Toronto Real Estate and Neighbourhoods Blog | Move Smartly

Home Buying 101: Matching Your House to the Life You Have

Urmi Desai in Home Buying, Lifestyle

One way to measure the success of a visit with friends and family is the quantity of ‘in jokes’ that result (the poorer the quality, the better the time had by all). On a recent trip to L.A., one of our shared jokes became “so called” (SoCal, or Southern Californian) architecture, shorthand for “Oh, that? That’s my kitchen/bathroom/bedroom/gym sitting outside in the sunshine.” Given the Mediterranean climate they have to work with (dry sunshine, perfect light, cooler nights), it makes sense for local architects to spill their homes outdoors, where people live almost year-round.

In contrast, I wonder if our backyards and front yards may be oversized for Toronto's climate. Does our willingness to pay a land premium for a few months of locally-produced grass stains make sense, or would that premium be better spent elsewhere?

We are, the experts tell us, moving into “the middle years” of housing. This means that prices are expected to remain steady, perhaps even sag a bit, but also mellow out. The best advice tells us not to panic, but to plan stay in our homes for at least 5 years and to buy comfortably based on our core needs. Easy. But alas, the ancient Greek philosophers predicted that we’d have trouble figuring ourselves out and, as a result, make bad purchases all over town, as confirmed by a lunch hour trip to the Eaton Centre. Our purchases don’t reflect who we are as much as who we’d like to be combined with the kind of doomsday planning espoused by bearded men living in remote compounds. Though there is unlikely to be a single occasion in your life that will call for a severely bejeweled gym suit, it does not stop you from picking one up “just in case.”

In a similar way, perhaps our oversized dinning rooms don’t mesh with the fact that the last time we hosted a 12 person sit-down dinner party was when Uncle Bob convinced Uncle Ted that it was a great idea to invest in Nortel. And with a climate more prone to sudden showers, haven’t Parisians devised a more elegant and clever substitute to the large backyard – the small, easy to escape, street-facing balcony? (Montrealers have instead come up with tall flights of front stairs descending to the street, a charming way to teach the young how to ski.)

Five Questions For....Pascal Gauthier, TD Bank Senior Economist on the Real Estate Market in Canada and Toronto

John Pasalis in Toronto Real Estate News, Mortgages and Finance

Editor's Note: "Five Questions For" is a periodic series in which Move Smartly bloggers get answers to the questions we'd all like to ask about real estate.

TD Economics made headlines a few weeks ago when they released a report forecasting a 10% decline in Canadian home prices.  

I invited TD Bank Senior Economist Pascal Gauthier to answer five questions about the report they recently published and about Toronto's real estate market overall:

John Pasalis: Hi Pascal, thank you for taking some time to answer a few questions about the recent TD Economics report on Canada's real estate market.  Your colleague Grant Bishop calls for a roughly 10% decline in average home prices in Canada.  When do you see this happening?  Do you expect a quick decline in prices or is this going to carry into 2011?

Pascal Gauthier, TD Economics: The -10% mentioned by my colleague Grant is a peak-to-trough figure, rather than an annual average. Some of that adjustment is already under way on a (seasonally-adjusted) month-to-month basis, with average prices down about 3.5% since May. We think we are roughly a third of the way through the price adjustment, implying roughly another 9 months of trend decline – bottoming sometime in the first half of next year, likely Q2 on a quarterly basis.

John Pasalis: In May 2010, TD Economics released a report forecasting a roughly 5% total decline in home prices by the end of 2011.  What economic factors have changed over the past three months to account for the significant change in TD's forecast?

Pascal Gauthier: The May report referred to a -2.7% annual average national price change in 2011. As of August, this had been revised down slightly to -3.0% (see our latest housing tables, page 2)

John Pasalis: The strong recovery in the housing market in 2009 caught virtually everyone by surprise. What impact, if any, do you feel behavioral variables such as consumer perceptions and confidence have on the real estate market and how do you as an economist account for such variables?

Interest Rates: Why the Sky Isn't Falling

David Larock in Mortgages and Finance

Editor's Note: This week's post also appears in the September issue of REM magazine.

What a roller coaster ride the last two years have been. In the spring of 2009, Canadian house prices fell across the board and transactions slowed as fears of a global economic downturn spread. But then, as if only pausing for breath, Canada’s real estate market revved up once again and the spring dip looked like nothing more than a good buying opportunity. So why is everyone so nervous? When I talk to realtors, fears of rising interest rates are among the first concerns raised. There is a widespread assumption that rates can only go up, and a related belief that higher rates will hammer the real estate market. In fact, I don’t think either fear is warranted. Here’s why:

Short-term (Variable) Rates Aren’t Going Anywhere Fast Because… 

• The central bank’s primary reason for raising rates is to control inflation. Our inflation rate (as measured by the consumer price index) was at 1% as of July 23, 2010, well below the central bank’s upper limit of 2%.
• The effects of higher rates are felt only over time, so raising short-term interest rates gradually allows the central bank time to measure the impact of previous increases before tightening further.
• The real estate market is cooling off. One of the central bank’s main concerns with leaving its overnight rate at emergency low levels was that it would fuel a housing bubble. Today’s more balanced housing market has rendered that concern moot for the time being.
• While the Canadian economic recovery is in full swing, most of the rest of the world is not faring as well. In its recent commentary, our central bank has acknowledged that aggressive interest-rate hikes could stifle our momentum, especially against today’s backdrop of global economic uncertainty.
• The US Fed is not expected to increase its short-term policy rate until 2012 at the earliest. If our central bank keeps raising rates independently of the Fed, our dollar will continue to appreciate and this will slow our economy further. Most experts do not believe that Canadian short-term rates can be sustained at much more than 1% above comparable US rates (and we’re already .75% higher today).

