RBC says home ownership was less affordable in most major Canadian cities during the first quarter, although Calgary and Edmonton bucked the trend.

The latest RBC Economics report on home affordability says its index deteriorated sharply in Vancouver and to a lesser degree in Toronto, Montreal and Ottawa — primarily due to higher real-estate prices.

But the bank’s affordability index was unchanged in Calgary and improved in Edmonton compared with the fourth quarter of 2011.

The report tracks how much of a home owner’s income would be required to pay typical costs associated with owning a standard one-storey detached house.

In Vancouver, RBC estimates the combined cost of mortgage payments, utilities and property taxes rose 3.1 percentage points to 88.9 per cent.

In Calgary, by contrast, only about 36.7 per cent of pre-tax income would be required to pay for a standard bungalow — unchanged from the previous study — and in Edmonton the index improved by 0.4 percentage point to 32.4 per cent.

In Toronto, the index deteriorated by 1.2 percentage points to 53.4 per cent; in Montreal, the cost of ownership increased 1.2 percentage points to 41.4 per cent of income and in Ottawa it was up 0.9 per cent to 41.8 per cent.

“It became a little tougher on household budgets to carry the costs of owning a home at market prices at the start of this year,” said Craig Wright, RBC’s chief economist said in a statement today.

“Strong buyer demand was a principal driver of the modest rise in homeownership costs. While the deterioration in affordability was felt to varying degrees across the country, it was mild in most cases.”

He said the challenge will likely increase once the Bank of Canada begins raising interest rates.

“Exceptionally low interest rates have been the key force in keeping affordability from hitting dangerous levels in Canada in recent years,” Wright said.

“Affordability headwinds are likely to increase next year, as interest rates make their way towards more normal levels.”

He said RBC expects Canada’s central bank will hike rates gradually, starting in the fourth quarter.

“A gradual pace of increases will allow income growth to provide some offset,” he said.

Source: David Paddon, Canadian Press

The Bank of Canada may be thinking about raising interest rates but there’s apparently no need because Canadians are hunkering down to cool debt obligations on their own.

“The pace of growth in household credit is no longer a reason for the Bank of Canada to move from the sidelines any time soon,” says Benjamin Tal, deputy chief economist at CIBC World Markets.

He wrote a report released Wednesday that suggests central bank intervention is not needed, especially with consumers already seeing interest payments on debt eating into 7.3% of their disposable income as of the fourth quarter of 2011, even at today’s low rates.

“Why are you raising rates? To slow down credit growth — but it’s already slowing,” Mr. Tal says. “I say let the market slow naturally. We are so concerned about this but it’s moving in the right direction.”

Toronto-Dominion Bank economist Francis Fong also weighed in, suggesting Canadians have begun to get the message about having too much debt, based on the slowdown in consumer credit growth.

Even the chief executive of one of the big five banks joined the discussion, hoping to extinguish some of the panic about Canadian debt.

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

The CIBC report does note that as of March 2012, mortgage debt rose by 6.3% on a year-over-year basis, which is below the average rate of growth seen in the past two years of 7.3%.

Mr. Tal says there will be a gradual softening in the housing market with prices falling 10% in the coming year or two. He says tougher rules from regulators on loans will cool the market and notes the banks themselves are questioning values, citing “the increased use of full-scale appraisals as part of the adjudication process.”

Overall, Mr. Tal says that for the first time since 2002 consumer credit is rising more slowly than in the United States.

“Consumer credit [growth] is basically zero,” he says, adding Canadians have been optimizing their credit situation by taking high-interest credit card debt and transferring it to lines of credit.

TD’s Mr. Fong agrees that Canadians are starting to “hunker down” and pay off their debt, but at the same time he suggests a two-percentage-point increase in rates would leave many households at risk.

Source: Garry Marr, Financial Post

Helmut Pastrick has heard the growing talk from other financial analysts that a real estate bubble or “craze” in Vancouver has left the condo market ripe for a crash.

So far, he doesn’t see it.

