INVESTING IN WHAT WE LOVE

Invest in real estate and in your kids
Garry Marr, Financial Post
Published: Friday, May 07, 2010

Here's one way to tackle the red-hot Canadian housing market: Get someone to buy you a home.

That someone would be your parents. According to a new survey from TD Canada Trust, 10% of Canadians are considering buying a condominium for their adult children. A year ago, only 5% of parents thought about buying the kids a condo.

"It could be something that the parents are looking at as a long-term source of income, letting their children live it in for now," says Chris Wisniewski, associate vice-president of real estate and secured lending with TD.

It could also be that parents know condominium prices, like detached homes, have climbed to unprecedented levels, making it difficult for adult children to come up with a minimum 5% down payment, let alone the 20% needed to avoid costly mortgage default insurance.

Toronto condo research firm Urbanation Inc. says the average existing condominium in the city sold for $331,000 in the first quarter of 2010. Based on an average $369-per-square-foot price, that's a 900-square-foot unit.

For a new one, prices averaged $443 per square foot in the first quarter, so about $400,000 for that same-sized condo.

Ms. Wisniewski says low interest rates are convincing parents to step up and buy their children homes. The condominium represents an attractive alternative to those parents because the costs are stable.

"They know what the maintenance costs will be," she says. "[Parents] are thinking, ‘I'm not worried my children are too young to accept the responsibilities of home ownership if I set them up in an apartment. They don't have to recognize the responsibilities of maintenance in an apartment.' "

Parents might also see a condominium as a way to get their kids to start a family. The survey found 36% of Canadians are willing to raise families in a condo.

"One of the reasons for that is affordability," says Ms. Wisniewski. "Where are the new condominiums being built? They are being integrated in really nice existing neighbourhoods with all the infrastructure and all the schools and amenities."

Brian Johnston, president of developer Monarch Corp.'s Canadian division, says he doubts families will ever be integrated into the condominium stock, but does agrees with the premise that parents are helping to buy housing for their children. He says parents often want to keep children close to them so they'll chip in for a condominium in a nearby neighbourhood.

"How do we know they're helping out? They tell us when they are writing the cheques for the deposit," Mr. Johnston says.

Mr. Johnston said when it comes to recent immigrants to Canada, there is "lots of help" from family members to get that first home. "Condominiums are not inexpensive and they're going to need that help, particularly if the younger ones have not had time to build up their finances."

The builder has his own children and, based on today's prices, he figures he's going to have to lend a helping hand. "I don't expect them to be able to buy a condo ... before they are 30. That is just part of the deal [for parents]," says Mr. Johnston.

It's not like Baby Boomers don't have the cash. There have been endless studies that suggest the Boomers are set to inherit billions of dollars in the coming years from their parents.

Craig Alexander, deputy chief economist with TD Bank Financial Group, says there is no hard data to suggest how much parents are helping children, but they certainly have the financial capacity to lend a hand.

Canadians have $1.5-trillion invested in stocks and mutual funds with $500-billion of that figure in capital gains.

"The generation before the Baby Boomers were big savers and, as a consequence, there is a very large income transfer going to take place over time," says Mr. Alexander, adding it makes sense that some of that money is going to end up in housing and real estate.

For first-time buyers facing rising rates and increasing prices, the helping hand couldn't come at a better time - just ahead of tighter mortgage financing rules. Most of them probably hope their folks go from "considering" buying a condo to actually doing it.

Photo By: Remodeleze

TIME & RATES WAIT FOR NO MAN!

Time to lock in that mortgage rate?

Andrew Allentuck, Financial Post

Published: Thursday, May 06, 2010

Taking on a mortgage is a big commitment. Every buyer who uses a mortgage has the choice of floating or going with a fixed rate that often costs a couple of percentage points higher per year. Today, for example, one can get variable rates at an average rate of 2.34% while five year closed rates average 5.27%, according to Fiscal Agents Financial Services Group in Oakville, Ontario. Negotiated rates can be lower.

If rates never changed very much, there would be no contest – the floating rate deal would win. But rates do rise and fall and therein lies the borrower's dilemma.

Borrowers with kids and an aging car fear that their ability to pay interest rates twice or thrice the current floating rates are limited. "The test is liquidity and risk tolerance," says Derek Moran, a registered financial planner who heads Smarter Financial Planning Ltd. in Kelowna, B.C. "People with ample liquidity can afford to take a chance on rising mortgage rates. It follows that those who lack liquidity feel some pressure to avoid drastic interest rate increases."

