Tag Archives: Low mortgage rates
Rob Carrick – The Globe and Mail
The sucker’s bet on housing is to pounce on that five-year, 2.99% mortgage deal offered so controversially by Bank of Montreal.
Oh, it’s a great rate. There’s next to no chance over the next five years that you’ll kick yourself for having chosen to lock in such a historically low cost of borrowing. But the low-rate argument for getting into the housing market for the first time just isn’t compelling enough to jump in right now.
Comment: Except that rates will not go lower, they will only rise. And prices are also going to rise. Even if they stay flat, then rates stay flat or rise. The future will only even cost the same as now, at best. Most likely, with prices and rates rising, you will pay more. Heck, a $500,000 house now at 2.84% (which you can get from BMO) with 20% you are paying $1,879 or so per month, mortgage only. Say prices keep rising, but at 4% rather than the 10-year average of 6.09%. Let’s say mortgage rates rise to a not-very-high 4.09%. That means that in 3 years that same house would cost $546,363 – and now cost $2,344 per month to finance with 20% down (never mind your down payment rose $9,273). By waiting, with very minor increases, you just wound up paying $465 per month more – for the exact same thing. Never mind 3 years of rent down the toilet…
For one thing, no one expects rates to move higher any time soon. The Canadian economy, not to mention the global economy, simply can’t handle higher rates right now. They’d smother growth.
Second, there is a very real chance that housing prices could decline further. On Monday, the analysis firm Fitch Ratings said Canada’s housing market is overvalued by about 20% across Canada. Fitch isn’t saying housing prices will necessarily drop by that much, but its view does suggest caution for those who think the housing market will rise like daffodils when spring comes.
Comment: What do you mean decline further? They have not declined at all so far… And who the heck is Fitch Ratings? And why do they carry equal weight against the entire real estate industry with a different opinion.
Note that we’re talking about a pullback in prices, not a crash. The debate over the housing market is too often framed as being crash or boom. There is a middle ground possibility of price stagnation or modest declines.
Comment: Try flattening or modest increases. That is the most likely outcome for Toronto over the next few years.
The smart play for a first-time buyer right now: Start checking out what’s available in your price range in the neighbourhood or community you like. Get a sense of pricing and then wait to see what happens through the spring.
Don’t worry about missing that 2.99% rate while you’re on the sidelines. A quick survey of rates shows that it’s possible to set up a five-year mortgage for as little as 2.79% from the sort of lenders that mortgage brokers deal with. Looking ahead, rates may move around a bit, but a big surge higher from current levels seems unlikely.
Comment: Contrary to the naysayers who predict mortgage rates of 15% by this fall.
BMO’s rate isn’t quite the lowest out there, but the bank has been taking all kinds of guff over its decision to lower its five-year rate from 3.09%. Finance Minister Jim Flaherty even warned the banks to engage in “prudent lending,” which is odd because aggressively low rates are a benefit to borrowers.
Mr. Flaherty has already urged Canadians to engage in prudent borrowing, and it seems people have listened. Growth in borrowing rates has tapered way down and the numbers from late last year suggest we’re back to levels last seen in 1993. This is a big part of the reason why the housing market has slowed in some parts of the country.
First-time home buyers, this trend is your friend. Don’t rush into the market just because a big bank is stirring things up with a great mortgage rate.
Comment: But don’t wait too long and price yourself out of the market. With the price increases and mortgage increases from above, if your income stays the same, all of a sudden the houses you liked are now out of your price range range. Truly, in this market, waiting is not your friend. Any clients of mine that hve waited have either paid more, or not bought at all as they were priced out of the market.
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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For all the ominous talk of a housing market collapse, the end result could be yet another rebound in prices
Jason Kirby – Macleans Magazine
As the housing market stalls, several people who bought pricey Vancouver condos before they were built are suing to get out of the deals. In Toronto, condo sales during the first half of the year fell for the first time since 1994. And at least one homeowner near Halifax just offered to give away his house for free, so long as whomever took it assumed the $395,000 mortgage.
Everywhere, tales of real estate woe and miserable sales data have prompted predictions of a crash. James Grant, a prominent U.S. investment newsletter author well known for his bearish outlook on the American economy, has warned house prices here are primed to fall: “The median Canadian house is, in fact, certifiably unaffordable.”
Even if prices tumble, though, as happened in 2008—when the economy was also teetering and house prices were at record levels—they could still make another surprising comeback.
No question Canadian prices are outrageously high. As Grant points out, compared to rental rates, home prices in Canada are more than 60% above the historical average. And with home ownership rates and household debt levels higher than they’ve ever been, Scotiabank economist Derek Holt says there’s nowhere for prices to go but down. “This time when we come off the boil, prices are going to stay lower,” he says.
