By Melanie Epp

There are two sides to every story; the one about Canada’s housing bubble is no different.

According to Arizona-based accountant Ben Jones, Canadians should be worried about the housing market going bust. This isn’t the first time he’s made a prediction that others scoffed at. The first time was in December 2004, when he raised concerns about the vulnerability of the US housing market. If they were laughing then, they certainly aren’t now.

At that time, Jones continued to post reports about plummeting home prices from around the world – in China, Australia, the US, Canada, Japan and Europe – even though no one really believed his cries. Jones is still “uncovering signs that the real-estate mania is far from over,” says the Globe and Mail, but the focus seems to have shifted on to Canada.

“China has probably the largest bubble in the world,” says Jones, “and when it blows, it’s going to shake the globe. There have been housing bubbles before, but never all over the world. Every time I hear people talk about the housing bubble in the past tense, I cringe.”

In particular, Jones points to the real estate markets in major cities such as Vancouver and Toronto, where he says prices are completely out of control. Although it was projected that prices would stabilize and correct, they haven’t. Jones believes that we are headed on a dangerous path, one that’s remarkably similar to that of the US in 2008. He also thinks that Canadians who are investing in property south of the border might also be in for a big surprise as the risks are higher than they think.

“When I read things about Canadians using home-equity money to leverage up 100 per cent to buy homes in Arizona,” says Jones, “well, we’ve seen the damage that leverage can do. They’re not only putting the cash that they’re bringing here at risk, they’re borrowing money against their own houses in Canada. They’re actually contributing to the inevitable collapse of the bubble in Canada.”

Part of the problem in the US, Jones suggests, is the presence of shadow inventory, or millions of empty houses or houses in foreclosure that the government and banks don’t put on the market. They do this to keep the supply low, he says, so that they can price those on the market higher. Those who are buying homes are paying more than they are worth. Low interest rates and down payments are influencing investors to spend more than they’d like to just to make a quick buck.

Jones suggests that any objective economist should know that the situation in Toronto is a “disaster in the making.” The entire system, he says, is a “house of cards.” Referring to the Toronto house that sold for $400,000 over asking, he says, “China probably has the largest bubble in the world and the fact that they’re using their bubble wealth to drive up prices in Canada is the rolling-bubble phenomenon playing out on a massive scale.”

“Ask yourself, why are the Chinese buying all these properties in Toronto and Vancouver? To make money. Yes, they say they are really nice places, but they say that about every bubble market,” says Jones. “Florida is a really nice place. California has great weather. I don’t think that justifies paying $400,000 over asking. Toronto was a really nice place 20 years ago, but nobody was paying half-a-million dollars for a condo.”

Others, including some of Canada’s top economists don’t take the bubble talk seriously. The Canadian Mortgage and Housing Corporation says that Canadian housing starts have risen to their highest since September 2007.

“When we look at the overall marketplace, there might be pockets of vulnerability but we remain quite comfortable,” says Gordon Nixon, chief executive officer of RBC. “Frankly, I’d like to see the rhetoric come down a little bit.”

He’s not alone. Economist Paul Fenton says that while housing prices are currently about 10 percent overvalued, there doesn’t seem to be a sense that there’s been overbuilding. Housing doesn’t pose a systematic threat to the function of the nation’s financial system, he says.

While new condo sales in Toronto hit another high when they reached 6,070 units in the first three months of this year, Jim Ritchie, senior vice president of sales and marketing at Tridel and a Toronto-based real estate developer says that condo builders “tend to be risk adverse.” He says that some 70 percent of condos are presold to buyers who put down at least a 20 percent deposit.

“It’s all about managing risk,” he says. “There’s a market for condos because average house prices in Toronto’s 416 area code are about $830,000 compared with $400,000 for a new condo.”

While some reports say that foreign investors are responsible for rising home prices, Ritchie says that just isn’t so. He says that almost 60 percent of people buying condos in the area are either single or couples without children. Concerns about foreign investment are overdone, he says, “given that 95 percent of purchasers are locals who have social insurance numbers and local addresses.”