The Central 1 Credit Union chief economist instead says prices aren’t soaring dramatically and he expects continued stability over the short term in the Lower Mainland.

“The Vancouver market is still obviously very expensive,” Pastrick said. “But it’s not skyrocketing away from us. Nor is it likely to fall into the tank either.”

Lower Mainland home sales were down in April, but most prices are up modestly from a year ago, although some categories have sagged in recent months.

Nor does he see signs that builders are flooding the market with new units.

The risk as Pastrick sees it is not from over-inflated prices, but from global events – a new financial crisis in Europe or a war that sends oil prices spiking.

He said that could spark a new recession that drags down both real estate and stock markets.

“If there’s a global event, Canada will also feel it and the housing market will as well,” he said, adding detached houses would fare better than condos.

Over the longer term, Pastrick doesn’t expect Metro Vancouver will suddenly become a more affordable place to own a home.

“When I look over the next 25 years, I expect prices will be higher,” he said.

“I expect it will be even more difficult for many to enter the housing market.”

The proportion of people who rent instead of own will rise over time, he predicted, and builders will continue the trend of offering smaller units.

He also foresees more intergenerational households than in the past with larger extended families living under the same roof.

The Real Estate Board of Greater Vancouver’s benchmark price for all residential homes was up 2.8 per cent in the last three months to $683,000 in April, and is up 3.7 per cent from a year ago.

Detached house prices have been the strongest, up 6.3 per cent from a year ago, while condos were up just 1.1 per cent.

Benchmark prices released by the Fraser Valley Real Estate Board were up 5.3 per cent year-over-year to $576,600 for detached houses in April, although that number was down two per cent from March.

Townhouses were up 1.9 per cent from a year ago to $318,400 and condos rose 0.8 per cent to $205,800.

The federal government, wary that low interest rates – important for economic recovery – are leading consumers to take on too much debt and inflate home prices, has tightened mortgage lending rules a number of times since the 2009 recession.

Metro Vancouver home starts held steady in April and are up 16 per cent from a year ago to nearly 6,000.

Total building permits issued in the Lower Mainland were up nine per cent in March from the same period a year ago. That includes industrial and office construction.

Source: Jeff Nagel, Surrey Leader

Existing home sales in Canada’s most expensive city dropped in April, according to the Real Estate Board of Greater Vancouver.

The board described home sale and listing activity as maintaining a “consistent pace” leading to balanced market conditions but its April statistic shows total sales across the Multiple Listing Service in April were 2,799, a 12.3% decline from a year ago. It also represented a 2.6% decline from March 2012.

REBGV said April sales were the lowest for the month in the region since 2001 and 16.9% below the 10-year average for the month of 3.369.

“Although April sales were below what’s typical for the month, we continue to see, with a sales-to-active listing ratio of nearly 17%, a balanced relationship between buyer demand and seller supply in our marketplace,” said Eugen Klein, president of the board.

The board’s so-called benchmark price for all residential properties in Greater Vancouver was up 3.7% in April from a year ago to $683,800. Prices are up 2.8% over the last three months. In the Lower Mainland prices were up 3.4% in April from a year ago to $612,000.

“Recent activity has had a stabilizing effect on home prices at the regional level, although pricing can vary depending on area and property type,” said Mr. Klein said.

Supply has been increasing in the Greater Vancouver area with the total new listings in April up to 6,056, a 3.6% jump from just a month earlier. However, new listings are also only up 3.6% from a year earlier. April new listings were 6.7% above the 10-year average for Greater Vancouver in April.

Overall, the board had 16,538 homes listed for sale on the MLS which is up 8.5% compared to March, 2012 and 16% from a year ago.

Source: Garry Marr, Financial Post

When will the Bank of Canada raise rates? Bank of Canada governor Mark Carney surprised few with the announcement on April 17 that the overnight lending rate (from which prime rates are derived) would remain unchanged. His comments, however, has begun large changes in rate-hike predictions. BMO has already moved its prediction for the next rate hike from mid-2013 to end of 2012, and many are expected to change their outlook. Swap traders are pricing in a 90-per-cent chance of a rate hike by the end of 2012.

