Was typo behind Wall Street plunge? For a brief, heart-stopping period, stock markets plunged, currencies went crazy, bonds ran wild and investors ran for cover
Greek legislators pass crucial austerity bill despite protests “Either we vote and implement the deal, or we condemn Greece to bankruptcy”
Islamic mortgages now in Canada
• TSX -32.73 to 11,842 closed lower for a fourth straight session. Amid the selloff, the TSX fell 452 points, or 3.8 percent, to 11,422,73, its lowest level since February 25. It was the steepest one-day percentage fall since June 2009. Article below…
• DOW -347.80 to 10,520
• Dollar -2.09c to 95.03cUS hitting a near 3 mth low. What we’re seeing is a very strong, strong U.S. dollar, because very quickly people are closing out foreign positions and moving into the deepest capital markets in the world: The U.S. and the U.S. treasury market.”
• Oil -$2.86 to $77.11US per barrel. on fears the debt crisis could threaten economic recovery and undercut demand for oil.
• Gold +$22.30 to $1,196.90 USD per ounce . jumped 3 percent to a near record on a broad flight to safety.
•
The Canadian Press OTTAWA - Canada added 108,700 jobs in April, far more than economists had expected.
As a result of the huge number of jobs added last month, Canada's unemployment rate slipped to 8.1 per cent — down from 8.2 per cent in March.
Was typo behind Wall Street plunge?
The Canadian Press, Reuters and thestar.com
What was that? For a brief, heart-stopping period, stock markets plunged, currencies went crazy, bonds ran wild and investors ran for cover.
But by the end of the day U.S. stocks had recovered much of their losses, the Toronto Stock Exchange was basically flat losing 32.7 points to close at 11,842.43, and the Canadian dollar, though pummeled, was still intact.
Experts were flustered, but puzzled by the wild action, though they generally pointed to the ongoing Greek debt crisis.
Rumors also circulated that the panicky sell-off had been triggered by a U.S. stock trader mistakenly put in a sell order for 15 billion shares of Procter & Gamble on the New York Stock Exchange, instead of 15 million.
Whether that’s true or not, the stock dived to $40 from $60 within moments just before 2.30 p.m..
The Dow Jones Industrial Index also began a free-fall of about 1,000 points, or 10 per cent, in less than half an hour.
It didn’t stop with stock markets. The U.S. dollar soared, which meant the Euro plunged along with the Canadian dollar.After rising as high as 97 cents U.S, at one point the Canadian dollar was down almost 4 cents. It finished the day at 95.03 cents U.S.
Pascal Gauthier of TD Economics pointed to the Greek debt crisis as a possible trigger for the turmoil.
Jean-Paul Trichet, who heads the European Central bank, said in Lisbon Thursday that the bank’s governing council had not discussed the possibility of buying government bonds. Many analysts have speculated it might do so, as a means of providing debt-crushed governments with financial support.
“There might have been expectations that the bank might take some measures, though we were of the view that they would not,” Gauthier speculated.
He warned that other days like this could loom ahead.
“On the fiscal side, those economies that were fragile to begin with before the recession like Greece, Italy, Spain are going to be vulnerable, and markets are going to be nervous,” he said.
“This is going to stay with us. This isn’t just a one-day thing.
Camilla Sutton, currency strategist at Scotiabank, said no one was attacking the Canadian dollar. Instead, investors ran for the safety of U.S. investments.
“This story is about the U.S. dollar,” she said. “What we’re seeing is a very strong, strong U.S. dollar, because very quickly people are closing out foreign positions and moving into the deepest capital markets in the world: The U.S. and the U.S. treasury market.”
The Canadian dollar was simply trampled by the rush into the U.S., she said.
* NEW YORK—The biggest intraday point drop ever in the Dow Jones Industrial Average may have been caused by an erroneous trade entered by a person at a big Wall Street bank, multiple market sources said Thursday.