When asked if he thought the Canadian housing market was in a bubble, chief executive officer of the Canadian Association of Accredited Mortgage Professionals, Jim Murphy, said no. He says that mortgage credit growth is actually below normal.

Other reports predict that Canada’s housing prices will continue to rise over the next three years, but so will economic growth.

“I don’t agree with fears that record house process are signs of a price bubble that must soon burst,” says chief economist for Central Credit Union, Helmut Pastrick. “While price levels are high relative to incomes, low interest rates are keeping mortgage carrying costs manageable. I expect rising rates will dampen demand a bit, but economic growth and growing employment will offset that decline.”

CMHC officials agree. “Clear evidence of a bubble is lacking,” their annual report says. “CMHC continues to monitor very closely housing prices and underlying factors such as demographic and economic fundamentals and financial conditions across all major urban centres, including condominium markets.”

So who’s right? Only time will tell, but both sides present valid and compelling arguments. The best advice one can offer is to exercise caution – always.

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By Melanie Epp

Like over 20% of Canadians, Sara is self-employed. She works as a graphic designer in a busy city in Ontario. Although she’s been in business for nearly two years and she’s making more money than she’s ever made before, her bank won’t give her a mortgage. And she’s not alone. When Sara asked her friends and family, they agreed that getting a mortgage while self-employed could be extremely difficult task. Even though they have excellent credit scores and money in the bank, it would seem that many of the major financial institutions shy away from lending to self-employed individuals. Provided she meets the criteria, it is possible for Sara to get a mortgage. Here’s how:

What makes self-employed individuals different?

Before we get into the how, let’s talk about the why. Why is it so difficult to secure a mortgage if you’re self-employed? Unlike traditionally employed individuals, those who work for themselves do not receive regular pay, nor do they get a printed T4 at the end of the year. While they might be making really good money, their income is best described as ‘inconsistent.’ When you work for yourself, the only thing for certain is that nothing’s for certain. For this reason, many of the major financial institutions consider self-employed individuals too risky to qualify.

How to secure a mortgage

Mortgage lenders want to make sure that you are a viable candidate for a mortgage. They need to know that you can make your payments, no matter what business is like. While it’s the job of the lender to carefully assess the risk involved in lending to individual clients, it’s the job of the individual to lessen that risk. It is your responsibility to show the lender that you are a desirable candidate. Here’s what you’ll need to provide in order to secure a mortgage:

Proof of income: Most mortgages lenders will require you to have 2 years of steady income prior to applying. You will be asked to provide a two-year average of Line 150 on your tax return. While small business owners claim expenses, which can make their income appear lower, a good lender will take this into consideration.

An excellent credit history: A good credit score will get you far – an excellent score will get you even farther. Make sure that in the months leading up your visit to the lender that you keep on top of all of your finances. Don’t miss a payment and lower your personal debt. Doing so will increase your chances of securing a mortgage at a good rate.

Other paperwork, including HST returns and business registration papers: Keep a file of important documents on hand in case your lender needs to see them. Make copies, if necessary.

A hefty down payment: While 5% is usually acceptable for the traditionally employed, you can expect to put at least 10% – and as high as 20% – down. Know that some of that money can be gifted, though.

One more thing to consider is the location of your business. Some lenders prefer to give money to business owners whose place of work is located near a busy, urban centre. It is thought that the location of your business helps to determine whether or not it will be busy year round.

While the journey to homeownership can be tough at times, it’s certainly not impossible. Call around and speak with a mortgage specialist. They’ll tell you everything you need to do to prepare. The more you prepare yourself ahead of time the more desirable you’ll be in the eyes of the lender.

Ontario Mortgage Superstore is here to help you. We arrange Self employed mortgages with as a little as 5% down (2 years proveable income). Whether you are a first time home buyer or looking for a new to Canada mortgage. Use our mortgage calculator to find out how much you can afford.

By Melanie Epp

Mark Carney believes that record high household debt is the number one threat to the economy. He also believes that if he raises interest rates it would hurt economic recovery, but slow spending.

“In exceptional circumstances,” he says, “If there are issues that threaten financial stability, such as household debt … the bank could use monetary policy for that purpose.” And Carney believes that we are well on our way to these “exceptional circumstances.” As a proportion of disposable income, household debt reached almost 151% by the end of last year. Currently, it stands at 153%.

