Canada's mortgage collapse?

Here are some highlights from CAAMP Winter Report. The report highlights research done by the Federal Government:

- Bank of Canada simulations made predictions that the number of Canadians with high debt service rations (greater than 40%) could rise to as much as 9.6% by mid 2012, versus the average rate of 6.1% over the past ten years.
- 70% of Canadians own a home now, compared to 63.6% in 1996. At 70% Canada is looking a lot like the US before their housing crash.

So here's what CAAMP found:

- 86% of all mortgages in their sample were fixed rate (around 4%) vs variable (2.25%)
- 70% of all the fixed rate mortgages chose security of a rate that was fixed for 5 years or longer
- It is not true that buyers who take adjustable or variable rate mortgages are borrowing to the limits of what they can currently afford. For insured mortgages, for adjustable rate loans, lenders must “qualify” the borrowers (calculate affordability) based on rates for three year fixed rate mortgages, not on the actual contract rates. This inherently gives the borrowers
considerable capacity to absorb future rises in rates.
- The average total debt service ratio (“TDS”) is 32.8% (based on the qualifying
rates assumed by the lenders) and 32.3% (based on the actual contracted mortgage
interest rates). This is well below the 44% maximum allowed for borrowers with high
credit ratings and 42% allowed for others.
- On their own simulations, making assumption of a modest income growth and rates going to 5.25%, there will be marginal impacts to TDS ratios


Note: The CAAMP research was done 1/6th of the total expected amount of mortgages financed in 2009 (so it may not represent a true representation of the Canadian Mortgage market)

So in essence, CAAMP data is showing that Canadians are a very cautious...but is it a true representation?

Scotia Bank's Economist, Derek Holt, feels differently. In a recent Maclean's article, Holt says: “I have difficulty with the CAAMP report. It’s a very different picture than what I get from talking to people in the mortgage industry."

Holt says as many as "40 per cent of first-time buyers have opted for variable rate mortgages, while another 10 per cent chose fixed mortgages with just a one-year term." Macleans notes that means half of all new mortgages are heavily exposed to short-term rate changes.

“I think their study grossly underestimates mortgage rate sensitivities,” says Holt. “It doesn’t even really matter if they went variable rate or fixed rate, because pretty much all of the mortgage market in Canada resets in the next five years.”

Holt doesn't say how he came up with the 40% of first time buyers (is it a survey of his buddies at the branch?) but the Maclean's article highlights some nice anecdotal evidence of a credit counseling service indicating that their clients are in more debt problems than ever.

We no way expect a housing collapse...but we'll keep on eye on this

Why Canadian Banks want tougher regs.

Time to comment on interest rate hysteria from a profit making framework.

- On Monday February 8th 2010, the Globe reports that the big 6 banks met with Mark Carney in November to highlight their fear of easy access to credit will will lead "to a potential collapse in house prices."

The article further states: "The banks reportedly want Ottawa to mandate tighter rules on mortgages so that buyers will need a larger down payment - as much as 10 per cent. They also want Ottawa to reduce the maximum amortization period of a mortgage to 30 years from 35."


In a follow up article on Tuesday February 9th, The Globe reports Peter Aceto, CEO of ING, the 6th largest lender in Canada, advised that the Canadian government
should think twice about changing qqasx0the regulations.

Aceto comments: “The banks in this country don't have to lend to the limit of the law – they can make smart rules on their own and not have Minister Flaherty make the decision for them.”

Now, let's think bank...every decision they make is for profit. Why would the banks want more regulation from Mark Carney?

They can't afford to police themselves and what the government to do it for them because they want to aggressively build more relationships with you. Think NHL salary cap!

Why else would the banks want to have the government increase regulations?

Well according to a note I read in the blog Canadian mortgage Trends (via Georgia Straight Blog), the banks want to cut out competition from smaller credit unions. According the George Straight article, "tighter mortgage rules would make life harder for the banks’ competitors, like credit unions, which rely heavily on mortgages."

That's a look of what's going on behind the curtain.

Suburbs Appreciation in GTA: Are people rushing to take advantage of interest rates?

Let's do some quick analysis on the data in the article in The Star (Suburbs the big winner for price appreciation)

So E12, and E11 did well for appreciation. Why? Well, you would assume because interest rates are so low there were a lot of first time home buyers taking advantage of the times to buy a home. Well let's do some quick analysis with data from TREB (note this is for overall sales including semis, towns and condos - TREB doesn't break down totals for each housing class).



Both e12 and e11 had listings go down a significant amount. In e12 in particular, sales remained the same while listings went down 21.65%

It should be noted that both in 2008 and 2009 there was only 232 sales.

In e11 listings went down and sales went up, again showing a supply shortage. Following the trend, it only represented a total number increase of less than a 150 sales.

So it seems more of a listing crunch that is causing the appreciation - as opposed to a mad dash of "sub-prime" buyers teetering on the brink of insolvency.

LA GANG TOURS..making the 'hood hip!

You liked Boyz N the 'Hood and Training Day? Love Snoop Dogg and Dre? Well a company called LA Gang Tours is offering a great opportunity to check out street life in person.

