CREA urges caution over more mortgage rule changes

STEVE LADURANTAYE — REAL ESTATE REPORTER

From Wednesday's Globe and Mail

Published Tuesday, Feb. 15, 2011 9:41AM EST

Last updated Tuesday, Feb. 15, 2011 9:43PM EST

The Canadian Real Estate Association has cautioned the federal government to stay out of the mortgage market until the effects of recent changes can be gauged, as it suggested buyers are racing to secure 35-year mortgages before they are banned in late March.

The federal government recently announced the end of insurable 35-year mortgages, leaving new buyers to take on amortization periods of 30 years or less. The move was made to help lower household debt in Canada, and makes it more expensive on a monthly basis to own a home.

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The changes have yet to come into effect; the government gave the industry 60 days to adapt after making the announcement in mid-January. That has given buyers a chance to secure longer mortgages ahead of the changes, CREA suggested, noting January sales increased by 4.5 per cent over December but were down 6.6 per cent compared to January, 2010.

“It will take some time before the longer-term impact of the latest mortgage regulations on the housing market can be known,” CREA president George Pahud said. “For that reason, further action shouldn’t be taken until the impact can be measured.”

Market watchers have expressed varying degrees of concern over the amortization changes, with some suggesting it will have a minimal effect even as it pushes some first-time buyers out of the market, and others suggesting price drops of up to 10 per cent as the market adjusts.

Finance Minister Jim Flaherty acknowledged the changes – which also included a reduction in the amount of equity homeowners could access to refinance their homes to 85 per cent of the property’s value – will be difficult to gauge.

“This is not arithmetically predictable, precisely,” Mr. Flaherty said when he made the changes. “We expect some moderation in the market. We’re taking these steps in any event now because of our concern about higher interest rates down the road.”

Rising interest rates are a deeper threat to the market, according to economists, because they would make monthly mortgage payments more expensive and push some Canadians – who took on too much cheap debt – out of their homes.

Still, CREA and Royal Bank have both raised their forecasts for the next two years suggesting that a balance between new listings and demand will temper any big moves in the broader market in either direction and that an improving economy will help Canadians service their loans.

Not everyone sees such a rosy picture. Capital Economics recently issued a cautious report suggesting higher interest rates could drive home prices down as much as 25 per cent over the next three years.

CREA said Tuesday the national average price in January was $343,675, little changed from the previous three months (the average price in December was $344,551). Resale listings more than doubled from December, however, and on a seasonally adjusted basis new listings rose 3.9 per cent for the largest monthly gain since March 2010.

There are still relatively few houses for sale, however, with the seasonally adjusted months of inventory – the amount of time it would take to sell all of the homes at the current rate of sales – at 5.5 months. That's the lowest level since March.

“Because sales activity and new supply rose in tandem in January, the national resale housing market remained balanced. The national sales-to-new listings ratio, a measure of market balance, stood at 55.7 per cent in January, 2011, which is little changed from the previous two months,” CREA stated.

Toronto-Dominion Bank economist Diana Petramala noted that a pickup in sales had been expected as buyers rush to beat new mortgage insurance rules that come into effect next month.

“The growth spurt will likely be short-lived, and come at the expense of future sales,” Ms. Petramala said. “As was the case the last time the federal government made mortgage insurance rules more restrictive, the strength in sales will likely be followed by a short period of weak housing data.”

Overall, she added, the housing market is still in a “well-balanced position with little price pressures on the horizon.”

Flaherty warns of even higher mortgage rates

The Canadian Press - http://www.ctv.ca/CTVNews/Canada/20110208/housing-market-110208/

Date: Tue. Feb. 8 2011 10:11 PM ET

OTTAWA — The Royal Bank of Canada became the third major Canadian bank to hike its five-year mortgage rate Tuesday, and Finance Minister Jim Flaherty is warning of further increases in the months ahead.

RBC joined TD Bank and CIBC in raising its posted rate for a five-year closed mortgage by one quarter of a percentage point to 5.44 per cent. The bank also raised a number of its other posted and special mortgage rates Tuesday.

Finance Minister Jim Flaherty said the hikes are "exactly what we expected."

Speaking outside the House of Commons Tuesday, Flaherty told reporters that with lending rates at historic lows, there is nowhere for the cost of borrowing to go but up.

"We're likely to see higher interest rates as we go forward because interest rates are still very low," Flaherty said.