The so-called "fat finger" trade apparently involved an exchange-traded fund that holds shares of some of the biggest and most widely traded stocks, sources said. The trade apparently was put in on the Nasdaq Stock Market, sources said.
Several sources said the speculation is that the trade was entered by someone at Citigroup. A Citigroup spokesman said it was investigating the rumor but that the bank currently had no evidence that an erroneous trade had been made.
CNBC reported this afternoon that a trader entered a "b" for billion instead of an "m" for million in a trading order, setting off a series of events that led to the Dow’s biggest one-day drop since 1987.
Greek legislators pass crucial austerity bill despite protests
BY ELENA BECATOROS
ATHENS — Greek police fired tear gas to repel stone-throwing protesters after lawmakers approved drastic austerity cuts Thursday needed to secure international rescue loans worth $147 billion Cdn.
The rescue loans are aimed at containing the debt crisis and keeping Greece’s troubles from spreading to other countries with vulnerable state finances such as Portugal and Spain. The money will come from the International Monetary Fund and the 15 other governments whose countries use the euro.
Clashes in Athens broke out at the end of the main protest that drew tens of thousands of people as police pushed back a few thousand demonstrators outside parliament.
The violence was quickly contained with riot police firing tear gas at the protesters, who had earlier pelted them with oranges and bottles. Several small fires burned in surrounding streets. No injuries or arrests were reported.
The clashes followed violent street protests Wednesday that left three people dead after a bank was firebombed.
Demonstrators banging drums and shouting anti-government slogans through bullhorns, unfurled a giant black banner outside parliament earlier Thursday. More than 30,000 demonstrators filled downtown streets, chanting “They declared war. Now fight back.”
In parliament, lawmakers voted 172-121 to approve the cuts — worth some $40 billion Cdn. through 2012 — that will slash pensions and civil servants’ pay and further hike consumer taxes.
Prime Minister George Papandreou expelled three Socialist deputies who dissented in the vote, reducing the party’s number of seats to 157 in the 300-member parliament.
“We have done what was necessary, not what was easy,” Finance Minister George Papaconstantinou said after the vote. “Without these measures, we’d be thrown into the deepest recession this country has ever known.”
The bulk of Thursday’s protest — organized by the Greek Communist Party — quickly dispersed, leaving about 5,000 demonstrators outside parliament before police dispersed them.
Protester Thodoris Mougiakos said he was angry the IMF would control Greek finances.
“It’s blackmail,” the 32-year-old engineer said. “There is money, but they spend it on things like armaments and businesses. The church has money, too. If we had been drawing money from all these sources, we wouldn’t be in this situation now,”
But the protest remained peaceful, in contrast with Wednesday’s rioting that left three people dead, 59 injured and 25 people arrested. Police said 50 stores, banks and offices were damaged and seven vehicles damaged or burned.
Papaconstantinou said Greece would default on debt payments this month unless it received the bailout loans from the International Monetary Fund and 15 euro-zone countries that had remained divided for months on how to aid Athens.
“Today things are simple. Either we vote and implement the deal, or we condemn Greece to bankruptcy,” Papandreou told parliament before the vote.
“Some people want that, and are speculating (on it), and hope that it will happen,” he said, referring to speculative attacks that have been blamed for raising Greece’s borrowing costs to unsustainable levels. “We, I, will not allow that. We will not allow speculation against our country, and bankruptcy to happen.”
European governments are now scrambling to get parliamentary approval for the Greek loans. European leaders will meet on the issue in Brussels today.
Fears of Greek default have undermined the euro, and while the current package should keep Greece from immediate bankruptcy, its long-term prospects are unclear. The country’s growth prospects are weak, and the population’s willingness to accept cutbacks may wane, leading some economists to predict an eventual debt restructuring somewhere down the road.
Opposition parties lambasted the government for imposing measures that are too harsh for the population to bear.
“The dose of the medicine you are administering is in danger of killing the patient,” conservative opposition leader Antonis Samaras said.
“You know that these measures have sparked a social explosion ... The citizens of this country have to believe there is a way out. Because whoever cuts pensions of €700 cannot convince anyone.”