The point is not merely academic, for Canada, in spite of recent mortgage rate increases, is still at a relatively low point of rates over the last four decades. "There is more room for rates to go up than down," Moran points out.

The cost of making a decision to float or go fixed varies with the rate differences.

In 2008, Moshe Milevsky, Associate Professor of Finance at the Schulich School of Business at York University, and Brandon Walker, a research associate at the Individual Finance and Insurance Decisions Centre in Toronto, published a study that measured the direct and opportunity costs of going with either choice. "Over the long run, homeowners really do pay extra for fixed rate mortgages," they concluded.

The reason is intuitive. Lenders do not want to take the chance that when they have to refinance a loan that they will be stuck paying more than they are getting.

Mismatching what they lend with the cost of what they borrow can cut their profits and even lead to insolvency. So lenders attach what amounts to an interest rate insurance fee and bundle that into the price of money they lend on fixed terms.

Milevsky and Walker confirmed this explanation. "The study showed that a positive Maturity Value of Savings [the value of investing the difference between floating and fixed mortgages in 91-day T-bills] was positive the majority of the time, so the homeowner saved by using a variable-rate mortgage."

The amount of money that the homeowner can save by taking a chance on floating rates varied in the Milevsky and Walker study, depending on the time periods in question. But the average amount was impressive: $20,630 as of 2008. Put another way, floating allowed borrowers to cut the time it would take to pay off the mortgages by a year or more, in some cases as much as five years on 15-year amortizations.

Rational calculation and personal feeling are, of course, different things. A person with a fixed income and a great deal of debt may be reluctant to put a rate casino between himself and the lender and will therefore go with certainty, even at a high price.

It is also a matter of experience. "First time buyers tend to pay close attention to the cost of the mortgage," says Laura Parsons, Areas Manager of Specialized Sales – which includes mortgages, for the BMO Financial Group in Calgary. For them, the appeal of locking in is relatively high. Their mortgages are new, the amounts they owe are higher than they would be 10 or 15 years in future when the mortgage is substantially reduced, and their incomes, often early in their adult lives, are lower than they will be in future.

"First time home buyers are net debtors and they don't want to endanger their finances," suggests Adrian Mastracci, a portfolio manager and financial planner who heads KCM Wealth Management Inc. in Vancouver.

There are other strategies that the buyer can use to provide some rate insurance without taking on what Milevsky and Walker have demonstrated as the high cost of peace of mind.

"The buyer can take a variable rate mortgage but set payments higher than the minimum required" says Parsons. "That could be at the 5 year closed rate, which would mean a faster paydown and growing asset security while still keeping the low cost of the variable rate mortgage. Faster paydown is itself cost insurance if interest rates do rise."

Banks are nothing if not inventive in helping clients cope with the fixed versus floating dilemma. For example, TD Bank offers to give 5% of the amount borrowed on a five or six year fixed rate residential mortgage to the borrower. The program, aptly dubbed the "5% CashBack Mortgage," implicitly acknowledges that fixed rate loans can be more costly than variable rate ones.

For its part, RBC has a RateCapper Mortgage that builds on the initial low cost of a variable rate mortgage but limits the cost if rates shoot up. On a five year mortgage, the borrower will never pay more than the capped rate and if the variable rate, based on the prime rate, drops below the RateCapper mortgage maximum, the interest rate charged to the borrower also drops. The plan is a compromise and spreads interest rate risk. Many other lenders allow borrowers to mix fixed and variable rates, thus accomplishing a similar goal.

Plan selection, it turns out, is gender-related. According to a BMO survey, men, 44% of the time, are more likely than women to choose a fixed rate mortgage than women, who make that choice only 28% of the time. Women, it turns out, tend to make the better choice, for as BMO's analysis shows, "fixed rates were advantageous during only two periods – through the late 1970s and in the late 1980s, in both cases ahead of a period rising interest rates, as is the case now."

So where are interest rates headed? The yield curve, a line that links interest rates for periods of time from 1 day to 30 years, implies that rates will rise, but not very much.

There is no sense that we are returning to a period of double digit rates. Moreover, there are deflationary forces at work, notes Patricia Croft, chief economist of RBC Global Asset Management in Toronto. "The present crisis in European finance and the potential fizzling out of the present recovery in North American capital markets could presage falling inflation and even disinflation – the subsidence of rising prices and interest rates," she explains..

