just recently given OSFI the job of overseeing CMHC, a federal Crown corporation that is the largest player in the industry; it was already regulating two private-sector rivals, Genworth MI Canada and Canada Guaranty.

The mortgage guidelines that OSFI released for banks this summer are believed to have played a role in the decline in national home sales for the second half of this year. The new rules pushed lenders to be more cautious in areas such as background and credit checks on borrowers, document verification, and appraisals. The biggest impact is believed to have come from one particular rule that capped the amount that any individual can borrow on a home equity line of credit at 65 per cent of the home’s value.

“I would not expect the same impact” from the rules that OSFI intends to create for mortgage insurers in the new year, Julie Dickson, the regulator’s superintendent, said in an interview.

The final guidelines for banks came out in June. That was shortly before Finance Minister Jim Flaherty tightened up mortgage insurance rules, including cutting the maximum length of insured mortgages to 25 years, in an effort to stem the growth of consumer debt levels and house prices.

While Mr. Flaherty is focused on the risks to the broader economy, Ms. Dickson is responsible for ensuring that the country’s banks, insurers and mortgage insurers remain financially sound. Unlike Mr. Flaherty’s changes, the guidelines that she will release are more likely to focus on the things that mortgage insurers must do behind the scenes to assure that they are not taking on too much risk when they insure homeowners’ mortgages.

“We are in a market where there is a lot of growth in household debt, some froth, and I think whenever you see that you have to act early and try to ensure that people aren’t forgetting sound practices,” Ms. Dickson said.

“Having buttoned-down mortgage underwriting policies does slow things down a bit, so that if mortgages are presented that are outside the policy, [the financial institution] is going to have to take more time to consider it; that does have an impact.”

OSFI is taking action in this area after the Financial Stability Board, an international body made up of regulators and banking experts around the world, suggested that all countries review their rules for banks and mortgage insurers.

The board is chaired by Bank of Canada governor Mark Carney. It suggested, among other things, that mortgage insurers be regulated. Mr. Flaherty moved to put CMHC, which dominates the mortgage insurance business in Canada, under OSFI’s authority earlier this year.

I would emphasize that while a 10% correction sounds scary, in actual fact, this would be a healthy outcome

WHAT THE ECONOMISTS SAID

Twenty forecasters were polled on Canada’s housing market. Here are the results

CANADIAN HOUSE PRICES
A rise of 0.1% in 2012 was the median from 14 forecasts
A rise of 0.1% in 2013 was the median from 12 forecasts

TORONTO HOUSE PRICES
A rise of 0.3% in 2012 was the median from 6 forecasts
A fall of 2.0% in 2013 was the median from 5 forecasts

VANCOUVER HOUSE PRICES
A fall of 3.0% in 2012 was the median from 6 forecasts
A fall of 4.8% in 2013 was the median from 5 forecasts

2a. If you think Canadian house prices will fall, how much (in percentage terms), will they drop from here?

5.0% was the median from 9 forecasts.
Forecasts ranged from 0.0% to 25.0%.

2b. When will they stabilize?

1 said Q1 2012 1 said Q2- Q3 2012
1 said Q4 2013 1 said Q1 2014
1 said Q1 2015 2 said 2015

3. On a scale of 1 to 10, where 1 is extremely undervalued, 5 is fairly valued and 10 is extremely overvalued, what best describes the current average level of Canadian house prices relative to fundamentals?
7 was the median from 14 forecasts
Forecasts ranged from scale of 5 to 8
4. Do you think the Canadian government will tighten mortgage rules within the next 12 months in an attempt to cool the housing market?

10 said yes
4 said no

TORONTO — Canadian housing prices will fall 10% over the next several years and homebuilding will slow sharply in 2013, but the country’s recent property boom is not expected to end in a U.S.-style collapse, according to a Reuters poll.

The survey of 20 forecasters published on Friday showed the majority believe the Canadian government has done enough to rein in runaway prices, preventing the type of crash that has devastated the U.S. market for years.

“This isn’t a sharp correction, this isn’t a U.S.-style correction, it’s just simply an unwinding of the excess valuation that was created by artificially low interest rates for a long period of time,” said Craig Alexander, chief economist at Toronto-Dominion Bank.

