Calgary Alberta Mortgage and Real Estate News

New-home construction in Canada is set to cool slightly next year, and would likely drop more precipitously if not for the widespread adoption of longer-term mortgage products, according to one economist.

Housing starts are expected to pull back about 6 per cent in 2008 as rising prices curb demand, according to an outlook report by the Canada Mortgage and Housing Corp (CMHC).

“The pullback in housing starts next year will be mainly due to increases in house prices in recent years, which have pushed mortgage carrying costs higher,” Bob Dugan, chief economist at CMHC, said in a statement.

This would still put new-home construction at a relatively strong 214,000 units in 2008, the seventh consecutive year in which they’ll top the 200,000 mark, according to the report.

Lofty prices in the country’s hottest markets, particularly Western Canada, would likely take a much bigger bite out of new construction if it weren’t for longer-term mortgage products, said Derek Holt, assistant chief economist at Royal Bank of Canada.

Last year, the federal government extended the maximum amortization period for mortgages from 25 years to up to 40 years.

Consumers have embraced these products, which raise the cost of a mortgage over time but lower the entry hurdle to buying a home because the longer payment period allows for smaller monthly payments.

“It’s my belief we would be 10 to 20 per cent below 200,000 housing starts next year if it wasn’t for the impact of these mortgage innovations,” Mr. Holt said.

Sixty per cent of new and rollover insured mortgages are for amortization periods of longer than 25 years, and half of those are for 40 years, Mr. Holt said.

The economist expressed concern that people taking out 40-year mortgages aren’t leaving themselves any buffer in the event of future rate shocks.

Buyers should also be aware of the much higher overall interest cost of a longer-term mortgage.

For example, the total interest on a $300,000 mortgage can soar from $286,161 over the life of a 25-year mortgage to $498,416 over a 40-year amortization period - adding more than $200,000 to the cost of the home.

In the resale market, sales of existing homes are poised for their best year on record, with slightly more than 521,000 units expected to be sold in 2007, as measured by sales on the Multiple Listing Service sponsored by the Canadian Real Estate Association.

The 7.8-per-cent increase in volume from 2006 is attributable to booming sales in the Prairie provinces.

However, purchases of resale homes are expected to slow somewhat in 2008 to slightly more than 500,000 units, a drop of about 3.9 per cent.
 

The Bank of Canada’s 4.5-per-cent overnight lending rate “is appropriate” but the bank must “look at the causes” of the rising loonie over the next three and a half weeks as it drafts its Oct. 16 interest-rate announcement, governor David Dodge said in speech Tuesday.”We need to assess the effect of movements in the exchange rate on the balance of aggregate demand and supply in the Canadian economy,” Dodge said, in what observers took as a hint that an immediate interest rate hike is unlikely as the bank examines the ongoing fall-out from this summer’s market turbulence.

“Overall, it looks like the bank is solidly on hold until they have a chance to assess the impact of the tightening of credit conditions on the real economy, and the impact of the most recent appreciation of the Canadian dollar,” Jacquie Douglas, an economics strategist with TD Securities, wrote in a note following the speech.

In his speech, Dodge noted “significant upside and downside” inflationary risks, observing that stronger-than-expected household demand could drive up inflation while spillover from the sputtering U.S. housing market could have the opposite effect.

Assessing which of those risks is more serious is what “we will be concentrating on between now and our next interest rate announcement,” Dodge told reporters after his speech to the Vancouver Board of Trade.

Of particular concern are rising housing prices, he said, which make up about five per cent of the country’s consumer price index.

“When, on average, new housing is rising at eight per cent, that really puts an upward bias into the CPI and it’s clearly something that in hitting our target we are very concerned about,” he said.

But he offered little hope to Canadian manufacturers, who have pressed the bank to cut interest rates as a way of dropping the value of the loonie, whose flight to parity has slashed returns in the auto and forestry sectors.

