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.

Finance Minister, Jim Flaherty, has announced he’s having a press conference this morning @ 8am. And there were rumours flying around yesterday that he would announce some changes to the mortgage regulations to try and cool down the housing sector. Although its believed he won’t look at changing the amortization period or down payment rules he mentioned before Christmas.

More to come….

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.

Stephen Jarislowsky, one of Canada’s best known investors, believes that the government’s recent talk of possible tighter restrictions on mortgage regulations has put the housing sector in a bubble – exactly what they were trying to avoid.

Mr. Jarislowsky told Bloomberg News that “I am convinced there is a housing bubble in Canada….prices in Canada are far more expensive than they should be. They (the government) have basically encouraged people to buy houses based on cheap mortgages.”

There was a study recently released outlining the seriously most unaffordable housing markets out of Canada, the US, the UK, Australia and elsewhere. Vancouver, BC came out #1 – as the least seriously unaffordable housing market in the world! Victoria, Kelowna, Abbotsford and Toronto were also in the 58 markets, so Mr. Jarislowsky could be right about a few markets at least…

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.

There has been a lot of news lately about opening up the Canadian Real Estate market and allowing easier access to list properties on MLS, in addition to accessing more of the detailed information on MLS. Historically, this data has only been available to licensed, registered real estate agents, but today, their stranglehold on this information may have loosened.

The Competition Bureau announced today that it will challenge rules imposed by the Canadian Real Estate Association (CREA) that “limit consumer choice and prevent innovation in the market for residential real estate services”. The Commissioner of Competition has determined that CREA’s rules restrict the ability of consumers to choose the real estate services they want, forcing them to pay for services they do not need. The rules also prevent real estate agents from offering more innovative service and pricing options to consumers, such as agents simply charging a fee for listing a property on MLS, and the consumer can purchase additional services only if they want to. The Commissioner’s application to the Competition Tribunal seeks to strike down these anti-competitive rules.

Melanie Aitken, Commissioner of Competition said, “Consumers should be able to choose which services they want to buy in order to facilitate that transaction, including lower-cost options. While the Bureau would have preferred to resolve this matter amicably, CREA’s leadership was unwilling to agree to changes that would have opened up competition, and offered options for consumers and real estate agents.”

For example, under CREA’s rules, agents are prohibited from offering consumers the option of simply paying a fee for an agent to list a home on the MLS system. Instead, all consumers looking to list a property on MLS must purchase a pre-determined set of additional services from a real estate agent, such as the presentation of offers and negotiation of a final deal.

These rules have given room for the For Sale by Owner or private sales to grow. These companies mainly offer their services over the internet and charge a seller to list their property for a much reduced cost and they don’t have to pay a commission once they sell their property. The major issue is getting enough eyeballs or buyers to these websites, to generate enough interest for people to sell their homes. That’s the main draw of the MLS system, its popularity, as so many people use it to look for homes for sale, although after today’s announcement it will be interesting to see if that’s still the case in 5 years time.

The Toronto housing market started 2010 off with a bang as house sales increased 87% in January 2010 over last year.

The Toronto Real Estate Board (TREB) reported reported 4,986 transactions last month, and this was only slightly higher over previous January’s, so 2009 was an unusually slow month.

The average house selling price in the GTA also increased in January 2010 19% from $343,632 to $409,058 over last year.

TREB also believes that annual growth rates for existing home sales and average prices will continue to be strong through Q1 2010 as the comparisons are being made to a weak market in 2009. Things will slow down in the later half of 2010 as a lot of housing demand is being brought forward as Canadians look to take advantage of incredibly low mortgage rates, although some members of our Mortgage Rate Outlook Panel believe that we could see rates go even lower this month.

Great article on the weekend in the Globe and Mail, entitled The battle to unlock the housing market about the real estate industry and how some companies are fighting back against the MLS and some people believe its unfair that more people aren’t able to list their properties on MLS, and have to use a real estate agent.

Last year 465,251 homes were sold through MLS at an average price of $320,333. Owned by CREA, MLS aggregates listings from Canada’s 101 local real estate boards. Only registered real estate brokers can get key information such as past selling prices, and only these professionals can use the the site to connect buyers and sellers. Housing information is freely available in other countries, such as the UK, where the property market is massive, and anyone can find out how much their neighbours sold their house for, or how much a prospective purchase was sold for in the past, with a simple search on the internet. It provides transparency and empowers consumers to do alot of their own research, to help them make informed decisions, without relying on a real estate agent, who has access to “secret” information, and you have pay 5% of your property value, to have them share this with you.

The federal Competition Bureau, is now interested in this, and is questioning whether consumers be forced to use a real estate agent to represent them throughout the entire buying/selling process.

One of the largest for sale by owner websites in Canada, is Propertyguys.com, which enables buyers and sellers to connect through their website, with the onlly costs being a small charge for the house owner to list their property on the website. This is usually for around $500 and is an amazing deal if you compare this to $15,000 in commissions that would be due based on a sale of a $300K house at 5% commission.

The Globe and Mail had a live blog session with Walter Melanson, the VP of Propertyguys.com today, and here were some of the key comments:

Question: People have no limitations on selling their own homes – if they want to sell their homes – they can – if they want to use a real estate sales rep. they can – why all the big fuss?

PG: That’s exactly our sentiment. You are right – It’s all about options. I think the fuss is all about what the market perceives their options are. Given the state of the industry it doesn’t seem like many options exist.

G&M:
Some people think private sellers are at a disadvantage because the homes can’t be posted on the MLS, which is owned by the Canadian Real Estate Association. If you want your home on there (that’s where it’ll get the most eyeballs), you need to employ and agent through the whole process. Some feel that isn’t fair, that you should be able to post your listing there and still handle most of the details yourself.

Question: Aside from the obvious $ saved are there more benefits to both parties that are not so obvious?

PG: We don’t feel that Private Sellers are at a disadvantage at all. Our feel is that the internet levels the playing field. Selling a house is all about letting people know its for sale. We’ve been successfully doing that!

Question: Are there any legal risks or pitfalls that a real estate agent will help to prevent a seller or buyer from encountering? Can a lawyer fill this gap at a much cheaper cost?

PG: Our system weighs heavily on interaction between lawyer and seller. Most people are totally comfortable with that. We feel that a lawyer is best equipped to handle situations surrounding mitigation of fraud or any other legal concerns.

Question: I have heard of people having deals not go through because CMHC has denied the deal because it was being handled as a private sale. Can you explain what that situation is?

PG:No. We don’t see that mortgage insurers are predjudice on types of deals. They are simply mitigating risk on a property by property basis. In our case – we help parties supply all relevant information for CMHC to input into their system.

Question: What is the average difference in time on the market for a private sale vs. one with an agent? ?

PG:When we examine data, we see that private sellers (given proper mix of Price/Product/Exposure) sell on average sooner.