Tag Archives: credit card balances
Don’t fool yourself into believing that a house is an investment like a bond or annuity.
By Steve Maich – Canadian Business
There’s always a fair bit of muddled thinking and downright silliness floating around any thriving market. But the current debate over the state of Canada’s real estate market offers an overabundance of both.
For months, pundits and self-described experts have debated whether soaring prices in cities like Toronto, Vancouver and Calgary indicate a bubble.
Finally, last week, Ottawa made its move to cool the house-hunting frenzy. The feds tightened the requirements on certain mortgages and slightly raised minimum standards for first-time buyers. The curious thing wasn’t the changes themselves, which will do little to alter the trajectory of house prices. What’s strange is that these changes were enacted at Bay Street’s request, even as the banks’ own analysts repeatedly insist there is nothing to worry about, and that rising home prices are a perfectly rational and sustainable response to low interest rates and a recovering economy. Finance Minister Jim Flaherty was similarly sanguine in December, saying he saw little evidence of a bubble in real estate.
Two months later, bankers and politicians would have us believe they routinely solve problems that don’t exist.
The banks could have imposed these conditions on their own if they wanted to. They are all free to set their own lending conditions. But taking a harder stand would run the risk of losing them clients. Better to have Ottawa play bad cop and save the banks from themselves.
Never mind that Canada’s mounting debt loads aren’t really being driven by first-time home buyers who can’t qualify for fixed-rate mortgages. Our burden is being driven, to a far larger degree, by surging credit card balances and home-equity lines of credit (rising at a 20% annual rate as recently as last summer). The banks don’t want Ottawa messing around with those highly profitable businesses, so the status quo holds.
All this gets at our deep confusion about house prices. We want them to rise, but we fear the rise at the same time. One writer for a certain national newspaper recently argued that the problem in real estate isn’t with ludicrous home prices, but with the level of debt being taken on — as though there is no connection between soaring prices and mounting mortgage balances and credit lines. That’s nonsense, of course, but people will make tortured arguments to support a bull market.
All of which brings us to this week’s cover story by Joe Castaldo. Lots of people will no doubt be shocked (and probably offended) at the notion that homes are a bad investment, even at the best of times. But housing never used to be regarded as an “investment” at all. Previous generations bought houses when they wanted to settle down and raise a family, not as a way to get rich. Today, we’ve bought, en masse, into the idea that homes are an asset that can be relied upon to appreciate much faster than inflation. As a result, millions of Canadians are willing and eager to take on huge levels of debt for a home they hope to sell at a substantial profit a few years down the line. Others figure their home equity is just as good as a retirement fund.
In reality, a house is just a consumer good like any other — a pile of wood, metal and glass. The land itself has a value independent of what’s built on it, but that value can collapse and sometimes does. Just ask anybody who owns property in Detroit or suburban Las Vegas.
Still, there are plenty of good reasons to own a home. It keeps the rain off, and gives you a place to store your stuff. I own a home, and I don’t regret buying it. But don’t fool yourself into believing that a house is an investment like a bond or an annuity. Approach it the same way you do the purchase of a car, and you might just escape the consequences of all the muddled thinking that is swirling around us.
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Credit card balances, lines of credit, personal borrowing up in June
Rita Trichur – Toronto Star
Canadians, buoyed by a budding housing market recovery, took on more debt in June as they tapped banks for a variety of loans tied to real estate, says a report released yesterday by TD Economics.
Total bank-issued credit to households grew by 1% in June from May. On a year-over-year basis, household credit increased by 9.9%.
Although the recession is taking a toll on consumers, relatively low interest rates helped whet their appetite for more housing-related debt. That helped drive home sales last month, but economists warn demand for mortgages will likely diminish during the rest of 2009.
The report, citing data from the Bank of Canada and the Canada Mortgage and Housing Corp., said much of June’s lending growth was fuelled by “loans secured on real estate.” Specifically, mortgages grew by 0.8% from May and 8% compared with June 2008.
Lines of credit, including popular Home Equity Lines of Credit, were up 2% month over month and more than 21% year over year. There was also more growth in personal loans and credit card balances. “While having risen from lows during April and May, interest rates on fixed-term mortgages in June remained at near 30-year record lows,” the report said. “Encouraged by these low rates, home buying has been brought forward.”
Economists Grant Bishop and Craig Alexander, the report’s authors, noted that countrywide sales of existing houses were up 18% year-over-year in June, while average resale prices jumped by 3.6% during that time. “However, since June’s housing sales are unsustainable and new home construction will be weak during 2009, demand for mortgage credit should wane in the months ahead.”
Last week, the Bank of Canada suggested that low borrowing costs for consumers should help bolster the economic recovery. It also warned, however, that consumers are likely to “remain cautious” because of rising unemployment.
TD also said yesterday its financial stress index for Canada recorded “a minor decline” last week.
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Each year thousands of prospective homeowners are shocked to discover their credit history will hinder their ability to own their dream home.
The very first thing that your loan officer checks when you apply for a mortgage or any kind of credit is your credit score. You are rated in terms of the score which in most cases influences the amount you can borrow. Understanding your credit score in a better way enhances your chances to develop a higher score and thus benefit from loans at better terms and conditions.
A credit score consists of many factors: your payment history, your credit card balances, bank accounts, including savings and checking accounts, and any other form of credit including all outstanding personal loans, mortgage loans, store credit cards, etc.
Credit scores are calculated from many different forms of credit data in your credit report. Each credit reporting bureau has their own standards and formulas that they use for the purpose of calculating a consumer’s credit score. The following is a generalized classification of a credit score rating:
Excellent credit rating – No late payments, no collection notices, no bankruptcies or repossessions.
Good credit rating – May contain a late payment within the last two years.
Fair credit rating – More than one late payment. May or may not have a bankruptcy or repossession in the last two to three years.
Poor credit rating – Recent collection attempts, late payments within the last year, bankruptcies and/or repossessions within the last two to three years.
The reason why a credit score is important is that it will determine your eligibility for a loan. A low credit score may hinder approval, and it will also impact the interest rate you will have to pay for the money that you borrow.
Since individuals with less than perfect credit traditionally present more of a risk of defaulting on a loan. Lenders are able to justify charging more interest to those consumers. The extra interest the lender earns on the loan is intended to compensate the lending agency in the event the consumer defaults on the loan. Over the course of a 15 or 30 year mortgage, those extra interest points can add up to an astounding amount of money.
Your credit score is the indication of your financial health. You should do your best to avoid damaging your credit history with late or missing payments, too many outstanding loans or too many loan requests. Watching your credit score closely especially before you make any major purchases will help you avoid unwanted surprises.
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