Tag Archives: home equity
Are Canadians mistaking home equity with wealth?
Ronald Hirshhorn – The Globe and Mail
As we brace for a housing slowdown, it is a fitting time to ask how the prolonged upward surge in housing prices has affected Canadian homeowners. The answer is, for the most part, not much.
Comment: “Brace” for it? Sounds like a bad Game of Thrones meme… The slowdown has begun, it started in the summer, the day after the new mortgage rules took effect.
The general view is that those fortunate enough to have ridden the uptrend in the housing market have reaped a huge windfall. My friends, Vic and Amy, for example, are the proud owners of a charming two-storey, three-bedroom house they purchased in midtown Toronto about 10 years ago. They are happy to guide guests through the living room with its large wood-burning fireplace, up to their impressive master bedroom and out onto the deck overlooking their carefully tended garden. But what excites them more than showing off their home is calculating the wealth they have accumulated as a result of the approximate doubling in the value of their property. They are not unique. Across Canada, house prices increased 109% from 2000 to 2011, according to the Teranet-National Bank composite index of 11 main cities. A survey by Environics Analytics found that between 2006 and 2011 the net worth of Canadian households rose from $330,000 to $363,000, with almost all of this accounted for by the increase in housing equity.
The problem is that these figures only tell part of the story. What is left out is the impact of rising house prices on the costs Canadians must pay for shelter services. This cost, which for owners who occupy their homes is essentially the rent they forego by living in their dwelling rather than renting it out, increases as housing prices rise. In tandem with the increase in house prices, households experience a rise in the cost they incur over time for housing services.
Comment: That is faulty math. Your friends who bought in 2000, their mortgage payments did not go up as their home value rose, those payments are based on what they paid for it. Their utility bills are not tied to house value, so there is no change there. Their property taxes would have risen, but by veritable pennies annually, so little as to be moot. Maybe $30/month over the decade. And their insurance may have risen, maybe another $10-20/year.
Families that are settled in their own home are protected from this growing liability; with the gains that come from the appreciation of their residence, they will be compensated for the increase in shelter costs they must incur now and in the future as a consequence of the rise in housing prices.
Comment: And yes, prices have risen, but rates have fallen, keeping things pretty much in line. In 2000 the average Toronto home price was $243,255 with mortgage rates at around 8.25% (what I paid for my first house). Thus, with 20% down, the monthly mortgage payment would have been $1,531.57. Adjust this upwards for inflation and that same payment would have been $1,916.84 in 2011. Now, in 2011 the average house price was $465,412 and mortgage rates were around 4.5% – making for a mortgage payment of $2,081.35 – a $164.51 difference in monthly costs, as opposed to the near doubling of housing prices. So be sure to analyze the numbers properly, just because the prices shot up does not mean the monthly costs have shot up. This is why the market keeps plugging along. Prices broke $500k in 2012, but mortgage rates have dropped below 3%, keeping the monthly costs affordable. Average incomes have risen almost 6% since 2006 alone, while monthly mortgage costs rose 8.6% in 11 years. Safe to say they have kept pace, incomes possibly exceeding mortgage cost increases. So, technically, houses are cheaper to pay for today than they were in 2000.
Homeowners who have all the housing they require are therefore no worse off. But, contrary to general perceptions, neither are they better off. Unlike gains made in the stock market, the gains that Vic and Amy and other long-time homeowners have made from exceptionally strong real estate markets are not a windfall that can be used to support a more lavish lifestyle.
Comment: They can if they sell and cash out, or re-finance to pull asset money out of the house. Not that I advise either of those options. Same with stock market gains, or any paper gains, you have to sell to actually get the money. My Wayne Gretzky rookie card is worth $xxx according to eBay, but it is worthless until someone actually puts the cash in my hand.
While those that have satisfied their housing needs are little affected, rising housing prices do create winners and losers. The winners include real estate investors and speculators, and elderly households that require more modest shelter accommodations than in the past and can partially cash in their gains. The losers consist of young families that have bought a house recently or have not yet purchased a residence, along with those who are in a starter home and hope to acquire a larger residence that better meets their family needs. The increased costs of home ownership for young Canadians who are already facing significant challenges because of a difficult job market and earnings prospects that are dimmer than those of their parents’ generation is one of the more unfortunate consequences of the run-up in housing prices.
Comment: That much is true. I would certainly not want to be 25 right now, trying to make a decent living, maybe wanting to buy something. Unsure of where I might be in 5 years – job-wise, love-wise, etc. But that is what I am here for, to help people like that figure out the right course of action.
Although the economic circumstances of most households have not changed, a strong housing market has encouraged Canadians to spend more. The evidence is mixed on whether this is partly due to homeowners’ mistaken belief that, as a result of increasing housing wealth, they are better off financially or whether it is simply because increases in home equity have made it easier for households to borrow the money needed to finance their purchases. It is clear, however, that, along with low interest rates, rising home prices have been a factor underlying the growth in spending and the unsettling rise in Canadian household indebtedness.
