In the News

With mortgage rates dropping, it's strategy time

ROB CARRICK

September 15, 2009

It was a little less than a year ago that the global financial crisis began to hit home, which is to say that mortgage rates spiked higher.
Now, the cost of mortgages is coming down. If you're buying a home or renewing a mortgage, it's time to review your options.

Fixed-rate mortgages declined a little last week, but the most dramatic changes can be seen in variable-rate mortgages. For the first time in almost a year, it's possible to get a variable-rate mortgage at the prime rate used by most major financial institutions, which is currently 2.25 per cent.

Pre-crisis, variable-rate mortgages came with discounts that ranged from 0.75 percentage points to as much as 0.9 points off prime. By late last fall, crisis conditions prompted lenders to start charging prime plus a full percentage point or more. Now, some lenders are starting to unwind their crisis-rate premiums.

"Variable-rate mortgages are all over the map right now," said Gary Siegle, regional manager with the mortgage brokerage firm Invis Inc. in Calgary. "We're seeing them right in the area of prime with some lenders."

An example of a variable-rate mortgage at prime: ResMor Trust, a small player that deals through mortgage brokers, is offering four-year variable-rate mortgages at prime in all provinces except Quebec. The catch: You have to have your mortgage approved by Sept. 30 and close the purchase within 45 days.

Can variable-rate mortgages fall back to their pre-crisis lows any time soon?
"Definitely, 100 per cent, no," said Robert McLister, a mortgage broker and author of the Canadian Mortgage Trends blog (canadianmortgagetrends.com). "Could they get a little below prime? Definitely."

Okay, it's strategy time. With prime at 2.25 per cent and fully discounted five-year fixed-rate mortgages going for something in the area of 3.9 to 4.1 per cent, you're got some thinking to do if you're buying a home or renewing a mortgage.

The variable rate looks tempting. Sure, the prime is going to rise in the medium term, but it's expected to stay put until next spring at least. Even when prime does move higher, it will have to increase by roughly 1.75 percentage points to get to where today's five-year mortgages are.
"The risk is obviously that rates go up a lot more," Mr. McLister warned. "Rates went down four percentage points from December, 2007, through April, 2009. They could easily go up four - why not?"

Variable-rate mortgages allow you to lock into a fixed-rate mortgage, so there's no reason why you have to ride interest rates all the way up. Still, you have to recognize that fixed-rate mortgages could be significantly more expensive by the time you decide to lock in.
An academic study of rates between 1950 and 2007 found variable-rate mortgages were the money-saving choice over five-year fixed-rate mortgages 89 per cent of the time. If you're willing to ride rates higher for a while in hopes of longer-term savings on interest costs, then consider a possible approach suggested by Mr. McLister.

Instead of arranging a variable-rate mortgage now, go for a one-year fixed-rate mortgage. Then, when you're renewing in one year's time, you'll move into a variable-rate mortgage that will ideally have a rate that is discounted below prime.
Fully discounted one-year closed mortgages today go for about 2.55 per cent, so you're not paying much of a penalty at all compared with what variable-rate mortgages are pegged at right now.

Another suggestion from Mr. McLister is to consider a three-year mortgage, which offers an attractive blend of low rates and security against interest rate surges. Three-year mortgage typically go for around 3.39 per cent on a fully discounted basis, but he knew of one small lender offering 2.9 per cent through the mortgage broker channel.

The case for going with a five-year fixed rate is that rates are very cheap by historical standards. Rates were a little bit lower last spring, but they're not as high as they were a month or two ago thanks to a pullback in bond yields that has trickled down to fixed-rate mortgages.
Mr. Siegle said over half of his firm's clients are locking into a fixed-rate mortgage right now. "You can't ever time the bottom of the market, but are these good rates that you can be comfortable with? A lot of people are saying, 'yeah, they are.' "

Bank of Canada expected to keep rates at record low

Paul Vieira, Financial Post Published: Tuesday, September 08, 2009

OTTAWA -- Analysts appear to be unanimous in believing the Bank of Canada will hold its record-low policy rate steady at its meeting Thursday, and maintain its commitment to keep the rate at 0.25% until June 2010.
The only item to look for in the pending rate statement, they indicate, is any change in nuance or tone, and possibly further concern about the rise of the Canadian dollar.

"The fact that the major economic data has largely evolved in line with the Bank of Canada's forecasts suggests (the central bank) is likely to reiterate its conditional statement to keep the overnight rate at 0.25% until the end of the second quarter of 2010," said Charmaine Buskas, senior economics strategist with TD Securities.