Samaras also expelled a dissenting lawmaker, former Foreign Minister Dora Bakoyannis, reducing his share of parliamentary seats to 90.
The Associated Press http://news.therecord.com/Business/article/707717
Man. credit union 1st to offer Islamic mortgages
A Manitoba credit union has become the first major financial institution in Canada to offer mortgages geared towards the needs of devout Muslims.
On Wednesday, Winnipeg-based Assiniboine Credit Union (ACU) announced it was launching an Islamic Mortgage Program.
Currently, the majority of the Winnipeg's roughly 13,000 Muslims rent or don't own the homes they live in, the credit union said.
For-profit loans are problematic for people of the faith because the Qur'an forbids the payment of interest.
Under the program, the credit union and the homebuyer enter into what ACU calls a "declining partnership agreement." Both parties co-own the home and its title.
"During this time, the family has exclusive rights to live in the home and in exchange they agree to pay ACU a profit. At the end of the contract the Muslim family is the sole owner of the home," the credit union said in a press release.
The would-be homeowner must contribute a minimum of 20 per cent of the home's price at the start of the agreement, ACU said.
The plan was developed with the help of Islamic religious scholars in Canada and the U.S., the credit union added.
Friday, May 7, 2010
Thursday, May 6, 2010
Financial Update For May 6, 2010
$70m mortgage fraud
House prices to cool in 2011
• TSX -155.73 to 11,875 as worries about a spreading European debt crisis darkened investor sentiment after Moody's Investor Services warned it may also downgrade its view on Portugal's debt in the next three months. There are also concerns about the Greek government's ability to push through massive austerity measures in return for the cash. Wednesday's general strike in Greece -- which left three dead -- is unlikely to assuage concerns that the government will get the popular backing it needs
• DOW -59.94 to 10,866 amid rumours that Spain was also negotiating a bailout from the International Monetary Fund
Why are you seeing CMHC respond with “unsupported values” recently?
When CMHC says they can only support $x on a file, they aren’t necessarily saying the house is only worth that amount.
The interpretation is ,…
“based on the home value and possible renovations done, how recent an mpac assessment is, the type of home-o/o or rental, the clients job consistency and security, their credit and amount utilized and whether it’s a purchase or refi and for what reasons …..
they are saying, “based on above, we have $xxx comfort level with doing that deal”.
Based on new rules and qualifications they are taking less risk this year. It is important to remember that a property valuation is not a fixed or permanent number
Sometimes an appraisal will assist, but if their concern is based more on covenant criteria as opposed to an old mpac value, we are also seeing files where the appraisal doesn’t increase their comfort.
So when discussing with your clients a value to use when submitting your applications, take all the criteria above into consideration before using the highest resale on the street to base your qualifications on. This will assist you to under-promise and over-deliver, provide you with more expert guidance than a bank employee provides, have less puzzled and disappointed clients, and improve your efficiency ratios too!
House prices to cool in 2011, says TD
Financial Post
OTTAWA -- The latest housing forecast from TD Economics leaves 2010 totals for sales and prices in Canada largely the same as its previous expectations in December, though that masks a wider discrepancy it now expects between a hot first half of the year and cooler second half.
The forecasting unit of Toronto-Dominion Bank released a report on Wednesday that maintained its call for housing resales this year to rise 2.1% to 475,000, and the average price to gain 9% to $349,000.
"While sales in Q1 were slightly higher than our late-2009 forecast, we view the strength as borrowing from future sales in a move by buyers and sellers to pre-empt regulatory and interest-rate changes," TD said in its report.
The bank said that people in Ontario and British Columbia are pushing ahead with home purchases to avoid higher costs associated with harmonized sales taxes that take effect in those provinces in July.
As well, it said homebuyers across the country have felt rushed to avoid higher interest rates. Major banks have already started raising their borrowing costs, and the Bank of Canada is expected to start hiking its overnight target rate from a record-low 0.25% in June or July.
