Housing affordability is improving in the Greater Toronto Area, thanks to lower mortgage rates and softening price appreciation.
According to a Royal Bank of Canada report to be released Monday after four consecutive quarters of steep decline, housing affordability gained traction in the third quarter of 2010, thanks to bottoming mortgage rates and a slowing demand.
“The improvement in affordability has reduced some of the stress that had been mounting in housing markets during the past year,” said Robert Hogue, senior economist with RBC.
Housing affordability measures improved for the first time since the second quarter of 2009, when sales and prices of homes started to surge in the Toronto market coming out of the recession.
Many of those sales were buyers rushing in to avoid a new Harmonized Sales Tax and to buy before more stringent mortgage regulations. This led to fears that the market was in an unsustainable bubble.
“Although triggering a fair amount of anxiety while it unfolded, the Toronto area market’s return to earth this spring was, in retrospect, a mostly benign affair,” said Hogue. “The fears were that the payback for the clearly unsustainable record high levels of existing home sales at the start of this year would be an all out rout.”
So far that hasn’t happened, as the Toronto market seems to be in for a generally soft landing.
However, affordability is not expected to improve moving into next year with the spectre of increased interest rates, says Hogue.
“The recent decline in mortgage rates, however, is not expected to be sustained much beyond the coming months of this year,” said Houge.
RBC expects the Bank of Canada to start hiking rates in the second quarter of 2011.
“Higher mortgage rates will be the dominant factor raising homeownership costs over the medium term,” said RBC. “We expect housing demand and supply to remain mostly in balance.”
Some of the increases in mortgage rates will be offset by increasing household income as a mitigating factor, says RBC.
The price of an average two-storey home was $554,700 in the third quarter. But it would take a household income of $120,400 to afford that.
Some banks raised five-year fixed mortgage rates slightly last week by a quarter percentage point, as turmoil in Europe spilled over into the bond markets. However, variable rates can still be had as low as 2.15 per cent from some lenders. A five year fixed rate is going as low as 3.45 per cent.
The RBC affordability index for a standard two-storey home has fallen to at 56.1, down significantly from the 60 points recorded in the second quarter of the year. (the lower the number, the more affordable the home)
A rise in the index means homes are less affordable. The study measures the proportion of pre-tax median income needed to service the costs of owning a home such as mortgage, utilities and property taxes. A measure of 56.1 means that it takes more than half of average pre-tax income in Ontario to pay the monthly costs of owning a home.
The long term average since 1985 has been 53.4, meaning that affordability is getting closer to a normal range.
Nationally, the RBC index is slightly above long term averages, suggesting that “some greater than usual tensions persist for Canadian homebuyers,” according to the bank.
“These tensions are unlikely to derail demand for housing in the near term, but will act as a restraint on growth and market activity going forward.”
The Toronto market, meanwhile, looks reasonable when compared to Vancouver. There it takes 78.1 per cent of pre-tax income to afford a two-storey home. But that’s down already by 4.7 points from the earlier quarter.
An average two-storey home in Vancouver goes for $766,300. To afford that, you need to be earning $149,400 annually.
Helping you is what I do!
Tuesday, November 30, 2010
Tuesday, November 23, 2010
Father doesn't know best
Suzanne Wintrob, National Post
Looking for your first home? Then do your homework before hitting the open houses.
"A first-time homebuyer can save a lot of time by knowing in advance how much they would qualify for and what they can afford," says Marcia Moffat, RBC's VP, Home Equity Financing, Canadian Banking.
RBC recently surveyed 1,050 Canadians, half who bought their first home in the past two years and half who intend to do so within the next two years. While two-thirds of future buyers said they hoped to purchase a single detached home, those who had already bought ended up in a townhouse or a condominium. The difference, suggests Ms. Moffat, comes down to dollars and sense.
"Affordability isn't just the house price -- it's thinking about maintenance of the home, taxes, legal feels on top of it and, if it's a young family, factoring in childcare costs," she says. "Sometimes when someone is in the market of intending to buy, they haven't thought through all those elements. Then, when they actually come down to buying, it's part of the whole approval process. Yet if they get pre-approval, it strengthens their credibility with the realtor and means they're not spending all of their time looking at homes that they can't reasonably afford."
Apparently, getting advice is all in the family. While one-third of current homeowners turned to the bank as their primary source of mortgage advice, those planning to buy turn to Mom, Dad and other family members to better understand mortgages. That's not always smart, says Ms. Moffat, since what was right for your parents when you were a kid might not be right for you now.
"I've heard parents say, 'You should go into a 10-year fixed,' but those were parents who lived through the late '80s at a time of very high interest rates and uncertainty," she says.
Of course, managing cash flow becomes a much more pressing concern once the sale is final. According to the survey, those planning to buy fret most about three things: being approved for a mortgage, affording the downpayment, and rising housing prices. Once in the market, though, they get cash-flow anxiety, worrying considerably about rising mortgage rates, being able to make their regular monthly mortgage payments, and declining housing prices. With all that stress, it's not surprising that 85% of first-time buyers said they intend to stay in their new home for the long-term.
