Variable Rate or Fixed? Canadians Unsure

THURSDAY, 02 JUNE 2011

After another reprieve from the Bank of Canada for an interest rate rise, there is much talk amongst Canadians about whether or not variable rate or fixed rate mortgages are the way to go.

Highlights from the survey include: 39% of respondents said they would choose a fixed mortgage if they had to choose between a fixed or variable mortgage today; 32% said they would go with a fixed rate; 25% said that they could not choose between the two.So, there is no clear-cut strategy favoured here.Also the survey showed that 61% of respondents believe interest rates will be up this time next year, while 24% believe that rates will hold their own throughout the next year. A mere 3% believe that rates will actually go down through the next year.

"The divergent opinions on whether to go fixed or variable underscores what our advisors see everyday in their meetings with clients - choosing the right mortgage depends on your personal financial situation, and there's no single answer for everyone," commented Colette Delaney, Senior Vice President, Mortgages, Lending & Insurance, CIBC Retail Markets.

There are other factors at play than just the directional predictions for interest rates, as Delaney reminds mortgage holders. "You need to approach the fixed versus variable decision from the inside out, starting with your personal financial goals and working from there," added Ms. Delaney. "Your mortgage is a major part of your overall financial plan, and your decisions should be based on how your mortgage fits with your long term financial goals, not on short term rate fluctuations."

Interestingly, the type of rate that you choose seems to have a lot to do with the stage of life that you are in, according to the CIBC poll.  27% of 25-34 year olds (who are also mostly first time home buyers or relatively new homeowners) would choose a variable rate mortgage; 42% among respondents 45-54 years of age, would choose a variable rate and who incidentally “are more likely to be near the end of their mortgage and have greater tolerance for rate changes within their mortgage payment.”

Ms. Delaney noted that homeowners can look at both a fixed and variable strategy over the life of their mortgage. "For most people, your mortgage is a long term proposition, so your strategy should look beyond your first term," commented Ms. Delaney.  "You may choose to start with a fixed mortgage when you buy your first home, then transition to a variable mortgage in later terms when you have improved your financial situation and paid down some of the principal."

What do you advise your clients when they ask this question?

Bank of Canada Holds Rates, Again

TUESDAY, 31 MAY 2011

Haven’t we seen you somewhere before?

The fact that there were nothing new in this morning's Bank of Canada’s interest rate announcement comes as no big surprise.

 Widely predicted by economists, forecasters, banks and average people nationwide, Mark Carney held the rate again.  The BOC has maintained its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

A softening economy both south of the border, and globally, with the addition disconcertion of a full blown financial crisis simmering in Europe was enough  encouragement for Carney to hold steady.

Although commodity prices have slid somewhat recently, they are expected to remain high over the coming months, because of strong global demand, in particular from emerging markets.

The Bank of Canada predicts too, that inflation will stay higher than the optimum 2%: “While underlying inflation is relatively subdued, the Bank expects that high energy prices and changes in provincial indirect taxes will keep total CPI inflation above 3 per cent in the short term. Total CPI inflation is expected to converge with core inflation at 2 per cent by the middle of 2012 as excess supply in the economy is gradually absorbed, labour compensation growth stays modest, productivity recovers and inflation expectations remain well-anchored.”

Although some experts predict that a rate hike could take place over the summer, the vast majority of those in the know pick September as the likely month for the next rate hike to take place.  If that is the case, it will have been a full calendar year since the last rate hike- which took place in September 2010.

There is no question that a continued rate hold is promising news for the housing market- as prospective homebuyers may view this latest move as a temporary reprieve- and move towards action more readily- sensing that this is indeed a time limited offer.

There are concerns though, among many analysts, that affordability is an increasing concern in many regions across the country- and that the combination of rising property prices and higher interest rates may be enough to push home ownership out of reach for some- or land those home owners that are on the fringe in hot water.

There is a sense of ebb and flow in relation to the housing market, and the Canadian economy in general though, suggests the BOC: “The possibility of greater momentum in household borrowing and spending in Canada represents an upside risk to inflation. On the other hand, the persistent strength of the Canadian dollar could create even greater headwinds for the Canadian economy, putting additional downward pressure on inflation through weaker-than-expected net exports and larger declines in import prices.”

For now though, it is business as usual. 

CMHC Predicts Return to Stability

TUESDAY, 31 MAY 2011

CMHC predicts that the housing market will stabilize in 2011, and that housing starts are expected to keep reflective of ‘demographic fundamentals’ through 2011-2012.“Modest economic growth, in conjunction with relatively low mortgage rates, will continue to support demand for new homes in 2011 and 2012. Nonetheless, we are expecting new and existing housing markets to fall in line with demographic fundamentals, as changes to mortgage rules take hold,” said Bob Dugan, Chief Economist for CMHC.

Housing starts are forecast to be in the area of 166,600 to 192,200 units in 2011, with a point forecast of 179,500 units. In 2012, housing starts are expected to be in the range of 163,200 to 207,500 units, with a point forecast of 185,300 units.

