By Derek Scott, The Canadian Press

VANCOUVER, B.C. – Buying a house in the hot housing markets of Vancouver, Toronto and other major cities in recent years has been a possible dream for some first-time homebuyers only because many of those houses had suites they could rent out.

But new rules coming into effect April 19 will all but wipe out that advantage in the eyes of banks handing out mortgages.

“It makes it much more difficult for people with rental properties to qualify for their own mortgage on their personal residence,” said Vancouver mortgage specialist Patrick Mulhern.

The new regulations are designed to prevent speculation in the market, said Jack Aubrey, of the Canada Mortgage and Housing Corporation.

But Vancouver mortgage agent Mike Averbach said the new rules will do little to prevent investors from gambling in the housing market.

“They haven’t decreased risk,” he said. “They’re just not allowing you to use the income.”

Currently, landlords can use 80 per cent of their rental income to offset monthly mortgage payments. That means, if they receive $1,000 per month in rental income, they can use $800 to offset a $1,200 mortgage payment, leaving only $400 to be debt financed.

But under the new rule, only 50 per cent of a landlord’s rental income will be used. Even then, that money will not be used to offset their monthly mortgage payment. It will be added to their total income, forcing them to qualify for the entire monthly mortgage.

For instance, a person earning $100,000 per year in regular income plus $12,000 per year in rental income will have a total income of $106,000 with which to qualify for a mortgage on their own home.

Rental income is essential for many of his clients, Averbach said.

In cities like Vancouver, where the average home price in February was more than $662,000, rental offset is the only way many people can qualify for a mortgage and the new rules will keep many of his clients in condos rather than houses, he said.

“Putting a renter in your basement is not speculative, it’s reality,” he said. “It helps you pay your mortgage.”

The rule changes also make it more difficult for people to buy a property separate property to use as a revenue generator.

CMHC will no longer offer high-ratio financing on rental property not lived in by the owner. That means someone looking to buy a house as a rental investment will have to come up with a 20-per-cent down payment on the property, as opposed to five per cent before the rules changed.

The changes haven’t worried groups advocating for tenants.

Jeordie Dent, of the Federation of Metro Tenants’ Association in Toronto, where vacancy and availability rates have dropped over the last year, said he doesn’t see a negative impact on renters.

Instead, he said his group welcomes the changes.

Dent said too many people become landlords without the financial or intellectual wherewithal to properly manage their properties.

“Anything that strengthens mortgage rules, from our perspective, is a good thing.”

http://ca.news.finance.yahoo.com/s/03042010/2/biz-finance-new-rules-rental-properties-squeeze-first-time-homebuyers.html

 

Anticipation of Bank of Canada rate hikes are fuelling mortgage increases, high dollar

By Julian Beltrame, The Canadian Press

OTTAWA — The Bank of Canada has yet to officially start hiking interests rates, but already Canadians are feeling the impact of higher borrowing costs.

Analysts say expectations the central bank will boost rates June 1 at the earliest and July 20 at the latest have boosted the Canadian loonie and pushed the big banks to twice raise mortgage rates in the past two weeks.

The loonie has been steadily gaining ground for weeks and Wednesday closed above parity, at 100.08 cents U.S., for the first time in almost two years.But economists warn there is danger in the Bank of Canada moving ahead of the U.S. Federal Reserve on hiking rates, even if it is justified by the fundamentals.

“The Bank of Canada is basically going to fly solo,” said Benjamin Tal, an economist with CIBC World Markets.“The markets are already discounting 75, maybe 100 basis points and it’s already in the price of the dollar.”

Canada’s economy has sprinted forward following last year’s recession to record a five per cent advance in the fourth quarter of 2009, and expectations are the first quarter will show an even quicker pace.

More importantly, Canada has recouped nearly half of the total job losses of the downturn, while the United States still struggles with the disappearance of 8.5 million jobs, a decimated housing market and a financial sector still hobbled by an excessive overhang of debt.

