Thursday, November 12, 2015

Saving up 20 per cent down payment for a house not always the best move

By Stephenie Morris | Insight – Thu, 5 Nov, 2015

I live in a tiny one bedroom basement apartment with my fiancĂ©. We are constantly in each other’s way, waiting to use the lone bathroom, or listening to our neighbours walk around above us. We despise living here but we do it because as Torontonians, buying a home seems out of the question since the real estate market in this city is insane.
The cost to get into a home can be staggering, especially if you abide by the “20 per cent rule;” the common belief is that you should be putting down 20 per cent of the total property price upon purchase to prevent yourselves from shelling out money for CMHC loan insurance. Loan insurance sounds terrifying, but it’s essentially calculated as a percentage of the loan based on your down payment amount. The higher the percentage that you are borrowing, the higher percentage that you will have to pay in insurance premiums, and no one likes paying more than they absolutely need to.
Is this ominous-sounding insurance really something that we should be avoiding while still living in our basement apartments, hating life and saving up that 20 per cent in order to avoid the extra cost altogether?
Not necessarily.
Dan Eisner, CEO of True North Mortgage which operates in B.C., Alberta, Saskatchewan, Ontario, Nova Scotia and Quebec, says that he has been seeing down payments trending toward less than the standard, allowing individuals to break into the market earlier.
“Very few first time home buyers have enough money to put 20 per cent down,” he says. “In fact, we find right now that about a third of our total clients are putting less than 20per cent down. I am including all our clients, not just first time home buyers. Typically, second or third time home buyers have built up enough equity to not need insurance. That being said, about 50 per cent of second time home buyers use CMHC.”
CMHC loan insurance is a handy tool to get people through the door of their new home sooner but comes with some strings attached, so buyers beware. The rate that you pay is directly dependent on how much you are able to put down, something that can be difficult to achieve for people entering the pricier markets across Canada.
Accredited Mortgage Professional Patricia Collins out of Greater Vancouver says she understands the struggle first time homebuyers face when trying to enter the pricey Vancouver market while using 20 per cent as the goal.
“Given the current environment here of constantly increasing values, it has been better to put down the five per cent or ten per cent a buyer has saved up now and simply get in the market,” Collins says of the Vancouver real estate market. “In the year or two that the purchaser would have spent saving more of a down payment, the equity earned over that time if they had just bought will have paid for any insurance premium incurred. Add to that scenario that people who waited are now finding themselves priced out of the market as prices continue to climb. It’s a moving target to save for as prices continue to climb.”
Eisner says he agrees that there is no time like the present to break into the heftier real estate markets.
“Given the property values in Toronto, saving for a significantly larger down payment may take years, so generally we would say buy when your lifestyle requires home ownership,” he says. “Trying to time the market is a fools’ game.”
The key is to live within your housing means so that your purchase becomes one that you can both afford and get into quicker. Collins suggests being realistic about the market when searching for your dream home while trying to achieve financial security, stating that it should be a gradual process, especially in Vancouver’s real estate market where people tend to trade up from condo to townhouse to house.
“You aren’t going to find a house under $1 million in Vancouver as a general rule, but you will in the outlying cities, which are all very accessible and great in their own right.”
The suburbs and rural areas can be a great alternative to saving some of the costs associated with living in the larger cities. Stanley T. Chapman, Broker of Record at TipTop Realty Inc. services Northumberland County in Ontario, which is a more rural setting for people looking to own their first home. With the costs of homes being significantly less than their big city counterparts, a 20 per cent down payment is more plausible. Chapman says he suggests the more money down, the better, but for someone starting out a small down payment of five to ten per cent would be workable.
“Just getting into the market, start building up a bit of a base of equity by paying the mortgage down a bit in the first five years, and hoping that the market will continue to trend up even two or three per cent a year over that first five years is really a good first step,” he says.
While a 20 per cent down payment can reverse the need for CMHC insurance, it is important for the buyer to consider all of their finances before jumping into a mortgage. For example, if someone is paying $2,000 in rent and taking three extra months to save to reach the 20 per cent down payment when the insurance itself costs $2,000, it wouldn’t make sense to do so.
“Rent here is at least as high as your mortgage payment, if not higher,” Collins says of Vancouver’s marketplace. “If rent were lower, my feeling might be different, but given the choice of giving someone $2,000 per month to pay their mortgage, versus having my own place and putting that money toward my future, I would definitely prefer it to go toward mine.”
Chapman says he agrees and that even outside of city limits it can be a waste of money to delay entering into real estate to save for the hefty down payment.
“When you buy a home, keep in mind that is a lifelong investment,” Chapman says. “You need a place to live anyway, and when you are paying rent, you are likely paying for a mortgage, it’s just not your mortgage. It’s the landlords.”
To help buyers know what they can afford, experts recommend finding a real estate professional to help you along the way wherever you live in Canada.
“Find a good realtor who you feel comfortable with,” Collins says. “It’s important you have someone who understands your wants and needs, and they are invaluable to the equation with their knowledge of neighbourhoods and property details. Find a great mortgage broker; they will provide invaluable mortgage advice and placement throughout your homeowner years and will help you manage and pay off this new debt you’re about to take on. Use professionals to make the best decisions you can during this process and the journey will be an exciting and happy one.”