Very soon, that number is expected to reach 160% – a number similar to that of the US just before the 2008 financial crisis.

“We have never been as indebted as we are today as individuals,” says Carney. “We’ve done analysis which shows that about 10 per cent of Canadians are vulnerable if interest rates returned to more normal levels, which will happen.”

Why is debt growing?

Currently, income growth is currently well below the rate of inflation. Because income growth has slowed, more and more Canadians are borrowing money to buy homes, or are taking loans out on their homes.

Despite what Carney says, though, private sector analysts keep telling Canadians that the Bank of Canada is unlikely to hike rates for at least another year, so many aren’t feeling the pinch. As long as the rates remain low, Canadians feel like they can afford the homes they’ve bought. Sure, record high debt doesn’t seem like an issue as long as home prices keep rising and interest rates remain low, but Carney warns that they’re not going to be this way forever.

As they certainly will, what happens if house prices drop and interest rates rise? Not only will Canadians see the value of their homes plummet, but they’ll also have higher debt to manage – all while income growth remains modest at best. The outcome? Canadians just won’t be able to keep up.

But will home values plummet? It’s hard to imagine, since they’ve been on the rise for so long with no sign of stopping. During an interview on CBC Radio’s The House, Carney told Evan Solomon that there are “issues in some segments” of the housing market, but he didn’t go as far as to say that a housing bubble exists in Canada.

“There are issues particularly in some parts of the country, in the condo market, without questions, where activity has been particularly strong,” he says. “And in some of our major cities, without question, evaluations are extremely firm.”

In particular, unsustainable condo markets in both Toronto and Vancouver have economists worried. The average home price in Vancouver finally declined in March from $823,749 to $730,998. In Toronto, however, the average home price continued to rise from $499,354 in February to $503,998 in March. Across Canada, the average home price is five times that of income, says Carney. The norm is 3.5 times higher.

While Carney says that there are a number of defense mechanisms that can be used to protect against a housing bubble, he suggests that it is ultimately up to Canadians themselves.

“First and foremost, it’s the decisions of the individuals who take out the loans, and Canadians are a smart and prudent people,” he says.

The responsibility, though, doesn’t just lie with Canadians, though; the banks and institutions are also responsible. They need to wise up and stop lending to people who clearly can’t afford the debt. Rates will rise and when the time comes, Canadians need to make sure that they will be able to carry their debt load.

What happens if debt becomes an issue? Without a doubt, some Canadians will be in over their heads when interest rates rise. Others will manage but be forced to reduce spending, a move that will help further slow economic activity.

Meanwhile, private sector analysts tell a very different story about the housing market. They almost unanimously agree that when compared to cost of renting and income, housing prices are too high in Canada. They suggest that a correction is coming, which could result in prices dropping by as much as 10-25%. In over-inflated markets, like those found in Vancouver and Toronto, those corrections may be even higher.

It’s not as if they’re not trying to fix the problem. Jim Flaherty, Minister of Finance, has made three attempts to deflate the housing bubble in the past six years by tightening mortgage-lending rules. Canada Mortgage and Housing Corporation (CMHC) have also done their bit to amend the system, as has the Office of the Superintendent of Financial Institutions (OSFI). In the recent federal budget, Flaherty announced that the government would introduce legislation that will increase governance over CMHC. And it since has.

Just last week, the Globe and Mail reported that Ottawa is “beefing up its scrutiny of CMHC and the more than $500-billion in higher-risk mortgages in its care.” The Conservative government has given OSFI, Canada’s banking regulator, new authority over CMHC.

Initially, the purpose of CMHC was to provide social housing and to insure mortgages for those who were unable to make down payments so that more Canadians could buy homes. Until recently, the federal minister of Human Resources oversaw CMHC. In 2007, CMHC’s mortgage portfolio had a legal limit of $350-billion. Since then, that limit has been increased three times to its current cap of $600-billion – a number that it is fast approaching. If mortgages run over, it’s Canadian taxpayers who’ll have to foot the bill, which is a scary thought since the pool is currently full of high-risk borrowers.