CMHC predicts that existing home sales will be between 429,500 to 480,000 units in 2011, with a point forecast of 452,100 units. In 2012, MLS sales will move up and are expected to be in the range of 410,000 to 511,900 units, with a point forecast of 461,300 units.

The average MLS price nationally has been propped up by a buoyant property market in regions like Vancouver, where a run on luxury housing and an influx of foreign property investors has contributed to significant price appreciations.

There is expectation though, as 2011 unfolds, that MLS prices will begin to fall in line closer to stable expectations.  That said, there is still an expectation that the average MLS price will increase through 2011.  In 2012, they expect that the market will shift towards stability and more balanced conditions, and that price growth- while still forecast, it expected to be much more moderate.

The report says, “We expect the average MLS® price to be between $347,700 and $374,300 in 2011 and between $349,500 and $385,000 in 2012. CMHC’s point forecast for the average MLS® price is expected to move up to $361,100 in 2011, while 2012 will see a further increase to $364,200.”

Looking at different regions, CMHC expects that BC will see the smallest declines in housing starts. In 2012, they predict that the greatest increase will be in BC and in Alberta. Ontario also will see a slight decline in 2011, with positive employment and economic recovery contributing to an increase in 2012.

Upcoming Interest Rate Announcement - No Change Anticipated

MONDAY, 30 MAY 2011 05:57

It is almost that time again, when eyes will turn towards Mark Carney and the Bank of Canada to see if interest rates will stay put again this time around.

The next announcement, slated for Tuesday May 31, comes at an interesting time. Throughout the first part of this year, it was widely believed that interest rates had stayed as low as they could, and for as long as they could, and the prediction was that rates would begin to creep up as early as this spring.

 However, as with many predications, several things were not foreseen in the forecasting.

What has happened most notably in advance of this latest announcement- was unpredicted behaviour on a number of fronts.  Consumer prices across many categories have been rising rapidly (although fell slightly below expectations last month), but are clearly displaying an upward trend.  Inflation, while still manageable, is running a little too high to be ignored as a factor as well.

So, rates will rise at some point, but given the existence of some volatile conditions in the market, and fears that a rate hike will erode an already tenuous hold on affordability due to rising prices, the question is, is that time now?

According to a survey done by Reuters last week, forecasters predict that a rate hike will not happen until Q3 2011.  It is widely believed that rates will go up to 1.25% in the third quarter from the current 1%. Almost unanimously, the forecasters polled agreed that the announcement on May 31 will be a rate hold- again.

Supporting these findings, three of the major banks have also indicated that they don’t expect to see rate hikes until the fall either.

If all of this comes to pass, it is good news for the Canadian housing market. The time-limited offer of ultra-low interest rates will get extended.  Coupled with the fact that this will end at some time contributes to a sense of urgency as well.

How does this translate into daily business for Real Estate and for the Mortgage professions? Propertywire.ca asked some members of the community.

Tara Gibson, Mortgage Broker, TAG Financial - Mortgage Alliance TAG Mortgages, agrees that rates will remain steady for the time being, but thinks that an increase could come as early as the summer. “In my opinion, our strong dollar is enough to predict that we won’t see an increase in interest rates this time; more likely in July. The question is, will discounts on Prime change with the lenders? I think we may start seeing this compress a bit soon enough; in fact, some lenders have already started to close the gap. Many clients are currently choosing to go with a variable rate; simple case of supply and demand, prices go up with increased demand.”

“Despite all the pressure to see interest rates increase, industry experts believe that the Bank of Canada and lenders will increase rates at a slow rate. Advice to borrowers, if you want a variable, get in on the rate holds before we see more lenders change the discount! Further to that and much more important, global uncertainty is only postponing the inevitable, rates WILL go up so make sure you are fully prepared to handle the change when you go to renew your mortgage in 5 or 10 years!"

Trish Pigott,Broker/Owner, Primex Mortgages agrees too that status quo will be the order of the day on Tuesday. “I'm sure they are going to remain steady and unchanged.  The majority of economists were predicting July as our next increase but they are now changing that until September and even some as early as next year.  With our global economy in the state it’s in, I can't see it changing much until the rest of the world stabilizes.”

Pigott feels too, that the current environment in prime for creating business opportunities: “I think it's great for the consumers’ buying decision, as it's a general mentality to purchase when rates are low.  My personal opinion is that we, as brokers, have to continue to create business andmarketing strategies despite a rising or changing rate market.  There is so much opportunity if we focus on servicing our existing database and capture their referrals along with staying consistent in our efforts to drive business.  If we work hard despite the market, the business will be there.”

GTA New Home Sales Had Strong Q1

FRIDAY, 22 APRIL 2011 08:29 

March saw a multitude of new home sales in the GTA, ultimately tipping Q1 into strong territory, according to new figures released by the Building Industry & Land Development Association (BILD) through a report by RealNet.

