High inventory, cooling sales put pressure on house prices

A high inventory of homes for sale combined with a softening demand from potential homebuyers is starting to put downward pressure on Calgary MLS prices.

Preliminary and unofficial data for August month-to-date indicates prices are dropping from levels of the past few months in both the single-family and condominium market.

“We have almost the same number of buyers that we had in December but we have so many more listings,” said Gary MacLean, a realtor with Re/Max Real Estate Central. “It’s like having a Safeway that got two times as big but only has the same number of customers coming in the door and in order to get rid of the inventory they have to reduce the prices.

“It’s a supply and demand issue. There’s an oversupply of houses not only here but all across Canada and the number of buyers are decreasing.”

For example, at the end of December one of every 1.6 houses listed for sale were selling. In July, that ratio jumped to one for every 6.6 listings. The month-end inventory of properties for sale in Calgary metro at the end of December was 3,258. It was 7,982 at the end of July.

MacLean said the inventory is starting to shrink but it’s not as a result of increasing sales. Many people have simply taken their homes off the market.

According to preliminary, unofficial data on the website of realtor Mike Fotiou, of First Place Realty, there have been 661 single-family home MLS sales in Calgary for an average price of $441,469 month-to-date until Tuesday.

In July for the entire month, there were 915 sales for an average of $464,655 and in August 2009 there were 1,277 sales for an average of $454,130.

The average MLS sale price peaked this year in May at $483,240.

The condominium market is showing a similar story with sales so far this month at 271 for an average price of $283,485. In July, there were 396 condo transactions averaging $291,168 and in August 2009 there were 632 sales for an average price of $283,330.

The average MLS sale price for a condo peaked this year in May as well at $304,662.

Diane Scott, president of the Calgary Real Estate Board, said supply and demand is playing a role on current average prices but there’s also the factor of luxury home sales.

“Homes sold over $1 million are down in numbers from last year for the same period,” she said. “June to August last year we had 98 sales over $1 million. This year we’ve had 87 … That will drive the average price down as well for sure.”

On Wednesday, the Teranet-National Bank Composite House Price Index showed Calgary was lagging behind other major Canadian centres in the rate of change for home prices.

The index is estimated by tracking observed or registered home prices over time using data collected from public land registries and all dwellings that have been sold at least twice are considered in the calculation of the index.

The report said in June Calgary prices rose by 0.2 per cent on a monthly basis behind Ottawa (2.7 per cent), Toronto (2.4 per cent), Montreal (1.4 per cent), Halifax (1.3 per cent) and Vancouver (0.8 per cent). The national average was 1.5 per cent, the 14th consecutive month of increases.

On a year-over-year basis, the national average was 13.6 per cent growth led by Vancouver at 16.3 per cent and followed by Toronto (16.2 per cent), Ottawa (12.0 per cent), Montreal (8.7 per cent), Calgary (8.3 per cent) and Halifax (7.1 per cent).

Posted by Calgary mortgage broker Conexia Mortgage

Reverse mortgages are no panacea

A reverse mortgage is often described as a way seniors — those who are house-rich but cash-poor — can continue to live in their homes and generate extra tax-free cash flow.

P.J. Wade, author of a 1999 book titled Have Your Home and Money Too, argues they are not only for the elderly destitute. “It’s a financial, lifestyle and wealth-management tool,” she says, which lets homeowners convert their equity into cash without selling it or paying the debt until a pre-set time in the future.

In her 2008 e-book update, the title became Reverse Mortgages: Worst Enemy, Best Friend … Your Choice! She says reverse mortgages are now being better marketed and the interest rates charged — about 4.5% — are more in line with other financial options.

But there’s nothing “reverse” about them, she cautions. “It does not easily reverse if you take the wrong product. You can use up your equity quickly. You need to look at every alternative before doing a reverse mortgage.”

For those who have exhausted all alternatives, and for whom remaining in their home and community is paramount, she says a reverse mortgage can be “your best friend.”

The “mortgage” part of the name should serve as a reminder this is still a form of debt. As time marches on, this debt increases, contrary to traditional mortgages. This is also the opposite of what many seniors did early in their lives — building up equity by paying down mortgages as soon as possible. Indeed, I’d argue a paid-for home continues to be an essential element of financial independence.

