Canadian home sales slowed down in February 2010 partly due to lower activity in Vancouver, BC because of the Olympics, but this was offset by continuing high activity in Toronto.

According to a report released today by CREA (Canadian Real Estate Association), seasonally adjusted home sales across Canada for February 2010 were 42,700, which was 1.5% lower than January 2010. CREA President Dale Ripplinger said the Ontario and BC markets were likely to remain high until the summary with buyers looking to get in before HST and interest rate hikes.

Other notable stats from the release included:

CREA Chief Economist Gregory Klump, commented that “There are still a number of major markets where sales negotiations favour the seller due to a shortage of inventory, but supply has begun rising. Further expected supply increases will continue to take the steam out of housing markets as the year progresses.”

Bank earnings announcements season ended this week with Canada’s major banks announcing more than $5B in profits in Q1 2010. Main drivers were less losses on loans as the economy recovers, along with personal loans and mortgages.

This is great news for shareholders, but probably not so great for mortgage shoppers, as highlights our story earlier this week about how Canadian’s lender loyalty could be costing them thousands of dollars over the years. TD was so happy with the results, that they’re giving their employees an extra day off next week!

Here is a breakdown of the bank profits:

Bank earnings – Q1 2010
Bank	Q1 profit	Change from year ago
	$988 million	+17%
	$652 million	+343%
	$657 million	+192%
	$215 million	+211%
	$1.5 billion	+35%
	$1.29 billion	+98%

The Bank of Canada did as expected this morning and kept interest rates steady. They will maintain their key interest rate, the target for the overnight rate at 0.25%, and reiterated their commitment to hold rates at current levels until the end of Q2 2010.

They cited that the global economic recovery is being fuelled by domestic growth in emerging markets, while the western world’s recovery is due to the monetary and fiscal stimulus by governments.

Closer to home in Canada, economic activity has been higher than expected back in January as the economy grew by an annualized rate of 5% in Q4 2009. The high Canadian dollar and low US demand are acting as the main drags on the economy while inflation seems to be under control.

So no major surprises ahead of the budget announcement on Thursday, and we expect the same from the Finance Minister.

The US government passed a new law back in May 2009 regarding stricter credit card regulations which went into effect today, February 22, 2010. It is aimed at credit card issuers and will try to eliminate bad credit card practices and was set up to help protect vulnerable Americans who are already having trouble with their debt. The American government is hoping this will help millions of people get out of bad credit and debt problems from their credit cards and over-leveraged mortgages brought on by the global economic collapse, and the US housing crisis.

The new rules include:

While these are great initiatives to help protect consumers, there are still ways that the credit card companies can still affect card holders. There is no limit on the interest they can charge and they can still reduce the credit limit on card’s already issued and create new fees. President Obama says its not perfect but a good first step and hope it will cut down on unfair practices.

Canadian credit card regulations

New credit card regulations were fairly high profile last year when the government proposed changes to Canadian rules, but then it went quiet. All the mortgage and housing market news must have overshadowed the credit card changes, but we just looked on the Department of Finance website and the credit card regulations did go through.

Most of the regulations went into effect on Jan 1, 2010 while a few are delayed until September 1, 2010.

The new regulations include:

The regulations apply to credit cards issued by federally regulated institutions. Some provisions in the regulations have broader application to other financial products, such as fixed- and variable-rate loans and lines of credit.

We’ll do some more digging and find out which ones are already in effect and which changes will be in Sept 2010.

Yesterday was a very busy day as the Finance Minister finally showed his hand and outlined what mortgage regulation changes he is implementing in his efforts to try and cool down the housing market, after months of speculation.

However, it seems that these changes won’t have a huge impact on the mortgage market. Flaherty and Bank of Canada Governor, Mark Carney, were both concerned about the increasing personal debt levels of Canadians, and with the additional pressure of the big bank’s top brass going to Flaherty and saying they were concerned that the housing market is getting out of hand and that mortgage arrears could increase in the future, the Finance Minister had to be seen as taking action and make changes.

Here are the main reasons that each of the changes won’t have a huge impact when they come into effect on April 19, 2010:

1. All borrowers need to qualify for a 5 year fixed rate even if they choose a lower mortgage rate or term

Many of the banks have been qualifying applicants at higher rates anyways. So if you were applying for a crazy, low variable rate at 1.95%, they would make sure you could handle at least the 3 year fixed rate at 3.29% or a higher 5 year fixed rate. Genworth Financial’s COO said they had been qualifying applicants for mortgage default insurance at at least 4% for the last little while.