Comment: So we average in prices from 1900? What about my grandmother’s house, which she bought 60 years ago for $15,000. Do we average that price in? Heck, movies cost a lot more than a nickel these days – everything rises in price over time.
That’s quickly becoming the prevalent view. And another modest 8% to 10% correction could occur. But if that happens, there are reasons to expect a repeat rebound, as happened previously when the Teranet-National Bank house price index slipped 8% in 2008 and then roared back 18%, reaching an all-time high two months ago.
Comment: And that is exactly what will happen. Many buyers are waiting, hoping for the sky to fall. If it does, they will race in to scoop up deals, which will push prices back up. Or, prices will not fall (much more likely) and they will realize they have to buy before prices get higher. That will just keep any increases on the uptick and prevent any sort of drop.
That’s because mortgages remain wildly cheap and, if anything, are getting cheaper. True, the Bank of Canada has raised interest rates twice since June to 0.75%. That only affects homebuyers taking out variable-rate mortgages, though, which currently sit at 2.75%. The fact is, lenders are furiously cutting fixed-rate mortgages. Since May, five-year fixed mortgage rates have fallen to 3.99% from 4.75%, according to Canequity.com.
Comment: Variable rate mortgages tend to be in the prime minus 0.x% range right now, with the best rates around 1.9% or 2.0%. Prime is 2.75%, yes, but variable rates discount that. And since this came up, current 5-year fixed rates can be had for as low as 3.64%. That is only 0.05% more than the current record low from early last year, when they hit 3.59%. Check for yourself, my numbers are more accurate.
Another reason house prices rebounded so sharply after the 2008 drop was that there were far more buyers than sellers. As the financial crisis hit in 2008, new home construction slowed while sellers yanked properties off the market, lest they get caught in a downward price spiral. But when the Second Great Depression in Canada turned out to be Just Another Recession, home buyers flocked back to the market before sellers had a chance to react, thus driving up prices. A similar phenomenon could play out again.
Comment: And it will. Prices will yo-yo for years before we settle back into a truly normal and balanced market. When the press calls for the sky to fall, things will slow. But buyers are impatient and they will not wait, so back up we go. Any economic issues and things could drop. But when things get better, back to the market people go, and back up we go. This is what has been happening for the past 3 years now. From the highs of 2007 to the lows of 2008, then high in 2009 and possibly low again in 2010. I bet we go high again late this year or into 2011.
But if another rebound occurs, it will likely be triggered by Ottawa. The Harper government has repeatedly intervened to micro-manage the $2.8-trillion housing market. Before the U.S. subprime mortgage crisis hit, Ottawa dramatically loosened mortgage rules, allowing Canada Mortgage and Housing Corporation to insure zero-down, 40-year mortgages. Ottawa reversed course when such loans were shown to be dangerous.
But with the recession, Ottawa swung back into action. It offered first-time home-buyer subsidies, allowed Canadians to withdraw more from RRSPs to buy homes, and authorized CMHC to take $75 billion of mortgages off lenders’ hands. Finally, as the market began to overheat in February, Finance Minister Jim Flaherty tightened mortgage lending standards. But Holt says Ottawa may loosen mortgage restrictions once again if the housing market craters. And it seems entirely possible the government will use its clout through CMHC to spur banks to lend and people to buy.
Efforts to halt prices from falling sharply might keep homeowners, and hence millions of voters, happy, but it’s bad economic policy. First-time buyers would be forced to take on even more dangerously large mortgages. At the same time, if the housing market continues to swing up and down, that eventually translates into stagnation—albeit at high levels.
Comment: Which is what I said above. Though not stagnation, normal and balanced. We forget what those terms mean after the chaos of the past few years. A slow July and August is normal, or at least it was, not a sign of the apocalypse. It does not matter what the fed, or any of us, do. Prices will not collapse – at least not in Toronto.
Which is why many believe it’s time to let the housing market pursue its own trajectory—and, given recent data, that would appear to be down. “There’s a strong case to be made for letting the markets follow their natural evolution, and the U.S. offers a good lesson,” says Holt. “Every time they’ve tried to use stimulus to avoid what’s inevitable in the long run, they end up making things worse.”
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The Canadian Press
Sellers are facing more empty open houses and fewer bids on their homes, but experts say buyers shouldn’t expect to see a retreat from record-high home prices when July housing data is released Monday.
Home sales have fallen 25% since reaching a peak at the beginning of the year as demand slows and more houses come onto the market.
Comment: But national home sales are only down 6.8% since July 2009 – where does this 25% number come from?
But it will take much longer for sky-high home prices to fall and the market to enter buyer-friendly territory. And history is on the side of the seller.