In testimony to Congress on Wednesday, Fed chair Ben Bernanke suggested it will be some time before the U.S. starts raising the policy rate from the current near-zero emergency stance.

“The Federal Open Market Committee has stated clearly that they currently anticipate that very low, extremely low rates will be needed for an extended period,” Bernanke told a Congressional committee.

Economists say moving ahead of the U.S. — which is all but certain — could have some beneficial effects, such as cooling what many believe is an overheated housing market by making mortgage costs higher.

But the bigger problem is that higher rates attract more foreign capital into Canada and gives an additional lift to the loonie, something few, except for possibly cross-border shoppers, want.

Finance Minister Jim Flaherty said Wednesday that the strong loonie is a reflection of the relative strength of the Canadian and U.S. economies.

While true, said Liberal critic John McCallum, a former bank economist, there is a risk in raising rates while the U.S. keeps theirs low.

“Then our dollar could get even stronger and that would be really bad for exports and jobs,” he said.

While some analysts have speculated that Canada’s manufacturing sector is no longer as exposed by a strong currency as a decade ago, few disagree with the notion that currency appreciation is a net negative for the economy.

This week’s trade numbers showed the rebound is almost all due to energy, while the goods side registered a $4.4 billion deficit in February.

Carl Weinberg of U.S.-based High Frequency Economists was not impressed.

“You might think that the largest supplier of crude oil to the United States would be able to run a bigger surplus,” said Weinberg. “Blame the strong loonie for a lot of the woes of exporters, especially since so much of what Canada sells is priced in U.S. dollars.”

Given the signals the bank has sent, it would take a major reversal in the recent spate of good economic news, as well as easing inflationary pressures, to stay the central bank’s hand on rates.

However, Sheryl King, chief economist with Merrill Lynch in Canada, says she does not believe governor Mark Carney will get too ahead of the curve and will keep the increases modest.

She says the economy may be hot now, but she sees it cooling in the second half of the year, and Carney putting on his brakes until the Fed shows signs of joining him on the policy tightening track. http://news.therecord.com/Business/article/698287

Published on Tuesday, Apr. 13, 2010 The Globe and Mail Report on Business  

berman@globeandmail.com

For a glimpse of what the future may feel like in the Great White North, look Down Under.

Faced with a jumping housing market, a steadily improving job market and a commodity boom, all of which sound familiar to Canadians, Australian central bank chief Glenn Stevens is cranking up interest rates hard and fast.

The goal is to unwind emergency cuts and return borrowing costs to the historical average, and fast. Last week Mr. Stevens tightened again, his fifth quarter point move in seven months, leaving home builders furious and retailers begging for mercy because customers are disappearing.

The rapid rate increases have made the Australian central bank chief a controversial figure in a world where most central banks have been standing pat. He is a hero to many who believe that other bankers are leaving rates too low too long and courting inflation. Doubters believe he risks overdoing it and the Australian economy will suffer.

With Bank of Canada Governor Mark Carney widely expected to embark on a path to higher interest rates in coming months, Mr. Stevens’ actions and their consequences are a reminder to Canadians who haven’t had to deal with rising rates in four years just what it feels like. In short, it hurts.

Thanks to the $250 (Australian) a month in interest that the Stevens rate increases now are costing the average homeowner on a $300,000 mortgage, Australia’s roaring housing market is finally showing signs of slowing. Building permits are suddenly unexpectedly soft, price gains are tapering off and home loan approvals have fallen for five straight months. Some analysts are raising the prospect of an outright price decline.

At the same time, even though the country is enjoying a job boom, increasingly strapped consumers are apparently dealing with higher interest payments by cutting back on spending. Retail sales fell in two of the three most recent months.

These are all the aftershocks of a central bank dealing with the difficult transition from easy money that was pushed into the economy to cope with a perceived emergency to a post-crisis world where rates more truly reflect the realities of the business cycle.