The more accelerated cooling effect during the second half of this year will lead to lower prices than previously thought in 2011, TD said. It now expects the average home price to fall 2.7% to $339,700 next year; it previously called for a 1.6% price gain.
TD said housing prices in Canada are currently overvalued by about 15%, based on longer-term economic factors such as income growth. That gap should narrow to 10% by the end of next year, it said.
The gap will close further in the following two to three years, the report said, as housing prices grow at about the rate of inflation - after having averaged 8% annual gains over the last eight years - and household incomes catch up.
Read more: http://www.financialpost.com/news-sectors/economy/story.html?id=2990374#ixzz0n98RQoRI
Bank of Montreal alleges huge mortgage fraud
By Charles Rusnell, CBC News
This house in the Bearspaw district of Calgary was bought for nearly $900,000 and in three years, its value was inflated to $2.3 million, a profit of $1.4 million for the alleged fraudsters. (CBC)
The Bank of Montreal is suing hundreds of people in Alberta, including lawyers, mortgage brokers and four of its own employees, in what is one of the largest alleged cases of mortgage fraud in Canadian history.
Legal documents obtained exclusively by CBC News allege the bank was the target of a sophisticated fraud operated by 14 inter-connected groups. The documents allege the scheme generated at least $140 million, about $70 million of which was for phoney mortgages.
The bank has estimated it may lose as much as $30 million.
Toronto forensic accountant Al Rosen said he has never seen anything like it.
"This is massive in the sense that it is so broad and so deep," Rosen said Tuesday. "This is [allegedly] a huge fraud. I can't think of any situation that has so many people involved and over a period of time like this one."
Problems detected in 2006
The bank said it first detected the alleged scam in 2006 when its security department noticed "irregularities" in a number of mortgages in Western Canada. Officials immediately hired a forensic accounting firm, which spent nearly a year unravelling what the bank calls a sophisticated scheme.
Legal documents allege millions of dollars have been transferred to such countries as Lebanon, India, Saudi Arabia, the United Arab Emirates and Pakistan. (CBC)
The bank's investigators say the scam's ringleaders would identify the worst house in a good neighbourhood. They would buy at an affordable, fair-market value price, but convince the bank it was worth much more because of the neighbourhood it was in.
The bank, which relies on a software program to determine house prices by neighbourhood, claims it would end up providing a grossly inflated mortgage, and the ringleaders would pocket the difference.
To carry out the alleged scheme, the bank claims masterminds would recruit what's known in fraud parlance as a "straw buyer." For a payment of $2,000 to $8,000, these straw buyers, mostly new immigrants, would allow their name to be used to obtain the mortgage on the house.
According to the court documents, the ringleaders allegedly created fake, inflated wage and net income documents for the straw buyers to make them appear richer than they were.
Lawyers, who are alleged to have been in on the scheme, would then produce the necessary legal documents for the house sale. Seventeen lawyers have been named in the bank's lawsuit.
House nets $180,000
In one case, a house in the Bearspaw district of Calgary was bought for nearly $900,000 and in three years, its value was inflated to $2.3 million, a profit of $1.4 million for the alleged fraudsters. An Edmonton house is alleged to have netted the scheme nearly $180,000.
During its investigation, bank investigators seized records that showed millions of dollars from the alleged scheme have been transferred to such countries as Lebanon, India, Saudi Arabia, the United Arab Emirates and Pakistan.
The Bank of Montreal said it conducted the investigation and filed the lawsuit for two reasons.
"One was to recover as much as possible of what was taken from the bank from the fraud," Ralph Marranca, the bank's spokesman told the CBC on Tuesday.
"And secondly was to send a very strong message to fraudsters and anyone who might contemplate something like this that the bank will pursue this very aggressively and will not tolerate fraud."
Other banks don't appear to be as aggressive in their approach, even though documents indicate they may have been targeted too. Bank of Montreal investigators found documents that showed one Calgary management company had 150 suspect mortgages from 16 different financial institutions.