The government is also banning banks from using mortgages that are insured by CMHC as collateral on covered bonds. The practice, it says, goes well beyond CMHC’s mandate. Ottawa says that the new rules will ensure that CMHC’s commercial activities “promote and contribute to the stability of the financial system.” Although the CMHC has become an important financial institution, it has not been subject to the rules of OSFI, says Flaherty. Now it will be.

It’s not just CMHC that’s being scrutinized. Mark Carney has also spoken directly to the banks, asking them to get on board by curbing their lending practices.

Although Carney is constantly warning Canadians about rate hikes, he says that they are a last resort, only to be used if debt threatens the financial stability of the country. Rate hikes will only be used as an option to complement other measures, he says. If debt does continue to rise, though, Carney will intervene. A new agreement, which came into effect last year, gives him the power to act whenever he needs to, if necessary.

Ontario Mortgage Superstore can help you. How to improve your credit. Bad credit mortgages. Mortgage after bankruptcy. Private mortgage lenders. Second mortgages

There are two types of consumers in the world – those who buy what they can afford, and those who live off credit. Sometimes it’s easy to justify racking up debt, especially when the item you want is deeply discounted. You only have to pay the minimum monthly payment, right? What most people don’t realize is that that deeply discounted item isn’t really deeply discounted when you consider the interest you’ll have pay on it.

Take, for example, the flat screen TV my friend bought last Boxing Day. He was totally maxed out from Christmas shopping, but really wanted to get the TV because the price was right. Without hesitation, he swiped his Future Shop card (at a rate of 29.99%), asked for the 6-month interest free promotion and walked out with a brand new TV. He had 6 months to pay it. No problem.

Sometime in January, his first bill arrived. Since he had received the 6-month interest free promotion, he wasn’t required to make a payment, so he didn’t. The next month passed much the same, as did the few that followed. He considered himself fortunate, as he tried to pay off the other holiday debts he’d amassed instead.

At the end of the 6-month period, the bill arrived with a minimum payment. It was only $10. He paid it. The next month, the $500 TV bill asked for a minimum payment of $18.05. No problem; that was the price of a lunch out, after all. When the bill came the following month it was even lower – $17.89, to be exact. Again, my friend paid the bill and waited for the next month’s one to arrive. Why he didn’t bother to calculate the total cost of the TV, I’ll never know. All he focused on at the time was the savings. Here’s what he should have recognized, though – that TV was going to cost him a total of $1,083! When you think about it, he didn’t really save anything at all.

My friend isn’t alone. Many, many people purchase now with the idea that they’ll pay for it later. And boy do they pay for it later. If you, like my friend, have outstanding credit card debt, here are 5 tips for paying it off quicker.

1.    Don’t avoid your debt, deal with it head on. Knowing what you owe is the first step to managing debt. When debt gets out of control, many of us tend to ignore it. Make a list and prioritize. Always pay the debt with the highest interest rate first.

2.    Hide your cards. Until they’re paid off, put the cards away. Easier said than done? Ask someone you trust to hold on to them.

3.    Think twice when shopping. Do you really need that item? Or do you just want it? There is a difference between needs and wants. Be conscious of yours.

4.    If possible, negotiate a lower rate. If you’re approved for a card with a lower rate, you may be eligible for debt transfer. Sometimes there’s a fee, though, and that fee can outweigh your savings. Always look before you leap.

5.    Devise a payment plan. The best course of action is to come up with a plan and stick to it. If you’re still not convinced that you need to pay more than the minimum payment, use a minimum payment calculator to see what the true cost of your item is.

See how to improve your credit, where to obtain your credit report for free and how your credit score is calculated. For more information on how to obtain a mortgage with bad credit, see our bad credit mortgage financing page. We also assist clients looking to obtain a mortgage after bankruptcy

By Louise Egan and Randall Palmer

* BoC holds rate at 1 pct, same level since Sept 2010
* Says may need to withdraw stimulus
* Sees firmer growth, inflation; faster return to capacity
* C$, bond yields jump on news, markets see earlier hikes

OTTAWA, April 17 (Reuters) – The Bank of Canada said on Tuesday it may need to start raising interest rates, preparing to lead the Group of Seven industrialized nations in lifting borrowing costs even as fears of a flare-up of the European debt crisis have not fully faded.

