Should Ottawa Move to Curb Foreign Speculation in Canadian Real Estate Market?

Date: May 18th, 2012

By Rubina Ahmed-Haq

Foreign speculation in Canada’s biggest cities is artificially increasing prices in the housing market, according to some experts.

In a recent example, a foreign student from China bought a small bungalow in Toronto for $1-million. This outrageous price and the new owner have some worried that Canadians may be loosing the real estate market to foreign ownership. Already the market in Toronto is overheating with the average selling price of real estate in the city recently hitting $503,998

There’s growing concern among experts that foreign money is unnaturally driving up the price of homes in Canada. This drive may be making it impossible for many Canadians to afford to buy property. Especially when interest rates start to rise.

Some say the rules of foreign ownership are too lax. Right now, foreigners can purchase property in Canada without being a permanent residence. This means they can stay here for less than six months at a time with no questions asked by the government and own property here for the long term.

Lawrence Kobescak, with Ontario Mortgage Superstore wants Ottawa to get involved. “The Canadian government needs to take steps to reduce foreign ownership in residential properties.” He points out that although we need foreign dollars to help Canada’s economy, the over saturated real estate market with outside investors is not all good for Canada  “Foreign investment is great, until its not,” he says

Canada’s good reputation and resilience during the recent economic crisis may be to blame. Investors from Hong Kong, Britain, and the U.S find Canada’s real estate market attractive because it looks much more stable compared to the rest of the world. Unlike our cousins to the south, our housing market has not been negatively affected by the global recession.

Recently, Bank of Montreal chief economist Sherry Cooper said Canada should learn the lessons made in places like Spain, where foreign speculation drove up prices to extraordinary levels.

“For nearly a decade starting in 1999, house prices exploded in Spain as both domestic buyers, and more notably, foreign buyers poured money into residential real estate,” Cooper says. She adds, “real estate agents have tales about foreign investors scooping up literally dozens of condo units at one time.” While Toronto’s condo boom still pales in comparison to what’s happened in Spain or the U.S., Cooper says, lessons must be learned from those experiences.

And it’s not only Canadians that are worried.

Housing bubble predictor Ben Jones states speculation in Canadian cities such as Vancouver and Toronto is “wildly” out of control. The Arizona based accountant has a good track record predicting bubbles. In 2004 he launched “The Housing Bubble Blog,” where he clearly indicated that the U.S housing market was overpriced and heading for a meltdown.

The reasons for the U.S housing market crash was from domestic speculation and homeowners taking on to much risk, but foreign speculation could create a similar bubble in Canada according to Jones.

He remains particularly concerned about Toronto and Vancouver’s condo market.  In a recent blog he wrote. The fevered pace of building in Toronto, Vancouver and Montreal is fuelling fears that the condo market is dangerously close to overheating.

He adds, Canada’s Finance Minister Jim Flaherty doesn’t have a good idea on the amount of foreign money in the Canadian housing market. Flaherty recently said ”It’s mainly anecdotal, so I don’t have a statistical grasp of it, no,’ he said, adding that he hears about lots of people in emerging economies paying cash for condos in Toronto and Vancouver.

With bank mortgage rates being so low and the foreign equity markets not performing well, the Canadian housing market is offering a safe and attractive return. Unfortunately we are reaching a point where we could suffer long-term economic damage if we do not change the policy.

Kobescak says the solution lies in Ottawa “Policy changes such as restricting the number of non owner occupied foreign owned properties to one, could help stem a collapse in the Canadian housing market.”

Here is a list the average home prices in Canada’s biggest cities sold in March 2012.

Calgary $406,844
Toronto $503,998
Vancouver $730,998
Montreal $323,766
Regina $293,532
Halifax $278,825

Luxury Home Sales Up

Date: May 18th, 2012

By Rubina Ahmed-Haq

Demand for luxury homes in Canada is rising despite gloomy predictions of the housing market. It’s good news, because luxury home sales are traditionally the slowest in the whole real estate industry.

The announcement comes from RE/MAX. It reports the demand for high-end luxury homes was strong in most markets in first three months of 2012. Sales were well ahead of 2011 figures for the same period in most markets across the country, according to the  report. From St. John’s to Vancouver the real estate company notes expensive homes are selling at a greater pace than seen in many years.

Its great news for real estate agents who have seen a slowdown in sales in the last part of 2011, but its also positive for Canada’s economy.

Homes sales of any kind stimulate the economy. New homebuyers often purchase new furnishing, appliances and make other big-ticket purchases. A new home is also coupled with renovations that help Canada’s construction industry. Even having a home painted can mean one week’s worth of work for a company.