Rosen said this alleged fraud illustrates how weak and ineffective the controls are in our banking system.
"To me the most exasperating part of our business is we are not doing what we are supposed to be doing," he said. "We are kidding ourselves that we have good systems, because we don't."
Read more: http://www.cbc.ca/canada/calgary/story/2010/05/04/mortgage-fraud-bank.html#ixzz0n43X4GCP
House prices to cool in 2011
• TSX -155.73 to 11,875 as worries about a spreading European debt crisis darkened investor sentiment after Moody's Investor Services warned it may also downgrade its view on Portugal's debt in the next three months. There are also concerns about the Greek government's ability to push through massive austerity measures in return for the cash. Wednesday's general strike in Greece -- which left three dead -- is unlikely to assuage concerns that the government will get the popular backing it needs
• DOW -59.94 to 10,866 amid rumours that Spain was also negotiating a bailout from the International Monetary Fund
Why are you seeing CMHC respond with “unsupported values” recently?
When CMHC says they can only support $x on a file, they aren’t necessarily saying the house is only worth that amount.
The interpretation is ,…
“based on the home value and possible renovations done, how recent an mpac assessment is, the type of home-o/o or rental, the clients job consistency and security, their credit and amount utilized and whether it’s a purchase or refi and for what reasons …..
they are saying, “based on above, we have $xxx comfort level with doing that deal”.
Based on new rules and qualifications they are taking less risk this year. It is important to remember that a property valuation is not a fixed or permanent number
Sometimes an appraisal will assist, but if their concern is based more on covenant criteria as opposed to an old mpac value, we are also seeing files where the appraisal doesn’t increase their comfort.
So when discussing with your clients a value to use when submitting your applications, take all the criteria above into consideration before using the highest resale on the street to base your qualifications on. This will assist you to under-promise and over-deliver, provide you with more expert guidance than a bank employee provides, have less puzzled and disappointed clients, and improve your efficiency ratios too!
House prices to cool in 2011, says TD
Financial Post
OTTAWA -- The latest housing forecast from TD Economics leaves 2010 totals for sales and prices in Canada largely the same as its previous expectations in December, though that masks a wider discrepancy it now expects between a hot first half of the year and cooler second half.
The forecasting unit of Toronto-Dominion Bank released a report on Wednesday that maintained its call for housing resales this year to rise 2.1% to 475,000, and the average price to gain 9% to $349,000.
"While sales in Q1 were slightly higher than our late-2009 forecast, we view the strength as borrowing from future sales in a move by buyers and sellers to pre-empt regulatory and interest-rate changes," TD said in its report.
The bank said that people in Ontario and British Columbia are pushing ahead with home purchases to avoid higher costs associated with harmonized sales taxes that take effect in those provinces in July.
As well, it said homebuyers across the country have felt rushed to avoid higher interest rates. Major banks have already started raising their borrowing costs, and the Bank of Canada is expected to start hiking its overnight target rate from a record-low 0.25% in June or July.
The more accelerated cooling effect during the second half of this year will lead to lower prices than previously thought in 2011, TD said. It now expects the average home price to fall 2.7% to $339,700 next year; it previously called for a 1.6% price gain.
TD said housing prices in Canada are currently overvalued by about 15%, based on longer-term economic factors such as income growth. That gap should narrow to 10% by the end of next year, it said.
The gap will close further in the following two to three years, the report said, as housing prices grow at about the rate of inflation - after having averaged 8% annual gains over the last eight years - and household incomes catch up.
Read more: http://www.financialpost.com/news-sectors/economy/story.html?id=2990374#ixzz0n98RQoRI
Bank of Montreal alleges huge mortgage fraud
By Charles Rusnell, CBC News
The Bank of Montreal is suing hundreds of people in Alberta, including lawyers, mortgage brokers and four of its own employees, in what is one of the largest alleged cases of mortgage fraud in Canadian history.
