The risk of mortgage rates rising to unaffordable levels in the near future is “negligible” and recent measures taken by Ottawa to clamp down on housing loans may be too harsh, says Canada’s mortgage industry association.

Due to the effect of tightened lending rules “housing demand at present and for the near future is probably lower than it needs to be,” according to the Canadian Association of Accredited Mortgage Professionals, which represents brokers and others in the industry.

In fact, the group suggested in a report Wednesday that the rules may need to be relaxed.

CAAMP said that a vast majority of borrowers studied had left themselves room to absorb a hike of as much as one percentage point on fixed-rate mortgages and even more on variable-rate mortgages.

“Canadians — lenders and borrowers — have been highly prudent in the mortgage market,” Will Dunning, the association’s chief economist, wrote in the report.

“There have been some calls for mortgage lending criteria to be tightened further. This analysis concludes that Canadian lending criteria are already tight enough. In fact, some might argue that with the changes implemented in April 2010, Canadian criteria are currently too tight.”

The report came two days after federal Finance Minister Jim Flaherty further altered lending rules to curb higher-risk borrowing in the housing sector. Changes coming into effect in March include reducing the maximum amortization period to 30 years from 35 for insured mortgages and limiting how much money Canadians can borrow using their homes.

It was the third time mortgage rules have been tightened in the past three years, a period in which historically low interest rates have been fuel for rampant borrowing.

On Tuesday, Bank of Canada governor Mark Carney left the key overnight lending rate untouched at one per cent, but with a renewed warning that household debt is mounting.

Both Carney and Flaherty have warned repeatedly over the past several months that Canadian consumer debt is rising too rapidly and threatens the future health of the economy.

Flaherty dismissed the CAAMP report Wednesday, noting that the group has a vested interest in seeing the housing and mortgage markets remain robust.

“My concern has been to strike the right balance between the availability of credit in the residential housing sector and the danger of developing any sort of bubble in the housing sector,” he told reporters, adding that he doesn’t believe further tightening will be necessary at this time.

John Andrew, a professor at Queen’s University School of Urban and Regional Planning, said it’s unlikely mortgage reforms would put a significant chill on the housing market because the changes are aimed at the highest-risk borrowers, who are already unlikely to qualify for insured borrowing from most lenders.

“I dispute their claim that the housing market is slowing down,” he said.

“I don’t see (mortgage changes) really affecting the market that much because there really aren’t that many lenders that are going to be lending … to that type of a borrower anyway.”

But CAAMP said changes made by Flaherty last April had already disqualified a significant number of potential borrowers, thereby curbing debt growth.

Last April, the government introduced changes that forced borrowers to meet the standards for a five-year fixed-rate mortgage even when applying for a lower interest, shorter-term loan.

That slimmed average gross debt service ratios, a measure used by banks to test how much housing debt will eat into income, by about one per cent to 19.3 per cent in the second half of the year, the CAAMP report said.

The study also tested the impact of higher mortgage interest rates, assuming a rate of five per cent by the end of 2012. That would raise the cost of a fixed-rate mortgage by about one percentage point but would have a bigger impact for those with variable rates, about 2.5 per cent.

It found that expected increases in income levels should more than offset increases in interest rate payments and most borrowers would be able to absorb the shock.

“Recent mortgage lending, in an environment of very low interest rates, results in some risk of financial difficulties if and when interest rates increase in future,” Dunning wrote in the report.

“However, the degree of risk does appear to be extremely small.”

Still, the CAAMP report found the amount of outstanding mortgage debt in Canada surpassed $1 trillion in August and stood at $1.08 trillion in October — about 57 per cent higher than five years earlier.

That represented a debt growth rate of 9.4 per cent per year. The figure is slightly lower than the average over the past decade, but troubling because it far surpassed income growth.

Mortgage defaults also remain higher — at about 0.43 per cent — than they were before the recession, when the rate stood at less than 0.30 per cent, the report found.

