Kelvin Mangaroo on CTV News discussing the Canadian housing market.

A think tank released a report today outlining the possibility that Canada’s housing market bubble could be heading for a big burst. RateSupermarket.ca’s President, Kelvin Mangaroo, was asked to discuss this on CTV News today with anchor Dan Matheson.

You can view the full video here.

Survey Shows 56% of Respondents Unaware of How HST Will Affect Home Owners/Purchases

TORONTO, June 17, 2010 … RateSupermarket.ca, Canadian consumers’ one-stop-site to quickly and easily compare over 500 mortgage rates from the country’s top providers, has embarked on an educational campaign to expose additional fees that homebuyers will experience when the HST comes into effect July first.

“We were surprised to see that of 383 respondents to our online poll, 56% said that they had no knowledge of how the HST will affect home owners, 24% said they had a little knowledge and only 20% said that they had knowledge of the HST,” said Kelvin Mangaroo, Founder, RateSupermarket.ca. “Clearly Canadians need to know the additional fees and taxes that they will be levied after July first because there is no doubt that the overall cost of home ownership will increase.”

RateSupermarket.ca has posted articles about the HST on their website info centre and created the following ‘hit list’ to highlight additional HST levies:

Breakdown of Costs with HST:

[1] Based on a 5 per cent fee – all real estate agent fees are negotiable

[2] Ontario land transfer tax

About RateSupermarket.ca (www.ratesupermarket.ca)

RateSupermarket.ca is an independent, impartial resource that is not affiliated with any mortgage lender or broker. It is the only resource in Canada that allows visitors to compare the whole mortgage market in the country. RateSupermarket.ca also compares insurance products, credit cards and GIC rates.

In less than one month, BC and Ontario will experience an overhaul in their tax system with the introduction of the Harmonized Sales Tax (HST) on July 1, 2010.
Many of our visitors still have a few questions about the new HST and how this will affect home buyers and existing home owners.

To help us make sense of these changes we asked Frank Bilotta, Associate Partner and Tax Specialist at SBLR Chartered Accountants, to answer our questions.
(Frank operates in Ontario, so answers are specific to Ontario law)

What exactly will change on July 1, 2010?

Frank: On July 1st the 13% Harmonized Sales Tax (HST) will come into full effect in Ontario. The HST is a combination of the 5% federal Goods and Services Tax (GST) and the 8% Ontario Retail Sales Tax (RST or PST). There will no longer be a separate Ontario retail sales tax. (The new Harmonized Sales Tax in BC will be applied at a rate of 12%.)

The biggest change is to services that were not subject to the Ontario PST, but will now be subject to an additional 8% in taxes under HST.

What type of services are we talking about?

Frank: Well, actually, quite a few common services will be affected. Consumers are most likely to notice an increase in the price of gasoline and heating fuels. Electricity will no longer be exempt from provincial sales tax, nor will tobacco. Personal services like haircuts, membership fees for clubs and gyms, magazines, and taxi fares will all be affected.

With regard to services associated with buying a home or home ownership items such as renovation services, legal fees, real estate agent commissions, landscaping, land survey reports, home inspections and cleaning – will all be subject to the new HST.

Will anything remain exempt?

Frank: Not a lot. Children’s clothing and footwear, children’s car seats, newspapers, books, diapers, feminine hygiene products and meals under $4.00, will remain exempt from the provincial portion of the single sales tax.

Basic groceries, rent, condo fees, prescription drugs, and medical devices which are currently exempt from both PST and GST, will remain exempt from HST.

What about home sales?

Frank: Only newly constructed or substantially renovated homes will be subject to HST. For purchases of new homes that straddle the implementation date of July 1, 2010, the provincial portion of the HST will apply depending on when the written agreements of purchase and sale were entered into and when ownership or possession are transferred.

For contracts signed before June 18, 2009, HST will NOT apply. For contracts signed on or after June 28, 2009, where both ownership and possession are transferred after June 30, 2010, HST will apply. For all contracts signed on or after July 1, 2010, HST will apply.

So resale homes will not be subject to the HST?

Frank: No, although real estate transaction fees will be taxed along with legal fees, as I mentioned earlier.

It sounds like home ownership is going to get a lot more expensive after July 1st. What’s the up side to all of this?