BMO forecasts that the rising Canadian dollar will put downward pressure on consumer prices, reflecting the fact that much of what Canadians eat and use is imported. Inflation could flare up, BMO's economists say, but there is a balanced risk of declining prices. For now, the Bank of Canada is being very cautious in its interest rate management commitments. For those who are strapped for cash, personal circumstance may dictate the choice of a fixed rate. But for everyone else, the folly of trying to make interest rate predictions over a business cycle and to predict both the short term rates and the long term rates along the yield curve should be apparent. No promises, of course, but the odds of saving money are with borrowers who choose variable rate plans or those that emulate them.

Photo By: Philipp Klinger

IN THE NEWS

Calgary luxury home sales surging in 2010
By Mario Toneguzzi,
Calgary Herald
April 27, 2010 6:51 AM

CALGARY - Affluent purchasers moved in the first quarter to take advantage of low interest rates, pushing luxury home sales in Calgary to nearly double what they were a year ago.

Although the high-end market is not on fire like it was a couple of years ago during the real estate boom, it has picked up dramatically from the recession in 2009.

In Calgary, for the first quarter of this year, 67 upper-end properties valued at more than $1 million were sold compared with 35 during the same period last year.

"We felt it in the last quarter of last year with the surge of first-time buyers coming into the market and it creates a catalyst all the way through. It just took a matter of time before it hit the upper-end market really," said Christina Hagerty with Re/Max Realty Professionals.

"There's an overall confidence seen in the Calgary market again. Specializing in the inner city, surprisingly, a good 20 per cent of people I've been speaking with are coming in from other places," said Hagerty.

Those places include Toronto, Vancouver, London and South Africa.

Hagerty said the overall real estate market should experience moderate growth in the years to come, and most likely increases in both prices and in the number of sales by three to five per cent in 2010.

People looking to buy at the $800,000 to $1-million range are taking their time.

"We're not really having bidding wars. We're seeing corrections in the market as well. I think this is one of the last price ranges to make a correction. And now that they're correcting, the buyers are buying them," said Hagerty.

Many of today's luxury buyers are taking advantage of favour-able market conditions to trade up to larger homes or better neighbourhoods, said the Re/ Max Upper End Market Trends 2010 report.

The Re/Max report said older, established areas such as Mount Royal and Elbow Park are popular with upscale purchasers looking for easy access to downtown, while Bearspaw, Elbow Valley and Springbank offer high-end buyers "more bang for their buck -- with country homes typically situated on sprawling lot sizes."

In Calgary, sales of luxury homes still lag 2008, when 86 were sold; 2007, with 124; and 2006, with 86.

The most expensive sale on MLS this year in Calgary was for $5.75 million in Elbow Park.

Re/Max said homebuying activity has improved significantly in the city over the past 12 months, but "purchasers are still cautious, especially in the top end of the market."

The report said some overpriced homes continue to linger on the market with "many risking stagnation."

The recent strength in the local market is due to low interest rates, said Dan Sumner, economist with ATB Financial in Calgary.

"Now the world is looking a little bit more stable," he said. "A lot of these people who were maybe finding the market too expensive in 2007 and 2008, and also a little bit more competitive then, are now saying, 'Hey, we lock into a low interest rate, prices are down a little bit . . . and maybe we can move up from the mid-priced home to the high-end home."

The Re/Max report, which highlighted sales and trends in 13 major Canadian centres and five sub-markets, found that virtually all areas experienced double-and triple-digit increases between January and March of this year over 2009 figures for the same period.

Nine out of the 13 markets examined set all-time highs for first-quarter activity in the upper end.

"Recovery in the upper end has been nothing short of remarkable," said Elton Ash, regional executive vice-president at Re/Max of Western Canada.

PEAKING YOUR INTEREST

Housing may have peaked
Gary Marr, Financial Post
Published: Thursday, April 15, 2010

The spring homebuying season has reached a fever pitch with a record number of "for sale" signs being placed on Canadian lawns for the month of March.

But there are indications the market has reached the peak with nowhere to go but down.

The Canadian Real Estate Association said yesterday that 97,663 properties were put on market last month, a 25% increase from the number of new listings in March a year ago. Since the beginning of the new year, there have been 233,402 homes put on the market, the best-ever first quarter for new listings.

