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DECODING THE MORTGAGE MARKET Mortgage rates today are way below normal. Or are they?
Finance Minister Jim Flaherty called Canada’s low interest rates an “anomaly” last week, echoing warnings that other government officials have been making since 2009. But one of the country’s best-known economists believes today’s rates are closer to normal than many think.Benjamin Tal, deputy chief economist at CIBC, caught viewers off guard in a recent webcast with a mortgage company TMG The Mortgage Group. Whereas most economists have been calling for the Bank of Canada to lift its 1 per cent key lending rate back to a more normal 3 per cent, Mr. Tal thinks that these days, “normal” is significantly less.“The speed limit of the economy has been permanently reduced,” Tal said. Inflation, the key rate threat, is extraordinarily low at 1.1 per cent. And the pace of economic growth is in a long-run downtrend, with few signs of bucking that trend.Consequently, “The new normal is much lower interest rates than there used to be…The new normal would be maybe another 100-125 basis points (above today), not more than that.”If true, this would suggest that prime rate - the basis for variable mortgage rates – will average just 4 to 4.25 per cent over the long term, a big departure from the roughly 5 per cent prime rate that most economists forecast as “normal.”Saving ¾ of a percentage point, over the long-term, would have enormous impact on the finances of regular Canadians. Over five years alone, it would put $11,000 of interest back in people’s pockets on the average home purchase, with 20 per cent down. If you’re financially secure, that makes shorter-term and variable-rate mortgages worth a close look.In an email with Mr. Tal about his call, he was careful to point out that “the new normal is a theoretical rate.”“There is a big difference between the actual and theoretical rate,” he said. “In practice, rates tend to overshoot or undershoot. So it is possible that rates will rise by more than that, possibly to 3 per cent.”Presumably, if his model is correct, rates would then revert back down to the mean and cycle around that 4.25 per cent prime rate number.Regardless of how accurate Mr. Tal’s forecast proves to be, the odds are decent that the prime rate will remain almost two percentage points below its 6.89 per cent 30-year average. That’s in keeping with the Bay Street consensus. But more importantly, it’s reflective of Canada’s new realities: contained inflation and modest economic growth.“Variable will probably do better in this environment...if you have a five-year time horizon.” But long-term interest rates will be “permanently higher” five years from now, Tal predicts.If Mr. Tal’s estimate of a 4 to 4.25 per cent prime rate does pan out, variable rates could save people more than fixed rates over the long-run, as they have for decades. And even if “normal” turns out to be a 5 per cent prime rate (which is closer to most economic forecasts), variables should still come out on top over the long term.The question is, what happens between now and the time that rates “normalize.”Today you can find variable rates at prime – 0.5 per cent (i.e., 2.5 per cent) and five-year fixed rates at 3.49 per cent. Let’s assume that rates shoot up in 2015 as economists expect (an expectation that changes with the wind) and that they increase two percentage points over the two years that follow.In the hypothetical scenario laid out above, those of you shopping for a mortgage may find extra value in two particular terms:A three-year fixed mortgage: If you can find one in the 2.75 per cent range or better, it’s a compelling option. It gives you meaningful savings for three years (when compared to terms of four years or more). It also provides insulation from rate increases for three years. Compared to a five-year fixed mortgage, rates would have to be 2.25 percentage points higher at renewal for you to lose on this strategy. That assumes you make equal payments in all cases and renew into a two-year fixed (which adds up to five years total). Betting against a 225 basis point hike in three years is a wager that most strong borrowers should make.A hybrid (50/50) mortgage: Despite our personal beliefs, rates are impossible to foretell with accuracy. A hybrid mortgage removes the guesswork, cuts your risk of rising rates in half and lets you participate in today’s low variable rates. This strategy involves putting 50 per cent of your mortgage in a five-year variable and 50 per cent in a five-year fixed, netting you a starting rate under 3 per cent. It also gives you more flexibility than a five-year fixed by letting you refinance early with a lower potential penalty, and letting you lock in the variable rate at any time.Keep in mind, these strategies are primarily based on hypothetical interest cost. They’re also suited mainly to well-qualified borrowers with sound finances, stable employment and a five-year time horizon. Your situation may be different so as always, make sure to do your own research on what works best for you.Robert McLister is the editor of CanadianMortgageTrends.com and a mortgage planner at VERICO intelliMortgage, a mortgage brokerage. You can also follow him on twitter at @CdnMortgageNews.Source:ROBERT MCLISTERSpecial to The Globe and MailPublished Sunday, Nov. 10 2013, 10:47 PM ESTLast updated Monday, Nov. 11 2013, 10:32 AM EST
Ontario just introduced a 16-point plan to control real estate, including a Foreign Home Buyer Tax
On April 20, 2017, the Ontario government introduced the Ontarios Fair Housing Plan, a 16-point plan to control real estate, address thedemand for housing, increase supply, and protect buyers and renters.
