CMHC released its 2009 housing market overview and here are the main highlights:
July 2009 housing starts decreased
The seasonally adjusted annual rate1 of housing starts was 134,200 units in July, down from 137,800 units in June.
The decrease in July housing starts is mostly attributable to the volatile multiple starts segment. Most of the decline occurred in Ontario and Alberta, while in Quebec housing starts increased by 21.9% representing 8,300 new units.
Year-to-date actual starts in rural and urban areas combined decreased by an estimated 41.5% compared to relatively high levels during the first seven months of 2008. Actual urban single starts from January to July 2009 are down 38.2% compared to a year earlier while urban multiple starts are down 47.0% over the same period. On a year-to-date basis, actual total housing starts in urban areas have decreased by an estimated 43.5% when compared to the same period in 2008.
Growth in new house prices moderates in June
The New Housing Price Index (NHPI) fell by 3.3% in June compared to the previous year.
In comparing June 2009 to June 2008:
St. John‘s had a double digit increase of 10.3%.
Declines were observed in:
Windsor (-0.1%)
Toronto and Oshawa (-1.1%)
St. Catharines-Niagara (-1.6%)
Hamilton (-2.0%)
Victoria (-7.0%)
Calgary (-8.0%)
Vancouver (-9.1%)
Saskatoon (-10.4%)
Edmonton (-11.7%)
MLS sales increased in July
The seasonally adjusted annual rate of MLS®1 (Multiple Listing Service®) sales increased to 510,468 units in July 2009, its highest level since November 2007, when the seasonally adjusted annual rate of MLS® sales reached 523,404 units. July sales were up 2.5 per cent compared to June.
Actual MLS® sales in July were up 18.2 per cent compared to the same period in 2008.
Demand for Variable Rate Mortgages Increased in 2008
Since 1998, variable rate mortgages have become increasingly popular. Among mortgage holders that participated in the Financial Industry Research Monitor (FIRM) survey conducted in December 2008, approximately 30 per cent opted for a variable rate mortgage, up from about 3 per cent in December 1998.
Home buyers in Canada have an array of mortgage products to choose from. The primary selection involves the choice of mortgage type, and term, which in turn has an impact on the mortgage rate.
An important choice facing borrowers is whether to “lockin” a rate for the mortgage term or to proceed with a variable rate. Fixed term 5-year mortgages have dominated the Canadian mortgage market for decades. Year after year, these mortgages remain the most popular type among Canadian homeowners, accounting for more than half of all mortgages. However, variable rate mortgages have become more prevalent in the market. Variable rate mortgages now account for about 30 per cent of all mortgages, up from 3 per in December 1998.
Variable rate mortgage products
A variable rate mortgage may be “open” or “closed”. An open mortgage can be paid off at anytime without an interest penalty, whereas for a closed variable rate mortgage, prepayment above an agreed upon threshold may result in an interest penalty.
Also, consumers have the choice
between floating variable rate mortgages and protected variable rate mortgages. A floating variable rate mortgage allows for a perfectly open and variable rate that moves in line with the prime rate. In the case of a protected variable rate mortgage, the borrower has some protection against rising interest rates; once the mortgage rate rises to some predetermined threshold the mortgage converts to a fixed rate mortgage for the remainder of the term.
Advantages and risks associated with variable rate mortgages
The choice between “fixed” and “variable” mortgage rates largely depends on personal circumstances and preferences of the borrowers. The interest rate charged on variable rate mortgages are generally lower than those on fixed rate mortgages,but they leave the borrower vulnerable to changes in the mortgage rates. Thus if a borrower is willing to absorb the risk of rising mortgage rates, he/ she might opt for a variable rate
mortgage product.
On the other hand, if a borrower wants the assurance of a fixed payment and peace of mind, he/she is more likely to choose a fixed rate mortgage
product.
According to the FIRM survey conducted in December 2008, thirty-eight per cent of homeowners with variable rate mortgages
expected to save substantially on interest costs over the longer term, up from twenty per cent in June 2002 (the last time the survey probed mortgage holders with the same questions). This was the most popular reason for choosing a variable rate mortgage in 2008.
Thirty-three per cent reported that variable rate mortgage offered the lowest interest rate, while twenty-six per cent selected a variable rate mortgage because they expected interest rates to be stable or decline. The latter was up from 17 per cent in June 2002.
The Bank of Canada aggressively cut its key lending rate in an effort to revive the national economy which led to a downward trend in mortgage rates during the second half of 2008. This contributed to the rising popularity of variable rate mortgages and has benefited borrowers. With the commitment of the Bank of Canada to hold the overnight lending rate stable through June 2010, borrowers with variable rate mortgages may continue to enjoy low monthly mortgage carrying costs, which can make these types of mortgages more attractive than fixed rate mortgages.
The interest rates charged on variable rate mortgages are tied to the chartered banks’ prime rate. Demand for variable rate mortgages, as measured by their market share, has varied inversely with the prime lending rate. Thus when the prime rate and subsequently variable mortgage rates decline, demand for variable rate mortgages rises.
