Canada’s housing market has two good years ahead of it yet, Canada Mortgage and Housing Corp. said Monday, with low interest rates and a “moderately” expanding economy keeping price corrections at bay.

The Crown corporation – which insures Canadian mortgages – has had a consistently rosier view of the market than many private sector forecasters.

Canadian banks have recently issued reports probing the consequences of cheap money, and trying to predict whether there is a bubble in prices that will eventually pop and cause prices to crash. They are particularly concerned about Vancouver and Toronto, where some have predicted price corrections of up to 10 per cent because of overbuilding in the condo market.

But CMHC said Monday Canadian markets would “remain steady in 2012 and 2013.

“With the Canadian economy set to expand at a moderate pace and mortgage rates expected to remain low, activity levels in 2012 in both new home construction and sales of existing homes will stay close to levels seen in 2011,” said Mathieu Laberge, deputy chief economist.

Also in the forecast: “Housing starts will be in the range of 164,000 to 212,700 units in 2012, with a point forecast of 190,000 units. In 2013, housing starts will be in the range of 168,900 to 219,300 units, with a point forecast of 193,800 units.

Existing home sales will be in the range of 406,000 to 504,500 units in 2012, with a point forecast of 457,300 units. In 2013, MLS sales are expected to move up in the range of 417,600 to 517,400 units, with a point forecast of 468,200 units.

The average MLS price is forecast to be between $330,000 and $410,000 in 2012 and between $335,000 and $430,000 in 2013. CMHC’s point forecast for the average MLS price is $368,900 for 2012 and $379,000 for 2013. The moderate increases in the average MLS price are consistent with the balanced market conditions that occurred in 2011, and that are expected to continue in 2012 and 2013.”

Canada’s mortgage party has come to an abrupt halt.

The bonanza of dirt-cheap mortgages offered by some of the country’s biggest lenders in recent weeks has been shut down sooner than expected, as banks pull their offers in the face of higher funding costs and concerns over dwindling profit margins.

RBC and TD were both offering four-year fixed-rate mortgages with a 30-year-amortization at 2.99 per cent, and had announced plans to keep those rates in place until the end of the month.

The offers were in response to Bank of Montreal (BMO-T58.640.040.07%) offering five-year fixed-rate mortgages over 25 years at 2.99 per cent, which observers said is the lowest in recent memory. Though BMO’s move was a two-week offer that was eventually halted, it led RBC and TD to match the rival bank with extended offers to avoid losing market share.

Hints that an economic recovery is taking hold in the United States are putting upward pressure on rates. A slight increase in bond yields this month has forced RBC and TD to pull their mortgage offers weeks ahead of schedule, an indication of just how slim lending margins are for banks in the current environment. Benchmark five-year Government of Canada bond yields have gone up 17 basis points since the start of February.

“The rates coming down were in response to a very aggressive move by a competitor and a need for us to defend our client base, and to defend our business. We didn’t lead it there, but we felt compelled to follow,” David McKay, group head of Canadian banking at RBC, said in an interview Wednesday.

“When that market attacker corrected and raised their rates, it enabled us to say funding costs are going up, we’re not making enough spread at this rate … and we need to raise pricing because the cost of funds is going up.”

In an improving economy, expectations of inflation taking hold gradually push up bond yields and lending rates. Government of Canada five-year bond yields reached a two-month high of 1.416 per cent on Wednesday.

“Rates can go up and down, depending on conditions. The new rates reflect rising bond yields and the subsequent increase in the cost of funds,” TD spokesman Mohammed Nakhooda said.

In response, TD and RBC both increased their four-year, fixed-rate mortgages to 3.39 per cent, an increase of 40 basis points. BMO has also raised its rates to similar levels.

“We have seen some modest backup in Canadian bond yields in recent weeks, amid growing optimism on the global economic outlook – and in particular an improving U.S. outlook,” said Doug Porter, deputy chief economist at BMO. “In turn, this has put some upward pressure on borrowing costs.”

The banks, which will begin reporting quarterly earnings at the end of the month, aren’t saying whether the deep discounts on mortgages led to a boom in new business. However, anecdotal evidence gathered from inside the mortgage community Wednesday suggested a flurry of activity has taken place since mid-January.

The lower rates came at a time when Ottawa is trying to warn consumers against taking on too much debt, worried that household debt levels across the country are rising too quickly. Sources indicated last week that officials in Ottawa were not happy with the price war the banks were waging on mortgages, since it potentially encouraged people to borrow more.

