This week’s top stories include how luxury home sales have seen a drastic increase during the first quarter of this year, how a quick rise in interest rates could effect everyone across Canada, how a prominent economist is predicting a housing market correction of 20% in the near future, how most people are not aware that the HST will actually need to be collected by most businesses starting May 1st, how RBC and TD raised interest rates this week for the third time this month, how consumer confidence saw a large decrease during the month of April, how there was a second warning this week in regards to a housing bubble forming in Canada, how Bank of Canada Governor Mark Carney stated that the hot Canadian housing market is ready to cool off, how the U.S. Federal Reserve has committed to keeping interest rates at a historic low for an extended period of time and how fixed rate mortgages can ease the stress caused by rate increases.
Luxury sales rise
The first quarter of 2010 saw a large increase in the number of luxury homes that were sold as purchasers try to take advantage of a strong real estate market in Canada. This was the latest news from a report that was released by Re/Max Canada on Monday. The report, called the Re/Max Upper End 2010 Report, recapped the trends and sales in 13 Canadian major centers as well as five submarkets.
The report found that increased personal wealth, improved economic performance, foreign investments and immigration all contributed to the heavy increase in sales seen in the first quarter. Almost all area’s saw double and triple digit increases between January and March of 2010 when compared to the same period last year. All time high records were set in 9 out of the 13 markets that were examined.
Michael Polzler, Executive Vice President of Re/Max Ontario-Atlantic Canada, commented by saying, “Real estate continues to resonate with purchasers at every price point. With the top end of the market shifting into higher gear, every segment of the residential real estate sector is now operating in tandem. Despite the upward momentum, there are still deals to be had, especially at the higher price points, a fact that is motivating buyers to act.” What do you think? Please comment below.
Interest rate rise to effect all
Mortgage rates are now set to climb in the next few months from the historic lows that they are currently at. It is quite the decision to figure out what will be the best option, to go fixed or variable. The largest fear is always the fear of the unknown and interest rates are always the unknown. If interest rates rise and spiral out of control, consumers on a variable rate mortgage could possibly left with a home that they can no longer afford.
A recent study from the Bank of Montreal shows that women are more likely to be overwhelmed when making a real estate purchase then men. The survey says that 44% of women were overwhelmed with only 28% of men being overwhelmed. Men are also noted to be more likely to take interest rates into account when deciding to buy then women.
Currently, variable rate mortgages can be obtained for 1.75% and a 5 year fixed rate mortgage can be obtained for 4.39%. Most home owners can save money by taking a variable rate mortgage but their monthly payments will increase every time interest rates increase and this could easily lead to trouble for most. The Bank of Canada is set to increase its overnight lending rate in June and the variable rate will rise accordingly.
If history were to repeat itself, chances are that it won’t, we could see interest rates mimic the 1980′s when interest rates shot up 67% in one and a half years to the 18% range. This would make mortgages unaffordable for almost everyone. What do you think? Could your mortgage handle an increase of 14% over a year and a half? Please comment below.
Housing market correction on horizon?
A prominent economist is predicting that the Canadian housing market will see a correction in the near future. David Rosenberg, chief economist for Gluskin Sheff & Associates, says that home prices are currently overvalued and that there will be a correction of roughly 20% right around the corner.
David stated, “The question is not whether home prices slide especially in bubbly Toronto and Vancouver, but just how much froth there is to come out. It would not be out of the realm to see a correction, using nationwide average home prices as the benchmark, of at least 20%.”
Rosenberg was among the first to predict a housing crash in the U.S. Housing activity and construction has been responsible for leading Canada out of the recession. Canada witnessed a 5% growth in gross domestic product (GDP) performance in the last quarter of 2009. Rosenberg stated that if it were not for the housing market, real GDP would have stagnated.
Canadians have been pretty smug about the strength of the economy because the housing market has strengthened ahead of fundamentals, pushed forward by simulative government measures. Much of the recovery was due to the low interest rate environment and strength in the housing market, which is similar to the U.S. market before it imploded and fell apart.