This makes sense as the mortgage lenders don’t want to give people mortgage loans that they can’t pay back and qualifying people at higher fixed rates is a prudent control. So this change shouldn’t have too big of an impact on people qualifying for mortgages.

The big question that comes out of this is – which 5 year rate will you have to qualify for? Depending on which mortgage lender you apply with, if it’s a big bank, do you have to qualify for their 5 year posted rate (currently 5.39%)? Or do you have to qualify for their “special discounted rate”, or the actual rate where it depends on the amount of investments you have with them and how good your negotiating skills are? If the bank has a 4.09% 5 year fixed special (like RBC), but you can get, 3.99%, due to your other investments with them, which rate is the qualifying rate?

Let’s look at the differences on the monthly payments for various 5 year fixed rates versus a variable rate with a mortgage value of $300,000 and an amortization period of 25 years:

5 year variable rate versus 5 year fixed rate payment differences

As a result, the monthly payment difference for qualifying could be from $256.18 – $556.09 per month or 31%, which is obviously a huge discrepancy. So which 5 year fixed rate is the “qualifying rate”? And each mortgage lender could have a different qualifying rate, so this means comparing products from different lenders could become even more important in the future.

As a result, it will be interesting to see how each mortgage lender defines the qualifying rate and how this is implemented.

2. Lower the maximum amount Canadian homeowners can refinance from 95% to 90% of the value of their homes

This could impact people looking to consolidate higher paying debt into their lower mortgage interest payments, but 5% should only impact a small % of Canadians.

3. Minimum 20% down payment for house buyers looking to buy investment properties and to get government insurance through the CMHC

This may slow down market speculators and real estate investors somewhat, but for the average Canadian looking for a home, the impact could possibly be more supply, so properties on the market, and could tame house prices as well, with less investors buying up large amounts of properties.

So these are our thoughts, we’ll see what else comes out over the next few weeks as more of these questions are answered, and we expect there to be a big rush of pre-approvals before April 19. More to come.

The mortgage market is changing.

After much talk since mid-December about possible mortgage rule changes, the Finance Minister finally announced the changes at a press conference. He re-iterated that the housing market is healthy and stable with 2/3 of Canadians owning their own home. The housing market has been performing very well providing Canada with a competitive advantage over other countries, and helping our economic recovery, driven by a stable banking system, low interest rates, and a growing population.

The Government wants to encourage ownership, assist first time home buyers, and they believe that previous regulatory changes helped avoid a US style bubble. These changes were made in 2008 with the government increasing the minimum down payments needed to qualify for a mortgage with CMHC default insurance from 0% to 5%, decreasing the maximum amortization period from 40 years to 35 years, and requiring standard loan documentation.

The 3 changes to mortgage regulations as precautionary measures are as follows:

1. All borrowers need to qualify for a 5 year fixed mortgage even if they choose a lower mortgage term such as the current 1 year fixed @ 2.09%, as Canadians don’t need to not take on higher financial risk due to lower mortgage rates

2. Lower maximum amount Canadian homeowners can refinance from 95% to 90% of the total value of their homes. Government wants to encourage home equity investment, and discourage people doing mortgage refinancing for cash.

3. Minimum 20% down payment for house buyers looking to buy investment properties and to get government insurance through the CMHC

These three new changes to the mortgage insurance guarantee rules are intended to take effect April 19, 2010.

He also went on to say there are no signs we are in a housing bubble, and that pro-active regulatory guidance can help avoid problems in the future. This will help protect Canada’s economy, and encourage prudent home ownership, with a family occupying their home and paying down their mortgage, and he wants people to stop using their homes as “an ATM” through refinancing to get out more cash. He also wants to curb the housing market speculators who believe prices will continue to increase and are buying up investment properties (such as buying 4 condos in a development and only living in 1), which reduces supply, and drives up prices.

He didn’t move to increase the current amortization period from 35 years or increase the minimum down payment needed from 5%, which he mentioned that he was considering in the past. Those would have been much more drastic changes, which could have killed the housing market rather than simply encourage home owners to act more prudently.

Check out the latest 5 year fixed rates you will need to qualify for in order to get a mortgage.

Former Bank of Canada governor David Dodge spoke out this week saying that as the reality is house prices are more likely to go down rather than up in the next few years that the Finance Minister and Bank of Canada need to consider intervening to avoid a housing bubble. He didn’t comment on whether we are in a housing bubble at the moment saying that you don’t know you’re in a bubble until it bursts, but believes house prices are strong enough that Ottawa should take action.