The banks pin the hikes on a rebound in the stock market that has led to rising government bond yields, signs the economy is continuing its slow but sure recovery from the recession.

"It's gaining some traction and as the economy recovers, interest rates begin that process of returning to more normal levels," Derek Burleton, TD Bank deputy chief economist told CTV News.

While experts have predicted a cooling in the housing market after tighter mortgage rules come into effect in mid-March, a new report predicts that growing consumer confidence may offset the expected negative effects of higher interest rates.

The Canadian Real Estate Association released a revised forecast Tuesday for Canadian home sales in 2011, which the agency predicts will be higher than it first predicted last year.

Its new forecast estimates that 439,000 existing homes will be sold in 2011, down 1.6 per cent from 2010 but an improvement on the nine-pet-cent decline predicted in December.

And unlike some economists, who predict that home prices will level off, or drop sharply, as rates shoot up, the CREA predicts that the average home price will rise by 1.3 per cent in 2011 to $343,000. In its earlier forecast, the agency predicted that the national average home price would fall by 1.3 per cent compared to 2010, to $326,000.

"Even though mortgage interest rates are expected to rise later this year, they will still be within short reach of current levels and remain supportive for housing market activity," said Gregory Klump, the CREA's chief economist. "Strengthening economic fundamentals will keep the housing market in balance, which will keep home prices stable."

With a report from CTV's John Vennavally-Rao

Rate hike could trigger housing collapse, economist warns

BY PAUL VIEIRA, FINANCIAL POST FEBRUARY 3, 2011

OTTAWA — The Bay Street consensus is that the Canadian housing market skirted the worst and managed a soft landing and homeowners are likely able to absorb higher mortgage payments once interest rates head upward.

But one analyst warned Thursday that people are overlooking a key risk that threatens to push down housing prices by as much as 25% over the next several years: subdued wage growth in a low-inflation environment.

That mix could make mortgage payments increasingly onerous for households already carrying record levels of indebtedness, David Madani of Capital Economics said, adding the knock-on effects to consumer spending could be so significant they could push Canada into another recession.

“This reality, we suspect, has not been given very much consideration at all,” he said. “All I am trying to do is step back and look at the longer-term picture of affordability.”

In a low-inflation environment, it’s harder for asset prices and wages to rise to make the burden of debt more manageable, Mr. Madani said.

In a report to clients, he said the fall in prices could start this year if the Bank of Canada raises its benchmark rate, which stands at 1%. Mr. Madani, one of the few economists to predict no rate hikes for all of 2011, warned an increase could mark the “tipping point” as consumer sentiment could swing rapidly.

The federal government last month decided to toughen mortgage-lending standards for the third time in as many years in an effort to curb Canadians’ appetite for taking on too much debt, which is at a record 148% as measured as a ratio to disposable income.

This pessimistic view isn’t widely shared.

Gregory Klump, chief economist at the Canadian Real Estate Association, said he does not foresee such a scenario, given present economic fundamentals, whereby housing prices would contract by a quarter.

“The continuation of low interest rates would [help] support housing activity in 2011,” said Mr. Klump, who is in the process of updating his forecast for this year and next. CREA has said it expects housing sales to drop 9% this year, with the average house price falling 1.3%.

In a recent report, economists at Toronto-Dominion Bank said the worst-case fears, such as a U.S.-style housing collapsed, had been avoided. A trough in existing home sales emerged in the third quarter of 2010, or earlier than expected, TD said, and that “better” affordability would provide momentum while the Bank of Canada holds its policy rate as is until mid-2011.

But Mr. Madani doesn’t see it that way. The underlying theme in his analysis is that housing affordability would deteriorate, as inflation remains relatively low for some time. In a low-inflation environment, he argued, Canadians’ debt burden doesn’t dwindle as nominal rates (not adjusted for inflation) remain low and wage growth slows. In a separate report released Thursday, economists at Goldman Sachs said concerns over higher inflation in developed economies are “misplaced” and wouldn’t emerge until there is real GDP growth that exceeds potential “for some time.”

According to Mr. Madani’s calculations, the average house price, of $314,000 as of the third quarter of 2010, is roughly 5.5 times greater than the average level of disposal income, at $58,347. Historical data indicate the average house price is roughly 3.5 times greater than disposable income — which, he suggested, translates into an average value of $205,000 for a Canadian home, or 3.5 times above the $58,347 of disposable income.