However, CAAMP said that as the housing market slows, debt growth is already decelerating and as of October stood closer to seven per cent, below the 10 per cent average for the decade.

The report was based on 59,000 insured mortgages for home purchases and 26,500 for refinancing that were funded in 2010. The vast majority of those included in the data — 97 per cent —were considered high risk, meaning the loan-to-value ratio exceeded 80 per cent.

The Honourable Jim Flaherty, Minister of Finance, and the Honourable Christian Paradis, Minister of Natural Resources, today announced prudent adjustments to the rules for government-backed insured mortgages to support the long-term stability of Canada’s housing market and support hard-working Canadian families saving through home ownership.

“Canada’s well-regulated housing sector has been an important strength that allowed us to avoid the mistakes of other countries and helped protect us from the worst of the recent global recession,” said Minister Flaherty. “The prudent measures announced today build on that advantage by encouraging hard-working Canadian families to save by investing in their homes and future.”

“The economy continues to be our Government’s top priority,” continued Minister Paradis. “Our Government will continue to take the necessary actions to ensure stability and economic certainty in Canada’s housing market.”

The new measures:

• Reduce the maximum amortization period to 30 years from 35 years for new government-backed insured mortgages with loan-to-value ratios of more than 80 per cent. This will significantly reduce the total interest payments Canadian families make on their mortgages, allow Canadian families to build up equity in their homes more quickly, and help Canadians pay off their mortgages before they retire.
• Lower the maximum amount Canadians can borrow in refinancing their mortgages to 85 per cent from 90 per cent of the value of their homes. This will promote saving through home ownership and limit the repackaging of consumer debt into mortgages guaranteed by taxpayers.
• Withdraw government insurance backing on lines of credit secured by homes, such as home equity lines of credit, or HELOCs. This will ensure that risks associated with consumer debt products used to borrow funds unrelated to house purchases are managed by the financial institutions and not borne by taxpayers.

Our Government’s ongoing monitoring and sound underlying supervisory regime, along with the traditionally cautious approach taken by Canadian financial institutions to mortgage lending, have allowed Canada to maintain strong and secure housing and mortgage markets.

The adjustments to the mortgage insurance guarantee framework will come into force on March 18, 2011. The withdrawal of government insurance backing on lines of credit secured by homes will come into force on April 18, 2011.

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

The global economic recovery is proceeding at a somewhat faster pace than the Bank had anticipated, although risks remain elevated. Private domestic demand in the United States has picked up and will be reinforced by recently announced monetary and fiscal stimulus. European growth has also been slightly stronger than anticipated. Ongoing challenges associated with sovereign and bank balance sheets will limit the pace of the European recovery and are a significant source of uncertainty to the global outlook. In response to overheating, some emerging markets have begun to implement more restrictive policy measures. Their effectiveness will influence the path of commodity prices, which have increased significantly since the October Monetary Policy Report (MPR), largely reflecting stronger global growth.  

The recovery in Canada is proceeding broadly as anticipated, with a period of more modest growth and the beginning of the expected rebalancing of demand. The contribution of government spending is expected to wind down this year, consistent with announced fiscal plans. Stretched household balance sheets are expected to restrain the pace of consumption growth and residential investment. In contrast, business investment will likely continue to rebound strongly, owing to stimulative financial conditions and competitive imperatives. Net exports are projected to contribute more to growth going forward, supported by stronger U.S. activity and global demand for commodities. However, the cumulative effects of the persistent strength in the Canadian dollar and Canada’s poor relative productivity performance are restraining this recovery in net exports and contributing to a widening of Canada’s current account deficit to a 20-year high.  

Overall, the Bank projects the economy will expand by 2.4 per cent in 2011 and 2.8 per cent in 2012 – a slightly firmer profile than had been anticipated in the October MPR. With a little more excess supply in the near term, the Bank continues to expect that the economy will return to full capacity by the end of 2012.

