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.
 

You have to wonder what David Dodge will be thinking this time. Just over a year ago, the Bank of Canada governor met with Canada Mortgage and Housing Corp. because of his fears exotic mortgages were juicing an already robust Canadian housing market. Now, CMHC has decided it is going to let Canadians buy investment properties with no down payment.The Crown corporation, which controls about 70 per cent of the mortgage insurance market in Canada, has quietly introduced changes that lower the down-payment threshold for an investment property. Instead of needing 15 per cent down, Canadians will be able to buy a second property — not to mention a third and fourth and fifth — with no money down.

“These enhancements will ensure continued supply of affordable rental accommodations across Canada,” said Pierre Serre, vice-president of insurance products with CMHC.

Critics charge CMHC once again has moved into risky territory, the last time being its decision to allow Canadians no money down on a principle residence. “Look at the fee, anytime it’s that high, you know there is a lot of risk,” said one senior mortgage industry observer.

The mortgage insurance fee for the new product is 7.25 per cent of the total amount of the loan. So, a $300,000 mortgage would have a $21,750 mortgage insurance fee.

Instead of paying the fee up front, CMHC will allow that fee to be added to the overall mortgage which can be amortized over as many as 40 years. Based on 5.8-per-cent interest,  the current discounted rate for a five-year term, it would cost just over $1,700 a month to carry that $321,750 mortgage.

By law, any consumer with less than a 20-per-cent downpayment must buy mortgage insurance if they are borrowing money from a financial institution covered under the Bank Act.

None of CMHC’s competitors are coming close to this new offer. Genworth Financial Canada — the other dominate player with about 30 per cent of the mortgage insurance market — requires investors to have at least 10 per cent down.

Back in July, 2006, Dodge demanded a meeting with the federal crown corporation. He was concerned about products like interest-only mortgages which give consumers the option of not making a principle payment for the first 10 years of a mortgage.

Serre said CMHC did consider the issue of whether the changes could over-stimulate the market. “We look at those kind of considerations all the time,” he said, adding that to get a loan consumers will have to meet certain criteria in terms of their overall debt load. “We’re not trying to get people into situations they can’t manage.”

Some question whether there was any need for the latest change, given how strong the market in Canada remains.

The Building Industry and Land Development Association said this week condo sales in Toronto — the largest market for new high rises in North America — were up 31 per cent over the first nine months of the year from a year earlier.

“I’m not sure why CMHC is relaxing the rules, the logic escapes me,” said Stephen Dupuis, chief executive of BILD. “The market is strong. I look at what is happening in the United States and wonder if there is a need to be so free with credit.”

The real reason for the new program, suggest some commentators, is CMHC trying to fend off competitors in the marketplace. In a constant battle with Genworth, CMHC is also facing up to four new mortgage insurers who have applied to do business in Canada or are already licenced to do so.

“There are competitors in the marketplace that didn’t exist before. They are reacting to competition that hasn’t even materialized yet,” said Dupuis.

CIBC World Markets senior economist Benjamin Tal said the latest changes by CMHC are probably just the beginning. “The genie is out of the bottle, this mortgage market is starting to move. Over the past 16 months we’ve seen more changes than the past 30 years,” said Tal.

the Bank of Canada this coming week almost certainly passes on another opportunity to raise interest rates.And that’s despite expectations that the annual inflation rate last month bounced back up above the central bank’s two-per-cent target.

The Bank of Canada’s interest rate announcement on Tuesday, its latest monetary policy report Thursday, and Statistics Canada’s September inflation report Friday are the major domestic economic reports this week.

While many economists still suspect that the next move by the Bank of Canada will be to raise rates further, they say it certainly won’t be this week, and may not be until next year.

Analysts expect the central bank will keep its trend-setting overnight target rate steady at 4.5 per cent, the second time it will have passed on an opportunity to carry through on last summer’s threat to raise rates further.

And that’s good news for indebted consumers, as changes in that key rate are almost always matched by changes in the chartered bank’s blue-chip prime rate to which the rates on consumer and business loan and variable rate mortgages are tied.

“While the recent employment and housing data have been strong and the turmoil in financial markets appears to be abating, the Canadian dollar is up about a whopping eight cents since the bank’s last meeting, and house price gains have been moderating,” UBS Securities Canada said in explaining why it expects no change in rates this week.

CIBC Worlds Markets economist Avery Shenfeld was even more adamant about why the central bank won’t raise rates.

“It can’t even think about cutting rates with a 5.9-per-cent unemployment rate, and a hike seems equally unthinkable given uncertainties over the U.S., a soaring Canadian dollar, and a crunch in commercial paper markets,” Shenfeld said.

Bank of Canada governor David Dodge will give his own explanation of what it did or didn’t do with rates and why when it presents its Monetary Policy Report which will also provide an update the bank’s expectations for inflation, the state of the domestic credit crunch, as well as its outlook for the Canadian, U.S. and global economies.

UBS, meanwhile, expects that Statistics Canada will report on Friday that the annual inflation rate bounced back up to 2.4 per cent last month from 1.9 per cent in August, which, under normal circumstances, would give the central bank justification to raise rates further.

But UBS also expects core inflation, which excludes volatile energy and food prices, and which the central bank monitors for underlying inflation trends, to ease to 1.9 per cent, a notch below the bank’s two per cent target, and down from 2.2 per cent in August.

Meanwhile, UBS sees mixed results coming from two other Canadian economic reports for the month of August, a 0.7-per-cent decline in factory shipments following a 2.3-per-cent gain in July but a three-per-cent rebound in new motor vehicle sales following three months of declines.

Americans and most of the rest of the world, meanwhile, will focus this week on speeches by U.S. Federal Reserve chairman Ben Bernanke on Monday in New York and then again on Friday in St. Louis, the latter being on the issue of conducting monetary policy in times of financial and economic uncertainty.

“And there’s no shortage of uncertainty these days,” CIBC’s Shenfeld noted.

Some of the uncertainty surrounding how the U.S. economy has responded to the mortgage market meltdown and ensuing credit crunch may be reduced with a string of reports from south of the border on September’s consumer price inflation and housing starts on Wednesday, the U.S. leading economic indicator on Thursday, and industrial production and business capacity utilization on Tuesday.

One uncertainty that will be cleared up is who is this year’s winner of the Nobel prize for economics, which will be announced Monday in Stockholm.