Legal documents obtained exclusively by CBC News allege the bank was the target of a sophisticated fraud operated by 14 inter-connected groups. The documents allege the scheme generated at least $140 million, about $70 million of which was for phoney mortgages.
The bank has estimated it may lose as much as $30 million.
Toronto forensic accountant Al Rosen said he has never seen anything like it.
"This is massive in the sense that it is so broad and so deep," Rosen said Tuesday. "This is [allegedly] a huge fraud. I can't think of any situation that has so many people involved and over a period of time like this one."
Problems detected in 2006
The bank said it first detected the alleged scam in 2006 when its security department noticed "irregularities" in a number of mortgages in Western Canada. Officials immediately hired a forensic accounting firm, which spent nearly a year unravelling what the bank calls a sophisticated scheme.
The bank's investigators say the scam's ringleaders would identify the worst house in a good neighbourhood. They would buy at an affordable, fair-market value price, but convince the bank it was worth much more because of the neighbourhood it was in.
The bank, which relies on a software program to determine house prices by neighbourhood, claims it would end up providing a grossly inflated mortgage, and the ringleaders would pocket the difference.
To carry out the alleged scheme, the bank claims masterminds would recruit what's known in fraud parlance as a "straw buyer." For a payment of $2,000 to $8,000, these straw buyers, mostly new immigrants, would allow their name to be used to obtain the mortgage on the house.
According to the court documents, the ringleaders allegedly created fake, inflated wage and net income documents for the straw buyers to make them appear richer than they were.
Lawyers, who are alleged to have been in on the scheme, would then produce the necessary legal documents for the house sale. Seventeen lawyers have been named in the bank's lawsuit.
House nets $180,000
In one case, a house in the Bearspaw district of Calgary was bought for nearly $900,000 and in three years, its value was inflated to $2.3 million, a profit of $1.4 million for the alleged fraudsters. An Edmonton house is alleged to have netted the scheme nearly $180,000.
During its investigation, bank investigators seized records that showed millions of dollars from the alleged scheme have been transferred to such countries as Lebanon, India, Saudi Arabia, the United Arab Emirates and Pakistan.
The Bank of Montreal said it conducted the investigation and filed the lawsuit for two reasons.
"One was to recover as much as possible of what was taken from the bank from the fraud," Ralph Marranca, the bank's spokesman told the CBC on Tuesday.
"And secondly was to send a very strong message to fraudsters and anyone who might contemplate something like this that the bank will pursue this very aggressively and will not tolerate fraud."
Other banks don't appear to be as aggressive in their approach, even though documents indicate they may have been targeted too. Bank of Montreal investigators found documents that showed one Calgary management company had 150 suspect mortgages from 16 different financial institutions.
Rosen said this alleged fraud illustrates how weak and ineffective the controls are in our banking system.
"To me the most exasperating part of our business is we are not doing what we are supposed to be doing," he said. "We are kidding ourselves that we have good systems, because we don't."
Read more: http://www.cbc.ca/canada/calgary/story/2010/05/04/mortgage-fraud-bank.html#ixzz0n43X4GCP
Wednesday, May 5, 2010
Financial Update For May 5th
Housing affordability: the great quandary Why there’s time to wait for the right home at the right price
• TSX -165.65 sharply lower, weighed down by persisting worries about Greece's aid package that sent investors to the safety of the U.S. dollar and hit oil prices.
• DOW -225.06 to 10,926echoed the wave of worry that gripped financial markets as investors fretted that the crisis in Europe could derail global economic recovery
• Dollar 1.39c to 97.56cUS
• Oil -$3.45 to $82.74US per barrel.
• Gold -$14.10 to $1,168.60 USD per ounce .
Housing affordability: the great quandary Why there’s time to wait for the right home at the right price
With only Montreal and Vancouver left to cheer for in the Stanley Cup playoffs, many luncheon conversations have returned to the topic of housing prices.
Recently, we’ve seen lots of headlines suggesting that house prices have run up to an unsustainable level and are due for a correction.