Underlying pressures affecting prices remain subdued, reflecting the considerable slack in the Canadian economy. Core inflation is projected to edge gradually up to 2 per cent by the end of 2012, as excess supply in the economy is slowly absorbed. Inflation expectations remain well-anchored.  Total CPI inflation is being boosted temporarily by the effects of provincial indirect taxes, but is expected to converge to the 2 per cent target by the end of 2012.

Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. This leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in an environment of significant excess supply in Canada. Any further reduction in monetary policy stimulus would need to be carefully considered. 

Another year has come and gone and you’re wondering how to improve your finances. You’ve relinquished your latte habit and given your shoe fetish the boot, yet you don’t seem to be able to save as much as you’d like. It’s too hard to trim expenses, you say. It takes too much time to budget. And, blech, comparison shopping for the best prices zaps your strength.

1. Mortgage

If you do nothing else to save money in the new year, take five minutes to see how increasing or accelerating your mortgage payments can save you thousands of dollars in interest. Grab your latest mortgage statement, plug your numbers into Industry Canada’s online mortgage calculator, then play around with the figures.

See how much you could save if you switched to biweekly payments or increased the amount by 5 per cent or more.

The site can also show you what would happen to your payments if interest rates changed or you refinanced your mortgage. That should provide all the incentive you need to plan your mortgage-burning party.

2. Insurance

If you have a house and a car, you’re likely spending thousands of dollars a year on insurance. Kanetix.ca is an excellent one-stop resource for comparing home, auto, health, travel and life insurance policies. Fill out a simple form about your driving history, for example, and you’ll get free quotes from more than 40 auto insurance providers. Use those quotes to find a cheaper policy or negotiate a lower rate with your current provider.

And while you’re reviewing your rates, take a few minutes to think about whether your home insurance is adequate. If you’ve recently inherited grandma’s jewellery, notify your insurance provider to make sure it’s covered.

3. Banking

Considering how much profit the big banks make from consumer fees, you owe it to yourself to spend five minutes trying to reduce your piece of the pie. Pull out a recent bank statement and use it to fill out a personal profile at the Financial Consumer Agency of Canada’s online comparison tool. Answer a few questions about your average balance and how often you do certain transactions, and you’ll get a list of the financial institutions with the lowest-fee banking packages that best meet your needs.

4. Mobile

Do you really need that unlimited wireless plan? You won’t know unless you do your research. A Billshrink.com survey found eight out of 10 people are paying an average of $300 more than they need to each year on their wireless bills because their plans do not suit their needs. Spend five minutes at a cellphone comparison site such asCellPlanExpert.ca, answer a few questions about your talking and texting habits, and you’ll get a list of cellphone plans, complete with prices and features.

5. Credit cards

According to RateSupermarket.ca, nearly half of Canadians have not changed their credit card company in the past five years. If you’re part of that complacent group, it’s time to do some comparison shopping. You can find online comparison tools at many sites, including the FCAC. Answer a few questions about your spending habits and what type of card you’d like and voilà: a table of credit cards appears with all the fees and features compared. Spending five minutes to find a better credit card deal: priceless.

Canadian housing prices dropped in October for the second straight month, but experts say it’s not the start of a precipitous decline like the plunges seen in the United States.

The Teranet-National Bank Composite House Price Index found that prices dropped by 0.4 per cent nationally, pushed by declines in Calgary (1.0 per cent) and Toronto (0.9 per cent).

A decline in September was the first drop after 16 straight months of increases. Since October 2009, national house prices are still up an average of 6 per cent.

National Bank senior economist Marc Pinsonneault, who conducted the study, said he believes prices could drop by another 5 per cent over the next two years, but said that number should be kept in perspective.

“That would mean prices would still be at their pre-recession peak, so this isn’t the start of something terrible,” said Pinsonneault. “We’re expecting to see house sale prices come more in line with rental prices and incomes, and that’s something that’s beneficial.”

