Mortgage Rule Changes Positive for Canadian Banks…What about the Edmonton housing market?
First off I'd like to apologize for missing the discussion on the mortgage changes last week. Sheldon and I were enjoying a much needed winter break on a Caribbean Cruise and our internet access was difficult to say the least. Many people felt we were trying to hide something, but we simply weren't able to comment.
Amortization Changes:
The recent changes to mortgage rules were designed to curb household debt in Canada. Last April we saw the maximum allowed amortization in Canada drop from 40 years, to 35 years, and this March we will see a further drop to 30 years. To us this appears to be part of a long term plan, and perhaps we will even see another drop to 25 years next year (putting us back to what was the norm for as long as I can remember). A gradual decline is certainly preferable to a massive change, and providing a few months notice also "lessens the blow."
So what does the amortization change mean to the average home buyer cost-wise? The monthly payment on a 30-year amortization is $34.72 higher for every $100,000 of mortgage than a 35-year amortization (assuming 4% interest rate). That's not a really a big deal as far as I'm concerned, the big deal is the impact it will have on approvals - many buyers are qualified at the maximum amortization, so buyers will not be approved for as much after March 18.
Over at the First Foundation Mortgage Blog, they clarified that current homeowners with 35 year mortgages may be concerned about what will happen upon renewal; typically, as long as you are not changing your loan amount at renewal, you should be able to continue with your original amortization schedule. However, you should confirm this with your individual lender or mortgage broker. If you need to increase your mortgage via a refinance at renewal, you will be subject to the limitations of the new rules.
Lower Refinancing Amount
Currently borrowers can refinance their mortgage and increase the amount of the loan secured against their home up to 90% of the value of the home. The new rules will reduce the limit on refinancing 85% of the value of the home. This change is directly intended to deter home owners from using their home as a "bank machine" and encourage Canadians to pay down their mortgages spending less money on interest charges.
A research note today by Peter Nerby, senior vice president at Moody’s Investor Service, says that “changes to the government’s mortgage guarantee insurance program that are intended to curb consumer mortgage indebtedness and cool the housing market ... are credit positive for Canada’s banking system and their bondholders.”
No more Government Backed Insurance on HELOCs and the like
The government does not want to encourage Canadians to have large HELOCs and other other "non-amortizing lines of credit secured by homes" for a few reasons:
- These loans are currently limited to 80% of the value of your home, there has been a substantial increase in the value of homes in the past few years, which means a substantial increase in the credit available to home owners. This is a big part of the rise in overall household debt in Canada.
- Generally borrowers are not required to make regular payments on the principle amount of the loan, and these loans are generally variable rate products which exposes borrowers to rising interest rates.
These changes are geared towards limiting tax payer risks (as we are the ones in the end insuring these loans) and decreasing the household debt in Canada and only affect new loans (if you have an existing insured HELOC it will remain insured until it is discharged).
How will all of this affect the Edmonton real estate market?
On first glance it would be easy to assume that these changes will push buyers forward and create an earlier peak in the housing market just like we saw last year. However, the changes last year had more of an affect on first time home buyers and their ability to get a mortgage; last year not only was the amortization shortened, but the rules for get approved were changed (you have to qualify at the 5-year fixed rate even if you're taking a shorter term and/or variable rate). These changes had a noticeable impact on the housing market in Edmonton (and Canada) and we saw sales drop off right after the rules came into place.
This year the changes will have less of an impact on buyers entering the market, and more of an impact on existing home owners looking for re-financing and lines of credit. I don't believe these changes will create a significant impetus for buyers move their purchase forward. We think there are other, bigger influences at play in Edmonton such as migration into the province, job creation and rising mortgage rates that will affect the housing market later in the year.
In a previously published post, we had quoted Chris Mooney, President of the REALTORS® Association of Edmonton about "external influences" and many people wondered "what constitutes an external influence?" I would suggest this qualifies as an external influence. As always, time will tell just what impact (if any) this has on the market.
Edmonton Real Estate: The year in review, 2010
New Year's Bull & Bear
It was the best of times and the worst of times... the same can be said for the Edmonton real estate market over the past year. Even still I feel very fortunate to be lucky enough to be in this city during these unique times. While signs abound that there are underlying weaknesses in the world - and especially the American - economy, some indicators have suggested that things stabilized in 2010, some have improved, and some continue to deteriorate. In the next few days our year end report to our subscribers will provide a fairly detailed look at the market in 2010 and will include our forecast going forward. Today though I am writing a summary...