With demand still strong, sales continue to soar. There were 49,256 units that traded hands in March, the second-best March on record, and a 40.8% rise from a year earlier.

Yet despite the huge increase in year-over-year sales, March was the fifth straight month that the percentage increase has declined. In some markets, sales are already falling. Seasonally adjusted sales in British Columbia dropped 17.8% from a quarter earlier and Alberta sales dropped 9.7% during the same period.

Phil Soper, chief executive of Royal LePage Real Estate Services, said affordability and consumer confidence drive the market. "The former has not eroded enough to affect the market and the latter has improved considerably," he said.

Still, he concedes the spring market may be the top for real estate. "It will be the top from an industry-volume perspective. It's the last hurrah for the pent-up demand in the market," said Mr. Soper, who expects prices to continue to rise, but more slowly.

Even with the increase in the supply of homes, sales are expected to remain strong this spring as homebuyers scramble before tougher mortgage rules, rising interest rates and the new HST in Ontario and British Columbia come into play - all by July 1.

Many in the industry concede, however, the spring market could be the last gasp before housing sales start to drop, along with prices. Few, however, are predicting a U.S.-style crash.

"If this isn't the top, we are very close to it in terms of sale activity and price," said Gregory Klump, chief economist with CREA.

Mr. Klump doesn't predict the market will reverse dramatically, but says year-over-year comparisons are going to continue to shrink for sales and prices.

Mr. Klump said prices at the high end of the market are going to start driving down because consumers in that segment are trying to beat the clock on all the changes ­coming.

New mortgage rules, which go into effect on April 19, will force consumers to borrow based on the five-year posted rate if they are locking in for a term less than five years. Previously, they could use the actual rate on their contract, meaning they could borrow more.

Banks have also raised long-term mortgage rates in the past two weeks, with a five-year, fixed-rate closed mortgage rising from 5.25% to 6.10%. The Bank of Canada is expected to raise its own benchmark rates shortly and that will affect consumers with floating-rate mortgages now based on a prime rate of 2.25%.

And the introduction of the harmonized sales tax on July 1 will raise costs for some services associated with buying a house, such as a real estate commission. It is coming only to British Columbia and Ontario, but Toronto and Vancouver are the most expensive real estate markets in the country and skew the national averages.

For now, the market still has some wind behind it. "Negotiations still favour sellers during the home-buying process in a number of major Canadian housing markets," said Georges Pahud, CREA's president.

"The rise in new listings means that buyers may shop around more before making an offer."

Photo by: Erik Twight

LILAC FESTIVAL

SUNDAY MAY 30th 2010 10:00AM TO 6:00PM

Sunday, May 30th 2010, marks the date of the 21st annual 4th Street Lilac Festival, and the streets have never been hotter!


In 2009 an estimated 125,000 Calgarians participated in this fabulous one-day festival. They enjoyed the wide array of entertainers that were featured on stages and entertainment zones along 4 th Street in the heart of the Mission district.

In addition, they had an opportunity to shop at over 600 craft, food and entertainment vendors along the 13 blocks of the festival. With something for almost everyone to see and do we had participants dancing in the streets to the smooth sounds and scrumptious tastes. Fourth Street is known for it's diverse cultural restaurants - "you can eat around the world on 4 th " - and those restaurants took to the streets that day selling samples of their fabulous menus.

The Lilac Festival has been voted " Calgary 's best free festival" by FFWD (Calgary 's News & Entertainment Weekly) readers for the last twelve years running.

LINK: LILAC FESTIVAL

MORTGAGE ADVICE

Changes to the Rules for Government Insured Mortgages
Eb Y.H. Chan

Mobile Mortgage Specialist
RBC Royal Bank

On February 16, 2010, Finance Minister Jim Flaherty announced changes to the rules for government insured mortgages. These changes are designed to ensure that Canadians are prepared for higher interest rates in the future and to maintain stability in Canada’s housing market.

We want to be sure you understand the changes and how they might affect your clients home financing options. Three of the new measures that have been announced are as follows:

New Guidelines – Effective April 19th 2010

1) Qualifications for Buying a Home

All borrowers with less than 20% down payment, will be required to qualify at a five-year fixed benchmark rate mortgage; even if they choose a mortgage with a lower interest rate and shorter term. Clients who choose a term of 5 years or greater can be qualified using the bank’s contract rate (current market rate). The 5 year benchmark rate is published by the Bank of Canada and can be found at the following site, http://www.bankofcanada.ca/en/rates/interest-look.html. This change will help to ensure homebuyers can not only afford their home today but for tomorrow as well, in the event rates were to rise.