“I would emphasize that while a 10% correction sounds scary, in actual fact, this would be a healthy outcome.”

U.S. house prices crashed as a mortgage crisis unraveled in 2008, triggering a financial crisis and leaving a trail of foreclosures, negative equity and financial hardship for millions of people. Housing prices in the U.S. have only begun to rise again this year.

On a national basis, Canadian house prices are expected to drop 10% over the next several years, and housing starts will fall more than 17% to 184,000 units by mid-2013, according to median results of the poll, which was conducted over the last week.

House prices have already begun to cool in some areas but nationally remain 23% higher than their trough in March 2009, according to a Canadian Real Estate Association index.

Respondents in the Reuters poll said house prices will rise 2.0% in 2012 and fall 0.1% in 2013, according to the median of 18 forecasts, putting most of the losses at least two years away.

Median forecasts had Toronto prices rising 5.1% in 2012 and falling 1.3% in 2013. But respondents saw an eventual 5% fall from current levels. Vancouver prices were forecast to fall 2.7% in 2012 and 3.8% in 2013, with an eventual decline of 12.5%.

As sales decline and prices fall, homebuilders will ratchet back on construction starts, the poll showed.

Housing starts, which notched a seasonally-adjusted annual rate of 222,945 units in the third quarter, will decline to 200,500 in the fourth quarter, 186,900 in the first quarter of 2013, and 184,000 in the second quarter of next year.

BITE OUT OF GROWTH

That 17.5% drop in new homebuilding will take a bite out of Canada’s economic growth, fuelled by the housing sector, consumer spending and government stimulus since growth slowed in 2009. But a strengthening global economy should help pick up the slack, Alexander said.

Not everyone is as sanguine. While economists at Canada’s major banks have consistently predicted a softening in prices and a slowing in housing starts, some independent analysts see a very hard landing ahead.

“The housing market is something to be very worried about,” said David Madani, Canada economist at consultancy Capital Economics in Toronto.

Madani, whose forecasts are included in the Reuters poll, has consistently predicted a 25% drop in prices and a plunge in housing starts to just 150,000 next year as builders grapple with too many homes and falling demand.

“The one symptom that housing bubbles always have in common is the over building, and I feel the banks play this down a bit,” said Madani, pointing to recent housing starts well above the 175,000 to 185,000 pace economists say is needed to keep up with population growth.

“We’ve been building above 200,0000 for several years. And we know we’ve been building above demographic requirements because the evidence is in the inventory data – it’s high, it’s not low,” said Madani.

“The excesses are there, it’s plain and clear to see.”

Still, all 15 respondents who answered an additional question said they believe the Canadian government has done enough to slow the housing market and prevent a U.S.-style crash, as Finance Minister Jim Flaherty has argued.

RULE CHANGES HURT

Mindful of the U.S. boom and bust, the federal government tightened mortgage lending rules four times in the last four years to make it harder for home buyers to take on too much debt in their quest for a home.

The rule changes gradually shorted the maximum mortgage length from 40 years to 25 and also put limits on how much homeowners could borrow against their house, among other measures.

While interest rates are not expected to rise until mid-2013, the stiffer lending rules and government warnings about the high debt loads of Canadian households have helped cool the ardor of home buyers, with the hottest markets, including Vancouver and Toronto, already feeling a chill.

Sales of existing homes were down 15.1% in September from a year earlier, and were 6.5% lower in the third quarter from the previous three months, according to data from the Canadian Real Estate Association.

Prices, which lag sales, have started to come down as well. Prices for existing homes dipped 0.4% in September from August, according the Teranet-National Bank Composite House Price Index, but remain 3.6% higher than a year earlier.

Prices of new homes rose 0.2% in the month, the 18th straight monthly gain, and were up 2.4% on the year, according to Statistics Canada.

 Maybe this is telling us you shouldn’t buy the biggest house

Just sit back and do nothing. It doesn’t sound like the most proactive advice when it comes to the housing market, but it might just be what everybody needs to hear.