With all of the negative news circulating globally, why have things changed so much over the past few months? Here’s what we can take out of the Bank of Canada’s comments:

1. Growth will be watched more closely than inflation. Economic growth forecasts have increased from two per cent to 2.4 per cent over the past month, as 82,300 jobs were created in March (a reduction of 0.2 per cent unemployment). Because there is so much money sitting on the side-lines, growth is a good indicator of potential inflation. Inflation was just under the two-per-cent target at 1.9 per cent in March.

2. Carney is now forecasting that Canada’s economy will return to full capacity in the first half of 2013, three to six months earlier than originally forecast. Full capacity is the limit at which the economy can grow without excessive inflation.

3. Global economic factors are improving. Greece’s bailout helped calm down European markets (especially bond markets). Carney predicts a strong second half of 2012 for Europe.

The above factors, combined with a constant reminder that consumer debt in Canada is above the comfort zone, may see rates rise more quickly than anticipated. Five-year bond rates (which heavily influence fixed rates) shot up nearly 0.1 per cent after the Bank of Canada announcement, anticipating a quicker recovery than originally forecast.

Don’t hit the panic button just yet, though. We have all been through times of positive spring numbers only to be disappointed by the summer, so expect the Bank of Canada to be cautious when evaluating a rate hike. Last spring most banks and economists had predicted the prime rate would be at four per cent by fourth quarter 2011, only to drastically change their outlook by summer and into fall. If the economic momentum carries through the summer and into third quarter, it would be expected that we see a reasonable .25 per cent increase in third or fourth quarter this year.

Source: Kyle Green is a mortgage broker with Mortgage Alliance Meridian Mortgage Service Inc.

Our bubbly housing market raises questions not only about the wisdom of buying right now, but also about selling.

What if you bought a home many years ago and had the opportunity to lock in a great profit while the market is still buoyant? A Vancouver woman and her husband answered this question recently by selling the family home and signing a one-year lease on a rental.

“We bailed,” said the woman, who asked to be anonymous in this column. We’ll just call her Ms. Bold. She and her husband have been having annual talks about whether to sell since 2008, when the housing market briefly plunged. This year, they agreed it’s time.

“When you look at all the statistics, it just doesn’t make sense,” Ms. Bold said of the Vancouver market. “Who’s kidding who? The cost of living here is so outrageously expensive and incomes are not keeping pace.”

The average price of a home was up about 6.9 per cent a year over the past decade on a national basis, and there are cities like Vancouver and Toronto where gains have been even better. The average price in the greater Vancouver area was $775,693 in the first quarter of the year – a decade ago the average was in the $300,000 range.

After a long rally in housing prices, concern about a correction of some sort is growing. For a majority of people, the idea of selling now to preserve their gain in the housing market will seem crazy. They like their homes, they like the homeowner’s lifestyle and they abhor renting. Let the housing market rise and fall – they plan to own for the duration.

Still, there’s a case to be made for getting your money out of a house now if you’ve done very well over the years. That’s what Ms. Bold and her spouse have been thinking. They’re in their mid-40s, she a professional coach and her husband an entrepreneur. They have two kids, aged 12 and 7. They bought a $275,000 home in 2003 and sold three years later for $375,000. Purchased for $445,000, their most recent North Vancouver home sold in March for over $1-million after attracting three bids from interested buyers. Time on the market: Less than a week.

“Let me put this in perspective – this is a 100-year-old home, 2,400 square feet on a 50-foot lot,” Ms. Bold said of her just-sold home. “We do not even have a bathroom upstairs with our bedroom.”

More than a million for a non-monster home? “That’s nothing,” she said. “This same home on the west side of Vancouver would sell at $1.5-million.”

Then again, the Vancouver housing market looked a little shaky in March. While average prices moved higher, sales fell sharply. Ms. Bold’s sense is that some parts of the city are holding up, but her confidence level in the market is near zero right now.

At first, she and her husband thought about selling in the traditionally strong spring market, and then buying another home during the traditional summer slowdown. Now, they see no rush to buy back in. Instead, they will rent a four-bedroom house for a one-year period in which they’ll look at their options.