Like annuities, a reverse mortgage may deprive your heirs of capital. This may be no problem for seniors without kids, or those with well-off adult children who have no expectation of inheriting.

One advisor, who didn’t want to be named, says a reverse mortgage can make sense if coupled with a conservative blue-chip stock portfolio. “The interest becomes a deduction from income, which contributes to retirement lifestyle. By minimizing capital withdrawals, the strategy can have a more neutral effect on wealth, particularly if the house continues to grow in value.”

However, Warren Baldwin, regional vice-president with Toronto-based T.E. Wealth, is less enthusiastic. Once the lump sum goes into the account, the debt tends to become “outta sight, outta mind,” he says.

Since interest rates and terms and conditions can be expensive, seniors may be better off with a simple line of credit from the bank, Baldwin says. Interest payments would be lower, there are no repayment penalties and the senior can draw against it in small increments. A line of credit reinforces the perception that debt is being increased. By contrast, a lump sum from a reverse mortgage tends to lead to spending or gifting away the funds while forgetting the original source was debt.

Graham Cook, president of Nanaimo, B.C.-based Composite Finance Inc., suggests a simple alternative is the Manulife One account, which provides a line of credit of up to 80% of a home’s value. Interest of about 1% is paid on any positive balances, while interest of about 3% is charged on net debt owing.

Before resorting to reverse mortgages or lines of credit, seniors should consider whether they can really afford their lifestyle — including home ownership. Alternatives are to sell and downsize to a condo or rent an apartment.

Until recently there were only two major providers of reverse mortgages in the Canadian market. The incumbent, Vancouver-based Canadian Home Income Plan Corporation (CHIP) was founded in 1986 and in 2009 became a chartered bank, the HomEquity Bank, a publicly traded company [HEQ] on the Toronto Stock Exchange.

The new entrant, Oakville-based Seniors Money Ltd., ran into problems when its funder, the Commonwealth Bank of Australia, disappeared after the 2008 credit crunch. According to president Nick DiRenzo, the firm still services existing clients but is not pursuing new business while it seeks a new business model.

By contrast, there are almost 40 suppliers in the United States, says Greg Bandler, senior vice-president of HomEquity Bank. Asked about the horror stories occasionally reported in the U.S. media, Bandler said the American reverse mortgage business is regionalized while HomEquity Bank has relationships with all major Canadian banks, mortgage brokers and wealth managers. The mortgages are conservative, lending only up to 40% of the value of a home.”We can guarantee that the value of the loan never exceeds the fair market value of the home,” he says. Most clients still have at least 50% equity left in the home when sold.

A reverse mortgage should not be an act of desperation. Wade says the best time to research them is before you need one.

Posted by Calgary Mortgage Broker Conexia Mortgage

One income must fit all

In suburban Toronto, a couple we’ll call Wayne, 34, and Julia, 35, are raising their two children, ages four and six. Julia hasn’t worked for years and doesn’t want to return to a job. They want to save for the kids’ education, move up from their $600,000 house to one worth perhaps $800,000, and plan retirement. Can they do it on Wayne’s monthly $8,000 take-home pay?

Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. of Kelowna, B.C., to work with Wayne and Julia. “Their ability to do all these things depends on how well they can balance their plans with goals. It is going to be a challenge, but it can be done,” he explains.

Educating the kids

Wayne and Julia have $6,000 in their RESP. They add $1,000 a year per child, including the Canada Education Savings Grant. If the plan grows at 3% over the inflation rate, it would amount to $21,113 in 11 years when the older child begins university. Given the same assumptions, the younger child would have $21,492 at age 17. Total RESP funds would be $42,605.

This won’t pay for the kids’ four-year degrees. Therefore, they should consider a tactic rarely recommended: reducing current mortgage payments to allow larger contributions to the RESPs, Mr. Moran says.

If Wayne and Julia put $2,500 per child per year into RESPs, they will qualify for the maximum $500 CESG per child. This choice would require putting $208 per child per month into the RESPs. This level of contribution, with the plans growing at a rate of 3% per year, would boost total RESP savings to $99,410. With a 50/50 split, each child would then have about $50,000 for post-secondary education. That’s enough for four years of tuition at any university or college in Ontario.

