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.

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.

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.

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.

The British Columbia Real Estate Association (BCREA) released their December housing sales report today entitled, “December Home Sales Second Highest on Record
2009 – In Like a Lamb, Out Like a Lion”. They reported that MLS residential sales increased 132% to 5,703 units in December compared to the same month last year. More homes were sold last month than in any December on record except 1989 when 6,014 units were sold.

“2009 came in like a lamb and went out like a lion,” said Cameron Muir, BCREA Chief Economist. “The year began with home sales trending at a 25-year low and ended at a 20-year high. Low mortgage rates, pent-up demand and improving economic conditions were key drivers of consumer demand.”

BC MLS stats for 2009 were as follows:

“Considerable momentum in the housing market is expected to carry through the first quarter of 2010, before home sales begin to moderate as a result of eroding affordability and less pent-up demand,” added Muir.

The chart below outlines the December 2009 Residential Average Price, Active Listings and Sales-to-Active-Listings Data by Board:

The Toronto Real Estate Board released their August 2009 Marketwatch report and reported 8,035 sales, up 27% per cent from August 2008. The average price for August transactions was $387,921 – up by six per cent compared to the same month last year.

“The increase in demand for existing homes has been widespread across different housing types and price ranges,” said TREB President Tom Lebour. “This suggests many categories of home buyers have chosen to make a long-term investment in housing, from first-time buyers to move-up buyers or buyers who are seeking a lifestyle change.”

Year-to-date sales, at 58,421 were up two per cent compared to the first eight months of 2008. Average price, at $385,978 was up by less than one-half of one per cent.
“We have heard more positive economic news lately. The improved housing market has played a key role,” explained Jason Mercer, TREB’s Senior Manager of Market Analysis. “Home sales have helped other sectors of the economy through home buyers’ spending on things like financial and legal services, moving, renovations and home furnishings.”

You can view the full report here.

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:

Declines were observed in:

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.

Yesterday the Globe and Mail reported that the number of new homes being built will not return to the same levels we saw in 2008 for a long time – regardless of a recovering economy.

Although this shouldn’t come as a surprise to many, the interesting aspect to the story is the reason behind this news.

According to CMHC, in the past it was common for housing starts to reach 200,000 in a given year (it hit 211,056 in 2008), but this year the figure is expected to decline to 141,900. Things look slightly better in 2010 with 150,300 housing starts expected. But by 2013 the number only climbs to 176,800 – 5 years later and still 16% lower than in 2008.

But CMHC believes this to be good news. They say that home starts will not return to those atrociously high levels because it’s not consistent with Canada’s overall demographic needs – not because of a long and painful drop in Canada’s housing market, which would persuade everyone to hold off on buying, resulting in a sudden increase in demand when the market does recover.

But there is some bad news… The CMHC report also suggests that home prices and sales of existing homes are expected to follow a similar trend. Which I’m sure won’t sit well with home owners who have experienced a significant amount of equity loss due to falling house prices.

Other interesting facts from the CMHC report provided by the Globe & Mail are:

• The national average price for a home is expected to fall 6.8% this year to $283,100, and stabilize next year.
• The number of houses resold through the Multiple Listing Service declined to 357,800 units this year, from 433,990 in 2008, but should increase slightly next year to 386,100 units.
• Nationally housing starts are expected to decline 32.8% this year (53% drop in Alberta, 42.5% in British Columbia, 50.2% in Saskatchewan and 31.6% in Ontario)

So although we won’t be breaking any records when it comes to home starts over the next few years, we can rest easy knowing that the predicted figures are much more sustainable in the long run. And after the recent market turbulence, a bit of stability should sound pretty good right now.