One option is to continue renting in Canada, at least for a few years, and buy a house in the United States. Annihilated in a slump that began five years ago, U.S. housing might in fact offer some opportunities for bargain hunters. Back in February, uber-investor Warren Buffett said he would buy “a couple hundred thousand” single family homes if he could find a practical way to do it.

For now, Ms. Bold and her husband are content to enjoy their debt-free status and the extra cash flow that comes from renting. In fact, their monthly rental costs are only a little less than their mortgage payments, which were set at a high level to speed up the repayment process. But they estimate they’ll save thousands by not paying property taxes and home maintenance costs.

It’s not an easy emotional transition to go from owning a home to renting, but there are compensations.

“The part I’m struggling with is the idea of living in a house that doesn’t look and feel the way I want it to,” Ms. Bold said. “My husband just keeps saying, wait until you see our bank account balance. We’re going to be debt-free with a big wad of cash.”

Source: Rob Carrick, Globe and Mail

When it comes down to it, many British Columbia home buyers just aren’t willing to battle for their dream home, according to a BMO Home Buying Report released today.

The report said Canadian respondents in the Prairies, Ontario and Alberta are more willing to enter into a bidding war than those in B.C., Quebec and Atlantic Canada.

In the survey, 22 per cent of Canadians said they were willing to enter into a bidding war when making an offer on a home.

“Of those prepared to fight, half would pay up to 110 per cent of the asking price, while a quarter would be willing to bid up to 120 per cent,” the report said.

Those surveyed in Manitoba/Saskatchewan ranked first in eagerness to enter into a mortgage bidding war (32 per cent). They were followed by respondents in: Ontario (28 per cent), Alberta (25 per cent), B.C. (23 per cent), Atlantic Canada (13 per cent) and Quebec (10 per cent).

The study also noted that 52 per cent of Canadians surveyed said they’re willing to pay between 100 and 110 per cent of the asking price, with Quebec ranking first at 62 per cent. It was followed by: Alberta and B.C. (53 per cent), Ontario (51 per cent), Manitoba/Saskatchewan (48 per cent) and Atlantic Canada (44 per cent).

Meanwhile, 27 per cent of Canadians said they would pay between 100 to 120 per cent, with the highest in Atlantic Canada (33 per cent), then Ontario and B.C. (30 per cent), Quebec (25 per cent), Manitoba/Saskatchewan (22 per cent) and Alberta (17 per cent).

John Pasalis, broker owner of Realosophy Realty Inc., a Toronto-area real estate brokerage, cautioned that the bidding wars may not be as lucrative as they seem.

“One thing to keep in mind is the houses that are getting pretty crazy bidding wars are underpriced anywhere from five to 10 per cent,” he said. “The list prices aren’t always an indication of what they’re actually worth.”

Pasalis said his company has seen “multiple offers almost non-stop for years now,” including as much as 10 or more buyers bidding on a house.

“You just get these spikes and valleys in the market where things get a little bit more heated and demand starts outstripping supply as things get faster,” he explained.

However, the mortgage wars may backfire on owners if the bank’s appraisal of the home is lower than what a buyer pays for the home, he said.

To avoid this, Pasalis cautioned that homeowners need to know the actual market value of the property they want to buy as opposed to its listing price.

Nationally, the average home sale price is $369,677, the report said. The average home prices across Canada are “rising modestly,” it said, except in Toronto ($504,117) and Vancouver ($761,742).

“Toronto prices have risen 11 per cent over the past year, while Vancouver’s have fallen 3 per cent,” said Doug Porter, deputy chief economist for BMO Capital Markets.

Source: Sheila Dabu Nonato, Postmedia News

Interesting perspectives on Toronto’s condo market – and some comparisons to Vancouver’s housing market – by industry experts.

A big jump in home construction last month has re-heated concerns by some analysts over the prospect of an overheated housing market. But the problem is highly localized, specifically among Toronto condominiums.