Pay down mortgage and build up RRSP

Cutting down mortgage payments is a balancing act that favours RESP growth. If mortgage payments are reduced by $278 per month to $1,122, amortization would be increased to 13 years from the present 10 years and total interest payable from $37,300 to $49,520, if their present 5.15% interest rate remains unchanged. The interest boost, $12,220, will be far less than the $56,805 boost in total RESP funds available to the kids.

The RESP should win, Mr. Moran says. Wayne and Julia can reduce their total interest payments by cutting interest they now pay on a $5,000 line of credit. They currently pay 6.5% per year, 4% over the bank’s prime rate. They can set up a secured line of credit for $100,000 as a way to have funds available if they exceed budget allocations. If their bank won’t go along, they can check with Manulife, which offers a loan program secured by their house.

With an extended line of credit that provides interest at perhaps 2.5%, they can pay down their 5.15% mortgage within the terms of their loan.

As well, they can use $51,000 in their taxable stock portfolio to make RRSP contributions. Wayne has $120,000 of unused RRSP space. The contribution in-kind would involve just a switch of stocks from the taxable portfolio to the RRSP. His refund would be about $15,300 on his 2010 tax return. He will be taxed on accrued gains, but losses in this manoeuvre will be denied. So he should sell his losers first and then transfer cash to the RRSP, the planner recommends.

Julia should not repay $18,000 for a Home Buyer’s Plan (HBP) loan, Mr. Moran says. By failing to make the $150 monthly payment required, it will turn into income and be taxable. Given that she has no income, the tax consequence will be zilch. Wayne will lose some of her value as a dependant. However, if the yearly $1,800 is added to his RRSP or her spousal plan, he will be more than compensated for her reduced value as a dependant, Mr. Moran says.

If Wayne puts $51,000 from the transfer in-kind into his RRSP and adds $500 per month plus $150 per month saved from HBP payments, and does this for 26 years until his age 60, they will accumulate $507,750. If Wayne works to age 65 and maintains contributions, the RRSPs, on the usual assumption of 3% growth per year, would grow to $630,000. All figures are in 2010 dollars.

If they add $15,300 from the tax refund resulting from the in-kind transfer to the RRSP, then the RRSP would grow to $540,750 at his age 60 or $668,300 at his age 65. This capital would provide $28,181 of retirement income to Julia’s age 90, or $39,460 were Wayne to work to age 65, Mr. Moran estimates.

Assuming that Wayne works to age 60 or 65, he will receive full Canada Pension Plan benefits, currently $11,210 per year. He and Julia would each receive full Old Age Security benefits of $6,222 per year. Both benefits are indexed and taxable.

Putting all benefits and savings together, the couple will have between $50,079 per year and $63,078 per year in income before tax in retirement. Their pension income, including RRIF distributions, will be mostly splittable for tax purposes, so the clawback, which currently begins at $66,733 per person, will not affect them.

They can add to their relatively modest projected retirement income by saving money liberated from paying down their mortgage, which will be at a zero level in 10 to 13 years, depending on how they decide to fund their RESP. That would free up about $1,400 per month they currently send to their bank. That’s $16,800 per year.

If that money is saved from Wayne’s age 47 to his age 60, it would build up an additional $262,380, or $393,360 if he works to age 65. That capital would support additional payments of $13,674, or $23,227, to Julia’s age 90, the planner estimates. And that, in turn, would boost total retirement income to a range of $63,753 to $86,305 per year, depending on whether Wayne retires at 60 or 65, the planner estimates.

The big house

These projections are based on paying off the mortgage on their existing house. Adding another $200,000 of debt for a larger manse means additional monthly mortgage payments of $1,052, assuming a 25-year amortization and a 4% interest rate. That would require payment of total interest of $115,612 and would restrict their plans to educate their kids and retire.

“If Julia gets a job and brings home at least $12,624 per year, she would pay for the larger mortgage,” Mr. Moran says. “If Julia does not go back to work, it’s likely she and Wayne would want to place financial security above a bigger house that, in retirement, they would no longer need.”