“Whether there’s a bubble or not you can only see after the fact,” he added. But it wouldn’t take a bubble bursting to cause consumers pain. If your house price goes down 10 per cent and you’ve borrowed 95 per cent of its value, all of a sudden you’d be in hot water, Mr. Dodge noted.

His comments come as the debate on whether the Canadian market is in a housing bubble or not, has become a very hot topic since December 2009, especially after Finance Minister Jim Flaherty’s comments that the government may consider adding additional restrictions on the mortgage market to slow down the housing sector. It’s a very fine line as this sector has been performing tremendously well while the economy was in trouble over the past year, and trying to rein in this sector alone while not affecting other struggling parts of the economy will be very difficult.

While it’s clear that low interest rates are heating up the market, it would not be wise to raise them just in order to calm housing because such a move would have other consequences, Mr. Dodge said.

He identified lending standards and the framework default mortgage insurance is issued by companies like the government controlled CMHC and private Genworth Financial, and said they are important tools and stands should probably have been tighter over the last little while. For example, he said that people putting down only 5% for a down payment isn’t enough, and that minimum down payments of 7.5% or 10% is probably better. This would make it tougher for first time home buyers to get on the property ladder and to get their first mortgage, as they would need to save more beforehand for a down payment. With an average house value of $300,000, currently prospective home owners, would need at least $15,000 as a down payment, versus $22,500 (7.5% down payment) or $30,000 (with a 10% down payment).

Genworth Financial’s President has said that the company is already being more prudent by making sure mortgage applicants can handle mortgage rates of about 4%, despite variable rates being under 2% at the moment.

The head of ING DIRECT, Canada’s 6 largest mortgage lender, has said he hopes that the Finance Minister doesn’t change the mortgage rules as there is too large a threat they could not only slow down, but kill the housing market.

In the Globe and Mail today he said, “High level, one-stroke fixes are too simple, and can have a very large impact, I worry about government-based tightening of the mortgage rules creating a much worse reaction – too fast of a cooling, which is not really good for anyone.” This comes after Scotiabank acknowledged that house prices are now in bubble territory.

Everyone is waiting for the March 4 budget where Jim Flaherty could announce if these proposed mortgage rule changes will actually go into effect.

RBC released its Canadian Consumer Outlook Index today which reported that despite continuing reports stating the economy is recovering quickly, Canadians are worried about their debt levels and are anxious about their jobs.

The Bank of Canada reported last week that consumer credit held by the big banks rose in December 2009 to $336B amount of consumer credit held by the country’s chartered banks rose to $335.6-billion in December, up $2B from the previous month and 15% over the previous year. It really has been an odd few years with the global economic crisis bringing down Lehman Brothers, bank bailouts around the world and it was the first recession in which real credit (or the level of debt people are taking on adjusted for inflation) has gone up.

The survey said that 58% of Canadians are concerned about their current level of debt. And when people are worried about having taken on too much debt, the last thing they need is to lose their jobs, and the survey also found that 26% say a member of their household is worried about losing their job or being laid off, which jumped up from 21% the previous month. Job security concerns were up in all provinces with the highest reported in BC (32%) and Alberta (31%).

Conversely, 45% of Canadians expect that their personal financial situation will improve over the next year, and 68% believe that interest rates will increased in the next 6 months while 28% believe they’ll remain the same.

Canadian Imperial Bank of Commerce chief economist Benjamin Tal commented that it looks like many people are over their head in debt and will be in trouble when interest rates rise. With rates at near all time, especially mortgage rates it has brought demand for big ticket items such as houses forward, meaning people looking to buy a house in the next year are rushing to get into the market now, and this will reduce activity in 2011.

The Globe and Mail reported today that the Bank of Canada appears confident that the hot national housing market will slow down before a bubble forms. The housing market has been on the central bank and the Finance Minister’s radar over the past few months as the market just hit a record number of sales last month, as they are wary that a bubble may be forming. Jim Flaherty thought the situation was getting so serious he cautioned that the government could look at adding further mortgage market regulations to the mortgage market to try and slow down people taking on too much low interest debt and to slow down the housing market.

Today the Bank of Canada governor, Mark Carney said, “Following a period of vigorous growth, housing investment is projected to slow through 2010 as pent-up demand subsides and affordability declines”.

In the same statement the bank said they expect the Canadian economy to grow faster than expected from the 2nd quarter of this year through early 2011, and increased its forecast for the US. So it seems like the recession is behind us, and with Obama’s recent announcement that he wants to increase banking regulations so that the US can’t get into a situation again where taxpayers are held ransom by a bank that is “too big to fail”, let’s hope we don’t get into this type of a situation again.

Time will tell.