That’s because the March data on housing starts showed a sharp divide between Toronto condos and the rest of the market. While the number of starts jumped by an unexpected five per cent across Canada in a market that was expected to be roughly unchanged, “this was pretty well entirely Toronto condos,” said economist Robert Kavcic at BMO Capital Markets.

Construction of Ontario multiple-unit buildings – mainly condos in Toronto – shot up by more than 50 per cent between February and March, while the rest of the nationwide market remained little changed from its average pace over the past 12 months.

“Canada’s condo craze kicked into even higher gear during March, and this is bound to feed concerns about over-building,” said Scotia Capital economists Derek Holt and Dov Zigler in a note to clients.

Holt and Zigler expressed concern that the number of unsold new condominium units has been rising sharply.

Other analysts noted that the condo boom isn’t evident in other big markets, so there’s little reason to see a widespread problem in the housing market. Montreal condo starts, for example, have trended down in recent months.

In Toronto, however, there are lots of anecdotal reports of international investment money flowing into Toronto’s condo market as a refuge from the low investment returns and economic uncertainties recently dogging many other countries, noted economist David Onyett-Jeffries at the Royal Bank.

On top of this, the huge jump in March construction is likely the result of exceptionally good weather and the fact that condo construction activity can move sharply up in any month that sees a single big new project.

The recent level of condo starts in Toronto is creating strains in the market, believes Craig Alexander, chief economist at the TD Bank. Although he doesn’t see it as the kind of speculative mania that would foreshadow a serious meltdown, there does seem to be a surge of supply that will be hard to absorb.

Alexander agrees with Onyett-Jeffries that international investors look like a large factor, but he thinks they’re mostly looking for long-term rental income in a world where gains on financial markets have been uncertain at best, not the overnight capital gains one seeks by flipping units in a speculative market.

Still, Alexander believes, the vigour of Toronto condo construction has turned this market, along with the painfully high-priced Vancouver housing market, into the high-risk neighbourhoods of Canadian real estate.

The problem with having a skyrocketing, investor-driven condo market, he notes, is that all the units now being built could flood the market, leaving some investors unable to find tenants and inclined to sell. If many sell at once, it could easily trigger a decline in all condo prices.

That probably won’t be catastrophic, since Toronto’s demand for housing is strong enough to mop up the excess units over the coming decade, but it could lead to bigger-than-average price declines over the next few years. Alexander estimates that the national home market is already overpriced by an average of 10 to 15 per cent.

His forecast, though, is that most of Canada will be able to back off from today’s high home prices with minimal damage. Across the country, he thinks prices will be roughly flat this year, then drop perhaps eight to 10 per cent, perhaps a bit less, over the following two years as rising mortgage interest rates squeeze demand.

The big exceptions are likely to be in the Toronto condo market and the Vancouver market for both condos and single-family homes. Vancouver has actually cooled recently, but remains the highest-priced market in the country.

Source: Jay Bryan, Montreal Gazette

Low rates and high temperatures conspired to increase Canadian home prices in the first quarter of 2012, according to new numbers from one of the largest real estate organizations, but few sales likely involved investors.

The Royal LePage House Price Survey showed the average price of a home in Canada increased between 2.2 and five per cent in the first quarter of 2012, compared to the previous year.

In the first quarter, standard two-storey homes rose five per cent year-over-year to $398,282, while detached bungalows increased 4.4 per cent to $356,306. Average prices for standard condominiums increased 2.2 per cent to $243,153.

Market activity in the first quarter of 2012 was unusually high resulting in tight inventories and strong price appreciation in most major cities, said the survey.

Investors, grappling with new tighter lending guidelines at the banks, didn’t significantly contribute to that climate, whereas homebuyers, with greater access to lending options, drove the market, using historically low mortgage rates. For their part, sellers brought listing inventory to market earlier than normal, encouraged by unseasonably warm weather.