“Over time, if you were to look at the last 40 years, it’s much more common to see sellers’ markets than buyers’ markets,” said Phil Soper, president of Royal LePage.
“It comes down to the different psychology that exists between buyers and sellers. Buyers are very quick to adjust to a down market and sellers are very slow to adjust to a down market. Sellers stubbornly hold onto their perception of what their home is worth, whereas buyers turn on a dime.”
Comment: Which is why buyers today expect to pay 25% less and buyers want 10% more. Prices are not dropping, buyers have to get used to that. Just because sales volume is down does not mean prices are down.
Soper expects to see sales decline dramatically from last July’s near-record activity, but predicts there will be little change in home prices when the Canadian Real Estate Association releases its monthly sales figures Monday.
Seasonally-adjusted home sales fell 8.2% in June from the month before and shrunk 19.7% compared to June 2009. However, the average Canadian home price sat at $342,662 compared to $326,689 in 2009.
Comment: The numbers came in with July 2010 being down 6.8% in sales volume from July 2009 and prices were up 5.6%.
“You would think prices would come down more rapidly given the drop in sales,” said Sal Guatieri, senior economist with BMO Capital Markets.
Comment: Except only the experts think that, the average person does not. Nor do real estate agents. Thus the market is doing what we said it would do, not what experts said it would do. I would listen to the people who are right month after month, not the ones who have been wrong for years. Read back over my posts and comments, they go back to 2006. I put my record against anyone out there.
Guatieri expects to see as much as a 35% year-over-year drop in July home sales. He projects monthly sales figures will be around 32,600 homes, which would represent the weakest July since 2001. However, he says price increases will weaken just slightly, and only because they were so high last year.
Comment: But July used to always be slow, this is more of a return to normal than a sign of the apocalypse. July 2001 was probably the last normal July before the record setting activity began. People go on vacation in July – and this has been a fantastic summer so far. Last year was cool and dreary, less vacations and more real estate activity. You also had the HST start July 1, and that scared a lot of people off. Right or wrong, it did. Once people realize that HST does not affect resale real estate, we should see a return to better sales volume.
“It’s only in a so-called buyers’ market, where there are lot more listings on the market than sales, that buyers have some bargaining power and sellers are more willing to ease up on price, that we would see prices actually falling,” he said.
Comment: And we certainly do not have a buyers market in Toronto!
But Mark Weisleder, a real estate author and lawyer, says real estate agents are beginning to notice some discernable changes as the Canadian housing market cools off.
Buyers are not as rushed to make an offer and are becoming more aggressive in negotiations, while sellers are beginning to accept less than asking price for homes as interest wanes.
“(Agents) are going to open houses, sitting there for three hours, and two people come in at the most. Right now there doesn’t seem to be that level of stampede mentality to go see a house,” Weisleder said.
Comment: So we are returning to normal, that is a good thing. It is not the sky starting to fall.
“I do believe there is a disconnect between some of the data that people are throwing out there every day in the numbers, and slowly you’re going to see prices come down.”
Many buyers hurried to close in late 2009 and the first half of this year ahead of the new harmonized sales tax in B.C. and Ontario, new mortgage requirements, and to take advantage of record-low interest rates.
Comment: And rates are even lower now, 5-year fixed terms are around 3.84% right now. But an awful lot of experts said that interest rates were going to hit 1,000% by now which scared a lot of people. And just like I noted last year, it was not going to happen – and it did not.
That pulled ahead sales that might otherwise have occurred in the second half of 2010, increasing demand and leading to bidding wars in which buyers were willing to overpay to secure a property.
As home prices crept higher and consumers became more confident about an economic recovery, more sellers put their homes on the market, which increased inventory.
Now fewer buyers are shopping for homes just as more listings flood onto the market. That has shifted the housing balance away from the seller-friendly market into neutral territory, but it’s still shy of a buyers’ market.
Weisleder says the market isn’t poised to enter buyers’ territory any time soon, as historically low interest rates and a stable economy continue to make buying a Canadian home attractive.
“Because of the interest rates being so cheap to borrow money, prices may not fall too much because people can still afford (to borrow) probably more than they should,” he said.
“But it doesn’t mean the house is worth that much,” he said, adding that if rates go up it could be catastrophic for homeowners who have taken on more debt than they will be able to afford.
Meanwhile, sellers have become accustomed to fetching high home prices and want to hang onto their properties for as long as it takes to get those prices — although that window has stretched from a couple of weeks to a few months.
“No seller wants to jump the gun, so a lot of people are sitting on the fence and trying to hold on,” Weisleder said. “A lot of people are very upset they didn’t sell six months ago.”
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