2) Purchase of Investor Property (Not owner occupied)

Also, as part of these changes, when purchasing an investment property (not owner occupied) the minimum down payment required will increase to 20% of the purchase price. Today, the minimum down payment required at RBC Royal Bank ® is 15 %.

3) Limit the maximum on refinancing:

Borrowers who are looking to refinance their mortgage can currently borrow up to a limit of 95% of the appraised value of their property. The changes announced on February 16th will lower the maximum mortgage amount to 90% of the appraised value of the property. This change will help ensure that homeowners don’t become overextended by using all the equity they have built up in their home when refinancing.

CMHC GUIDELINES CHANGING APRIL 9

1) Self employed clients with non traditional income confirmation

Effective April 9th changes have been made that reduce the percentage of financing available to clients who are self employed, have been in business for less than 3 years and who cannot provide traditional proof of income.

Clients looking to purchase a home under this program will require a minimum of 10% down payment to be eligible. For clients who are seeking to refinance their existing residence, the maximum percentage of financing available under this program will be reduced to 85%.

Getting pre approved for a mortgage is a great first step in the home buying process, but reviewing that pre approval as a result of these changes is very important. I am here to help to ensure your clients are still on track in achieving their goals of home ownership.

The following is a link to our Home, Mortgage and Lending Advice Centre. http://services.rbc.com/advice/video.html

Photo by: estheticcore

OIL UP!

Oil rises to highest price since October 2008
By Joshua Schneyer
Reuters

NEW YORK - Oil prices rose more than 2 percent on Monday to their highest since October 2008, after U.S. manufacturing, home sales and jobs data boosted optimism about a recovery in the world’s top economy.

The U.S. service sector grew in March at its fastest pace in nearly four years while pending home sales also rose, according to the ISM industry survey and a National Association of Realtors report on Monday.

That added to optimism following Labor Department data released on Friday showing U.S. payrolls rose by 162,000 last month, the fastest rate in three years.

U.S. crude oil for May delivery settled up $1.75 to $86.62 a barrel. Prices have risen by 8.3 percent since March 26, in their steepest 5-day winning streak since December.

Brent crude rose $1.87 to settle at $85.88 a barrel.

“Economic optimists have taken control of the market,” said Gene McGillian, analyst at Tradition Energy in Connecticut.

“We’re in uncharted territory. I think we can keep trending higher.”

U.S. markets reopened after a three-day weekend that included the Good Friday holiday. London markets remained closed on Monday for Easter.

Economic recovery bodes well for higher fuel demand in the United States, the largest consumer of oil. Flagging demand has helped bolster U.S. crude oil stocks, which are currently well above the five-year average.

Analysts polled by Reuters forecast weekly inventory from the American Petroleum Institute, due out on Tuesday, and data from the Energy Information Administration on Wednesday will show the 10th straight week of inventory gains.

Oil, natural gas and heating oil all rose sharply in a broad commodities market rally. U.S. equities moved higher, led by shares in energy companies, as the Standard & Poor’s 500 Index rose to an 18-month high.

The U.S. dollar weakened against a basket of foreign currencies, often an indication that investor funds are flowing away from safe haven assets and into those deemed riskier, such as commodities or equities.

OPEC members, including the world’s largest crude exporter Saudi Arabia, said last week at the International Energy Forum in Cancun, Mexico, that they favored an oil price in the $70 to $80 a barrel range. But OPEC, which pumps more than a third of the world’s oil, has no immediate plans to revise output targets and produce more crude even with oil near $85, a person familiar with Saudi oil policy told Reuters last week.

Crude prices also rose after reports that a South Korean supertanker was hijacked by Somali pirates off of East Africa over the weekend. The tanker, chartered by U.S. refiner Valero Corp., was carrying around 2 million barrels of Iraqi crude oil -- around 2.4 percent of daily world supply -- towards the U.S. Gulf Coast.

Technical analysts, who follow the movement of prices on historical charts, have become more bullish and suggest the oil market could move higher in the next few weeks.

“Our take on crude oil prices in the short-term is that we likely will push higher from here,” said senior commodities analyst Edward Meir at brokers MF Global.

“Technically, there is very little resistance showing on the charts given the upside breakout evident.”

Photo By: braniffelectra