The central bank held its key overnight rate at 1 percent as anticipated but issued a surprisingly hawkish statement that included explicit language on eventual rate increases for the first time since last July.

“In light of the reduced slack in the economy and firmer underlying inflation, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate, consistent with achieving the 2 percent inflation target over the medium term,” the central bank said in a statement.

The language caught traders off guard, with Canadian dollar and rate futures both jumping following the statement.

The central bank described an economy that is at a turning point where inflationary pressures could become a concern and high household debt is the biggest risk.

It raised its growth and inflation forecasts for this year and said the economy will return to full capacity – the limit at which it can grow without generating excessive inflation – in the first half of 2013 rather than in the third quarter as it predicted in January.

The news prompted three of nine primary dealers surveyed by Reuters on Tuesday to pull forward their forecasts for a rate hike. [C A/POLL]

The median forecast is now for a hike in the first quarter of next year whereas a similar poll last month called for a hike in the third quarter. Five dealers have now pulled forward rate hike forecasts since that poll.

“Certainly it’s a more hawkish statement than the market was anticipating,” said Sal Guatieri, senior economist at BMO Capital Markets.

“So we could see a rate increase this year – at least a couple of taps on the monetary brakes are possible,” he said.

FALSE START

The Bank of Canada has frozen rates since September 2010 after it became the first in the G7 to raise borrowing costs from lows hit during the financial crisis.

It had a false start in mid-2011 when it signaled intentions to increase rates, but it had retreated by September as the European debt crisis exploded.

Its language in Tuesday’s statement was more tentative than in July 2011 when the bank said stimulus “will” be withdrawn.

Canada’s economy has grown steadily since emerging from the 2008-09 recession but policy makers had warned the recovery was at risk from the European debt crisis.

Those external headwinds have abated somewhat, the bank said on Tuesday, although Spain and Italy have come under market pressure this week in a reminder the crisis is not over.

The outlook, which will be discussed in detail in its quarterly Monetary Policy Report on Wednesday, formalizes the more bullish tone adopted by Bank of Canada Governor Mark Carney in the past month.

“In sum, we view this communiqué as an important, and large, step towards further normalizing the overnight rate,” said David Tulk, chief macro strategist at TD Securities.

AHEAD OF FED

Such a move would put Canada well ahead of the U.S. Federal Reserve, which has said it expects its key rate to remain near zero until at least late 2014. The European Central Bank likewise has not discussed rate changes, ECB President Mario Draghi said this month.

Tulk now sees the earliest possible date for a hike as September, though he says it is more likely to come later.

On the more hawkish end of the spectrum, Nomura Global Economics analyst Charles St-Arnaud sees a hike as early as the bank’s next rate announcement on June 5.

The Canadian dollar strengthened after the release of the bank statement, rising to a near one-month high at C$0.9865 versus the U.S. dollar, or $1.0137, from C$0.9958 to the U.S. dollar, or $1.0042, before the statement.

Overnight index swaps, which trade based on expectations for the central bank’s key policy rate, showed that after the statement traders priced in higher odds of a rate hike later this year but see little chance of one at the next meeting in June.

The yield rose on the two-year Canadian government bond , and government bond prices underperformed U.S. Treasuries after the news, especially shorter term issues.

The bank said on Tuesday that economic growth and inflation are both likely to have more momentum than it forecast in its January Monetary Policy Report.

It revised its 2012 growth projection to 2.4 percent from 2 percent in January, but cut its 2013 projection to 2.4 percent from 2.8 percent. It sees growth moderating to 2.2 percent in 2014.

That was more upbeat than the International Monetary Fund’s World Economic Outlook, which on Tuesday forecast 2 percent growth this year.

The bank said inflation will soften in the second quarter but then will rise to the bank’s 2 percent target “for the balance of the projection horizon”. In January it saw inflation reaching 2 percent in the third quarter of 2013.

The next BoC meeting is scheduled for June 5th.