In the U.S., housing prices have dropped more than 24 per cent, according to a report Wednesday. In some cities, the fall has been even more precipitous: In Las Vegas, house prices have dropped 51 per cent in the last three years, according to the S&P Case-Schiller Home Price Index.

Pinsonneault noted that another key measure of the housing market still very healthy in Canada compared to the U.S.

In the U.S., between 5 and 6 per cent of mortgages are 90 days in arrears. Here, that figure is more like 0.5 per cent, according to Pinsonneault.

“When everything is going really well, it might be 0.4 per cent. So 0.5 per cent really isn’t that bad at all,” he said.

Pinsonneault also wasn’t too concerned about the drops in Calgary and Toronto, saying they are not big signs of a local economic slide.

“The markets were maybe a bit more overheated in Calgary and Toronto. In Calgary with the oil sands, there was some speculation in the market. When we came out of the recession, it was more noticeable in Toronto than in other housing markets. But I wouldn’t say it was a bubble,” said Pinsonneault.

In central Toronto, Kevin Somers of Royal Lepage said he has noticed a bit of a softening in the market, but nothing particularly drastic.

“We’ve gone from a situation where there might have been 10 bidders to now there are 4 or 5,” said Somers, a broker who is also Royal Lepage’s area manager for central Toronto.

“The picture has been pretty stable. Shy of any significant changes in the economy or interest rates, I don’t really see things changing all that much.”

In the U.S., many homeowners in the worst-hit cities are “below water,” meaning they owe more on their mortgage than their house is worth. Somers says that is not the case here.

“There are a few one-off instances of people being under water in Toronto, but it’s not any trend at all,” said Somers, adding that choosing the right house in the first place is always good insurance against a slide in the market.

“If it’s a desirable property in a good location, it’s still always going to sell,” said Somers

Canadian Finance Minister Jim Flaherty says it’s up to commercial banks — not government — to rein in lending as household debt soars, countering comments by Toronto-Dominion Bank Chief Executive Officer Edmund Clark.

“The primary responsibility for prudence in lending practices rests with the financial institutions,” Flaherty said in a Dec. 21 interview in Ottawa. “People also need to take responsibility for what they do and exercise common sense in terms of taking on debt.”

Clark said in a Globe and Mail interview published Dec. 16 that cutting Canada’s excessive household debt is a matter for the government rather than lenders, and would be best tackled through tighter rules on mortgages. No bank wants to lead the way in imposing stricter borrowing conditions for fear of losing customers to rivals, Clark, 63, told the newspaper.

Mohammed Nakhooda, a Toronto-Dominion spokesman, declined to comment yesterday.

“Banks are responsible for their own business practices and what I find odd from time to time is when a bank executive asks me to tighten lending rules,” Flaherty said. “It seems to me that’s the primary responsibility of the financial institutions and not the government.”

Household debt has risen in Canada after interest rates fell close to record lows, prompting consumers to take on bigger mortgages, car loans and credit-card balances. Canada’s debt levels topped the U.S. for the first time in 12 years in the third quarter.

Mortgage Rates

Flaherty, 60, said he expects interest rates to “go up over time,” which will bring higher mortgage costs.

“People have to make sure they can afford, in particular, their mortgage payments when interest rates rise,” Flaherty said.

The government would tighten mortgage-market rules again if it had to, Flaherty said. Measures to restrain lending taken earlier this year included changes for government-backed mortgages that forced buyers to meet standards for five-year, fixed-rate mortgages even if they opt for variable rates. Limits on refinancing were made stricter and down payment rules were tightened.

Don’t over do it this Christmas, if you want to sell your house, that is.

Royal LePage Real Estate Services says it’s time to start thinking about a smaller tree this year if you plan to list your home for sale over the holiday season. Those large, decorated trees can take over a room and make it appear smaller to potential customers.