Frank Techar, head of personal and commercial banking in Canada for BMO. said BMO began offering the 2.99-per-cent rate as a way to promote its 25-year mortgages, rather than 30-year amortizations. “We went to 2.99 per cent to draw attention to the benefits of having a mortgage with a maximum amortization of 25 years,” he said.

 Ah, February, when our thoughts turn to the ones we love, and our need to put some money into our RRSPs.

One of the best ways we can take care of our spouses and families is to take advantage of the long-term profit potential that can come from being invested in a solid real estate market.

Young couples dream of getting into the real estate market, partly because it’s a symbol of commitment and a prosperous future together.

Plus, it’s nice to have a secure roof over your head and a nice home to raise a family in.

 So as you cosy up to your beloved this Valentine’s Day, think of how buying real estate together, or ‘trading up’ to improve your home, is one of the best ways of saying a mutual “I love you.”

Once you’ve paid for the four-course meal, roses, or chocolates, it’s time to think about pulling together some cash for your RRSP investment, because the deadline is looming!

With today’s low interest rates, it might make sense to consolidate your debts and re-mortgage in order to free up some cash to invest in your retirement savings. You may be able to use the tax refund you get to pay down your mortage and it’s always a good idea to save for the future.

Whether you’re investing in real estate for the first time, or re-mortgaging or renovating, Entrust Mortgage Brokers can help you get the best rate. Take advantage of record-low interest rates now.

And hop over to Facebook and ‘like’ our Entrust Mortgage Facebook page before February 11. We’re giving away an Undine’s spa experience for you or your sweetie! Wouldn’t that make the ultimate Valentine’s gift?

Call Steven Brouwer at 1-866-798-2313 or email steve@entrustmortgage.ca Find us on Facebook at Entrust Mortgage.

Canada Mortgage and Housing Corp. is cutting back on mortgages it insures as the Crown corporation edges closer to a $600-billion cap imposed on it by the federal government, the Financial Post has learned.

A CMHC spokesman confirmed that it had approached a number of lenders at the end of 2011 about reducing its “bulk or portfolio insurance” after third-quarter results showed the agency had committed to back $541-billion in mortgages. CMHC, which guarantees mortgages held by financial institutions, is ultimately backed by the federal government and needs approval to go over the $600-billion limit — something that would create greater risk for taxpayers should the housing market collapse.

“CMHC has recently received an unexpected level of requests for large amounts of CMHC portfolio insurance.” said Charles Sauriol, a spokesman for the Crown corporation, in an email.

“To ensure equitable access to portfolio insurance within CMHC’s annual limits, an allocation process is being established which has caused some delays. Portfolio insurance provides lenders with the ability to purchase insurance on pools of previously uninsured low ratio mortgages and does not impact CMHC’s transactional business.”

Financial institutions are required to have mortgage-default insurance when a consumer has less than 20% equity. However, the banks have been seeking insurance on loans with even high downpayments — something not required by law — so they can securitize those bulk lending loans, thereby getting them off their balance sheets and reducing their capital requirements. In those cases in which the loans to value is less than 80%, the bank pays the insurance charge instead of the consumer.

“One of the things that has got them [to the limit] faster than expected is they are doing a lot of conventional insurance for lenders,” said one source. Just three years ago, CMHC had $450-billion in loans it was backstopping and had to go to the government to get that increased to $600-billion.

“I think as a taxpayer you should care. The policy question is why should the Canadian taxpayer take that type of meltdown risk within CMHC,” the source said.

The risk to the taxpayer would be a collapse in the market leading to a defaults like the U.S. saw. If CMHC couldn’t cover those defaults, Ottawa is on the hook for 100% of any shortfall.

On the surface, insuring conventional loans may not appear as risky as traditional mortgage default insurance because it comes with more equity. The banks have been demanding ultra low fees on the conventional mortgages, arguing the equity position makes them a lower risk. However, lenders are skimming their portfolio to load up mortgages that are 70% to 80% debt to equity and may also have other problems, said a source.

With mortgage defaults well below 1%, some might argue the risk to CMHC is negligible. “If you look at what is backing [CMHC’s] guarantee, it should be more than enough to cover any downturn in the market,” said one banking source, who asked not to be identified, about CMHC’s cash reserves. “Besides, what will the government do, not increase their limit? This could kill the entire housing market.”

CMHC gave no indication it would seek an increase in its limit.

“CMHC’s mortgage loan insurance limit in force is $600-billion. CMHC manages its mortgage loan insurance business in accordance with this limit,” said Mr. Sauriol.