Altogether, there were 3,434 new homes and condos sold in March 2011. During Q1 there was a total of 9,374 units sold which signals a drop of 8.5 %, year-over-year.

“Last year, we experienced the new home sales equivalent of March madness as 4,569 new homes were snapped up by homebuyers in a single month. The 3,434 new homes sales in March of this year, albeit down 25 per cent year/year, represents a healthy but much more stable level of activity," said BILD President and CEO Stephen Dupuis.

"While the demand side remains strong, the interplay of factors like the HST and the new mortgage financing rules are certainly keeping the froth factor at bay as the new housing market moves into a state of sustainable equilibrium," he added.

Looking at Q1 completely, RealNet Canada President George Carras pointed out that high-rise sales were steady with those seen in Q1/2010, partly attributed to the $75,000 price differential compared with low-rise.  The current high-rise price index sits at $446,965 while the low-rise product is a staggering $522,034 for low-rise product.

"You can't sell what you don't have," Carras explained, noting that as at March 31, 2011, there was only 5.5 months of supply of low-rise new homes. "Active new home inventories are well below the long-term average levels."

Looking at various regions through the GTA, the York area saw the biggest drop, down by 40.7%, followed by Toronto proper at 25.8%. On the other side, the biggest increase was in Halton, where sales increased by 43.1%- which, incidentally is the only region to register an increase.

Bank of Canada Holds Rates

TUESDAY, 12 APRIL 2011 08:28

Canadians are in for more of the same, at least for now.

Citing such reasons as; the economy is not at full capacity and there is room still for growth, inflation is still manageable, signs of recovery in global economies are becoming more firmly entrenched, and while still unstable, have been balanced by stronger than expected domestic growth, and the strength of the Canadian dollar, the Bank of Canada again chose to hold rates, again.

According to a press release issued this morning by the Bank of Canada, “The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent. “

The Bank of Canada forecasts that the economy will grow by” 2.9 per cent in 2011 and 2.6 per cent in 2012. Growth in 2013 is expected to equal that of potential output, at 2.1 per cent.”

Similarly, they believe that the economy will reach capacity by mid- 2012.

Domestic activity has been stronger than the Bank expected recently; globally, many of the troubled economies are starting to reach more stable ground, and are looking more promising- although they expect that a slow recovery in the U.S. may have an adverse effect on the rest of the world economies.

And too, the continuing strength of the loonie will have impact on imports and exports: “The persistent strength of the Canadian dollar could create even greater headwinds for the Canadian economy, putting additional downward pressure on inflation through weaker-than-expected net exports and larger declines in import prices.”

“Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. This leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in an environment of material excess supply in Canada. Any further reduction in monetary policy stimulus would need to be carefully considered.”

Mark Carney did indicate that tightening measures, and rate increases will be coming at some point, but did not indicate when. Many analysts predict that it will be summer time before we see rates begin to climb.

TREB Releases Promising March Figures for the GTA

According to the March figures just released for the GTA, March 2011 was the second strongest March on record, with 9,262 sales recorded; a number that is only 11% lower than the records broken last March.

“The strong home sales reported in March and throughout the first quarter of 2011 have been based on a solid affordability picture and improving economic conditions in the GTA and country-wide,” said Toronto Real Estate Board (TREB) President Bill Johnston.

Looking at average selling prices, March 2011 saw prices go up 5% year over year to $456,147. Condos and semi-detached homes saw the greatest increase in price, both rising by 7%.

A general tightening of the market itself contributed to the appreciations in value. “Market conditions were tighter in March compared to last year. With more competition between buyers, we have seen a strong but sustainable rate of price growth,” said Jason Mercer, TREB’s Senior Manager of Market Analysis.

Steven Fudge ,Sales Rep, Bosley R.E. Ltd., Brokerage has his own theories on why there is such a push, typically in the early spring.

“The spring market, in particular the months of March and April, is an ideal time for home owners to list their properties for sale. It is in these critical months where the momentum of demand will cycle to its highest, while the supply of good housing stock will be at its lowest."

"Buyers active since the autumn,who, for whatever reasons, did not secure a purchase become fully keen house hunters at the beginning of the New Year. Already suffering from buyer’s fatigue from several months of searching, these buyers become highly motivated. The problem for them is not their lack of motivation, but the limited supply of property.”

Speaking exclusively with Propertywire.ca, Fudge has seen much of what TREB has reported for the region in his own experience this March. “March was my busiest month in the history of my 21 years career in real estate sales thus far.”

As the spring, and the busy season continues, the question remains- will this uptick in sales, and steady price appreciation continue?

Fudge believes so-and bases it on good old fashioned, supply and demand- regardless of what else is going on.  “I'm optimistic for Toronto's downtown freehold housing market. In fact, I'm confident enough to predict the ongoing lack of supply will outstrip the burgeoning demand for all of 2011, regardless of the economic climate.”