With more and more new listings hitting the market and new taxes around the corner, it will be interesting to see how the Canadian real estate market actually plays out. Listings were up in 25 out of 28 major Canadian markets in the month of March. The lack of listings helped increase the value of homes and was considered a major part of price appreciation in Canada.
HST confusion
Most business owners think that they should be bracing for the July 1st deadline but as it turns out, they should be bracing for May 1st instead. Companies will begin to feel the actual impact of the tax on May 1st because businesses will start charging the Harmonized Sales Tax for any goods that will be delivered on or after July 1st.
Companies will now have to pay the new tax on supplies and equipment, while consumers will be charged the new tax on almost all services. The timing of the HST couldn’t be worse as Canadians are still prying themselves from the depths of the recession. The government will make quite a bit of revenue on the new tax but businesses will be left defending the costs of the products and services that they provide.
Mike Robillard, a tax partner at Ernst & Young commented by saying, “Suppliers have to understand what their obligations are and they have to start collecting the HST as of May 1. I’m not sure they all understand that. If they don’t collect the tax and they should have, they will be responsible for that tax.”
The HST is set to be applied to many services that were previously exempt from the provincial sales tax. There will be confusion for most as people are under the impression that the HST will take effect on July 1st. What do you think about the new date? Will it effect you? Please comment below.
RBC raises interest rates
The Royal Bank of Canada started this week with an announcement that they would be going through another round of interest rate hikes on Tuesday. This comment was just days after the Bank of Canada (BoC) announced that higher interest rates were on the horizon.
RBC raised interest rates by 0.15% or 15 basis points (Bps) on all their fixed rate mortgage products. Within hours of RBC’s announcement, TD Canada Trust followed suit and announced that they would also be raising their interest rates by 15 – 25 Bps or 0.15% – 0.25% on all their fixed rate mortgage products. This is the third straight interest rate hike that Canada has witnessed in less than a month.
Benjamin Tal, senior economist at CIBC World Markets commented by saying, “The market is getting more aggressive about the prospect of the Bank of Canada raising interest rates. Now it seems the market is expecting even more aggressive interest rates increases than it was last week. The bond market is really a mirror to the future and this mirror is now telling us that the Bank of Canada is going to move. That’s why bond rates go up.”
In the latest monetary report from the BoC, the central bank stated that the nation’s economy is expanding a rate more quickly than previously expected, which is why most analysts are not surprised about the interest rate hike. Economists now predict that the central bank will increase the overnight lending rate by 0.25% or 25 Bps and will continue to keep raising the rate through to the end of this year in order to control inflation. What do you think? Please comment below.
Consumer confidence nosedives
According the latest report released by the Conference Board of Canada, the index of consumer confidence took a huge loss in the month of April and wiped out all the gains that were gained in the month of March. The report was released on Tuesday of this week and outlined that consumer confidence across Canada had fallen 7.8% to 84.8 in the month of April.
The report also stated, “The national index has been bouncing up and down since the start of the year, and now stands significantly below its post recession peak of 96.6 recorded in January.” Consumer confidence levels are wide spread across the provinces but are significantly lower than they were at the beginning of the year. How you do you feel about the current state of the economy? Please comment below.
Second warning of housing bubble
A study released this week by investment house Edward Jones states that Canadians should be preparing for a possible housing market downturn. Edward Jones commented by saying, “Home prices are rising again across Canada, which is a relief to many but a worry to those wishing to buy. Our main concern is that prices have risen faster than economic fundamentals warrant, and could decline.”
This was the second report this week that expressed concern over heated market conditions in the Canadian housing market. The average resale price of a home was up to $337 410 in 2009. This was a rise in home prices of 19.3% despite higher unemployment. The relative strength of Canadian housing prices in the face of the recent economic recession suggests caution towards the housing market.
Investors that have well diversified portfolios may not have to worry but those consumers that are considering additional real estate investments should proceed with caution. When Canadian housing prices are compared to income and rental data, prices are well above the supported fundamentals. Although Canadians have been able to avoid a housing meltdown like that south of the border, consumer borrowing reached 146.2% of disposable income at the end of 2009. That was a record high and surpassed the 130.6% reached in the U.S.