Tuesday, October 27, 2015

Get ready: Realtors say Liberals to extend land transfer tax powers across Ontario

More from Garry Marr | @DustyWallet
Ontario realtors say Kathleen Wynne and the Liberal government are breaking an election promise by giving every municipality province-wide the power to charge a Municipal Land Transfer Tax.
Canadian PressOntario realtors say Kathleen Wynne and the Liberal government are breaking an election promise by giving every municipality province-wide the power to charge a Municipal Land Transfer Tax.

Ontario realtors say the government is moving ahead with a plan that will allow municipalities across the province to follow Toronto’s lead and implement their own land transfer tax.
The Ontario Ministry of Municipal Affairs and Housing is giving every municipality province-wide the power to charge a Municipal Land Transfer Tax (MLTT), the Ontario Real Estate Association says.
“Ontario home buyers are already charged a provincial land transfer tax, so by adding a municipal tax, they’re essentially doubling the tax burden on Ontario families,” said Patricia Verge, president of OREA, in a release. “If the Ontario Liberals follow through with this plan, homebuyers will be forced to pay $10,000 in total land transfer taxes on the average priced home in Ontario, starting as early as next year.”
The minister of municipal affairs and housing denied any decision has been made to extend the taxing power.
“In 2014 at the AMO conference, I was asked whether I would consider looking at municipal revenue tools as part of the Municipal Act review. I gave the shortest answer possible, ‘yes.’ We are currently reviewing the Municipal Act. No decisions have been made,” said Ted McMeekin. “As part of the review of the Municipal Act, we have been meeting with the municipal sector to discuss how municipalities can better utilize their existing financial tools and determine what, if any, barriers exist in the Act. During consultations, we have been hearing a variety of opinions from the sector with respect to revenue tools. It is not too late to submit your comments and ideas – we are accepting comments until October 31, 2015.

Economist says Bank of Canada and investors shorting Canadian housing should look closer at numbers