The Reserve Bank of Australia is “reaching the point at which the central bank does make tradeoffs between economic growth and its desire to contain inflation pressures, and at the point where those tradeoffs where those tradeoffs become quite fine judgment calls,” said Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce’s investment banking arm.

“It’s premature to say they’ve overdone it because they intend to sacrifice growth at this point in the cycle,” he added.

At some point, Mr. Carney will face the same tradeoff.

There are some fundamental differences between the two countries’ economies that mean it will be a while before Canada gets to the same turning point that Australia is now reaching.

While many people view the countries as very similar, Australia has a big head start economically. It skirted the global recession, its housing market didn’t drop as much in the worst of the crisis and the jobs picture is much brighter. The Australian unemployment rate is 5.3 per cent, compared to 8.2 per cent in Canada.

The other big difference is geography – Australia exports more to Asia, which has been fuelling the global recovery, while Canada remains heavily dependent on the hard-hit U.S.

Still, once Canadian rates start rising, they are likely to go up reasonably quickly. The Bank of Canada has a chance to hike at a scheduled rate-setting date next week, but most analysts expect the first increase closer to mid-year. After that, even the most dovish forecasters like Mr. Shenfeld lay out a scenario where Canadian rates climb over the next year and a half by much more than they have in Australia so far.

CIBC anticipates the Bank of Canada will take its benchmark rate up from the current 0.25 per cent to 2.5 per cent by the end of 2011. At the other end of the spectrum, Toronto-Dominion bank expects 3.25 per cent and Royal Bank of Canada forecasts 3.5 per cent.

At that point, as consumers feel the squeeze, having a thick skin becomes a key part of central banking. Mr. Stevens is blunt and seemingly unrepentant about the effects of his increases, judging by his recent statements. The hurt of higher rates is just part of economic life, so better to get it over with.

“If we wait too long do we end up having to do more of that (raising rates), and those people would actually end up in a lot more pain.”

http://www.theglobeandmail.com/report-on-business/pain-in-australia-is-a-peek-at-whats-to-come/article1532435/

 

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Central bank puts benchmark rate at 4.25%, says economy no longer needs the stimulus of low rates

Adelaide, Australia — the Globe and Mail-The Associated Press

Australia’s central bank raised its key interest rate Tuesday for a fifth time in six months and said the economy no longer needs the stimulus of low rates with unemployment lower than expected and housing sales robust.

The quarter percentage point rise took the benchmark rate to 4.25 per cent and followed a warning last week by the central bank governor that mortgage rates would continue to rise.

“It is appropriate for interest rates to be closer to average” because this year’s economic growth and inflation are likely to be near target levels, the Reserve Bank of Australia bank said in a statement.

Australia weathered the global downturn better than most developed countries and the economy grew at its fastest pace in nearly two years in the fourth quarter of 2009.

The central bank cited indications that lenders were more willing to lend, buoyancy in the housing market and lower unemployment than expected.

“With the risk of serious economic contraction in Australia having passed some time ago, the Board has been lessening the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker,” the bank said.

Federal Treasurer Wayne Swan said rates are still lower than they were before the global downturn and the central bank was making moves to bring them to normal levels.

“I know that is cold comfort for a lot of families and a lot of people in businesses,” he told reporters. “But that is the reality of a strengthening economy.”

http://www.theglobeandmail.com/report-on-business/economy/australia-boosts-key-rate/article1524458/   

 

Posted to FP: April 12, 2010, Jonathan Ratner

With most agreeing that a rate hike from the Bank of Canada is imminent, the talk now turns to the exact timing and extent of the central bank’s policy changes.

Governor Mark Carney made a “conditional” promise to keep the benchmark interest rate at 0.25% through the end of June 2010. However, one way to keep to this expiry date and provide markets with a jolt would be an initial rate hike of 50 basis points on July 20, according to Bank of America Merrill Lynch economist Sheryl King.

“Futures markets are only partially pricing in that possibility so it would be a shot across the bow to be sure,” she said in a note. “The strongest argument against this tack in our view is that the market would immediately rush to the conclusion that all future hikes will be similar in size.”