Panic is the worst thing that could happen because when that mentality sets in and people become irrational, it’s hard to forecast how low prices will go, says Benjamin Tal, deputy chief economist at Canadian Imperial Bank of Commerce. He is among the many who predict that prices will fall but by a moderate level that does not resemble the U.S. crash.

Considering where the house fits into our personal balance sheet, Canadians have good reason to fear a decline in prices and the impact on their wealth

“There is nothing to fear but fear itself,” says Mr. Tal, paraphrasing the famous quote from U.S. president Franklin D. Roosevelt before his election. The economist’s worry, and that of others, is that we are now talking ourselves into a housing crash by creating a scenario in which every new statistic is interpreted in the most negative way with an eye on trying to constantly compare the Canadian housing market with what our neighbours to the south experienced just before their housing prices plummeted by as much as 50% in some markets.

A study this summer by Environics Analytics WealthScapes found the average net worth of a Canadian was $363,519, with $269,024 of that figure the net equity in real estate.

When you see headlines screaming that Canadian household debt has reached a record level, an eerily similar spot to where Americans were before the market crashed there, it adds to concern. But the similarity ends with the headline-grabbing number, Mr. Tal says.

The distraction of [hearing about these debt levels] is more of a concern than the debt

In the second quarter of this year, the debt-to-income ratio rose to 163.4% from 161.8% in the previous quarter. The previous quarter had been revised from 152% using a new measurement.

“The quality of the debt is much different here,” says Mr. Tal, who is the process of writing a report that will put that thesis to the test. He maintains the people who have taken on more debt have a much higher credit score than the Americans who did the same prior to their market crash.

Collapse is too strong a word when it comes to housing prices. You can’t talk yourself into that but you can talk yourself into a slowdown or a delay

Another key factor that is ignored in the discussion is how much of that debt is locked in for longer terms and not subject to the vagaries of rising rates. Mr. Tal says 70% to 80% of Americans were in variable products at the peak while the Canadian figure is 29%, according to the latest survey from the Canadian Association of Mortgage Professionals.

Still, he worries the wrong message is getting out. “The distraction of [hearing about these debt levels] is more of a concern than the debt,” he says.

But could people actually talk themselves into a housing correction? Moshe Milevsky, a finance professor at the Schulich School of Business at York University, doesn’t rule out that scenario.

“Collapse is too strong a word when it comes to housing prices. You can’t talk yourself into that but you can talk yourself into a slowdown or a delay. It is one of the things behavioural economists are starting to appreciate that classical folks didn’t,” Prof. Milevsky says. “Attitudes matter. It used to be that just facts matter, but sentiment is going to be just as important. If people start to believe real estate prices are slowing down, they’ll slow down their purchases.”

It doesn’t help with confidence when the federal minister of finance says he has his own worries about the housing market and then imposes a set of new rules to make it more difficult to borrow.

“I remain concerned about parts of the Canadian residential real estate market, particularly in Toronto but not only in Toronto. So that is why we are intervening once again,” Finance Minister Jim Flaherty said before imposing his latest changes on consumers, which included a lowering of amortization lengths to 25 years from 30 years.

Prof. Milevsky says the government calling the market overheated could be having as big an effect as the rule changes themselves.

It’s almost as if you have to sit back and watch this unfold

“The rule changes only affect people actually going out and getting a house but Flaherty saying prices [might be] inflated affects anybody who hears it,” he says.

So what can you really do about to deal with your worries? Not much.

“It’s almost as if you have to sit back and watch this unfold and say, ‘Gee, I wish I could capitalize on it,’ ” says Prof. Milevsky, adding you could potentially short some real estate stocks and indexes. “But they are so broadly based and illiquid. The bid and ask on them is wide.”

The issue might be a little more simple for people who don’t have a house and are waiting and contemplating whether it’s time to buy one, or considering whether to buy a big or small house.

“The conventional wisdom was to buy the biggest house you can afford because you are going to make a lot of money. But maybe this is telling us you shouldn’t buy the biggest house,” Prof. Milvesky says.

Everybody believes something might be happening but so far it has not affected their conduct

But Gerald Soloway, chief executive of Home Capital Group Inc., says the rules really haven’t changed much for buying a house: Don’t time the market and buy what you can afford, he says.