Frank: HST will result in the removal of the hidden PST which is buried in the price of the final goods and services. This should result in lower costs incurred by businesses and potentially allows savings to be passed onto consumers. The new tax will also make things easier for businesses currently charging both GST and PST; one sales tax is all they need to worry about now.

For consumers, the Ontario government has allowed for certain point of sale rebates and transition credits to offset the additional cost of the HST.

Tell me more about the housing rebates that will be offered.

Frank: Under the new HST rules, individuals will be eligible for the Ontario new housing rebate which is 6% of the value of the house, up to a maximum of $24,000.

This rebate is in addition to the existing GST New Housing Rebate, which remains at 5% and is phased out for house values greater than $350,000.

What if the value of the house exceeds $400,000?

Frank: Unfortunately, the rebate is capped at $24,000, but there is no reduction of the rebate if the value of the house exceeds $400,000. Unlike the rebate for the GST portion which is clawed back.

The chart below might help to explain this.

When will rebates be paid out?

Frank: The Ontario rebate will be administered by the Canada Revenue Agency along with the GST rebate.

What if a homeowner is in the process of renovating their kitchen? Will they be charged HST even though the work started before July 1, 2010?

Frank: HST will apply on the portion of the progress payments on contracts to construct, renovate, alter or repair real property (this excludes newly constructed or substantially renovated housing) relating to work completed from July 1, 2010 onward. For example, if 60% of the work related to a progress payment is completed before July 1, 2010 and 40% is completed after July 1st, HST will apply to the 40% portion.

Who determines what percentage of the work is complete?

Frank: With July 1st fast approaching, the rules for HST have not been finalized into law and we have not been given any guidance as to whether there is going to be a specific rule to determine this. What is most likely to happen is that the facts of each specific situation will determine the work completed before and after July 1st. The supplier of the services, who will be responsible for charging and collecting the HST, will have to ensure they have the necessary documentation/proof available to substantiate their determination under a CRA review of their GST/HST account.

What should potential home buyers and existing home owners do to prepare for the price increases caused by the new HST?

Frank: If you’re worried about the price increases, I suggest you speak with an accounting professional to see how these changes will affect your own personal situation. The most important thing is to be aware of the changes that are coming so you can adjust your spending plans and budget accordingly.

Where can consumers find more information about the new HST?

Frank: There are a lot of information sources out there. The Canada Revenue Agency website is likely to have the most accurate and up-to-date content. But if you can’t find what you’re looking for online, speak to your accountant.

HST chargeable common items

Here’s a list of common products and services that were subject to 5% GST before July 1, 2010, but will be charged 13% HST in Ontario after July 1st:

• Dry cleaning
• Electricity and heating
• Internet access services
• Home service calls (i.e. electrician, plumber, carpenter)
• Landscaping, lawn care and private snow removal
• Hotel rooms
• Taxis
• Camping sites
• Domestic air rail and bus travel originating in Ontario
• Magazine subscriptions
• Home renovations (i.e. installation for a new kitchen, or painting services)
• Gasoline/Diesel
• Real estate commissions
• Massage therapy
• Vitamins
• Green fees for golf
• Gym membership fees
• Sport/leisure lessons/classes (i.e. dance, karate, hockey, soccer, sewing, etc) (some exemptions apply)
• Hall rental fees
• Fitness trainer
• Hair stylist
• Esthetician services
• Funeral fees
• Legal fees
• Cigarettes and other tobacco purchases
• Nicotine replacement products

To learn more about the new tax changes go to www.ontario.ca/taxchange in Ontario and www.gov.bc.ca in British Columbia.

Frank Bilotta, CGA, Associate Partner
SBLR LLP Chartered Accountants
416-488-2345 x 269
fbilotta@sblr.ca
www.sblr.ca

Frank is a Tax Specialist with SBLR, a full-service accounting and business advisory firm located in mid-Toronto. With 9 partners and over 40 team members, including a full-time senior tax department, SBLR specializes in providing creative income tax solutions and high-impact growth and exit strategies for profitable, privately-held companies.

SBLR and RateSupermarket.ca do not accept any responsibility for the contents of this article or for the use thereof. Furthermore, SBLR and RateSupermarket.ca do not accept any contractual, tortuous or other form of liability for the contents or for any consequences arising from its use.

CREA‘s April 2010 housing market report indicates that Canada’s overheated housing market has started to show signs its cooling down.