The rise in the price of resource products relative to manufactured goods “sends a signal that real resource labour and capital really have to be diverted from now lower value-added activities in manufacturing to higher value-added activity in the resource sector or in a number of service sectors,” Dodge said. “The lesson of history is that not to adjust is just not an option. And we have to find ways to get on with it.”

Still, while noting that a rising currency has little direct impact on inflation, “to the extent the rise in the Canadian dollar affects our exports in a negative direction and our imports in a positive direction, obviously that effect really does flow-through into the balance of demand and supply of Canadian goods and services. And that precisely is what we will have to take into account,” Dodge said.

His comments suggest that “a tighter Canadian monetary policy is not likely and, if anything, pointed to a higher probability of an easing if economic conditions get much worse,” Scotia Capital economist Karen Cordes wrote in a note.

For a generation, Americans have had a reason to feel superior to Canadians: Our dollar was worth more than theirs. Ours was a full dollar; theirs was discounted. And thus it was a shock last week when the Canadian loonie stole across the line of superiority and registered a value of $1.0008.

There were several reasons for this. Oil is the obvious one. Canada is endowed with much oil and gas, and the rise in its value tends to lift the currency. Americans have a large appetite for that oil and gas, perhaps more than is good for them. Another reason for the muscular loonie has been the financial probity of Canada’s conservative government. Unlike our conservative government, Canada’s has really and honestly balanced its budget.

This year, Canada is planning to run a 2-percent budget surplus. Canada’s Treasury has announced a long-term plan to pay off the central government’s debt, allowing cuts in the rates of personal income tax.

Imagine that: Pay off the debt, then cut the tax.

Our conservative government doesn’t think that way. It cuts taxes first, increases domestic spending and starts a war. Our conservative government put the whole smorgasbord on the credit card and argued that there would be no financial indigestion.

When indigestion arrived in the form of a subprime-mortgage crisis, Fed Chairman Ben Bernanke slashed the interbank lending rate. Probably by that time, it had to be done but it was not what a prudent, fiscally sound country should have had to do.

With the interest-rate cut, the dollar fell again, because it is less rewarding to park one’s funds at a lower rate of pay.

Now the greenback swims in the same pond as the loonie, which as recently as January 2002 was worth just 62 cents on the dollar.

And it’s not just Canada: The dollar has fallen this year against the euro, the pound, the yuan and the yen, and also against such proud players as the Polish zloty, the Russian ruble, the Philippine peso, the Mexican peso and the Brazilian real.

We shall have to be polite to the Canadians.

The Bank of Canada is universally expected to hold its interest rates steady at 4.5% tomorrow.

Although the unemployment rate is at a 33-year-low of 6.0%, wages are rising at a 3.7% annual clip, the economy expanded 3.4% in the second quarter and core inflation has been above its 2% target for an entire year, the sludge dripping from North American debt markets is expected to persuade the bank to stay its hand for now.

It will take time to see whether this sludge will contaminate broader lending, mingle with the U.S. housing slump and cause the United States and Canadian economies to slow. Canada also has some sludge of its own to absorb from the asset-backed commercial paper blow-up here.

It is ironic that as the bank holds rates in response to the slump in U.S. housing, it may further stoke a Canadian housing market still on a tear and vulnerable to risks of its own — like the rising labour and materials costs the bank was previously trying to restrain.

While U.S. building and sales have cratered and prices have dipped 3.2% on the year, Canadian resales rose nearly 10% in July to a new record and average prices jumped 12.6% to a record $311,495.

Toronto high-rise sales, meanwhile, are in their second year of 24% increases year-to-date. The luxury hotel-condo — usually commanding the top floors of some architectural jewel and bearing a marquee name like Ritz or Four Seasons — is the latest boom’s must-have.

“It is now common to see 2,000-to 2,500-square-foot condos selling for $2-million or more with property taxes and condo fees to match,” Sherry Cooper, chief economist at BMO Capital Markets, said in a recent note. “Per square foot, condo prices are now higher than single-family home prices of similar quality and location.”