The 16 measures in the plan include a legislation that would implement a new 15 % Non-Resident Speculation Tax (NRST), similar to the 15 % tax on foreign buyers already introduced in Vancouver last May.
Once legislation passes, the tax would be effective retroactively to April 21.
The measures are aimed at cooling down the hot housing market in the Greater Toronto Area, where prices were up 33 % from a year ago while condominium rents rose 8.3 % in the first quarter from a year ago.
Now that two major cities have been impacted by a Foreign Buyer Tax, only time will tell if investors will look to other Canadian cities to invest their funds.
Canadian home sales up on a month-over-month basis in March
According to statistics released today by The Canadian Real Estate Association (CREA), national home sales were up on a month-over-month basis in March 2017.
- National home sales rose 1.1% from February to March.
- Actual (not seasonally adjusted) activity in March was up 6.6% from a year earlier.
- The number of newly listed homes climbed 2.5% from February to March.
- The MLS Home Price Index (HPI) was up 18.6% year-over-year (y-o-y) in March 2017.
- The national average sale price increased by 8.2% y-o-y in March.
Home sales over Canadian MLS Systems edged up 1.1% in March 2017, surpassing the previous monthly record set in April 2016 by one-quarter of a percent.
March sales were up from the previous month in more than half of all local markets, led by the Lower Mainland of British Columbia, London St. Thomas and Montreal.
Actual (not seasonally adjusted) activity in March was up 6.6% year-over-year, with gains in close to 75% of all local markets. Sales in the Greater Toronto Area (GTA) posted the biggest increase, which offset a decline in the number of homes changing hands in Greater Vancouver.
The number of newly listed homes rose 2.5% in March 2017, led by gains in the GTA, Calgary, Edmonton and the Lower Mainland of British Columbia.
With new listings having climbed by more than sales, the national sales-to-new listings ratio eased to 67.4% in March compared to 68.3% in February.
A sales-to-new listings ratio between 40 and 60 is generally consistent with balanced housing market conditions, with readings below and above this range indicating buyers and sellers markets respectively.
The ratio was above the sellers market threshold in about 60% of all local housing markets in March, the majority of which are located in British Columbia, in and around the GTA and across southwestern Ontario.
There were 4.1 months of inventory on a national basis at the end of March 2017, down from 4.2 months in February and the lowest level for this measure in almost a decade. The number of months of inventory in March 2017 stood at or below one month in the GTA, Hamilton-Burlington, Oakville-Milton, Kitchener-Waterloo, Cambridge, Brantford, Guelph, Barrie District, parts of the Niagara Region and parts of cottage country.
The Aggregate Composite MLS HPI rose by 18.6% y-o-y in March 2017. Price gains accelerated for all benchmark housing categories tracked by the index.
Prices for two-storey single family homes posted the strongest year-over-year gains (+21%), followed closely by townhouse/row units (+17.9%), one-storey single family homes (16.6%) and apartment units (16.3%).
While benchmark home prices were up from year-ago levels in 11 of 13 housing markets tracked by the MLS HPI, price trends continued to vary widely by location.
In the Fraser Valley and Greater Vancouver, prices have been recovering in recent months after having dipped in the second half of last year. On a year-over-year basis, home prices in the Fraser Valley and Greater Vancouver remain well above year-ago levels (+19.4% y-o-y and +12.7% y-o-y respectively).
Meanwhile, y-o-y benchmark price increases were in the 20% range in Victoria and elsewhere on Vancouver Island. Guelph recorded a similar price gain, while Greater Toronto and Oakville-Milton saw prices rise in the 30% range in March.
By comparison, home prices eased by 1.2% y-o-y in Calgary and by 1.5% y-o-y in Saskatoon. Prices in these two markets now stand 5.4% and 5.1% below their respective peaks reached in 2015.
Home prices were up modestly from year-ago levels in Regina (+1.7%), Ottawa (+4%), Greater Montreal (+3.3% y-o-y) and Greater Moncton (+4.7%).
Year-over-year price gains were led by different benchmark housing categories in each of these markets. In Regina, apartments posted the biggest price increase, which snapped a long series of price declines for apartments that began in early 2015. In Ottawa, prices rose most for one-storey single family homes. In Montreal, two-storey single family home prices posted the biggest gain; meanwhile in Moncton, it was townhouse/row unit prices that climbed the most.
HPI) provides the best way of gauging price trends because average price trends are prone to Home Price Index (MLSThe MLSbeing strongly distorted by changes in the mix of sales activity from one month to the next.
The actual (not seasonally adjusted) national average price for homes sold in March 2017 was $548,517, up 8.2% from where it stood one year earlier.
The national average price continues to be pulled upward by sales activity in Greater Vancouver and Greater Toronto, which remain two of Canadas tightest, most active and expensive housing markets.