But he acknowledges there seems to be an insatiable appetite for all information about the sector. Mr. Soloway says he’s become the most popular guy at cocktail parties.

“Constantly, I’m always asked,” he says about people wanting to know his opinion about where the market will go next. “This has been going on the last four or five years, everybody believes something might be happening but so far it has not affected their conduct.”

His own data show the fears appear overblown and he agrees with CIBC’s Mr. Tal that the credit quality of Canadians is better than Americans. “You look at our portfolio, half is insured [and backed by the government] and half is uninsured and people are paying their bills. Year over year, our arrears are down slightly and not dramatically,” Mr. Soloway says. “They were not very big to begin with.”

Mr. Soloway just doesn’t believe negative talk is enough to derail the housing market, just as negative sentiment is enough to drive us into recession.

“It can move the market but it’s not enough to change the fundamentals,” he says.

Like others, he thinks we might see a 5% to 10% easing in prices across the market but he believes builders can still make strong profits at that level. It’s also no reason to sell, especially when you factor in transaction costs that can be as much as 10% in some cities.

Besides, are you really going to pack up your home, move your kids and start renting as you try to ride out a potential downturn in the market?

Phil Soper, chief executive of Royal LePage Real Estate Services, says there is little benefit to timing the market.

“Potentially in some markets you could save a few bucks moving into a rental situation but it’s not as easy as you think,” he says. “If you live in a single-family home, the inventory of properties can be limited if you want your kids to stay in the same school or area. If you live in a condo in a large city, sure you can move into renting that same condo.”

Mr. Soper sticks by the notion that, over the long run, house prices rise and he thinks the consumer will stick it out and ignore the negative news. “People pay more attention to the reality of low interest rates than the hyperbole that finds its way into the discourse about housing,” he says. “There has been so much see-sawing in the economy that people are immune to whipsaw reactions now.”

Survey results suggest most Canadians feel now is a great time to buy a home, but not for them personally.

Photograph by: File , Reuters

Survey results suggest most Canadians feel now is a great time to buy a home, but not for them personally.

A poll done for Royal Bank of Canada found 59 per cent of those asked said now is the time to get into the housing market, as opposed to waiting until next year. That was up four percentage points from when the same question was asked in a survey a year earlier.

However, 73 per cent said they are unlikely to buy a home within the next two years, up two points from the previous year.

“There’s a mix of opinions on the housing market as Canadians still feel confident about real estate but are a little uncertain about where the market is heading and when it makes sense to buy,” Marcia Moffat, RBC’s head of home equity financing, said in a statement.

**When it came to property values, Quebecers were the most confident homeowners in the country, with 78 per saying they could withstand a potential downturn in house prices, compared to 74 per cent nationally. Yet 57 per cent of Quebecers – slightly below the national average – said now is a good time to get into the housing marking.

Not surprisingly, 69 per cent of Albertans said now was a good time to buy a home, with commodities-fueled growth driving a housing boom in that province.

Nationally, 88 per cent considered housing a good investment – including nine out of 10 Ontarians, despite concerns of a condo bubble in Toronto – while 68 per cent said the value of their homes had increased over the last two years. Just 47 per cent of Canadians said housing prices would be higher a year from now.**

The survey was done with 2,006 adult Canadians in an online panel by Ipsos Reid between Jan. 24 and 30. A random sample this size would have accurately represented the population within two percentage points, 19 times out of 20, RBC said.

Meanwhile, real estate firm Royal LePage released a report Thursday saying housing prices in Canada were up in the early part of this year after an “unusually high” number of sales resulted in tight inventories. Record-low mortgage rates at less than thee per cent, on five-year fixed plans, were part of reason why activity was so high, Royal LePage said.

It said the average price of a standard two-storey home in the first quarter was $398,282, up five per cent from a year earlier. The average bungalow price was up 4.4 per cent to $356,306, while the going rate for a condominium rose 2.2 per cent to $243,153.

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.

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How the savings rate has tracked in the past 50 years

(data taken from first quarter from each year)

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/