As for mortgages, the study reveals that first-time homeowners are more likely to opt for fixed or variable rate mortgages -- though older first-timers are more comfortable with variable rates than their younger counterparts. Future buyers go for a combination of the two, which RBC concludes may reflect their uncertainty.
Ms. Moffat says there are many simple ways for first-time homebuyers and those planning to buy to make the experience more soothing. For those unsure if they're ready to buy, mortgage specialists can offer budgeting advice while online mortgage calculators can compare monthly rental payments to mortgage payments.
Ms. Moffat also suggests setting mortgage payments for the highest amount possible.
"If you are concerned about rising rates, a good rule of thumb is to plan for the worst case scenario for the next five years and build your financial plan around that number," she says. "If things turn out better, you'll be ahead of the game because you've already paid down a good chunk of your principal and you've tested your budget for higher payments."
Looking for your first home? Then do your homework before hitting the open houses.
"A first-time homebuyer can save a lot of time by knowing in advance how much they would qualify for and what they can afford," says Marcia Moffat, RBC's VP, Home Equity Financing, Canadian Banking.
RBC recently surveyed 1,050 Canadians, half who bought their first home in the past two years and half who intend to do so within the next two years. While two-thirds of future buyers said they hoped to purchase a single detached home, those who had already bought ended up in a townhouse or a condominium. The difference, suggests Ms. Moffat, comes down to dollars and sense.
"Affordability isn't just the house price -- it's thinking about maintenance of the home, taxes, legal feels on top of it and, if it's a young family, factoring in childcare costs," she says. "Sometimes when someone is in the market of intending to buy, they haven't thought through all those elements. Then, when they actually come down to buying, it's part of the whole approval process. Yet if they get pre-approval, it strengthens their credibility with the realtor and means they're not spending all of their time looking at homes that they can't reasonably afford."
Apparently, getting advice is all in the family. While one-third of current homeowners turned to the bank as their primary source of mortgage advice, those planning to buy turn to Mom, Dad and other family members to better understand mortgages. That's not always smart, says Ms. Moffat, since what was right for your parents when you were a kid might not be right for you now.
"I've heard parents say, 'You should go into a 10-year fixed,' but those were parents who lived through the late '80s at a time of very high interest rates and uncertainty," she says.
Of course, managing cash flow becomes a much more pressing concern once the sale is final. According to the survey, those planning to buy fret most about three things: being approved for a mortgage, affording the downpayment, and rising housing prices. Once in the market, though, they get cash-flow anxiety, worrying considerably about rising mortgage rates, being able to make their regular monthly mortgage payments, and declining housing prices. With all that stress, it's not surprising that 85% of first-time buyers said they intend to stay in their new home for the long-term.
As for mortgages, the study reveals that first-time homeowners are more likely to opt for fixed or variable rate mortgages -- though older first-timers are more comfortable with variable rates than their younger counterparts. Future buyers go for a combination of the two, which RBC concludes may reflect their uncertainty.
Ms. Moffat says there are many simple ways for first-time homebuyers and those planning to buy to make the experience more soothing. For those unsure if they're ready to buy, mortgage specialists can offer budgeting advice while online mortgage calculators can compare monthly rental payments to mortgage payments.
Ms. Moffat also suggests setting mortgage payments for the highest amount possible.
"If you are concerned about rising rates, a good rule of thumb is to plan for the worst case scenario for the next five years and build your financial plan around that number," she says. "If things turn out better, you'll be ahead of the game because you've already paid down a good chunk of your principal and you've tested your budget for higher payments."
Tuesday, November 16, 2010
Canadians are on the move
There is no place like home, but for many Canadians, buying a home doesn’t mean they plan to stay for long, says a recent TD Canada Trust report. It found one-in-five repeat buyers have owned more than five homes. Twenty-three per cent of those surveyed plan to move again within six years, and less than one-third say their next move will be their last.
Canadians are split on whether their next home will be larger (49 per cent) or smaller, but there is consensus that in their next house-hunt, they intend to find a fully detached home. Seven-in-10 repeat home buyers are looking for a fully detached home – even those currently living in condos, townhouses or semi-detached homes are looking for fully detached homes for their next purchase.
Half of Canadians say the proceeds from the sale of their current home will be less than the value of their new home, meaning that they will need to take out a mortgage.
The top factor that influences the decision to move is retirement (29 per cent). Other factors include being bored of their current home (16 per cent), investment opportunities (15 per cent) and market conditions (15 per cent). Fourteen per cent say they had always planned to move but were waiting to save enough money.
The top considerations for Canadians’ next home are the layout of the home (98 per cent), the size of the home (97 per cent) – though they are divided on whether to go smaller or bigger – and price (96 per cent).