The first tour on January 16th was sold out! Passengers received a discount of $35 on the regular $100 per head ticket and signed waivers that they were aware they could become crime victims and agreed to put themselves in the hands of ex-gang members who had negotiated a cease-fire in the most violent gang area in the U.S.

The tour stop includes:

• The Los Angeles County Jail
• The Metropolitan Detention Center
• Birthplace of Black Panther Party
• Firestone Sheriff Station

While I don't see real estate prices going up in the area because it is more attractive to baby boomers (see my previous blog on Rochester) these folks at LA GANG TOURS seem to have their heart in the right place.

The objective of these tours, which are scheduled to run once a month, is to create jobs for residents of South Central and to inject money back into the community. It also promotes the continuation of a cease fire in certain designated areas in exchange for the tour operators hiring some of their youth for employment and training opportunities. Designated routes and times are being honored by participating gangs.The objective of these tours, which are scheduled to run once a month, is to create jobs for residents of South Central and to inject money back into the community. It also promotes the continuation of a cease fire in certain designated areas in exchange for the tour operators hiring some of their youth for employment and training opportunities. Designated routes and times are being honored by participating gangs.

Population Increase: South Asian Factor

According to the City Mayors Website, many of the fastest growing cities in the world are home to south asians (see here). No surprise to those in Toronto, as now South Asian's represent the single largest visible minority group (just edging out Chinese Torontonians).


Since there are more South Asians taking post secondary education than the population of Canada, this represents a great opportunity for Toronto businesses if immigration can be fast tracked and education/experience abroad would be better recognized. US's tougher immigration laws would lead Toronto to be a beacon of skilled labour for large US corporations looking to set up shop in Canada.

These initiatives were something close to the late David Pecaut, who saw skilled worker immigration as one of the tools to a prosperous city.

Real Estate Development in Toronto

Happy New Year to all, two weeks ago I had a chat with Pat Berne of the Pemberton Group.

I found it extremely insightful to see how financing works from a developers perspective. In Canada, a developer receives construction financing to build a project based evaluating the following criteria:

1. Equity - How much has the developer invested into the land where construction is to take place
2. Track Record - Has the developer displayed a history of completing projects on time and on budget
3. Valuations - What they plan on selling the units for
4. Buyers - How much deposit have they invested, the structure of the deposit, credit situation, who the are (i.e. close relatives, family and friends vs actual buyers)
   

What has separated Pemberton from other hi-rise developers is their specialization. They understand their craft, and they don't just hire a general contractor to build and have free reign on managing the construction budget or don't allow the marketing side have the final say on how the condo should be built.

There are rumors in the city where fantastic marketers having trouble completing projects because of huge cost over runs and changes, and examples where great construction companies mess up their marketing and have troubles getting sales off the ground.

According to Berne, "you have to understand the impact of changes, and what they will have on the entire project." That is why on a daily basis, Berne and his people are on top of all costs, changes to design, construction, and marketing of a project.

The challenges facing Berne are two fold: Affordability and Acquisitions

Back in 1989, condo prices were about $400 psf in 1989 real money, they quickly fell to $180 psf because of affordability. While Berne doesn't see a crash up coming because this recession is a bank/finance recession rather than a job loss recession...he does see problems for land owners trying to sell to developers for unrealistic prices.

Land owners been approaching developers to buy their land as if it was already zoned to build a hi-rise, not realizing the tremendous zoning risk to developers.

"We've had owners calling us and saying that you should buy our property at our price because the property down the road had 20x coverage...which was completely false, " says Berne. "We won't buy anything that doesn't make sense to build today, we won't spec that appreciation will still occur to bail us out, otherwise it would make our (homes) less affordable"

While not expecting appreciation to bail us out, Berne constantly monitors immigration, incomes, unemployment, interest rates when planning their next steps, and his research is showing that we are going through an period of price stability.

What's his advice to investors? keep on top of the market and know it inside in out to find value (continue to shop around), understand how much you will spend on financing now and in the future..and most of all, keep writing those offers.

KPMG report on HST's impact to Real Estate

For more information on HST's impact on real estate...check out KPMG's report here

Proponents argue that HST is going to beneficial for Ontario as a large portion of our economy is based on construction and manufacturing (industries that require a lot of start up capital rather than labour capital).

Some benefits include:

• More construction jobs. A recent C.D. Howe Institute report estimates there was an increase in construction machinery and equipment investment by 12.1 per cent in the Atlantic Provinces after a HST was implemented there. As the purchasing power of a business increased, thanks to the benefits of input tax credits, so did the investment.

• Infrastructure construction stimulus. The Ontario Road Builders’ Association (ORBA) have been longtime advocates for sales tax harmonization and say the new HST will help with competitiveness and clarity. With a simpler tax system it will eliminate a lot of bureaucracy and paperwork. Construction is a paper-heavy industry, but having a streamlined tax system will alleviate a lot of that burden.”

For finance, insurance and real estate (FIRE), which are huge component of the Toronto economy, this is not so much of a good thing, especially for real estate investors like us (will it drive jobs away from Toronto?). It will be inflationary and add significant costs to our business. Services such as home staging, legal fees, accounting, maintenance, real estate commissions, new home prices will all go up with no benefit to the parties involved.