Posted By Calgary Mortgage Broker Conexia Mortgage

Variable rate may no longer win

Not that there are a lot of people buying houses these days, but the answer to the age-old question of whether to go long or short on your mortgage is unclear yet again.

The Bank of Canada’s second quarter-of-a-point rate increase in the past two months is likely not going to do much to boost a real estate market that saw sales drop almost 20% across the country in June from a year ago.

The popular variable-rate product tied to prime that helped people buy a lot more house with more debt is going up too. The prime rate at the major banks, which tracks the Bank of Canada’s rate, is now at 2.75%.

But a funny thing happened as the Bank of Canada was raising rates. With much of the credit crisis seemingly behind us, the discounts on short-term borrowing are increasing as the cost of funds for banks also fall. Instead of borrowing at 100 basis points above prime, it’s now 70 basis points off prime.

At 2.05%, a variable-rate product today may look as attractive as ever, but the five-year fixed-rate closed mortgage is falling fast. It can now be had for a shade under 4%, says Rob McLister, editor of Canadian Mortgage Trends.

“Bond yields have fallen out of bed and nobody expected that,” said Mr. McLister, adding the spread between the five-year Government of Canada bonds and five-year mortgages is still large enough that the banks may reduce long-term rates even more. However, at about 4%, the five-year closed fixed-rate mortgage isn’t far off its record low.

Bank of Montreal senior economist Sal Guatieri does agree that variable-rate products have worked out better than fixed-rate mortgages throughout history, but says the tide may be turning.

“Given that the central bank has already raised rates a couple of times now and will likely continue to raise rates, it probably is a correct assumption to make,” says Mr. Guatieri, noting variable usually works in a declining interest-rate environment. “The next five years might not quite follow the past. You could probably argue it’s wiser to lock in now. It’s a close call.”

Bank of Montreal is forecasting another 25 basis point move in September and says rates will climb another 1.5 percentage points by the end of 2011. If Mr. Guatieri and others are right, by 2012, the variable-rate products out today would clock in at just above 3.75%, if the discounting remains the same.

“If you are still in that variable-rate product then, you’d have to sweat out the next three years because there would still be possibly more increases,” says Mr. Guatieri, who adds his bank sees the overnight rate eventually going to 4% in the following three years. Based on the present gap between the Bank of Canada and prime, that would place the variable-rate product you get today at 6% by around 2015.

Fears of such a scenario are driving people into fixed-rate products again. That, plus new mortgage rules that make it easier to qualify for a mortgage if you go for a fixed-rate product with a term of five years or longer.

“The Bank of Canada is doing what it said — it’s going ahead with rate increases. If I was counselling someone, the prediction is rates are going up, so now is a good time to consider locking in for a term,” says Don Lawby, president of Century 21 Canada.

It makes sense, but with variable rate still at around 2%, it’s easy to see why people wouldn’t want to lock in. Even Mr. Guatieri says if you are secure in your financial situation and don’t need to fix your mortgage payments, “you might just want to let it ride.”

There just never seems to be a clear answer on whether to lock in or stay variable.

Posted by Calgary Mortgage Broker Conexia Mortgage

Building permits rise more than expected in June

OTTAWA — The value of building permits in Canada jumped more than expected in June, as an increase in non-residential activity offset a decline in residential permits, Statistics Canada said Thursday.

Values rose 6.5 per cent to $6.6 billion during the month. Most economists had expected a gain of 1.8 per cent.

The June figure was up 24.9 per cent from the same month last year, the federal agency said.

In the non-residential sector, permit values rose 23.5 per cent to $3 billion. “This increase was largely attributable to higher commercial and institutional construction intentions in Ontario and higher commercial construction intentions in Alberta,” the agency said.

Residential permits, meanwhile, fell 4.5 per cent to $3.6 billion in June, due to a decline in single-family intentions. It was the third straight monthly decline for the sector.

In total, permit values rose in six provinces. The biggest gains were in Alberta, Newfoundland and Labrador and British Columbia. The largest drop was in Saskatchewan.