The Crown corporation would be going to the government looking for an increase in its limit at a time when both Bank of Canada Governor Mark Carney and Finance Minister Jim Flaherty have been casting a wary eye at the housing market.

“We watch the housing market carefully and we are prepared to intervene if necessary. Having said that, we’re not about to intervene in the housing market now,” said Mr. Flaherty this month. For his part, Mr. Carney said “we see that in a number of real estate markets in Canada, valuations are at a minimum, firm; in others, they’re probably overvalued. So there are risks there.”

Sources have indicated the government is already considering tough new measures for calculating how the self-employed qualify for loans and tightening regulations for condominium buyers, so there is probably little appetite for backstopping even more debt from CMHC. In addition to CMHC, the government has a $300-billion limit for private mortgage default insurers.

http://business.financialpost.com/2012/01/30/cmhc-backing-fewer-loans/

Financial institutions appear to be cracking down on rules for borrowers with self-declared income, a move that comes as Finance Minister Jim Flaherty said he’s concerned about a lack standards in the sector.

Responding to a question about whether the Office of the Superintendent of Financial Institutions was looking into the practice of banks loosening their standards for so-called stated income mortgages, Mr. Flaherty confirmed it is an issue.

“OSFI’s concern arises out of some work that OSFI has done as part of it – the ordinary course of its business to look at some of the — some of the loans being made by financial institutions. I was informed of what their assessment showed with respect to a few financial institutions which is a matter of concern and that is — that is being corrected,” he said.

The Financial Post first reported last month that the government was looking at another round of tough new mortgage rules, among the considerations being a crackdown on how the self-employed qualify.

Stated-income products have become very popular during this housing boom, allowing more banks to get involved in loaning to the self-employed. A source indicated many financial institutions have looked more at the financial behaviour of the self-employed — about 13% of the market — because income is hard to verify.

Vince Gaetano, principal of Monster Mortgage confirmed that CIBC’s wholesale arm FirstLine Mortgages Inc. is pulling out of the stated-income business. Mr. Gaetano said Street Capital Financial Corporation has followed the CIBC lead and he expects other financial institutions to follow very soon.

“We are hearing rumblings that everybody is going to be tightening up in the next week,” he said. “What’s happening is one person leads and everybody follows.”

What it ultimately means for the self-employed is they will end up back in the arms of non–traditional lenders and that means higher rates for them — something they faced in the housing market about five years ago.

“It’s bit like we are going back in history,” said one economist, who didn’t want to be named. “This is the way it used to be before the market took off.”

For his part, Mr. Gaetano said the federal government should blame itself for loosening standards on the minimum down payment required before consumers have to get mortgage default insurance. The government required 25% down last decade but it has since been lowered to 20%.

“The reason it changed is the banks were pushing their line of credit products. They could only lend up to 75% and they wanted the extra 5% to go to 80% without insurance under the Bank Act,” said Mr. Gaetano.

That drop in the minimum down payment could also be attributed to the banks being forced to buy more portfolio insurance for loans that have more than 20% down.

The banks have been seeking insurance on loans with even high down payments — something not required by law — so they can securitize those bulk lending loans, thereby getting them off their balance sheets and reducing their capital requirements. In those cases in which the loans to value is less than 80%, the bank pays the insurance charge instead of the consumer.

Canada Mortgage and Housing Corp. acknowledged to the Financial Post this week it had talked to lenders about reducing its bulk or portfolio insurance as it tries to allocate its resources. The Crown corporation, which guarantees mortgages held by financial institutions, is ultimately backed by the federal government, but it is getting close to its $600-billion limit. Third quarter results showed it was backstopping $541-billion of loans.

Banks have been scrambling to deal with the CMHC change and are said to have contacted private insurance Genworth Financial Canada and Canada Guaranty Mortgage Insurance which together have a $300-billion limit guaranteed by Ottawa for loans they insure.

OTTAWA — Canadian house prices dropped in November for the first time in nearly a year, according to the monthly Teranet-National Bank house price index released Wednesday.

The 0.2% drop followed two months of flat prices, and was the first decline in the index since a “brief correction during the three months ending November 2010,” said National Bank senior economist Marc Pinsonneault.

The national composite index, which tracks registered prices of homes sold at least twice, shows prices fell in eight of the 11 metropolitan markets tracked — one more than in October.

“Calgary and Victoria stood out with declines of 1.6% and 0.9% respectively,” said Mr. Pinsonneault, noting the declines were much smaller in the other six markets, though declines in Toronto, Hamilton and Winnipeg “are noteworthy in that these three markets are considered tight.”