The week between Christmas and New Year’s is a slow period for real estate transactions, meaning sellers need any advantage they can muster.

“When people are selling their houses at Christmas time, they are selling under some other stress. They are usually highly motived to sell,” says Dianne Usher, a vice-president with Royal LePage. “You’ve got the euphoria of the holiday season and, oops we have to sell. It’s a great time to buy.”

The real estate company is not being a total Scrooge about the season, it’s just calling for less of everything.

Among its other suggestions are avoiding too many lights and opting for white lights instead of multi-colored flashing bulbs to give your home a neutral glow.

Forget the stacks of presents under the tree too, they just give your home a cluttered look. And those holidays meals may smell great to you, but they are a strange odour to a potential buyer.

“You want to try to tone it down a bit. Take the personal aspect of your home out of it,” says Ms. Usher, adding Christmas marks your home more than usual. “It just adds too much of a distraction to the room.”

But should you have no Christmas decorations? Would that be a turn off to buyers?

“Not in major urban centres because we are so multicultural today,” says Ms. Usher, adding in some rural and suburban centres, a touch of Christmas can be important to selling.

Mary Helen Rosenberg, a partner in Stage To Sell, says the whole idea behind staging is to keep your home as neutral as possible, so it appeals to the widest audience of buyers.

“No, I wouldn’t get rid of the tree all together, but I wouldn’t overdo it with decorations, too,” Ms. Rosenberg says. “You can’t rob the family of traditions. I wouldn’t put the tree up Dec. 1 and take it down Jan. 20. I might close that window and keep it fairly short and allow the family to enjoy its regular traditions. If it’s serious and we need to sell your house, you bring the tree down a little earlier.”

Even the guys who grow the trees say it’s probably not a good idea to have a giant one in the middle of your living room during an open house.

“When it comes to selling a house, it is important to not fill the room with a large and wide tree loaded with decorations. The eyes of the buyer will look at how big a tree is and how small the room is, even if it’s in the basement,” said Lewis Downey, executive director of Canadian Christmas Tree Growers Association.

“I think you do need a tree though. It’s Christmas time and it’s natural to have a tree. If you don’t have a tree, it can have reverse effect and people may say, ‘What’s the matter, there’s no tree. They’re not happy to live there.’”

A BMO survey showed that 69% of Canadians are open to the idea of a shorter amortization. 

“While the purchase of a home represents an important investment for many Canadians, those looking to get into the housing market now or in the near future should be considering financially responsible options, such as a 25-year amortization, to ensure they can pay down debt faster and begin saving more for their long-term goals,” said Martin Nel, Vice President, Lending and Investment Products, BMO Bank of Montreal. 

“Canadians should be realistic in measuring what they are able to afford when it comes to the purchase of a home. Taking on a larger mortgage with a longer amortization in order to afford a ‘faux chateau’ will mean carrying the debt load longer and ultimately paying more in interest over the full term.”

Click here to read the BMO press release.

This latest bout of concern is being fuelled, among other things, by:

1) Record consumer debt

2) Mark Carney’s debt warning

3) Concern by TD & BMO’s CEOs over 35-year amortizations 

It’s clear that debt-to-income ratios cannot be left unchecked forever. Eventually consumers will have to reign in credit or the government will do it for them. The repercussions are undeniable. Unabated debt can put Canada’s economy in peril. If macro shocks occur, high debt ratios mean people have less ability to weather income reductions or home price declines.

The nightmare scenario is runaway defaults. Defaults sparked by economic crises can create a “negative feedback loop” says Mark Carney. That occurs when desperate home sellers drive down prices and beget more desperate home sellers.

The good news is that Canada’s regulators are keenly aware of these risks. The Bank of Canada, default insurers and major lenders regularly collaborate on ways to control systemic risk. One important tool is “stress testing,” which involves creating “what-if” scenarios using dire economic assumptions.

Click here to read the CanadianMortgageTrends.com article.