The economist thinks a 25 basis point hike on June 1 is the most likely scenario.

Meanwhile, Ms. King feels a 25 basis point hike on July 20 is the least likely scenario. She noted that this expectation is already fully priced into the Eurodollar and overnight index swap (OIS) markets. “If the Bank wants to elevate the risk premium in the bond market, validating market pricing cannot be the way they will go.”

The economist said that with growth running 40% faster than the Bank of Canada’s January forecasts, a rollover in unemployment and core CPI “frustratingly high,” there is justification to move a bit early. She added that moving early rather than large would help build up that needed risk premium without having 10-year notes move above the 6% mark that a normalized risk premium of 1.8% and a neutral overnight rate of roughly 4.5% would command.

The main arguement against a June 1 rate hike is that it comes ahead of the June 30 expiry commitment and puts the Bank’s credibility in the market at risk. Ms. King insists that credibility in achieving the central bank’s 2% inflation target is “very arguably the more important badge to maintain.”

“All along, the Bank has warned investors the commitment to not touch rates was not a promise and earlier rate hikes possible if conditions warranted.” http://network.nationalpost.com/NP/blogs/tradingdesk/archive/2010/04/12/when-will-the-bank-of-canada-raise-interest-rates-and-by-how-much.aspx

‘Orphan mortgages’ begin to surface

 John Greenwood, Financial Post   

 Rod and Joyce Marentette bought their house in Chatham, Ont., a month before getting married in 2005. The economy was booming and credit was plentiful, so even though they didn’t have a down payment and Rod had recently gone through a bankruptcy, there were plenty of mortgage companies willing to lend to them.

 

The house was $98,000 and with the additional legal fees the total price came to $100,000, all of which they were able to borrow from the mortgage company.

 

Things took a turn for the worse when Rod, who is 39, suffered a workplace injury and had to leave his job as a factory supervisor. But Joyce, 40, was determined to hold on to the house, taking on extra work to make ends meet. When Rod finally recovered two years later, he found a new job with a construction company. While the paycheque was lower, it took the financial pressure off.

 

That’s when they got the call from the mortgage company. It was the year the credit crunch hit. The economy was in a tailspin and lenders around the world were scrambling for liquidity. The mortgage, they were informed, could not be renewed and as the company was closing its subprime business, they would have to find another lender.

 

But the little lenders who had been so eager for their business back in 2005 had disappeared. That left the big banks and insurance companies, but they wouldn’t lend either and the Marentettes quickly realized their dream of owning a home was about to become a nightmare.

 

It ends up that despite its squeaky-clean financial image, Canada does indeed have its own subprime-mortgage mess.

 

Industry insiders say that over the next few years the Marentettes’ story will play out over and over again across Canada, as an estimated 30,000 so-called “orphan mortgages” reach maturity. Unless the government takes action, this may trigger a flood of foreclosures.

 

In the wake of the financial crisis, the business of subprime loans has dried up. Prior to 2007, there were at least a dozen subprime lenders in Canada and it was the fastest-growing sector of the entire mortgage market, says Benjamin Tal, senior economist at CIBC World Markets, who pegged it at about 5% of the total market.

 

But most of those lenders, including players such as Xceed Mortgage Corp., GMAC Residential Lending and Wells Fargo, have either changed their business or closed up shop.

 

Meanwhile, the rules around home loans have been tightened. Earlier this year, the federal government raised the minimum down payment required for Canada Mortgage and Housing Corp. insurance.

 

The mortgage industry clearly has a problem on its hands.

 

“This thing is a wave and it’s just starting,” says Eric Putnam, formerly with a subprime lender, now managing director of Debt Coach Canada, a company that provides financial and bankruptcy advice to consumers.

 

Estimates vary on the total value of the subprime market in Canada.

 

No one knows for sure how big it really is because there is no central database tracking these mortgages.