Residential housing sales via MLS was over 52K across the country in April 2010 which was up 20% over last April 2009. Seasonally adjusted home sales was down 2.6% from March 2010. With talk of the housing market cooling over the next few months and continuing into 2011 due to higher mortgage rates and the introduction of the HST on July 1, 2010 many homeowners entered the market as sellers trying to see if they get out before buyers dry up. This resulted in 99,901 homes listed for sale in April 2010, with the total supply of residential homes listed on the MLS of 236,397.

House prices are still rising however, as the average house price sold on MLS rose 12.2% in April 2010 over last April and was driven by increases in the major markets of Alberta, Ontario and Quebec.

Source: CREA

Source: CREA

CAAMP released their latest survey regarding the mortgage industry which resulted in the following key insights (Maritz survey for CAAMP):

House prices:

To what extent do you think housing prices in your community will go up or down in the next year?

Mortgage rates:

To What Extent Do You Think Mortgage Rates Will Change in the Next Year?

Average mortgage interest rate is 4.09%, down from 4.83% last year

Mortgage brokers versus banks

Among the mortgage shoppers who took out a mortgage in the past year, they used the following sources:

Mortgage holders:

Taking out a new mortgage on a home that was newly purchased or which previously did not have a mortgage (7%)

40% of borrowers, payments are at least
$100 per month more than required, which gives them flexibility to adjust payments
in the event of future challenges.

Mortgage types

For mortgages transacted during the past year, the rate types were:

These results are interesting as we typically find that for searches done on RateSupermarket.ca, fixed mortgage rates are typically 55-65%, with variables at around 25%-35% and the rest simply searching for the best rates regardless of type.

For mortgages transacted during the past year, the rate terms were:

For mortgages transacted during the past year, the amortization periods were:

Housing market forecasts:

Housing sector resale activity:

Volume of outstanding residential mortgage credit in Canada will exceed $1 trillion in mid-2010

The volume of mortgage approvals which include new mortgages, transfers of existing
mortgages between lenders, and refinances) will increase this year to $228B (foreacast) and slow in 2011 to $218B

Kelvin

CMHC’s latest report on Canadian housing starts was released this morning and showed that the seasonally adjusted annual rate of housing starts in April 2010 was up 2,500 units or 1.3% over March 2010 to 201,700 units.

This is the latest evidence that Canada’s housing market is still doing exceptionally well and driving Canada’s economic recovery, and comes on the heels of Bank of Canada Governor Mark Carney’s comment last month that he expects the housing market to cool over the next few months as mortgage rates increase and HST comes into effect on July 1. I guess the cooling just didn’t start in April.

April’s provincial seasonally adjusted annual rate of urban starts housing start saw increases as follows:

• +16.4% in British Columbia
• +6.7% in the Prairie regions
• +4.5% in Ontario
• +1.1% in Quebec

The Canadian Real Estate Association (CREA) has offered to change its rules to allow agents to post listings on the MLS, through which 90% of Canadian house sales are done, for a flat fee charged to the house sellers. Previously if a seller wanted to list their house for sale on the MLS system they had to use an agent and pay anywhere from 3-6% of the sale value as a commission for the privilege. When you include these costs with securing a home mortgage, appraisals, legal fees, moving costs etc, buying a new house can be a daunting prospect.

Despite this move by CREA, the Competition Bureau has said the changes are still not enough to open up CREA’s grip on the MLS and still prevents innovative players from entering the market as a simple future vote by members could reverse these changes again. Competition Commissioner Melanie Aitken, said “There is nothing in these proposals that we haven’t seen before and they do not solve the problem. They are a step in the wrong direction. These amendments amount to a blank cheque allowing CREA and its members to create rules that could have even greater anti-competitive consequences.”

In addition, agents are now required to pass along a home phone number, if the seller chooses, directly to an interested buyer, so that they can negotiate directly.

The changes should be made soon at each of the local 101 real estate boards, but they must individually approve these changes themselves.

The Competition Bureau believes that the current system keeps prices artificially high, so hopefully future changes will bring down the price of selling your home. If you take a house value of $300,000, a 5% commission charge on that sale, amounts to $15,000 that the seller needs to pay. With the upcoming introduction of the new HST in the summer, any savings in the housing industry would be welcome.

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.”

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.