Housing to cool off
Bank of Canada (BoC) Governor Mark Carney stated this week that Canada’s hot housing market will likely begin to cool off this quarter and continue to cool over the next few years. He spoke in front of the House of Commons finance committee on Tuesday and stated that economic activity has rebounded strongly from the recession.
The housing market was noted to be too strong and led to recent changes in mortgage qualification guidelines. Mr. Carney commented by saying, “We see a marked weakening in housing over the course of our projection into 2012 starting from the second quarter of this year and over the balance.” He went further and noted that consumer credit has grown despite poor economic times as Canadians borrowed against their homes and took out new mortgages.
He also stated that the current extraordinary low borrowing conditions can not last and warned consumer to consider their obligations over the course of a loan before taking on any additional debt. This was in response to financial institutions raising interest rates three times in the last month. Mr. Carney did not say when the BoC would begin raising interest rates but the BoC did withdraw its conditional commitment to keep the overnight lending rate at a record low of 0.25% until July.
Economists have interpreted this as a signal that the central bank will raise the overnight lending rate by 0.25% or 0.5% at the next meeting that is scheduled for June 1st. Mr. Carney did say that the removal of the conditional commitment in itself represents a tightening moving forward. What do you think? Please comment below.
U.S. feds keep rates at low
On Wednesday the U.S. Federal Reserve made a comment that the economy is strengthening and pledged to keep interest rates at a record low to help the economy gain traction. In a 9-1 decision, the Fed committed to hold rates at historic lows for an extended period to help strengthen the current recovery.
The Feds say the economy is looking more promising but did note that risks remain. The job market is beginning to improve, which is an upgrade from March when the Feds stated that the unemployment situation was just stabilizing. Consumer spending also has gone up from the Feds previous statement of just expanding at a moderate pace.
High unemployment, tight credit and sluggish income gains are still hindering consumer spending, which is a major contributor to economic activity. This is reason to be cautious. The commercial real estate market is still listed as fragile even though housing activity has edged up.
New fears are beginning to rise in the United States about keeping interest rates too low for too long. The concern is that this could lead to excessive risk taking by investors, which could lead to new speculative bubbles in the prices of bonds, stocks and commodities. Low interest rates could also eventually unleash the wrath of inflation on the economy.
The Feds commitment to keep rates low for an extended period also limits the central banks ability to start modestly raising rates. The central bank has held its target range for lending between zero and 0.25% since December of 2008. How do you feel the rate hold will effect Canadians? Please comment below.
Fixed mortgages ease stress
The latest news is that whether you chose a fixed rate mortgage or a variable rate mortgage right now, the difference between the two will likely be minimal. Historically, variable has always been the way to go 89% of the time but right now it seems to be a toss up.
Senior vice president of CIBC mortgages, Collette Delaney commented by saying, “Rates have never been this low so Canadians are increasingly looking for advice when it comes to mortgages. The question of fixed versus variable takes on greater importance when you consider where rates are and the possibility that rates will start to increase towards the end of this year.”
A fixed rate mortgage definitely brings more peace of mind to consumers that are first time home buyers but those that are further into their mortgage may consider taking a variable rate to try and save some money. This may not be right for everyone. It seems that there really is no generic answer as what’s right for you may not be right for others because people are in different stages of their financial planning and lifestyles.
The advantage to a fixed rate mortgage is that is provides a high level of stability. When you lock in your mortgage, you are locking in for the complete term and now know exactly what your payments will be every month and how much will go to principal and interest.
Variable rate mortgages don’t have a change in monthly payments but the amount going to principal and interest fluctuate with the prime rate. If interest rates were to go down, you would be applying more to principal and less to interest. In the event that interest rates increase, you will be paying more to interest and less to principal. With less money covering the principal, there is a chance that your amortization could be extended.
Your best bet is always going to be to speak with an expert. They can assess your wants and needs and come up with a solution that fits those wants and needs. If you need further information or would like to discuss your options feel free to contact me directly.
Prime Rate: 3%
You Can Also Find Me Here:
Paul Sidhu: Vice President of National Sales
Useful Information: Mortgage 101
Learn More About Your Mortgage:
Now that you know what it takes to get a Canadian mortgage, check out our other handy reference articles filled with Useful Mortgage Tips.