December data released by the Canadian Real Estate Association suggested most real estate markets in the country are balanced, with the exception of those three cities, and Victoria, which is considered to be a buyer’s market.

November’s prices were higher than October’s in Edmonton (0.1%), Montreal (0.4%) and Halifax (0.5%).

Year over year, the composite index has gained 7.1%, up slightly from 7.0% the previous month because of a bigger drop in prices between October and November in 2010.

“Since prices began rising again in December 2010, the recent acceleration trend in 12-month changes could come to an end with next month’s report on December 2011 prices,” Mr. Pinsonneault said.

TABLE

November housing prices (% change m/m % change y/y):
Calgary -1.6 0.5
Edmonton 0.1 1.0
Halifax 0.5 2.8
Hamilton -0.3 4.4
Montreal 0.4 7.2
Ottawa -0.2 4.2
Quebec -0.2 6.0
Toronto -0.2 10.8
Vancouver -0.2 9.1
Victoria -0.9 -0.3
Winnipeg -0.1 7.5
National Composite -0.2 7.1
Source:Teranet-National Bank

Real estate investment guru Don Campbell blames the media’s sensational reporting for a lot of the confusion that exists today around the real estate cycle.

 The misinformation that results from this reporting gives rise, he says, to differing opinions as to whether real estate is a sound investment vehicle. The confusion comes from what he calls moment-in-time reporting that fails to recognize other factors that have influenced how a cycle plays out.

So when the media reports that housing starts are down and interprets the slump to mean the real estate market is slipping, that’s just plain wrong.“There’s a lot of guesswork going on,” Campbell says. “And you have people making bold statements that, for example, housing starts are down so the real estate market is down and those aren’t equative.”

Following January and February of this year, you’ll likely see reports about housing starts being up in Toronto. But don’t be fooled into thinking that the city’s housing market is on the rise again, says Campbell.  That’s an example of his moment-in-time theory, when in fact the reason for the apparent hike in housing starts will be “developers trying to slam through major developments before the possibility of a major strike by city workers.”

The influence of, say, a pending city strike or changes to the country’s mortgage regulations or large volumes of foreign money coming into the country can influence a real estate cycle by prolonging a boom, a slump or a recovery.

Understanding how and why cycles work should be top of mind for anyone involved in real estate from buyers to realtors to investors, says Campbell.

“The more time people spend doing homework and understanding the basics of cycles, the more clear and intelligent choices they’ll make when buying their home,” he says. “I think homebuyers need to start thinking as investors do in order to make a good solid decision. You can save thousands and thousands by thinking like an investor.”

The real estate cycle is a relatively simple concept that has a beginning, a middle and an end.  At its simplest, says Campbell, the real estate cycle is a number of phases ranging from a real estate bust to a real estate boom. But a deeper, more sophisticated understanding of the cycle shows that it comprises three major phases consisting of boom, slump and recovery.

According to Campbell, a real estate cycle is predictable but its duration is not. A cycle typically lasts anywhere between seven to eighteen years. To more deeply understand real estate cycles, we need to consider key drivers that push the cycle along on its regular path. Key drivers tend to be more long term and supportive such as the job growth currently taking place in Alberta, says Campbell.

Key influencers, however, tend to bump a cycle off its path some by extending the boom or the slump. Campbell cites foreign money coming into Canada as a good example of how that has influenced longer-than-expected upward real estate cycles in Vancouver and Toronto.“Once an investor grasps this, they are no longer worried by influencers such as news headlines,” says Campbell. “I’m telling you this is not rocket science and people truly believe it’s a magic crystal ball.  Then you hear sales people trying to justify the market by saying this time it’s different.  But the truth is it’s never different. The only time it seems different is when market influencers are pushing the market off its cycle.”

Political influence and financial regulation can heavily influence real estate cycles, says Campbell. Historically, real estate price bubbles occur when governments loosen their financial industries and offer favourable taxes to real estate investors. Given the deregulation of the financial industry in Europe and the U.S. over the past 15 years it’s not surprising that a real estate bubble formed and burst in those countries beginning in 2006. But by comparison, Canada refused to loosen its financial regulations and as a result managed to maintain relatively stable real estate values and a healthy banking system.