Comment: Canadians are better off, in general, than they were before. And better off than the press would have you believe. But we MUST curtail our stupid spending. Getting loans for TVs and vacations and non-tangible things is going to come around and bite us in the ass. Spend less on Christmas gifts, delay non-essential purchases. Treat your credit card like you are borrowing from a large man with a baseball bat.
What does all this mean for the coming period of expected falling house prices? A slowing in housing activity and a reduction in spending by households that need to adjust to a decline in housing wealth are not welcome developments for a country trying to re-ignite its economy. These effects will impact, directly or indirectly, on all Canadians. But, in themselves, lower prices are clearly good news for prospective buyers and those looking to increase their housing. At the same time, the vast majority of homeowners who are not leveraged to the point where a drop in housing prices could lead to a risk of default can draw encouragement from past experience. Just as rising home prices do not lead to an improvement in living standards, falling prices do not translate into a loss of economic well-being. So, if you are an owner that’s settled in your home and not needing to cash out, hold on, sit back and relax as the Canadian housing roller coaster rounds its peak.
Comment: Only those who cannot see all of the factors at play think we are going to see prices drop. Spend 5 minutes on this site and you can find all of my various essays on why that won’t happen. I agree that lower prices are a good thing, as it allows more buyers into the market. Those who are selling, they may not like it. But if they bought 10 years ago, then they are complaing about getting 96% more than they paid as opposed to 103% more. But, as soon as we get tons more buyers into the system because of lower prices, they will start to bid against each other and push prices right back up again. We saw in in 2008-2009, what makes you think it will any different this time? With lower mortgage rates and stronger incomes, there is no going down. My age-old favourite stat is simply that 43 of the past 47 years have seen Toronto real estate prices rise. There is no impetus in the market right now to change that in any major way.
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Contact the Jeffrey Team for more information – 416-388-1960
Laurin & Natalie Jeffrey are Toronto Realtors with Century 21 Regal Realty.
They did not write these articles, they just reproduce them here for people
who are interested in Toronto real estate. They do not work for any builders.
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Mortgage holders well prepared for rate hikes
REM Online
A survey by the Canadian Association of Accredited Mortgage Professionals (CAAMP) says Canadians appear well prepared to face the new phase of the residential mortgage market, in which interest rates are rising and house activity is expected to ease.
The survey found:
· Consumer concern about rising rates is offset by increasing home equity.
· Many mortgages were renegotiated at lower rates; amortization periods are declining.
· Many Canadians have used cost savings from low rates to pay more than required, providing flexibility to deal with mortgage rate increases.
· Mortgage debt is a priority – the vast majority of Canadians have never missed a payment.
· A high percentage of Canadians still believe it is a good time to buy a home.
The report, entitled Prudence Paying Off For Canadian Mortgage Borrowers, is authored by CAAMP chief economist Will Dunning and based on information gathered by Maritz Research Canada in a survey of Canadian consumers conducted in April.
Canadians are positive about the housing market in their communities, but only 3.4% said they were very likely to buy, suggesting activity may slow during the remainder of this year. This number is slightly lower than that of previous surveys.
Still, Canadians across the country are bullish about house prices. Almost one-half of those surveyed expect prices to rise and 44% expect them to remain stable. These numbers, when tabulated with previous survey results, show the highest number of Canadians indicating they expect house values to increase rapidly. Previously, attitudes varied between provinces, but this spring, optimism is nationwide, says CAAMP.
rising mortgage rates
The report simulates the impact of mortgage rate increases up to 5.25% and finds that about 375,000 mortgage holders are already challenged by their current payments, and another 475,000 might be if their rate rises to 5.25%. “But many borrowers are paying more than required, they already have significant equity, and they have flexibility to adjust payments in the event of future challenges,” says Dunning. “The very high percentage of Canadians who have never missed a payment confirms that Canadians take their mortgage obligations seriously.”
The survey says the average outstanding mortgage principal is $138,000 and for mortgage borrowers, the average amount of equity represents 53% of the average value of homes ($297,000). Approximately 11% of mortgage borrowers withdrew equity from their home in the past year, totaling $20 billion, a substantial reduction compared to the $34 billion estimate of 2009. The results indicate caution on the part of borrowers, says CAAMP.
This view is accentuated by the fact that among mortgages transacted during the past year, 65% are fixed rate, 29% are variable or adjustable, and six% are combination mortgages. Most terms are long – 70% are five years or longer, nine% have short terms of two years or less, and 21% have terms of three or four years. Significantly, of the 65% with fixed rates, 12% locked in from a variable rate during the past 12 months and a further 10% had locked in more than a year ago in anticipation of rising interest rates, says the association.