“Our housing market is being pulled in opposite directions by opposing economic forces,” said Phil Soper, president and chief executive of Royal LePage Real Estate Services. “On one hand, there is the rapidly strengthening U.S. economy, increasing Canadian consumer confidence and what can only be called a national mortgage sale encouraging activity and bidding up home prices. On the other, we have signs of over-shooting values and strained affordability in our largest cities. We are likely to see much more modest price appreciation as the year unfolds.”

Soper commented that the effect of low mortgage rates, which fell below three per cent for a five-year fixed-mortgage, is more pronounced in cities that are affordable such as Winnipeg, Ottawa and St. John’s.

“In Vancouver, the average price of a standard two-storey home is now $1,182,250,” he said. “Although the city posted strong year-over-year price gains in the first quarter, we expect to see Vancouver’s housing market to reach a level of price resistance. Although desirability is high, many potential buyers have simply been pushed out of the market and cannot take advantage of low mortgage rates, which will ease demand and should bring price relief.”

In comparison, Soper commented that he did not expect price resistance to affect Toronto’s housing market where a standard two-storey home would sell for $645,467.

Another notable exception was Calgary whose flat year-over-year house price appreciation masked a very active housing market that witnessed double digit growth in unit sales compared to the same period in 2011.

Source: Canadian Real Estate Magazine

Much of Canadians’ rising household indebtedness is being fuelled by cheap foreign capital, Mark Carney, governor of the Bank of Canada, said yesterday.

Mr. Carney has repeatedly warned over the past year about excessive consumer borrowing – particularly around mortgages – but Monday fleshed out his concerns, noting that the phenomenon is being enabled partly by buyers from “abroad” and that the trend is “unsustainable.”

Speaking to a business group in Waterloo, Ont., Mr. Carney said the growth in domestic demand and household spending has helped boost Canada’s economy, but “the limits to this growth model are becoming clear.”

Ballooning household debt levels represent the biggest single risk facing the Canadian economy, according to the Bank of Canada.

In the financial crisis that began in 2008, the central bank lowered interest rates to encourage borrowing and revive the economy. But much of the lending that followed was not to businesses but to consumers focused on buying homes.

Even after the economy revived, the low interest rates remained in place, continuing to spur the spending spree.

Canada’s banks mostly emerged from the crisis unscathed, which helped burnish their international reputation. It’s also why foreign investors – especially in the United States – are so keen to buy bonds issued by Canadian banks.

A primary reason for the strong demand is that many of the bonds are backed by mortgages that are guaranteed by the Canada Mortgage and Housing Corp.

In 2011 the big six Canadian banks issued a total of $74-billion of term bonds, of which 64% was sold to foreigners, according to George Lazarevski, an analyst at BMO Capital Markets. They raised “a lot of term funding outside of Canada,” said Mr. Lazarevski. He said buyers were mostly in the United States, Australia and Switzerland.

A significant chunk of that funding, or about $25-billion – was in the form of bonds backed by mortgages insured by the CMHC, a Crown corporation.

“The Canadian dollar is consistently strong, our fiscal situation is still attractive relative to much of the developed world, and even at the provincial level – there’s still plenty of fiscal capacity to raise deficits if backs are against the wall,” said BMO economist Robert Kavcic.

Mr. Carney’s comments on household indebtedness were within the context of the main theme of his speech: the need for Canadian companies to “refocus, retool and retrain” if the country is to compete in emerging markets.

Mr. Carney said the growth in domestic demand and housing-driven spending has helped boost Canada’s economy, but “the limits to this growth model are becoming clear.”

Mr. Carney also pointed to ongoing uncertainty over Europe’s debt crisis – despite some recent signs of improvement – and a modest recovery in the United States, both regions where Canada is dependent for the bulk of its exports.

“Emerging markets represent the greater opportunity for Canadian exporters. Since the recession, these economies have accounted for roughly two-thirds of global economic growth and one-half of the growth in global imports.”

Business must develop new markets but also and new products, Carney said. As well, companies should “further exploit the tremendous opportunities in mobile computing and customer-focused applications. In addition, they need to invest in new plants and equipment.

“Innovation is critical to our success and Canada’s record is only average,” Mr. Carney said.

Source: John Greenwood, Financial Post