Posted by Calgary Mortgage Broker Conexia Mortgage

Calgary’s housing market continues to cool

CALGARY – Calgary’s housing market continued its summer slowdown in July, although prices appear stable, new figures show.

The Calgary Real Estate Board said Tuesday single family home sales were down 42 per cent from the same period a year ago. Condominium sales were down 44 per cent in the same period.

In July, there were 915 single family home sales, compared to 1,061 in June. The number of condo sales fell 11 per cent to 396 from the previous month.

The average price of a single family home was $464,655, down four per cent from the previous month, but six per cent higher than in July 2009.

The average condo price was $291,168, level with June, but a two per cent increase from a year ago.

“Calgary’s housing market is cooling off after its record-setting pace in the post-recession period,” said Sano Stante, president-elect of the board, in a statement.

“Rising mortgage rates and increased inventories will be the primary head-wind facing Calgary’s housing market, but improving job prospects will offer some tailwinds in the latter half of 2010 and into 2011.”

© Copyright (c) The Calgary Herald

Posted by Calgary Mortgage Broker Conexia Mortgage

CREA predicts fewer total MLS sales, but higher prices

CALGARY – The Canadian Real Estate Association has revised its forecast downward for MLS residential sales activity but elevated its average price forecast at the national level.

The national association of realtors said today that weaker than anticipated sales activity during the crucial spring home buying season in Canada’s four most active provincial markets prompted the revision. “The decline is consistent with the exhaustion of pent-up demand from deferred purchases during the economic recession, and sales having been pulled forward into early 2010 due to changes in mortgage regulations,” said CREA.

In Alberta, CREA is predicting total MLS sales of 51,300 this year, down 10.8 per cent from the previous year and a further 3.2 per cent annual decline in 2011 to 49,650 sales. It is forecasting the average MLS sale price this year will increase by 2.5 per cent from 2009 to $349,600 but fall by 0.3 per cent in 2011 to $348,500.

In its previous forecast released in early June, CREA forecast MLS sales of 55,900 this year with an average price of $348,400 and sales of 55,400 in 2011 with an average price of $350,800 in the province.

At the national level, sales activity is forecast to reach 459,600 units in 2010, representing an annual decline of 1.2 per cent. CREA is also predicting a 7.3 per cent decline in 2011 to 426,100 units. As for average sale prices, the association sees a 3.5 per cent gain this year to $331,600 followed by a 0.9 per cent decline next year to $328,600.

In its June forecast, the association was predicting sales of 490,600 this year and 448,700 next year with average sale prices of $325,400 in 2010 and $318,300 in 2011.

“Slowing first-time home buying activity means lower – and mid-priced homes are making a smaller contribution to the average price calculation, causing the average price to be skewed upward as a result,” said Gregory Klump, CREA Chief Economist in a news release. “It also means pricing momentum will lose steam due to rising competition among current homeowners looking to trade up.”

“The hangover from accelerated home purchases earlier this year is expected to persist over the rest of the year, but positive economic and job market trends bode well for home price stability. Sales activity and new supply are both expected to continue to ease, so inventories are unlikely to pile up the way they did during the recession.”

Posted By Calgary Mortgage Broker Conexia Mortgage

Signs of continuing softening in Calgary housing market

CALGARY – Preliminary unofficial MLS data shows Calgary’s housing market continued to soften in July with sales plunging from year-ago levels and the average sale price falling from the previous month.

According to the figures on the website of realtor Mike Fotiou, of First Place Realty, so far this month until Thursday there have been 843 single-family homes sales in the city compared with 1,585 sales for the entire month of July 2009.

In June of this year, there were 1,061 sales.

The month-to-date average sale price so far in July is $464,899, down from June’s $481,964 but up from a year ago at $436,782.

Average single-family home prices peaked in July 2007 at $505,920.

Calgary’s condominium market is telling a similar story.

So far this month there have been 368 sales compared with July 2009 when there were 702 sales for the entire month. June of this year had 445 sales.

The July month-to-date average MLS sale price for condos is $289,921, up from $285,032 last year but down from June’s $292,238.

The average MLS sale price for condos peaked in June 2007 at $323,269.