In mid March, The New York Times made a rare foray north of the border with a headline that read “Some See a Real Estate Bubble Forming in Canada.” A couple of weeks back, Gluskin Sheff star economist David Rosenberg released a report suggesting that Toronto and Vancouver housing prices could drop by 20 per cent.
And one of the most e-mailed Globe articles last week was based on a ReMax report trumpeting the buoyant sales of luxury homes.
Focusing on affordability
Perhaps the most important determinant of short-term-price movements is affordability, the percentage of a typical household’s income required to carry a house. The two big variables that drive this number: house prices and mortgage rates.
RBC has been tracking this data for 100 neighbourhoods across Canada since 1985, focusing on typical two bedroom homes, bungalows, townhouses and condos.
The traditional rule of thumb for banks is that mortgage payments, property taxes and utilities shouldn’t exceed 32 per cent of a household’s income, assuming a 25 per cent down payment. The more of a household’s income required to carry a house, the lower the affordability.
As housing prices spiralled up in the 1980s, this guideline was relaxed – since 1985, the typical household would have devoted 39 per cent of its income to carrying a detached, 1,200 square foot bungalow.
RBC economist Robert Hogue points out that there have been large swings in affordability over time and that different cities show different patterns.
In most cities, rising house prices meant that affordability was at its lowest in early 1990, when the typical household would have spent 53 per cent of income to carry a bungalow. On the other end of the scale, Vancouver, always an outlier when it comes to real estate, hit its own high of 81 per cent of household income to carry a bungalow in early 2008.
Once out of balance, there are only three ways for affordability to get back in line:
- Prices can stay flat as incomes increase over a period of years
- Mortgage rates can come down – unlikely in the next while
- Or housing prices can drop – something that happened after the all-time lows on affordability were hit in 1990
The impact of low mortgage rates
In the past eighteen months, governments around the world chopped interest rates to boost economies – and Canada was no exception.
As a result of low interest rates, carrying costs dropped and affordability improved. Even with strong housing prices, at the end of December the affordability level in most cities was close to its long-term average. The exception, again, was Vancouver – with the average bungalow taking up 69 per cent of the typical family’s income, up from the historical average of 57 per cent.
In a recent report, RBC estimated that in late December posted rates for a five year mortgage were 5.6 per cent, 1.6 percentage points lower than normally expected given inflation expectations. Note that we’ve already seen mortgages rates begin moving up toward those higher levels, with more increases likely to come.
RBC estimates that if mortgages had been at their normal levels in December, the percentage of the typical Canadian household’s income to carry an average bungalow would have increased by four percentage points – although some cities would have been hit worse than others.
The affordability verdict
If mortgage rates in December had been at normal levels, the percentage of income to carry a house in most cities would have been well above its long-term average. The good news: In most cities those percentages would still have been well below their highs – prices may be a bit elevated but this doesn’t suggest a bubble or a big drop ahead.
The one city to worry about if you’re a homeowner is Vancouver, where normal mortgage rates would have resulted in the typical household spending 78 per cent of its income to carry a bungalow, just shy of the peak level.
History shows that it’s impossible to accurately predict short-term movements of house prices – markets regularly overshoot rational levels both on the way up and the way down. What we can say is that based on current affordability, if house prices do continue to escalate, at some point they’re almost certain to correct back down.
That means there’s no rush to buy and time to wait for the right home at the right price – and that for the next while at least home buyers should evaluate houses as places to live rather than on their potential for appreciation. http://www.theglobeandmail.com/globe-investor/investment-ideas/features/experts-podium/housing-affordability-the-great-quandary/article1554481/
• TSX -165.65 sharply lower, weighed down by persisting worries about Greece's aid package that sent investors to the safety of the U.S. dollar and hit oil prices.
• DOW -225.06 to 10,926echoed the wave of worry that gripped financial markets as investors fretted that the crisis in Europe could derail global economic recovery
• Dollar 1.39c to 97.56cUS
• Oil -$3.45 to $82.74US per barrel.