At the Four Seasons hotel-condo in Yorkville for example, a 2,500-square foot condo sells for more than $4-million; a 3,900-square-foot penthouse has a $7.4-million price tag.

Although the prices may not be quite so lofty, they are racing across the country, too, with Saskatoon joining Calgary as the latest hot spot.

Analysts are at pains to point out how the Canadian market is in much better health than the United States.

“The current subprime default rate in Canada is less than 3% compared with 13% and growing for the United States,” Warren Lovely, economist at CIBC World Markets said in recent note. And there isn’t much subprime debt in Canada anyway. It accounted for barely 5% of mortgage originations during 2005-06, well below the 20%-plus share in the United States, Mr. Lovely said.

As well, Canadians have taken out fewer mortgages with teaser or adjustable rates and they have traditionally relied less on home lines of credit to fuel consumption.

Builders and lenders in Toronto, burnt by the 1990 real estate bust, are smarter too.

“There’s a healthy amount of discipline that has been inserted into the Canadian system that was a direct result of the problems of ‘89, ‘90, ‘91,” said George Carras, vice-president at RealNet Canada Inc. Typically a project is 60% to 70% sold before a shovel breaks ground. Deposits are also quite significant and required at various milestones over the course of construction.

At the Four Seasons for example, the buyer must put down a $50,000 deposit, followed by additional deposits equal to 25% down at the end of the first year after signing — with still more than two years to go before occupancy, Ms. Cooper notes.

“There is an incredible rigour around the interim financing, which is typically done after a minimum pre-sales target has been met and enough due diligence is in place — there is enough money to get their loan back on the completed building,” Mr. Carras said.

Yet trouble can come rumbling out of nowhere, as the Canadian ABCP market storm has shown.

Instead of buyers walking away from deposits as prices slid in the United States, Canadian developers might run into trouble grappling with runaway costs, especially if borrowing costs become stickier north of the boarder.

Canada is at, or very near full employment in the construction industry, and competition for labour has become fierce, Mr. Lovely said. Material costs have also soared.

Under a supply-side crunch, a developer might go bust before he can bring his project to completion, leaving buyers hanging.

Mr. Carras agrees the biggest risk for the Toronto market now appears to be execution risk, especially with some 60 of the 160 or so developers building new homes in the Greater Toronto Area having operated for five years or less.

“The things to watch are in the execution risk–being able to deliver the units that are sold, within budget to people that will be closing when they are supposed to be closing,” Mr. Carras said. “That’s the risk profile of this marketplace because there are a number of people in this space that have not been in this space before.”

So far though, the market appears to be functioning smoothly and the condos are flying off the shelves.

But as the U.S. market shows, sentiment can sometimes turn on a dime — all the more reason for the Bank of Canada to hope this subprime mess sorts itself out and it can get back to raising rates.

Real estate fraud is costing Canadians millions of dollars each year — perhaps even more than a billion — and becoming an “incredibly growing industry.”One of the country’s largest title insurers, First Canadian Title, says the upcoming busy real estate season in the spring can be a breeding ground for real estate scams, often averaging as much as $300,000 per case and industry estimates for how much real estate fraud costs Canadians range between $300-million and $1.5-billion each year.

On Thursday, First Canadian Title and the Consumers Council of Canada kicked off a public awareness campaign in Calgary warning homeowners of the growing danger. March is fraud prevention month across Canada.

Bill Huzar, president of the Consumers Council of Canada, said the real issue is there are so many different varieties of fraud but “this is one that is really hurtful because when the ordinary Canadian makes their biggest investment probably, the most expensive item they ever buy is their home.”

“The most difficult thing to understand is that people who are most at risk are people that have lived in their homes a long time, have increased equity because they’ve paid their mortgage down and now they’re feeling really good. And that’s the prime target,” said Huzar.