2010 started reasonably well in terms of MLS® home sales. It paralleled 2005 and 2008 in the first quater which resembled a more balanced market. Sales started higher than they did in the first quarter of 2009 but that didn't last long as 2010 sales peaked in April while 2009 saw sales skyrocket in June and July. The next time we saw 2009 and 2010 sales in the same league was November. While 2010 certainly lacked the drama that 2009 brought with it, it brought us back to reality - agents still need to understand pricing and how to work with their fellow agents. It seemed there would be no "easy deals" in 2010, especially since sellers for the most part didn't control the negotiations unless they were very well priced.
In 2009 we saw extremely low sales in the first quarter which was to be expected coming off of the fiscal crisis late in 2008. Then sales shot up like a rocket which I viewed as surprising after the undeniable storm the world financial markets had just weathered. The resurrection of the stock markets took many stock analysts by surprising just proving the point that if anyone is certain they know what's going to happen they are full of beans. (I would say crap but I don't think Sara would like that).
At the time (mid 2009) it appeared to me that many of the buyers in the market were moving their decisions forward to take advantage of the extremely low interest rates. We had predicted this would likely cause a vacuum effect in the sales down the road and it did, this is in large part why we saw sales in the Edmonton real estate market peak early in 2010.
Normally sales would peak in May or June based on seasonal historical trends. From April to June sales slowed considerably and I considered the overall sales numbers sluggish. Although our office ran against the grain with our sales increasing that is not indicative of the market. The sales slump continued right through to November, partially because there was nothing pushing anyone to buy (typically rising mortgage rates or rising prices will push people to buy).
You could almost feel the bears smile (their dreams of spiraling market were crushed in 2009) as they came out again with knives in 2010. When you add the increased number of residential listings, to the lower than normal sales the stage was set for downward pressure on home prices in Edmonton. However, given all the negative pressures - lower sales, higher inventory, a media cycle fed on negative stories - prices actually held their ground with the average price of 2010 finishing right around where it started. It makes one wonder what will happen when the news cycle shifts to more positive stories on the Alberta economy? We'll address some of that in our forecast.
So how is the market? As a seller or a buyer you really have to look at what and where it is that you are selling or buying. For example, absorption in Millwoods has been just under 3 months and the market can be described as hot in the lower price ranges. Sherwood Park has performed similarly, but acreages around Sherwood Park and downtown Edmonton condos are having a much slower absorption rate. Even within the different price ranges you can see a difference performamce. One underlying factor going forward that we touch on in our forecast is the construction condo inventory that represents probably the greatest opportunity for buyers and the greatest risk.
All in all it was a year of necessary adjustment. While properly priced properties had an opportunity to sell, the challenge for many sellers has been trying to determine what is a bona fide offer versus a buyer just fishing to "steal a deal". We also saw a lot more creativity in putting sales together with interest buy downs, home warranties offered by sellers, and more recently a buyer protection program being offered through First Foundation.
That's it for our brief review. Have a Happy and SAFE New year and a prosperous 2011.
Readers Predictions for 2011
On Tuesday we posted a poll asking our readers what they thought would happen with the real estate market in Edmonton. We've had 95 responses so far and they keep coming in. It seems to me our readers are more optimistic than in the past (certainly more so than the last poll we had in July).
Here are the results:
1. At this time next year the average residential sale price in Edmonton will be:
- 43% said higher
- 36% said lower
- 20% said about the same
So 63% of readers think prices will be the same or higher at this time next year.
2. The total sales for 2011 will be:
- 40% said higher than 2010
- 30% said lower than 2010
- 29% said about the same as 2010
3. Some economists have said Alberta's economy will grow more in 2011 than any other provice. As a result, our real estate market will:
- 64% said we will do better than the other provinces
- 28% said we will do about the same as the other provinces
- 5% said we will do worse than the other provinces
So I guess that means even if we can't agree on what the market will do, we can agree that Alberta will at least do as well, if not better than the other provinces next year.
4. The 2011 spring market will be:
- 31% said good
- 31% said average
- 27% said below average
- 11% said hot hot hot!
5. In 2011 mortgage rates will:
- 48% said stay about the same
- 45% said rise
- 3% said drop
- 2% said skyrocket
The interesting thing is, although the answers to the questions were middle of the road to positive, the comments were almost all negative. We asked "Do you have any other thoughts on what will happen to the real estate market in Edmonton in 2011?" Here is what our readers had to say:
- same as what will happen everywhere else in Canada: not goodThe arena may spur some commercial development in downtown Edmonton but we won't see that announced until the end of 2011 and nothing started until the arena footings are in and investors can see something tangible - perhaps early 2013.
- The cost of new construction on the outer edge is still cheaper on greenfield than on brownfields so the city will increase the cost of urban sprawl to encourage developers to infill.
New construction will be on smaller lots with less "real" amenities. The "features" of new homes will all be fit and finish, glitzz and glamour rather than long term features (garages, finished basements, extra bedrooms, landscaping) that really add value to a resale down the road. - It will grow slowly. Not extreme...but steady growth.