 

But according to Ivan Wahl, chief executive of Xceed, one of the biggest players in Canada until it recently converted to a bank, the subprime market in this country grew to about $11-billion in 2006, the year before things started to implode.

 

Given that the total mortgages outstanding in Canada amount to around $1-trillion today, the subprime portion is not a huge slice.

 

But the vast majority were made toward the middle of the decade with terms of three and five years and they’re coming due over the next two years.

 

“Given the current environment it will be very difficult to finance these [people],” says Mr. Tal, who calls it “a big problem for specific borrowers but not one from a macro perspective.”

 

But the industry is so concerned about the situation that it recently approached the federal government with a request for a bailout.

 

According to Mr. Putnam and others, it wants the federal government to participate in a $1-billion fund to help finance the coming flood of orphan mortgages.

 

During the credit bubble, subprime lenders funded themselves through the asset-backed commercial paper market.

 

The loans they made were packaged up and sold to securitization pools and then to investors in the form of ABCP.

 

But when the commercial paper market froze up in the financial crisis, lenders were suddenly left without a way to fund their businesses.

 

“Investors are no longer willing to continue on and these mortgages were not insured by the Canada Mortgage and Housing Corp., so the borrowers are not going to be able to move to another lender in today’s environment,” Mr. Putnam says.

 

The definition of subprime depends on who you ask, but for practical purposes the term generally refers to high-interest loans made to people who are unable to get a better deal at one of the big banks. Many such borrowers are simply self employed entrepreneurs but a good part are people with bad credit histories.

 

In the United States, the subprime market took off in the run-up to the crisis, growing to more than 20% of total mortgages outstanding as the loans were packaged up into complex securities and sold to investors around the world. When real estate prices finally started to crumble the value of the securities cratered, ultimately destabilizing the global financial system.

 

Analysts say it’s difficult to draw comparisons between the U.S. subprime market and what happened in Canada. The market here never grew to more than a sliver of the total and, more important, the type of loans offered by Canadian players were more conservative than those offered by their peers south of the border.

 

But there are nevertheless some disturbing parallels between the two markets. “Compared to what was going on in the U.S., it never got to the same level here, but having said that, they were going down the same slippery slope,” says Mr. Putnam.

 

“The Canadian population wanted to buy a home, that was the No. 1 goal.

 

“People were taking on high debt loads, stretching the amortization out as long as possible and lenders were looking at all the opportunities. It made sense when the market was hot, but of course, no one could foresee the problems.”

 

Exacerbating the situation, the early part of the decade saw the arrival of a number of U.S. players looking to get in on the Canadian market.

 

Because many of the players were not deposit-taking institutions, they qualified for looser regulations than banks and other traditional players.

 

That meant, for instance, that they didn’t need insurance for risky loans and they could lend in excess of the value of the property. Borrowers loved it at the time but in today’s post-crisis world, such loans are almost impossible to renew.

 

The good news for the Marentettes is that they succeeded in finding a new lender, though they’re still paying almost double the interest rate of a conventional mortgage.

 

Thousands of other subprime borrowers may not be so lucky.

 

“Hopefully, if they have been making their payments, they can qualify for [another mortgage],” says Jim Murphy, president of the Canadian Association of Accredited Mortgage Professionals.

Read more: http://www.financialpost.com/story.html?id=2785564&p=2#ixzz0knfwbZ8a

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Julie Fortier, Financial Post 

OTTAWA – With the Canadian economy doing surprisingly well over the past six months, many see higher interest rates from the Bank of Canada in the not so distant future, but according to a report released Thursday from CIBC’s chief economist Avery Shenfeld, rates are likely to remain at a very low 2.5% through to 2011.

In CIBC World Markets’ latest Global Positioning Strategy report, Mr. Shenfeld lists several reasons for Bank of Canada Governor Mark Carney to keep interest rates subdued after July. He points out that the U.S. will probably have a more gradual approach to raising rates and if Canada gets too far ahead, that could send the Canadian dollar soaring.