Jarek Bucholc, who owns and operates Canada REIC (Real Estate Investors’ Club),  says real estate cycles are very important in terms of investing and the more knowledge you’ve gleaned and acquired along the way, the more likely your odds of success. Not only is it vital to learn about the markets you’re interested in, he believes you need to take into account world economies and global politics as well.“If you’re having problems in Europe and the U.S., directly or indirectly our properties will be influenced by these events,” says Bucholc. “We have a crisis in the U.S. and even if our banking system is more powerful and well organized we are still affected by the crisis by our neighbour to the south. Because we are providing resources to the U.S. so automatically if there’s less demand from our neighbour than you see a higher unemployment rate and less demand for workers and migration and the real estate boom goes down.”

The Calgary-based real estate investor encourages other investors to subscribe to his golden rules when considering cycles and how best to spend your money to maximize your return. Bear in mind the kind of cycle you’re currently in so you can best use your marketing strategies. Don’t speculate that the market you’re in will appreciate and consider it a bonus if it does.

It’s important that housing professionals know what drives real estate cycles, says Michael Ponte, owner of Prosperity Real Estate Investments based in Langley, B.C.“For people in the business, it helps them prepare for those things in advance and a lot of agents don’t understand those determining factors,” explains Ponte. “It’s their business and they should truly understand their business. They want to maintain profitability and provide that extra level of service that speaks volumes about their credibility and sees them educating their clients.” 

Realtors generally understand the type of market they’re working in, says Ponte.  A recovery market is one that is balanced and experiencing steady growth with equal numbers of buyers to sellers and marginal increases in the one to three per cent range. A slump is a buyer’s market and is characterized by an abundance of inventory and a lot of negotiating. Finally, a boom is considered a seller’s market and is marked by limited inventory and lots of buyers.“It can be difficult to get your head wrapped around it but the more you can understand the markets your involved in – by looking at GDP growth and population growth and those key things that will create a boom, slump or recovery scenario – the better off you’ll be. In a lot of ways it’s like having a crystal ball.”

Do you look to real estate cycles when guiding the path of your career decisions? Is this something you discuss with clients? What cycle would you say you’re working in right now? Share with us.

While 2011 proved to be a rocky road in the economy, there is much to look forward to in 2012 in the housing market- according to Dave Liniger, Chairman and Co-Founder of RE/MAX.

Speaking about the recovery of the US housing market, Liniger says that the key to activity lies in the continuation of low interest rates.

Many believe that 2012 may the year of turnaround for the beleaguered US housing market, but Liniger draws on several factually based elements to make his predictions for the year to come.It has been stated by the Federal Reserve that homeowners can expect low interest rates to continue through the next few quarters.  A move like that has been unprecedented, and provides a unique opportunity in the housing market.With interest rates low, of course, there will be more buying activity- which will in turn bring some life to housing prices that have remained depressed throughout the recession, and afterwards.He believes as well, that inventories will continue to rise, as foreclosures will continue to rise too.  

There will be great buying opportunities on the market.He also sees the rate of homeowners fall, perhaps suggesting that those who may have been on the fringes of homeownership prior to the subprime crisis are now removed- and that those who continue to be homeowners have healthier financial situations, which contributes overall to economic health.With prices continuing to be low, there will likely be a continued interest from foreign property investors. Liniger puts 25% of purchases next year in the hands of investors. Canadians lead foreign property investment in many pockets of the country, in appealing areas like Arizona and Florida.Linger also thinks that 2012 will be the year that will see the resurgence of the real estate agent. In times of trouble, people need guidance and support that training and experience provides. He thinks that more homebuyers will be seeking this in the coming months.

According to CMHC, the seasonally adjusted rate of housing starts rose in December, mostly due to a spike in multiple urban starts, support the notion that condo development is surging in this country.

There has also been a trending towards returning to urban centers- in particular with the Baby Boomers to be closer to amenities and health care. 

Housing starts registered in at 200,200 units in December up from 185,600 units the month prior.

“The increase posted in December was mainly attributable to the multiple urban starts, particularly in Ontario and in Atlantic Canada”, said Mathieu Laberge, Deputy Chief Economist at CMHC’s Market Analysis Centre.

Multiple urban starts far outpaced single urban starts. Urban starts overall went up by 10.1 % to 181,900 units in December. Urban single starts rose by 3.8%, compared with a 14.5% surge in multiple urban starts for the same time period.

Regionally, Atlantic Canada far and away saw the most starts, claiming 52.9% of the total. Ontario and Quebec also saw rises in urban starts, with 35.3% and 9% respectively. Housing starts actually fell in B.C. and in the Prairies.

Rural starts came in at an estimated at a seasonally adjusted annual rate of 18,300 units.