"And with no expected change to the overnight rate, all the focus will be on the nuances in the statement. It is likely to be very similar to the July 21 statement."
For the record, 21 economists in a Bloomberg News survey anticipate no change in the Bank of Canada rate, nor do the 11 members of the C.D. Howe Institute's monetary policy council.
The C.D. Howe said the Bank of Canada should stick to its mid-2010 commitment, adding that growth prospects remain uncertain as council members questioned how sustainable Canadian exports growth abroad will be, with "the dependence of U.S. and Chinese growth on government stimulus being a particular point of concern."

CMHC expects housing market to rebound strongly this year and next

Financial Post Published: Friday, September 04, 2009

Canada's housing market will rebound strongly in the second half of this year and into 2010, the federal housing agency said yesterday. Housing starts will reach 141,900 this year and increase to 150,300 for 2010, said Canada

Mortgage and Housing Corp. "Improving activity on the resale market and lower inventory levels in both the new and existing home markets are expected to prompt builders to increase residential construction," CMHC said.

Bob Dugan, CMHC's chief economist, said, "Economic uncertainty and lower levels of employment tempered new housing construction in the first half of this year. In the second half of 2009 and in 2010, we expect housing markets across Canada to strengthen."

Housing activity on brink of rebound, Canada Mortgage and Housing says

Canada's national housing agency predicts home construction to make a comeback in the second half of this year and into 2010, however economists say it could be a long time before we see the same building frenzy that has dominated this decade.

Canada Mortgage and Housing Corp. said Thursday it believes housing starts will hit 141,900, of which 68,400 will be single-family detached homes and 73,500 multiple-housing units, such as condos.

CMHC chief economist Bob Dugan said economic uncertainty and lower employment tempered new-housing construction in the first half of this year."In the second half of 2009 and in 2010, we expect housing markets across Canada to strengthen," he said in releasing the agency's third-quarter outlook.CMHC says improving activity on the resale market and lower inventory levels in both the new-and existing-home markets should prompt builders to increase residential construction.CMHC predicts overall starts to reach 150,300 in 2010.That compares to 211,056 housing starts recorded in 2008, of which 93,202 were single-family and 117,854 were multiple-housing units.Annual housing starts have surpassed the 200,000 mark every year since 2002.

However, CIBC World Markets economist Benjamin Tal believes the recovery in housing starts will be much slower."I think those number are a bit on the high side," he said, predicting a "not very weak, but not very strong" recovery of about 140,000 units in 2010.Tall also believes housing starts won't surpass 200,000 annually again for quite some time."We simply can't justify it. We don't have the demand," Tal said.The new normal will be about 170,000 to 180,000 starts annually, which we could hit by 2011, Tal said.Slower population growth and higher costs for new homes after provincial sales taxes are harmonized with the GST in provinces such as Ontario and B.C. next year will soften near-term growth in new home construction, Tal said.

Scotiabank economist Adrienne Warren also sees a slow recovery in new home building due to oversupply in some major markets, particularly in the condominium sector.But Warren said the CMHC forecast is yet another sign Canada's real estate market is on the rebound, and performing better than previously thought."It reaffirms that the market is far exceeding expectations across the board," Warren said.

CMHC also said Thursday it expects total sales on the Multiple Listing Service (MLS) to hit 420,700 in 2009 compared with 433,990 in 2008.That forecast is slightly higher than the Canadian Real Estate Association's recently revised 2009 resale forecast of 432,000 units.CREA boosted its outlook last week, saying it expects resale activity to drop by 0.4 per cent in 2009 versus 2008. That's better than its previous forecast of a 14.7 per cent drop year-over-year.
CHMC said the average price of a home across Canada last year was $303,607 and is expected to fall slightly to $301,400 in 2009, before climbing to $306,300 in 2010.

Warren predicts 2009 sales and prices will be on par with last year's levels."By and large we are looking at matching last year's levels, and holding steady on average, which is far from what anyone expected a few months ago," she said.She expects a "modest pickup" in sales in 2010."We will be looking at more of a balanced market."

Meantime, sales of existing homes rose in major centres across Canada in August compared to the month before.In the Greater Toronto Area, sales were up 27 per cent last month to 8,035 units compared to August 2008. The average price was $387,921, up by six per cent compared to the same month last year.Year-to-date sales in the Toronto area were 58,421 were up two per cent compared to the first eight months of 2008, the Toronto Real Estate Board reported this week. The average price of $385,978 was up by less than one-half of one per cent.
In Greater Vancouver, residential property sales increased 119.5 per cent in August to 3,441 compared to 1,568 in August 2008, according to the The Real Estate Board of Greater Vancouver.It said prices were down 1.1 per cent to $539,600 in August compared to the same month last year, but up 11.4 per cent from the start of the year.