“While factories are recovering in Canada alongside a global industrial revival, output remains nearly 20% below the pre-recession peak, and wages are now substantially above those stateside without the productivity gains to match. There’s only so much of a competitive challenge that non-resource exporters can take in short order,” Mr. Shenfeld said.

He also pointed out that inflation is not expected to rise much further and stimulus spending is expected to be reigned in by governments – including Canada’s – which will slow growth.

“If the U.S., the U.K., and Japan all move from huge stimulus to even modest restraint, Canada will feel it in our export prospects come 2011,” Mr. Shenfeld pointed out.

Mr. Carney has promised to keep interest rates where they are at 0.25% until the end of June. However, the latest reading of Canada’s economic growth showed the core inflation rate at 2.1% in February, far above the Bank of Canada’s forecast of 1.6% for the first quarter of the year. Many analysts believe the Bank of Canada will not wait until mid-2010 to raise rates.
Read more: http://www.financialpost.com/news-sectors/economy/story.html?id=2777584#ixzz0kYfL1zaB

 

 

By The Canadian Press

TORONTO – Prices for all key housing types were up more than 10 per cent across Canada in the first quarter, although some markets were hotter than others.

That’s according to a national real-estate survey by Royal LePage, which says the Canadian housing market will likely become more moderate as 2010 unfolds.

The survey found that, on a national basis, the average price of a detached bungalow in Canada rose to just over $329,000 in the first three months of this year – up 11 per cent from the first quarter of 2009.

Standard two-storey homes rose 10.3 per cent, to about $365,000, while condominium units increased by 10.9 per cent to just under $229,000.

Royal LePage, which is a national real-estate sales organization, says the national numbers don’t paint the whole picture, however.

It says some local markets, such as Vancouver and Toronto, may be overheated while most others have shown more moderate growth.

Have a great day!

News Release: April 6, 2010

BUYER’S MARKET CONTINUES IN FRASER VALLEY

(Surrey, BC) – With plenty of selection and relatively modest price increases, buyers are enjoying a healthy spring market in the Fraser Valley. The Board’s Multiple Listing Service® (MLS®) recorded 1,565 sales in March, an increase of 30 per cent over February’s sales and an increase of 56 per cent over the 1,006 sales processed March of last year.

Deanna Horn, president of the Board says, “March sales volumes can fluctuate as much as the weather, and this year’s reached the mid-point between the highs and lows seen over the last decade.

“However, available listings were near the peak, meaning buyers had lots to choose from and were clearly taking advantage of great buying opportunities.”

There were 3,395 new listings entered onto the MLS® in March, slightly higher than in March 2009, when 3,028 new listings were added. Altogether, there were 9,828 active listings on the MLS® at the end of March, on par with the 9,832 active listings one year ago.

The ratio of sales compared to active listings, which indicates the type of market, reached 16 per cent in March, representing a buyer’s market. This is up from last year’s 10 per cent but a far cry from the 25 per cent ratio in March 2007, when the Fraser Valley was in a seller’s market.

“Prices are closing in on the record highs we last saw in spring 2008, so it’s no surprise to see the increase in listings as sellers position themselves to move up or downsize into a smaller residence using their home equity for their purchase.”

In March, the benchmark price for Fraser Valley detached homes was $514,787, an increase of 11.9 per cent from the March 2009 price of $459,841.

The benchmark price of Fraser Valley townhouses in March was $326,307, a 10.3 per cent increase compared to $295,809 in March 2009. The benchmark price of apartments increased by 8.6 per cent year-over-year going from $227,188 in March 2009 to $246,673 in March 2010.

Information and photos of all Fraser Valley Real Estate Board listings can be found on the national, public web site www.REALTOR.ca. Further market statistics can be found on the Board’s web page at www.fvreb.bc.ca. The Fraser Valley Real Estate Board is an association of 2,990 real estate professionals who live and work in the communities of North Delta, Surrey, White Rock, Langley, Abbotsford, and Mission.