- I believe that Alberta's real estate market will continue to decline next year due to the following reasons:
1. Commoditites will do much better next year, partly due to continued demand outside of the USA (namely China), for our natural resources...
2. This will cause greater inflation, (namely demand pull). This in turn with a stronger dollar will cause interest rates to rise....
3. I strongly believe that there are a majority of people out there who have overextended themselves and you will see this begin to bite in a big way.
4. This however will not have much effect to the overal employment figures in Alberta as companies have learnt to operate in a much more efficient manner. I also believe that the majority of the construction/ upgrading has already been completed/ accounted into next years growth.
5. Construction companies will continue to build at full speed in order to repay thier loans, as these loans will beginning to expire next year and the cost of servicing that debt will increase, due to higher rates. This is my 2 pennies worth! - Looking for more "normal" market - ie 2005-06.
- Keep up the great work
- If builders can stop creating a glut then prices will recover. Otherwise, we're screwed.
- Demand for workers will tend to shift people to Alberta once again. Once people believe the bottom of the market was reached and the swing back up has momentum (even if the speed is not fast), then the trade-up market will get back on track. I don't see this happening until mid-year, but you never know and it could happen in the spring.
Condo sales will heat up, especially in the mid and high level marketplace as aging suburban residents who have been putting off the move will want to respond to the improving market conditions by trading up and even down.
The first time buyers market will also improve as jobs increase and workers move in. This will be strong even at the start of the year as people take advantage of record low interest rates. - I think the excitment will even be lower then the past few years. People just don't care like they did in 2006 and 2007. Users on blogs might be higher but thats just the realestate market breaking through online. Real estate will go back to being a home not a money making machine.
- Edmonton will muddle through the next two years better than most cities. It's 2013 and 2014 when things get interesting.
- 2011 should be a repeat of 2010 with the exception that prices will dip by at the most 10%, made evident in first half of year. This should bring the resale prices at a bottom. Finally!
Sales should remain put. - Lots of inventory, an average number of buyers with prices trending lower than the prices at the same time in 2010.
- It will be considered stable as compared to other provinces , but the slow decline in prices will continue due to mortgage rule changes in Apr 2010. When I talk to people in mortgage business, they say that the difference in max mortgage approval is around 50K to 100K less now than before Apr 2010. That has to have an effect somewhere. Its already showing because people are buying smaller houses more than before.
- Newer neighborhoods that mix condos and higher price point houses may be in for a bit of a shock if cash-poor condo owners have to start renting out at reduced prices.
- It will be another good year for sellers. Last spring there were only some owners bought in 2007 peak started to list their properties. This time almost all or most 2007 peak buyers would list them. Thus price should not go higher too fast due to the inventory. On the buyers side, this time the real buyers who have been waiting for 2~3 years would step into the market. For these buyers, there is no time and room for them to waite further longer. Most lost their patient already.
- High listing and high sales would be a main tone for 2011!
- What is your prediction?
Thanks to everyone who participated, the results are very interesting and the comments are terrific. We will have our predictions for 2011 in the near future.
More Albertans Expect to Buy a Home Next Year
Gord McCallum at First Foundation Mortgages forwarded me a report from the Canadian Association of Accredited Mortgage Professionals called "Annual state of the Residential Mortgage in Canada." Here are some highlights:
6.4% of Albertans indicated they were highly likely to purchase a home in the next year, the highest in the country and well above the overall average of 3.56% (only 1.8% of Saskatchewan and BC residents indicated the same thing). This was also up from the Spring when 4.3% of Albertans indicated they were highly likely to buy and last fall when only 2.9% indicated so.
At the same time, Albertans had the lowest expectations that house prices would rise next year (perhaps that's why many are thinking it will be a good time to buy).
Most Canadians are confident in their ability to pay off their mortgages, do not regret taking on the mortgage they did, and believe that real estate in Canada is a good long term investment. At the same time most Canadians feel that as a whole we have too much debt, and that low interest rates have allowed many people to become home owners in the past few years who probably should not be homeowners. Is this a case of not in my backyard syndrome?
Among homeowners with mortgages, the average equity is about 50% (meaning they have about half the value of their homes paid off) and 81% have at least 20% equity.
Mortgage arrears remain stable at .42% nationally which is lower than what we saw for most of the 90's.
The average mortgage rate for a new mortgage this year was 3.75% and 72% of Canadians that renewed in the past year renewed at a lower rate.
The vast majority of mortgage holders in Canada have considerable capacity to afford rises in mortgage rates. 84% said they could handle monthly increases of $300 or more in the monthly payments, and the average amount was $1056 over their current costs.