“It’s an incredibly growing industry.”

He said the risk is great in a real estate market such as Calgary’s, where the value of homes has risen so dramatically in the past year. As a homeowner’s equity has soared, so has the risk of becoming a victim of fraud, added Huzar.

Susan Lawrence, who was a victim of real estate fraud in Toronto, said police have told her this type of crime is easy and “is more lucrative and safer than dealing drugs.”

“The message is to be vigilant. Check your records. Check that you own your house,” said Lawrence. “If you’ve got any equity in it whatsoever, get title insurance because you won’t be stuck with legal bills of tens of thousands of dollars in fighting to get your house back.”

Lawrence put her house up for sale in the fall of 2005. Thieves stole the house in November and she discovered the theft in February, 2006. Thieves took out a fraudulent mortgage on her home for almost $300,000.

“A girl posed as me. Said she was selling the house. Sold it to another fraudster. The fraudster had all kinds of fake ID. … Then they went to the bank and got a mortgage for $300,000 and disappeared with the money,” she said.

Mortgage fraud occurs when individuals fabricate their qualifications to obtain a mortgage when buying a house. There is also mortgage fraud for profit, when someone intentionally defrauds a lender or a homeowner of their interest in a property through identity theft.

Ownership of a property is transferred fraudulently from the rightful owner to the criminal, who then sells or mortgages that interest and makes off with the funds.

Julia Jones, assistant vice-president, Western Region, First Canadian Title, said in 2006 the company started a process of underwriting title insurance policies to detect fraud in an attempt to prevent it.

“We prevented $20-million of suspected fraud, mortgages, and transactions in one year which involved 52 properties,” said Jones. “That gives you a pretty good idea that there is some serious concerns.

“As consumers, they need to protect their identity. That’s really important. … It’s important to do a credit search on yourself every once in awhile to make sure there’s no unusual activity. We recommend you even do a title search of your property from time to time to make sure there’s no unusual activity. And then, although title insurance doesn’t prevent fraud, it certainly can help you if you are a victim.”

Canada Mortgage and Housing Corporation (CMHC) announced today that it will improve its mortgage loan insurance approval system, through a product enhancement called Self-Employed Simplified, to help more self-employed borrowers realize their dream of homeownership.“Self-Employed Simplified, will make it easier for certain self-employed borrowers to obtain mortgage loan insurance and, as a result, benefit from competitive interest rates,” said Pierre Serré, CMHC’s Vice-President, Insurance Product and Business Development. “This product enhancement will help self-employed borrowers and commissioned salespersons to obtain a CMHC-insured mortgage, much like borrowers who receive a salary or hourly wage from an employer.”

In recognition of the growing proportion of self-employed people in today’s workforce, CMHC has developed tools that help assess the risk associated with borrowers who have difficulty obtaining third-party validation of their income using traditional forms of documentation. Increasingly sophisticated risking models will enable the Corporation to launch this product enhancement effective March 30, 2007.

CMHC Self-Employed Simplified is designed for borrowers who have a minimum of two years in the same type of work and a proven track of responsibly managing their debt. CMHC Self-Employed Simplified will insure mortgages on one- or two-unit homeowner properties and will also be available for refinance transactions, for mortgages up to 90 per cent of a home’s value.

CMHC Self-Employed Simplified

Self-employed people represent a growing proportion of the Canadian workforce. CMHC’s Self-Employed Simplified product enhancement responds to this reality by making it easier for more self-employed borrowers to obtain CMHC mortgage loan insurance, and as a result to benefit from competitive interest rates.

CMHC already has mortgage loan insurance products for self-employed borrowers and commissioned salespersons who can provide traditional documentation to substantiate their income. These products will continue to be available.

CMHC Self-Employed Simplified will help more self-employed borrowers realize their dream of homeownership by making mortgage loan insurance available for borrowers who have difficulty obtaining third-party validation of their income through traditional forms of documentation. However, it will be limited to self-employed borrowers who have a proven track record of managing their debt, and who have worked a minimum of two years in the same type of work, either as an employee or self-employed.