Ninety-three% of mortgage holders have never missed a payment and of the seven% who have, four% did so during the past year. The survey data indicates that recent purchases and extended amortization periods are no more risky than are prior purchases and shorter amortization periods.
Mortgage holders have also been flexing their muscles – negotiating significant discounts on posted interest rates, says CAAMP. Over 80% of borrowers negotiated a discount of one percentage point or more. Last year, the average five-year fixed rate was 4.10% while the average posted rate was 5.57%. For new mortgages taken out in the last year, 50% obtained their mortgage from a Canadian bank, and 30% from a mortgage broker.
“Our spring survey report reveals a remarkably mature borrower,” says Jim Murphy, president and CEO of CAAMP. “We find that Canadians have taken advantage of the low interest rates to increase their regular payments (16%) and make lump sum payments (13%). This planning puts them in a stronger position to weather more expensive borrowing.”
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Contact the Jeffrey Team for more information - 416-388-1960
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Canadian Banks Raise Rates As Finance Costs Rise
Royal Bank, Bank of Nova Scotia hike costs of five-year mortgage rates; rival institutions weigh options
Tara Perkins – Globe and Mail
Royal Bank of Canada raised mortgage rates for the second time in two weeks, setting the stage for another wave of hikes by major banks as they grapple with higher financing costs.
“This is just the beginning,” said Canadian Imperial Bank of Commerce economist Benjamin Tal. “There is no reason to believe that this will stop at this point.” Indeed, by late Tuesday Bank of Nova Scotia had already followed suit, matching RBC’s 25 basis point hike on fixed-rate mortgages. Bankers at rival institutions were weighing their options.
RBC kicked off the increases in March when it increased the price of fixed-rate five-year mortgages by 0.60%age points to 5.85%; many rivals followed suit. Following Tuesday’s move, RBC and Scotiabank’s posted rates will be 6.10%.
Executives are balancing their desire for market share with their need to pad profit margins. For instance, most banks increased their rates two weeks ago after RBC did so. Bank of Montreal, which has lost market share in the mortgage market and wants to win it back, has been heavily promoting a special five-year rate for customers who sign up for mortgages with a term of 25 years or less. Other banks also have special rates.
But even BMO’s rates are poised to increase. Though the bank didn’t boost its five-year rate Tuesday, it will soon. “We wanted to give consumers an opportunity over the next few days to come in and get pre-approved and locked in at 3.95%,” said Jane Yuen, senior manager at BMO.
“Traditionally banks generally move in relative lockstep to changes,” said Craig Alexander, deputy chief economist at Toronto-Dominion Bank. “Having said that, there’s no guarantee that everyone will follow the leader.”
When one or more banks have a higher posted rate, they can adjust the rate that customers are actually paying in order to meet their market-share goals, he added.
As a result, most homeowners wind up paying a rate that’s discounted from the posted rate. The actual rate that a customer pays depends on a variety of factors including their financial situation, whether they use a mortgage broker, and how good they are at negotiating.
Peter Aceto, the chief executive of ING Direct Canada, said it was inevitable that mortgage rates would rise, but he expected the increase to be more gradual. “I would have thought it would have been a bit more gentle,” he said.
ING Direct has decided not to boost its rates again for now. Mr. Aceto noted that the bank, which makes use of the Internet rather than an expensive branch network to reach customers, has lower costs than the larger banks and can therefore afford to charge less.
However, he noted that the banks’ funding costs continue to rise. And he pointed out that the banks have “rate holds” that oblige them to hold on to rates for customers – ING Direct has a 120 day rate hold for instance. “It’s pretty likely in this environment that your funding costs are going to be higher in 90 days or 120 days,” he said. “RBC may have been thinking about that risk.”
Marcia Moffat, RBC’s head of home equity financing, said the bank increased rates again because its funding costs have risen further in the two weeks since it last raised rates.
Royal Bank is Canada’s biggest mortgage lender, with a portfolio of roughly $148.5-billion.
Many bankers said they have seen a large number of customers with variable-rate mortgages choosing to lock-in to fixed-term rates in the last two months.
Ms. Moffat suggested that could be wise. “Most times in history variable-rate mortgages have been more cost effective than fixed rate,” she said. “But there have been a couple of points in history where that hasn’t been the case, and where you would have been better off to have gone with fixed versus variable, and I would say that this could be one of those points in history.”
Funding costs for five-year mortgages are heavily influenced by the yields on five-year government bonds, which have been rising.
Bond yields, in turn, are being influenced in large part by the market’s growing expectation that the central bank will raise rates more quickly than previously believed.
While many experts are predicting that the Bank of Canada will increase rates by 75 basis points before the end of the year, the market seems to be adjusting beyond that, Mr. Tal noted. RBC’s five-year fixed mortgage rates have now gone up 85 basis points.
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Contact the Jeffrey Team for more information - 416-388-1960
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