Image result for bank of canada 
Garry Marr | October 26, 2015
It was just four Toronto condominium developers and questionable statistical reporting that led to news earlier this year about a glut of high-rise units in Canada’s largest market, says a new report.
Canadian Imperial Bank of Commerce deputy chief economist Benjamin Tal says in a report out Monday that even the Bank of Canada has been fooled by the raw numbers about unabsorbed or unsold units that once broken down appear to be a bit deceiving.
“The big question is to what extent the condo markets in (Vancouver and Toronto) are overshooting. The answer, of course, is multi-dimensional, but a good starting point is to assess the trajectory of recently completed and unabsorbed units,” said Tal, in his report. “An increase here suggests that developers are finding it increasingly hard to sell completed units — usually a first sign of troubles ahead.”
In Vancouver, the number of unabsorbed units fell over the past year from just over 2,000 to the current 1,100 indicating an improving situation, he writes.
But Tal says towards the end of 2014 and early 2015 there was a notable increase in the number of completed condominiums in the greater Toronto area. In a record housing year in 2012, the GTA saw just under 50,000 housing, 30,000 condos.
So what happened? Canada Mortgage and Housing Corp. decided to register 10,000 condos in the month of January. Tal says that according to CMHC, the GTA has seen no less than 26,000 condo completions in the first half of this year — three times more than the level seen in previous years.
“Registering a completion is more art than science, as different data providers use different criteria,” said Tal, noting other data providers such as RealNet have chosen to distribute their completion count more evenly — a fact that resulted in a less volatile count of unabsorbed units.
What happened using the CMHC data is that between December 2014 and May of this year, the number of unabsorbed units rose in Toronto from less than 1,000 to close to 3,000 — a level that is even higher than those seen in the early 1990s.
“This meteoric ascent was not only highlighted by the Bank of Canada as a sign of vulnerability but also by various short-Canada investors — using that surge as the ultimate illustration of the bubbly Toronto condo market,” said Tal, noting that since the numbers first came out completed and unabsorbed units fell over 800 in a month.
Now that the CMHC’s completed units have leveled off, it says there about 2,000 unabsorbed units in the GTA which is the same numbers that RealNet is now reporting— still a high level but not nearly as dramatic as 3,000.
So where did CMHC’s original numbers go awry? About half of the completed and unabsorbed units are in city of Toronto, but more importantly one third of all unabsorbed units, were constructed by four developers. And five projects coming on at once accounts for about one quarter of the unabsorbed units on the market today.
“To be sure, the GTA’s condo market will be tested as interest rates start rising in the coming years, and increased resale activity from domestic condo investors will result in excess supply and some downward pressure on prices,” says Tal. “But for now, those who look at the rise in unabsorbed units as a sign of increased vulnerability are barking up the wrong tree.”

Monday, October 26, 2015

CMHC May Slow its Policy Tightening

For over six years CMHC has been following a Finance Department directive to de-risk its mortgage insurance operations. In doing so, it has fashioned a more stable housing market, albeit one with less consumer choice and higher funding costs for lenders.

But enough may finally be enough — that is, if we’re to read into CEO Evan Siddall’s recent comments.

At CMHC’s annual public meeting Siddall was asked if CMHC had done enough to limit its risk exposure. He responded, “In a word, yes.”

He went on to note that CMHC is “very comfortable” with its reduction of risk and its current level of market share.

While Siddall reinforced that CMHC’s ongoing goal is to “align risk” with its mandate, one gets the distinct impression that any further rule tweaks should be far less impactful than some of its prior rule changes (which included cutting back amortization maximums, reducing maximum LTVs, eliminating products and so on).

By the Numbers…
The insurer’s annual report revealed an array of notable stats. Among them:

  • Average insured loan outstanding: $139,221 (as at Dec. 31, 2014)
  • Estimated policies in force: ~3.9 million (i.e., $543 billion of insurance in force/$139,221 average loan outstanding)
  • Capital to pay claims: Over $16.1 billion ($10.6 billion in reserves + $5.5 billion in unearned premiums)
  • Capital position: 343% of OSFI’s required minimum, a big jump from even one year ago (Put another way, CMHC’s capital to pay claims is about 3% of its mortgage exposure, double the buffer that Fannie Mae had during the height of the U.S. bubble…and growing.)
  • 2014 Profit: CMHC earned $2.6 billion in 2014 vs. $1.8 billion in 2013, largely due to securities gains
  • Earnings for taxpayers: CMHC has contributed $21 billion to government revenues over the last 10 years
  • Exposure: CMHC’s insurance-in-force fell 2.5% from $557 billion in 2013 to $543 billion in 2014 (it will likely drop another $10 billion in 2015, suggests CMHC)
  • Arrears: Delinquencies remained at about 0.35% in 2014
  • Borrower metrics: The average CMHC-insured homeowner had 46% equity, a 25.8% gross debt service (GDS) ratio and a 745 credit score
CMHC’s severity ratio (i.e., its “actual loss” on default, net of recoveries from the borrower and sale of the property) is 30.1% of the original loan amount. This number has been fairly stable over time, running between 30% to 35%. Genworth’s severity metrics are roughly the same.

CMHC doesn’t publish its actual loss per claim (it really should), but The Globe and Mail reports that its average claim is around $70,000.

On a side note, it’s tempting to point to relatively high home prices in some cities as an extra source of risk. But only 3% of CMHC’s book has an outstanding loan amount over $600,000. Moreover, the U.S. crisis highlighted a phenomenon that was really quite interesting. Freddie Mac statistics showed that the larger the loan, the lower the severity ratio.

Speaking of the U.S., if you hypothetically applied U.S.-housing-crisis-style losses (over 45 cents on the dollar) to CMHC, its average loss per default could exceed $100,000 per paid claim. At that rate, back of the napkin calculations suggest it would take over a 4% default rate to burn through its capital. That’s over four times the all-time high arrears rate at CMHC — almost an unimaginable disaster scenario…from a Canadian perspective, that is.

Sidebar: Siddall stated that there is “no progress” on lender risk sharing to report (e.g., lender insurance deductibles). CMHC continues to evaluate it, however.

Broker Market Share UP and Continuing to Grow!!!

Image result for bank vs brokerFirst-quarter market share data is in and the numbers are strong. Volumes in the mortgage broker channel are up 21% from the same time last year, according to D+H data provided by sources.
The split of variable-rate mortgages increased noticeably as well, to roughly 28% of brokered mortgages at the end of March. That’s almost a three-year high. Variable mortgages had their biggest share back in May 2011 (our records go back six years), when roughly 44% of broker customers chose floating-rate mortgages.
Here’s a look at the market share for leaders in the broker space as of first-quarter 2015…

Rank  Lender Market Share* 12 Mo
1 Scotiabank 17.4% -80 bps
2 First National 12.8% -180 bps
3 Street Capital 9.1% -100 bps
4 MCAP 8.3% +170 bps
5 Home Trust 7.3% -280 bps
6 RMG Mortgages 6.3% +220 bps
7 TD Canada Trust 6.1% -200 bps
8 Merix Financial 6.1% +100 bps
9 National Bank 4.9% -20 bps
10 Equitable Bank 4.5% +100 bps
Quick takes:
  • The market titans, as a group, aren’t producing like they used to. Overall market share by the top 5 lenders continued to fall, reaching 54.9% in Q1. That’s down from 57.3% in Q4, and the lowest total since we started tracking this data in 2010.
  • If you combine MCAP with its RMG Mortgages division, it amounts to the #2 lender in the broker channel. Both lenders are still on a tear, up 170 bps and 220 bps, respectively. They continue to benefit from the success of their “less-frills” mortgages, which continued to boast some of the lowest rates in the business.
  • Home Trust slipped significantly thanks to a 38% plunge in its Accelerator prime mortgage business (caused in part by mediocre rates).
  • TD Canada Trust’s share also continued to dive. It is now almost half of its 12% mark in Q4 2013. But TD’s vastly improved underwriting system is not yet live nationwide. Once it is, it should combine with TD’s improved rates, better buydown system and new compensation promotion to regain share.
  • Outside the top 10, the biggest movers were B2B Bank (190% growth y/y) and XCEED Mortgage Corp. (415% growth y/y)