• Gold -$14.10 to $1,168.60 USD per ounce .
Housing affordability: the great quandary Why there’s time to wait for the right home at the right price
With only Montreal and Vancouver left to cheer for in the Stanley Cup playoffs, many luncheon conversations have returned to the topic of housing prices.
Recently, we’ve seen lots of headlines suggesting that house prices have run up to an unsustainable level and are due for a correction.
In mid March, The New York Times made a rare foray north of the border with a headline that read “Some See a Real Estate Bubble Forming in Canada.” A couple of weeks back, Gluskin Sheff star economist David Rosenberg released a report suggesting that Toronto and Vancouver housing prices could drop by 20 per cent.
And one of the most e-mailed Globe articles last week was based on a ReMax report trumpeting the buoyant sales of luxury homes.
Focusing on affordability
Perhaps the most important determinant of short-term-price movements is affordability, the percentage of a typical household’s income required to carry a house. The two big variables that drive this number: house prices and mortgage rates.
RBC has been tracking this data for 100 neighbourhoods across Canada since 1985, focusing on typical two bedroom homes, bungalows, townhouses and condos.
The traditional rule of thumb for banks is that mortgage payments, property taxes and utilities shouldn’t exceed 32 per cent of a household’s income, assuming a 25 per cent down payment. The more of a household’s income required to carry a house, the lower the affordability.
As housing prices spiralled up in the 1980s, this guideline was relaxed – since 1985, the typical household would have devoted 39 per cent of its income to carrying a detached, 1,200 square foot bungalow.
RBC economist Robert Hogue points out that there have been large swings in affordability over time and that different cities show different patterns.
In most cities, rising house prices meant that affordability was at its lowest in early 1990, when the typical household would have spent 53 per cent of income to carry a bungalow. On the other end of the scale, Vancouver, always an outlier when it comes to real estate, hit its own high of 81 per cent of household income to carry a bungalow in early 2008.
Once out of balance, there are only three ways for affordability to get back in line:
- Prices can stay flat as incomes increase over a period of years
- Mortgage rates can come down – unlikely in the next while
- Or housing prices can drop – something that happened after the all-time lows on affordability were hit in 1990
The impact of low mortgage rates
In the past eighteen months, governments around the world chopped interest rates to boost economies – and Canada was no exception.
As a result of low interest rates, carrying costs dropped and affordability improved. Even with strong housing prices, at the end of December the affordability level in most cities was close to its long-term average. The exception, again, was Vancouver – with the average bungalow taking up 69 per cent of the typical family’s income, up from the historical average of 57 per cent.
In a recent report, RBC estimated that in late December posted rates for a five year mortgage were 5.6 per cent, 1.6 percentage points lower than normally expected given inflation expectations. Note that we’ve already seen mortgages rates begin moving up toward those higher levels, with more increases likely to come.
RBC estimates that if mortgages had been at their normal levels in December, the percentage of the typical Canadian household’s income to carry an average bungalow would have increased by four percentage points – although some cities would have been hit worse than others.
The affordability verdict
If mortgage rates in December had been at normal levels, the percentage of income to carry a house in most cities would have been well above its long-term average. The good news: In most cities those percentages would still have been well below their highs – prices may be a bit elevated but this doesn’t suggest a bubble or a big drop ahead.
The one city to worry about if you’re a homeowner is Vancouver, where normal mortgage rates would have resulted in the typical household spending 78 per cent of its income to carry a bungalow, just shy of the peak level.
History shows that it’s impossible to accurately predict short-term movements of house prices – markets regularly overshoot rational levels both on the way up and the way down. What we can say is that based on current affordability, if house prices do continue to escalate, at some point they’re almost certain to correct back down.
That means there’s no rush to buy and time to wait for the right home at the right price – and that for the next while at least home buyers should evaluate houses as places to live rather than on their potential for appreciation. http://www.theglobeandmail.com/globe-investor/investment-ideas/features/experts-podium/housing-affordability-the-great-quandary/article1554481/
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