CMHC System Enhancements

CMHC Self-Employed Simplified is possible due to enhancements to CMHC’s emili mortgage insurance approval system. These enhancements will include the use of new predictive models that assess the reasonableness of the income declared by the self-employed borrower. They will also allow for better assessment of mortgage default risk associated with self-employed borrowers who cannot provide traditional forms of documentation to substantiate their income.

The use of these models will help CMHC to insure these mortgage loans in a responsible and prudent manner.

Premium Levels

The CMHC Self-Employed Simplified mortgage insurance premium will vary from 0.8 per cent of the mortgage loan amount for loans with at least a 35 per cent down payment, to six per cent for loans with a 5 per cent down payment.  These levels reflect the absence of traditional forms of documentation to support the current income of the self-employed borrower.

While CMHC Self-Employed Simplified premiums are higher than those paid by borrowers with traditional forms of documentation, it is important to recognize that this product enhancement also allows borrowers to benefit from lower interest rates than would otherwise be the case. 

Resale housing activity in Canada’s major markets set a new record in January 2007 according to statistics released by The Canadian Real Estate Association (CREA).Seasonally adjusted MLS® home sales in Canada’s major markets totaled 30,359 units in January 2007. Led by gains in Vancouver, Edmonton and Toronto, seasonally adjusted activity rose by 3.4 per cent from December 2006 and surpassed the previous monthly record set in August 2005 by three per cent.

Seasonally adjusted activity set new records in Edmonton, Saskatoon, Ottawa and Saint John. Sales also reached their second highest monthly level on record in Calgary, and their third highest level on record in Toronto.

Seasonally adjusted MLS® residential new listings numbered 48,035 units in January, up 3.1 per cent from 46,579 units in December. The monthly increase resulted largely from an increase in new listings in Vancouver and Toronto.

The monthly increase in sales was slightly larger than for new listings, which caused the resale housing market to become slightly tighter in January compared to the previous month. Markets in Toronto and Montreal became tighter in January than in any other month in the past year.

The major market MLS® residential average price in January rose 11.2 per cent year over year to $299,318. Average price reached its highest monthly level on record in Calgary, Edmonton, Saskatoon, Hamilton-Burlington, London & St. Thomas, and Quebec City.

“Unseasonably warm weather in some regions may have boosted MLS® home sales activity in January,” said CREA Chief Economist Gregory Klump. “Transactions also rose in each of the three previous months. That clearly shows that resale housing activity continues to be supported by the same factors that have boosted the housing market over the past several years.”

“Low mortgage interest rates, high employment, rising incomes and upbeat consumer sentiment will keep the housing market on a strong footing for the foreseeable future,” he added.

Toronto home owners are paying more for repairs - and helping drive up inflation - in large part because many skilled workers are being drawn into Alberta’s red-hot housing market, making an already fierce trades shortage even worse.

An 8 per cent rise in the cost of home repairs across Canada helped nudge inflation up slightly last month, Statistics Canada reported Tuesday.

The annual inflation rate rose to 1.4 per cent in November from 0.9 per cent the month before. It was pushed up by higher mortgage and house repairs, but kept in check by the lower cost of new cars, gas and heating oil. In Toronto, the rate rose to 1 per cent from 0.7 per cent, while the provincial rate rose to 1.1 per cent from 0.6 per cent.

Statistics Canada said the rise in home repairs is the driving force behind the inflation hike; the first time in three months that the annual inflation rate has climbed over 1 per cent.

Analysts were quick to point to the flight of skilled trade workers to the boomtowns of Calgary and Edmonton - where home repair costs have jumped 45 per cent in one year.

“Alberta has seen an absolute explosion in housing which is drawing skilled workers from around the country and making the labour shortage in the trades even worse and driving up costs,” said Doug Porter, deputy chief economist of BMO Capital Markets.