To get back to a historical average, he calculates a housing price decline of roughly 25% over a number of years on the assumption that inflation-adjusted mortgage rates remain unchanged and growth in disposable income of 2% -- which is “slightly generous” given his low inflation outlook.

The Bank of Canada cited a “sudden weakening” in the housing sector as potential downside risk to its recently updated economic outlook. Such an event “could have sizable spillover effects on other areas of the economy, such as consumption, given the high debt loads of some Canadians.”

The central bank said inflation, both headline and core, would not converge to the preferred 2% target until late 2012.

Financial Post

Mortgage deal revives stalled securities market

STEVE LADURANTAYE — REAL ESTATE REPORTER

From Thursday's Globe and Mail

Published Wednesday, Jan. 26, 2011 7:02PM EST

Last updated Friday, Jan. 28, 2011 6:30AM EST

Canada’s moribund commercial mortgage-backed securities market is awakening from a three-year slumber.

Two major real estate companies are tapping the market for $206-million in the first deal of its kind since 2007, signalling that investors are returning to a sector they had abandoned over worries about the health of the country’s commercial real estate market.

Prior to the recession, Canadian real estate companies went to the CMBS market for about $4-billion a year in low-cost financing. The market literally vanished as lenders retreated and investors shunned higher-risk securities, forcing real estate companies to obtain mortgages almost exclusively from large banks.

The resurgence could make it cheaper for real estate companies to raise the money they need to expand their portfolios, driving up property values as more bidders vie for buildings. It will also give investors other than banks the chance to add secured mortgages to their portfolios.

A deal put together by Institutional Mortgage Securities Canada will see RioCan Real Estate Investment Trust(REI.UN-T23.300.090.39%) andCalloway Real Estate Investment Trust(CWT.UN-T23.990.230.97%) take out mortgages on 16 properties, which will then be securitized and sold to investors looking for yield.

“We’ve been getting a lot of investor calls and there seems to be interest,” said Erin Stafford, an analyst at DBRS Ltd. who helped rate the securities. “We met investors last year and there seemed to be some appetite again – people were asking what it would take to bring this market back.”

The properties behind the deal – which is still being shopped to investors – are so-called power centres in cities such as Winnipeg, Edmonton and Sherbrooke. Many have a Wal-Mart as an anchor tenant, with other retailers such as Shoppers Drug Mart and Rona also taking space.

The deal has broad implications for the country’s real estate investment trusts. Because banks have been the only lenders willing to take on mortgages, the lenders have been able to charge higher rates.

“This makes for a pretty interesting option for borrowers and adds to competition amongst lenders,” said Alex Avery, executive director and REIT analyst at CIBC World Markets. “The banks have been achieving very wide spreads on commercial mortgages.”

Meanwhile, the companies can take a property out of the mortgage pool at any time, and replace it with another of similar quality. That’s key to both RioCan and Calloway, which both hope to attract expansion-minded U.S. retailers to their properties over the next 10 years.

A slew of retailers have expressed an interest in expanding to Canada over the next decade, with Target Corp. already agreeing to spend $1.8-billion to buy most Zellers stores and convert them to Target’s banner by 2013. Most of these expansions will require retrofits of existing properties.

Landlords need permission to renovate or sell buildings under traditional mortgages, but would not need to seek approval if they pluck the building out of its CMBS pool and replace it with something else.

“Most mortgage lenders – understandably – want you to come back to them if you are about to do anything,” said Simon Nyilassy, chief executive officer of Calloway. “It is not going to be a static market over the next 10 years, and this gives us a lot of flexibility.”

CMBS loans have been fingered as one of the main culprits of the U.S. commercial real estate crash, as an abundance of lenders and a voracious appetite among investors led to billions of dollars in risky deals being financed. The flood of money also drove asset prices higher, as more buyers competed for properties.

The U.S. CMBS market has been struggling to recover, with deals expected to climb to $45-billion (U.S.) this year, according to JPMorgan Chase & Co. Banks arranged $11.5-billion of the debt in 2010 compared with a record $234-billion in 2007, according to Bloomberg. In the U.S., delinquency rates ended the year near 8 per cent. In Canada that figure was about 0.3 per cent.

“The demand from investors was so high in 2007 that investors weren’t concerned about too much,” Mr. Avery said. “That turned out to be a bad thing. In Canada, we’ve always maintained a more stringent approach and made sure loans were properly structured before securitizing them.”