Archive for December, 2010

OTTAWA — Ontario will see strong gains in both home sales and prices in the coming year, according to a forecast released Wednesday.

Central 1 Credit Union, which operates in Ontario and British Columbia, said listed home resales will increase about 5% to 204,000 next year, after a decline of less than 1% this year to 194,000. Prices are anticipated to rise 4.2% to an average $356,500 in 2011 from $342,000 this year.

“MLS (Multiple Listing Service) housing sales fell to an annualized rate of 155,000 units last July and have climbed since, helped by low mortgage rates, improved affordability and an improving economy,” the credit union said in a statement. “Central 1 expects sales to continue to grow early in 2011 to an annualized rate of 210,000, before tailing off in the second half as mortgage rates rise.”

Central 1 anticipates a stronger Ontario housing market than Canada Mortgage and Housing Corp., the federal government’s national housing agency. CMHC’s latest forecast says its expects just “modest growth” after 191,800 resales in Ontario this year, which would be a 2.1% drop from last year. It expects the average price next year to stay close to this year’s level of $342,600.

Central 1 also predicted that Ontario’s housing starts would rise 9% to 66,000 next year and the vacancy rate for apartments would be flat at 3.7%.

Source: The Financial Post

Ottawa is talking to the banks about putting new measures to curb the rise in consumer debt into the next federal budget.

Deputy finance minister Michael Horgan has broached the topic in prebudget consultations with executives from Bay Street firms, sources say.

Several bankers have told him that they would support further federal moves to cool the mortgage market, including cutting the maximum term of mortgages or increasing the minimum down payment.

Anticipating a hangover Saturday morning?

Lot’s of Canadians will be, which really isn’t so bad. If you can’t let go on New Year’s Eve then maybe you’re a little too tightly wrapped.

And you know there will be plenty of free advice on how to deal with that throbbing pain behind your eyes and the unnerving sense your brain is operating on a three-second delay.

The hangover cure story is a media staple around New Year’s Day.

But it’s being rivalled by another turn-of-the-year hangover obsession. Borrow too much during a low interest rate binge and you’ll be feeling a giant pain in your (empty) bank account when the party ends.

Call it the credit hangover.

Mark Carney has. The Bank of Canada governor warned last week Canadians are having too much fun drinking from the low interest rate cup.

The numbers back him up.

At this time last year Canadians had set a new personal debt record, averaging more than $91,000 per household. There were warnings to reduce spending and pay down debt before rates inevitably rose.

But rates have barely ticked up. Prime is sitting at 3%, apparently not high enough to scare the spenders.

As Carney pointed out, Canadians’ debt-to-income ratio hit 148% last month. On average we owe nearly one-and-a-half-times the amount we earn. For the first time in 12 years Canadians are carrying a higher debt load than their neighbours in the U.S. — the land of the mortgage default.

A lot of that new debt is in mortgages. Younger Canadians see low rates as an attractive alternative to rent and have jumped into the housing market.

Among the older generation, bank lines of credit are popular.

Which means, at the risk of sounding like a party pooper, Carney is right. Interest rates could double in two years as the economy improves. Mortgage costs could get ugly. Someone carrying a $50,000 line of credit at prime plus 1% today could easily see their monthly payments jump to $350 from $135.

That’s a hangover tomato juice won’t cure.

Hair of the dog? It could be fatal.

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Source: The Toronto Sun

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In the late 1960s, Jeff and Ann signed a 25-year fixed-rate mortgage. It was a huge gamble. The interest rate they agreed to pay for the next quarter century, 8 per cent, was high by 1950s or 1960s standards. Just over ten years later, interest rates had doubled, and they knew they had done the right thing.

Others, who signed mortgages in the late 1970s at 10 per cent, and renewed those five years later at punishing terms, did not fare so well.

The Bank of Canada knows how low interest rates are by historical standards. This is the Bank’s polite way of saying you’ll be in serious trouble if interest rates rise: “The proportion of households with stretched financial positions that leave them vulnerable to an adverse shock has grown significantly in recent years, as the growth rate of debt has outpaced that of disposable income.”

But what are people supposed to do? Incomes are stagnant, house prices are high. People take on debt to provide homes and an adequate standard of living for themselves and their families. This is the Bank’s polite way of saying you’re on your own: “When taking on debt, households bear ultimate responsibility for ensuring that they will be able to service that debt in the future.”

Responsibility is a good idea in principle. Yet good choices require good information, and what will happen to interest rates over the next 25 years is anyone’s guess. Moreover, people’s numerical abilities are often weak, so they do not know just how vulnerable they are.

If you’ve chosen to read this column instead of watching funny animal videos on youtube, you’re probably more financially literate than the average Canadian. Click on the attached test to see how well you can predict the impact of interest rate changes.

I determined my calculations using CMHC’s on-line mortgage payment calculator. If you answer all three questions correctly: congratulations. Unfortunately, I cannot tell you how much smarter you are than the average Canadian, because I do not know of any financial literacy test that asks these kinds of questions.

Mortgage Interest Rate Chart:

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Source: The Globe and Mail

Efforts by chiefs of the big banks to slow the growth of Canada’s booming mortgage market are unjustified and in fact could set off a housing slump, the thing the banks most want to avoid, warns the chief economist of Central 1 Credit Union, the umbrella group for credit unions in British Columbia and Ontario.

“I don’t see a price bubble and I don’t see that we need the mortgage criteria tightened as is suggested in some quarters,” said Helmut Pastrick.

The comments come on the heels of warnings from several top bank executives, including Ed Clark, chief executive of Toronto-Dominion Bank, that consumers are carrying excessive debt, especially around mortgages, and that’s made them vulnerable to economic shocks.