Posted by Calgary Mortgage Broker Conexia Mortgage

Calgary lags major Canadian cities in home price gains

CALGARY – Calgary had one of the lowest year-over-year house price gains in the country in May, according to a national report released Wednesday.

The Teranet-National Bank House Price Index, which surveys six major centres in Canada, said house prices in Calgary rose by 7.8 per cent from May 2009.

The index is estimated by tracking observed or registered home prices over time using data collected from public land registries. All dwellings that have been sold at least twice are considered in the calculation of the index.

Year-over-year, the composite index rose 13.6 per cent nationally consisting of increases of 17.1 per cent in Vancouver, 16.0 per cent in Toronto, 11.4 per cent in Ottawa, 8.5 per cent in Montreal and 5.6 per cent in Halifax.

On a monthly basis, prices increased in each of the six regions covered and by 1.3 per cent overall, the 13th consecutive monthly rise.

Prices gained 2.3 per cent in Ottawa, 1.8 per cent in Montreal, 1.2 per cent in Vancouver and Calgary, 1.1 per cent in Toronto and 0.7 per cent in Halifax.

In April, the index said Calgary showed year-over-year price growth of only 4.2 per cent — the lowest rate in the country behind Toronto at 17 per cent, Vancouver at 15.6 per cent, Ottawa at 9.7 per cent, Montreal at 8.2 per cent and Halifax at 6.3 per cent.

The national composite was 12.9 per cent.

On a monthly basis in April, Calgary saw prices rise by 0.8 per cent — the same as the national average.

Posted by Calgary Mortgage Broker Conexia Mortgage

Slow growth predicted: Economic signs expected to stop short of double dip

Those looking for signs of a double-dip recession will likely have
trouble finding them in the coming week, analysts say.

The main economic data on tap will focus on growth in Canada and the
United States, with the release of reports Friday in both countries on
gross domestic product.

While they are expected to show the North American economy cooling off ,
the reports are unlikely to hint at either country slipping into
negative growth, said BMO Capital Markets economist Benjamin Reitzes.

“For Canada, we expect continued growth but ebbing momentum,” said
Reitzes, whose forecast calls for tepid 0.1 per cent monthly growth in
the country’s economy in May, following stellar annualized growth of 4.9
per cent in the final quarter of last year and 6.1 per cent in 2010’s
first quarter. The consensus among most economists is for an increase of
between 0.1 and 0.2 per cent in May.

“That’s to be expected at this point. You get a big bounce off inventory
rebuilding after the end of the recession and pent-up demand, but that
fades and growth slows.

“In the U.S., it’s essentially the same story. We still expect growth in
the second half.”

TD Economics senior economist James Marple said he is expecting U.S.
growth to slow to a 2.1 per cent annualized rate in the second quarter,
while the consensus of economists surveyed is calling for 2.5 per cent,
following on 3.5 per cent average growth over the past three quarters.

Despite the end of the home-buyer’s tax credit and reduced retail
spending on building materials, Marple sees a silver lining in business
spending on equipment and software, which has been strong in the second
quarter.

“In the U.S.,” Reitzes agreed, “businesses are flush with cash and
they’ve been investing signifi cantly, we’re just waiting for them to
start hiring.”

Both he and Marple are calling for continued, but slower, growth in the
U.S. in the second half.

Having managed to post gains in a week that included the Bank of Canada
raising rates, U.S. Federal Reserve chairman Ben Bernanke warning of
“unusual uncertainty” in the economy and the release of European bank
stress tests, markets will continue to watch earnings report closely for
signs as to the broader economy.

Rogers Communications and Talisman Energy release results on Tuesday,
Canadian Pacific Railway on Wednesday, Thomson/Reuters and oilsands
producer Cenovus on Thursday, and food giant George Weston on Friday.

In the U.S., USSteel and Du-Pont report Tuesday, Boeing on Wednesday,
ExxonMobil on Thursday and Merck & Co. on Friday.

Other Canadian economic releases in the week look at industrial product
and raw material prices for June on Thursday, and payroll, employment,
earnings and hours data for May on Friday.

Posted by Calgary Mortgage Broker Conexia Mortgage