In Toronto, contractor Jeff Mowder says a shortage of skilled workers has sent home repair costs “skyrocketing in the past couple of years.

“When I’m looking for people in the specialty trades - tin ceilings, trim work, cabinet work - there’s a real lack of skilled workers, and the rising costs do get passed on to the customer,” said Mowder, president of Mowder Construction.

Add this to Toronto’s own competing renovation boom, especially in high-end neighbourhoods, and the demand for skilled workers is higher than ever, said Michael Tafts, owner of G. Pederson and Associates Construction.

“We’re stretched thin on trades with the amount of business we’re seeing in neighbourhoods like Rosedale and Lawrence Park - partly because of the renovation boom but also partly because consumer taste for renovation has gone up. Everyone wants the bells and whistles and they’re biting off more than they would have a few years ago,” said Tafts.

Even north of Toronto, contractor Scott Wootton has had to raise his pay for entry-level carpenters twice this year after losing five of them “in a mass exodus to a competitor who was paying more.

“In 20 years I’ve never had this kind of attrition — ever. But the bar is being raised for entry-level workers because there’s such a shortage,” said Wootton, president of Kawartha Lakes Construction Co. and chair of the Ontario Home Builders’ Association’s Renovation Council.

“There’s also the rising price of metals like copper and steel - which affect your plumbing and electrical trades - and sheet goods have gone up as much as 12 per cent.”

Yet customers often don’t realize the effect this has on their overall bill, notes Mowder.

“You don’t want to be a general contractor out there today - the costs of material have skyrocketed in the last couple of years, but homeowners are still back in the 1980s with what they expect to pay, and even I get surprised some times.

“They’re still looking for drywall to be installed for $2 or $2.50 per square foot when it’s actually about $3.50. We’re all a little ‘old school’ when it comes to the new prices.”

The Consumer Prince Index also reflected the fact that restaurant meals cost more last month, as did electricity. But auto purchases and the prices of gasoline, heating oil, natural gas and computers all went down.

Gasoline prices fell only 3.1 per cent between November 2005 and last month after dropping more than 14 per cent during the previous two months.

The core inflation rate, which is used by the Bank of Canada to gauge underlying inflation pressure in the economy, was at 2.2 per cent last month.

This core rate discounts volatile items such as energy and food and ignores changes in indirect taxes such as July’s GST cut. In setting interest rates, the bank aims to keep the core inflation rate at two per cent.

It’s tougher to find a vacant apartment in Toronto these days and prospective tenants still face the highest rents in Canada.

Figures released yesterday by the Canada Mortgage and Housing Corporation show Toronto’s vacancy rate for private apartments fell to 3.2% in 2006, down from 3.7% in 2005 and 4.3% in 2004.

And the vacancy rate for rental condominiums was a mere 0.4%.

The average rent for two-bedroom condo was $1,487, while two-bedroom private apartments averaged $1,067.

CHMC predicts the Toronto rental market will be even tighter in 2007, with the vacancy rate falling to 2.7%.

“Stronger demand for rental housing in 2006 was driven by increased home ownership costs, strong growth in youth employment and a steady in-flow of immigrant households,” said Jason Mercer, CMHC’s senior market analyst for the Greater Toronto Area.

“In 2007, these factors will cause the vacancy rate to decline further and average rents to grow at an annual rate in line with inflation.”

Vancouver and Calgary both had lower average rents than Toronto, despite having much lower vacancy rates.

Vancouver’s vacancy rate was 0.7% and the average two-bedroom apartment rent was $1,045, while a two-bedroom condo averaged $1,273.

Calgary had the lowest vacancy rate of any major city at 0.5%. The average two-bedroom apartment rent was $960 (up 19.5% from 2005), while two-bedroom condos averaged $1,257.

The lowest average monthly rents for two-bedroom apartments were in Trois-Rivieres ($488) and Saguenay ($485).