They fear that a rise in interest rates or deterioration in employment could leave many borrowers unable to meet their payments.

The bankers are now in talks with the federal government, which is expected to unveil new measures in the next budget aimed at putting the brakes on home loans, the biggest slice of consumer debt held by the banks.

But according to Mr. Pastrick, any such move would be a mistake.

If Ottawa does what the bankers are asking and tightens up on mortgage lending, that will only slow the economy, potentially triggering a domino effect ending in a slump in the housing market, Mr. Pastrick said in an interview.

“If you slow down the housing market that in turn slows down the economy,” he said. “Housing is an important sector. It generates a considerable number of jobs, particularly in housing construction, and [to a lesser extend] in sales. And certainly as sales go, so go housing starts and housing construction.

“Most forecasters are saying it’s going to be the domestic economy that’s going to carry the day [over the next year], so if we begin to tighten on the housing front that too will begin to diminish the growth rates we see on the domestic side.”

This is the second time the big banks have lobbied the federal government on the matter. In the spring, the government lowered the maximum amortization on mortgages to 35 years from 40 and required borrowers to qualify for a five-year, fixed-rate mortgage even if they were applying for a shorter term.

“I didn’t think [the market] needed it at that time either,” Mr. Pastrick said.

“I may be a contrarian here but the market was already in adjustment phase, housing sales were moving down…. So there was no bubble developing at that time, nor is there one developing now.”

Central 1 Credit Union is the umbrella organization for credit unions in British Columbia and Ontario. Member financial institutions have nearly three million customers and hold about $70-billion in assets, the lion’s share of which are in British Columbia, home to some of Canada’s most expensive housing markets.

Mr. Pastrick said the real estate industry is an important economic driver, generating large numbers of jobs in everything from construction and manufacturing to sales, and if it slows down, the result will show up in declining employment.

Most forecasters are already calling for slower growth in 2011 and it doesn’t make sense to add to the negative pressure by artificially pushing down demand for homes, he said.

The bankers have been warning that after more than a decade of rising prices, real estate is overvalued and approaching bubble territory.

“I’m not of that view,” Mr. Pastrick said. “Obviously, the market over time will have some periods where prices decline, but for the most part history shows that housing prices have risen in Canada … so it’s an appreciating asset.”

Even if consumers are borrowing more than ever before, that shouldn’t be seen as a problem because it’s mainly backed by real estate, which will continue to hold its value — unless of course the government decides to tinker, he said.

Mainstream economists point to the ratio of household debt to disposable income of about 150% as the focus of their concerns. They note that it’s now the highest it’s been in history and about the same level it was in the United States immediately prior to the real estate collapse.

But Mr. Pastrick argues that comparison doesn’t work because the U.S. mortgage industry is fundamentally different from Canada’s. For instance, there is no significant subprime sector in this country, nor did Canadian mortgages get securitized to the degree they did in the United States.

Household debt levels have been growing in Canada as well as most industrialized countries since the 1970s, he said. His economist peers’ fixation on 150% as a danger level is “arbitrary” and illogical, he said.

“It’s just a broader trend in the economy and society that we are more reliant on debt than before,” he said.

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With Bank of Canada governor Mark Carney wagging his finger like a modern-day Scrooge at free-spendin’, debt-accumulatin’ Canadians Monday, you might be feeling a little guilty heading to the mall for some extra non-denominational holiday gift-shopping on your work break.

Well, guiltier than usual anyway.

Luckily Sanjay Thakur with Queensbury Securities Inc., by way of the Chartered Accountants of Ontario, has come to the rescue with some advice for worried Canadian shoppers.

First, of course, is the preamble about the spirit of the holidays, inherent goodness of people, and all that good stuff.

“At this time of year, it bears remembering that the best gifts of all usually don’t cost much money. Volunteer, donate to charity, or help out a neighbour,” he said in a release. “Spend time with friends and family, and make the holidays about spending time together, and not spending yourself into debt.”

But for the rest of us heathen spenders, he’s got some helpful hints for keeping debt headaches to a minimum. Or at least to minimize that buyer’s remorse the next day:

1. “Have a spending plan”: Make a list and check it twice, or preferably at two or more stores. In other words, don’t pick up the first, and most expensive, thing you see. Shop around. Oh, and come up with a budget while you’re at it.

2. “Take advantage of today’s tools”: As Mr. Thakur points out, “Personal money-management software like Quicken or Microsoft Money can be invaluable when it comes to tracking spending and paying bills.” A good way to keep track of that budget of yours.

3. “Keep it simple”: Try to use one bank account for income, bills and expenses, and one credit card for non-cash purchases. It’s a lot easier to keep track of everything, and you may even get extra loyalty-plan points by consolidating.

4. “Know the cost of money”: Did you know credit cards charge interest? Try applying the 20% compounded interest rate on your projected spending budget. Shocked yet? Doesn’t seem like such a good idea to pay just the minimum now, does it?

5. “Gift cards often remain unused”: Mr. Thakur figures about 25% of all gift cards go unused a year after they are given. That’s a lot of cash down the drain.

6. “Have a savings plan”: Tuck some cash away in a savings account throughout the year, and there should be more than enough for your shopping needs. Sort of like putting cash aside for your kids’ college fund, but you spend it on ties and garish sweaters instead.

7. “Pay cash”: If you can’t trust yourself with borrowed money, then only spend what you have. “Carry cash or pay with your debit card. When the money’s gone, the shopping will stop,” Mr. Thakur said.

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Source:Financial Post

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