The majority of home buyers plan to sell their current property before purchasing another one (84 per cent). Of the remaining 16 per cent who will keep both properties, 39 per cent will use one as a rental property or investment property.
Fifty-five per cent of Canadian home buyers are cautious, saying they wouldn’t buy a new home until their current home is sold – but 45 per cent say they would put in an offer if the perfect home came up for sale and hope that their house sells.
Canadians are split on whether their next home will be larger (49 per cent) or smaller, but there is consensus that in their next house-hunt, they intend to find a fully detached home. Seven-in-10 repeat home buyers are looking for a fully detached home – even those currently living in condos, townhouses or semi-detached homes are looking for fully detached homes for their next purchase.
Half of Canadians say the proceeds from the sale of their current home will be less than the value of their new home, meaning that they will need to take out a mortgage.
The top factor that influences the decision to move is retirement (29 per cent). Other factors include being bored of their current home (16 per cent), investment opportunities (15 per cent) and market conditions (15 per cent). Fourteen per cent say they had always planned to move but were waiting to save enough money.
The top considerations for Canadians’ next home are the layout of the home (98 per cent), the size of the home (97 per cent) – though they are divided on whether to go smaller or bigger – and price (96 per cent).
The majority of home buyers plan to sell their current property before purchasing another one (84 per cent). Of the remaining 16 per cent who will keep both properties, 39 per cent will use one as a rental property or investment property.
Fifty-five per cent of Canadian home buyers are cautious, saying they wouldn’t buy a new home until their current home is sold – but 45 per cent say they would put in an offer if the perfect home came up for sale and hope that their house sells.
Monday, November 8, 2010
Canada’s housing market ‘pricey, not dicey,’ BMO says
Michael Babad
Housing pricey but no bubble seen
Canada's housing market is moderately overvalued but not a bubble waiting to be burst, BMO Nesbitt Burns says.
“All things considered, the Canadian housing market does not appear to be in a bubble, and is unlikely to suffer a U.S.-style collapse,” economists Earl Sweet and Sal Guatieri said in a research note.
“A key and overriding difference is the quality of loan origination in the past decade, as well as other institutional factors such as mortgage insurance and recourse against defaulters,” they wrote in the report titled “Canadian housing: Pricey, not dicey.”
The Economist published a report recently that indicated Canada's real estate market is overvalued to the tune of 24 per cent. The magazine used a measure that compares home prices and rent, whereas comparing prices with personal income is a “superior methodology,” Mr. Sweet and Mr. Guatieri said.
Using their method, they found prices peaked, in terms of overvaluation, at 18 per cent late last year. But a 3-per-cent drop in prices so far this year, along with moderate income growth, cut that to “a less worrisome” 11 per cent in the third quarter.
“Though overpriced, the absence of widespread speculation and egregiously loose credit standards suggests the market is not in a bubble,” They wrote. “Instead, Canada’s housing market remains reasonably affordable because of exceptionally low interest rates. Barring a sharp spike in mortgage rates or a relapse into recession, a substantial price correction is unlikely to occur. The greater risk could be that sustained low interest rates might recharge the housing market and inflate a true bubble that ultimately bursts when rates normalize.”
The BMO study comes as Canada’s mortgage market tops $1-trillion for the first time, Globe and Mail real estate reporter Steve Ladurantaye writes today.
Housing pricey but no bubble seen
Canada's housing market is moderately overvalued but not a bubble waiting to be burst, BMO Nesbitt Burns says.
“All things considered, the Canadian housing market does not appear to be in a bubble, and is unlikely to suffer a U.S.-style collapse,” economists Earl Sweet and Sal Guatieri said in a research note.
“A key and overriding difference is the quality of loan origination in the past decade, as well as other institutional factors such as mortgage insurance and recourse against defaulters,” they wrote in the report titled “Canadian housing: Pricey, not dicey.”
The Economist published a report recently that indicated Canada's real estate market is overvalued to the tune of 24 per cent. The magazine used a measure that compares home prices and rent, whereas comparing prices with personal income is a “superior methodology,” Mr. Sweet and Mr. Guatieri said.
Using their method, they found prices peaked, in terms of overvaluation, at 18 per cent late last year. But a 3-per-cent drop in prices so far this year, along with moderate income growth, cut that to “a less worrisome” 11 per cent in the third quarter.
“Though overpriced, the absence of widespread speculation and egregiously loose credit standards suggests the market is not in a bubble,” They wrote. “Instead, Canada’s housing market remains reasonably affordable because of exceptionally low interest rates. Barring a sharp spike in mortgage rates or a relapse into recession, a substantial price correction is unlikely to occur. The greater risk could be that sustained low interest rates might recharge the housing market and inflate a true bubble that ultimately bursts when rates normalize.”
The BMO study comes as Canada’s mortgage market tops $1-trillion for the first time, Globe and Mail real estate reporter Steve Ladurantaye writes today.
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