“Canadians recognize and appreciate the stability of real estate,” says Elton Ash, Regional Executive Vice President, RE/MAX of Western Canada.  “Given volatility in other areas, housing has emerged as a blue-chip asset among the country’s most affluent individuals. The capital gains exempt status ups the appeal, particularly as we see ongoing fluctuations in stocks and uncertainty in Europe.  All the variables have come together to support an upper-end market firing on all cylinders.”

So, which city saw the biggest increase in luxury homes sales?

The greatest percentage increase was reported in Regina, where first quarter sales of luxury homes priced over $500,000 climbed 56 per cent year-over year.  Quebec City placed second, posting a 50 per cent upswing in activity, while Toronto followed closely with a 49 per cent gain.

Also a number of mid sized cities say a increase in sales. London-St. Thomas was up 43 per cent and KitchenerWaterloo up 39 per cent. This is demonstrating that upper-end enthusiasm is not exclusive to Canada’s larger centres.

“The strength of the upper-end is underpinned by solid fundamentals,” says Sylvain Dansereau, Executive Vice President, RE/MAX Quebec.  “Most markets remain largely balanced across the board, with stable or modest price growth forecast in the luxury segment.  Inventory levels have played a role in some multiple offer activity, with shortages notable in Montreal, throughout Ontario, and Winnipeg.  While selection may be adequate in other markets, the demand and competition for quality stands out.  Buyers at this price level are very discriminating.  They are raising the bar nationwide, altering the Canadian housing landscape in the process.”

Luxury home sales don’t directly indicate the health of our economy but give confidence that one of Canada’s slowest markets continue to see a surge in sales.

Use the OntarioMortgageSuperstore.com mortgage calculator to find out how much you can afford.

When Will Housing Prices Come Down?

Date: May 18th, 2012

By Rubina Ahmed-Haq

The average price of a home in Canada is now $375,810. In the country’s major cities the prices are much higher. For example in Toronto the average home sells for more than half a million dollars and in the most extreme example in Vancouver the average prices are hovering above $700,000.

Massive mortgages, fuelled by cheap borrowing, are now the norm for many homeowners. But, it means many also remain on the sidelines wondering when prices will come down and if they have missed their chance to buy a house of their own. The understanding is when interest rates start to rise, home prices should come down, but this will be coupled with more expensive cost of borrowing. It’s leaving homeowners in a very confusing position.

In the next 12 months there are several scenarios possible. Here are three that I think are most likely.

Canadian housing prices continue to rise

Canada has been in a bull housing market for the better part of 20 years. But despite prices rising for so long and so quickly, our major cities remain a bargain compared to other cities around the world. New York, London, Paris and many others are still suffering with much higher home prices. The ability to handle debt is also better for Canadians compared to Americans. If interest rates stay low or rise slowly, the appetite to spend more on homes could remain.

Housing market has a 20 per cent correction

In Canada’s biggest cities some first time homebuyers have been prices out of the market. This is a very important group of buyers who make up more than 50 per cent of total real estate sales. Those who have the drive to buy will remain on the sidelines and more people who remain there means sellers will have to lower their prices to lure those buyers back in.  A 20 per cent correction could be the discount new home buyers need to be attracted back to real estate market.

This could be the beginning of a decade of decline

As home prices have been steadily rising for two decades imagining a steady decline for 10 years doesn’t seem impossible. As soon as interest rates rise home prices could start their decline to reflect the higher cost of borrowing. If interest rates rise steady to more normal levels, overnight lending rate at 4 percent and prime 6 per cent, it could take years to get there. This means Canadians could see a steady decline in home prices as well.

Finally

The only thing for certain is interest rates eventually have to start coming up. Bank of Canada Governor Mark Carney has been hinting for months that could start as early as Fall 2012. What we don’t know is how the housing market will react.  If you are in the market to buy a home, purchase one you can afford today and when rates rise. You can do this by calculating your affordability based on a higher interest rate. I recommend at least 2-3-percentage point higher. For example if you are getting a mortgage rate at 3.5 percent, pay your mortgage as if the rate was 5.5 percent. This means you will be prepared when your mortgage comes up for renewal and when rates start to rise.

Will the housing boom go bust?

Date: May 11th, 2012

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.

OntarioMortgageSuperstore.com offers residents in Ontario the best mortgage rates. Use our mortgage calculator to find out what is affordable for you. We can assist those in need of second mortgages and bad credit mortgages.

Securing a mortgage: Tips for the self-employed

Date: May 11th, 2012

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.