Moderately Higher Rates Won’t Hammer the Real Estate Market Because… 

• Contrary to popular belief, there is no strong correlation between rising interest rates and lower house prices. In fact, historical data show that rates and house prices rise together more often than not. Before you say I’m out to lunch, let me elaborate. I readily accept that, all being equal, higher rates hurt affordability and are bad for the housing market.  But all is not equal.  Rising rates generally occur in an improving economy, and the positive economic momentum that accompanies higher rates creates a net effect that has historically proven more positive than negative. (I will elaborate on this point in next week's post.)

A Different View: Another Way to Value Your Home

Bruce Freedman in Mortgage and Finance

Editor's Note: "A Different View" is a periodic series in which guest bloggers are invited to share new and differing views on all things real estate.

For most Canadians, their home is by far their largest investment. That said, most new home buyers don’t actually do much in the way of valuation analysis to ascertain whether they should buy this largest investment. Instead they focus on “affordability” and the ever popular “hardwood floor-to-crown molding” ratio. Imagine if your broker used affordability as a reason to buy a stock.

Imagine this conversation:

Broker: “Ahhh. I just picked up 100,000 shares of Acme stock for you at five dollars.”

You: “Really? That’s $500,000! I’ve only got $50,000 in my account. And this stock has risen so much! What’s the valuation look like?”

Broker: “Huh? Valuation? What do you mean by this word “valuation?” I never heard such a question. The stock trades at five dollars. I bought your shares at five dollars. Five dollars is the valuation. Right now. But it’s going higher. The price has been rising for years and analysts, banks, politicians, property agents & taxi drivers expect it to continue to rise. Particularly if people like you continue to buy. Don’t worry about the price. I arranged a $450,000 loan for you to cover the difference. Don’t worry about the loan either. You and your wife earn good incomes and can afford the loan payments. Especially if we assume that interest rates remain at all-time lows — for the next 30-40 years.”

When an investor looks at an investment — any investment — as part of their due diligence, they should value it against its alternatives — both alternatives within the same industry and alternatives in other industries/asset classes. After all, greed knows no boundaries — it’ll eventually chase out the best returns.

Real Estate Roundup August 27th, 2010

Real Estate Roundup

Real Estate News

What happens when a home is damaged just before closing? (Toronto Star) 

Canadian construction industry faces slowdown (Toronto Star) 

Move to suburbs can’t offset condo sales slump (Toronto Star) 

Realtors launch ad campaign to buff up their image (Toronto Star) 

Portrait of the artist as a real estate tycoon (Toronto Star) 

Canadian home prices continue to rise (Globe and Mail) 

Canada's resale housing market plunges in July (Vancouver Sun)

Rising resale home prices set to stall: Teranet report (Financial Post) 

Home Prices in Canada Post Biggest Monthly Gain in 10 Months, Teranet Says (Bloomberg) 

Toronto artist sues Ivan Reitman's condo developer (Hollywood Reporter)

Toronto Condo Listings Up 72% in Second Quarter

John Pasalis in Toronto Real Estate News

Below is the Toronto Real Estate Board's condo market commentary written by their Senior Manager of Market Analysis, Jason Mercer.

Active Listings Growth for Condo Apartments Outpacing Listings for Low-Rise Home Types

Following very tight market conditions in the first quarter of 2010, the resale home market became better supplied between the beginning of April and the end of June. The number of active listings climbed strongly in the second quarter compared to the same period last year. Leading the growth in listings was the condominium apartment segment. In the central districts in particular, active listings for condominium apartments grew by 79 per cent year-over-year in the second quarter – a much stronger growth rate relative to the 25 per cent increase for all other home types.

 

The active listings trend for condominium apartments follows the trends for annual median price growth and new condominium apartment completions in the GTA. With the exception of a brief downward blip in the third quarter of 2009, new condominium apartment completions have remained strong over the past year. This suggests that many new units, which are owned by investors or buyers whose housing needs have changed since their preconstruction purchase, continue to be listed in the GTA resale market. This is especially the case within the City of Toronto where almost 80 per cent of GTA condominium apartment construction is taking place. Strong price growth has also attracted more listings into the market, as some owners look to convert substantial “paper” returns into actual “dollar” returns. Of course, with a surge in active listings over the past few months, buyers have benefitted from more choice and the annual growth rate for the median price has moderated to a certain degree.

 

The Mortgage Deal of the Week

David Larock in Mortgages and Finance

I love being an independent mortgage planner because I can offer my customers the best of what the wider mortgage market has to offer at any given point in time. Each morning I receive rate promotions and product updates from lenders across the country and sometimes, there are promotions and deals that jump off the page. “How”, I wondered, “can I keep readers apprised of the best deals going as part my ongoing advice and commentary?” After carefully considering different options, I decided to create a new link in the top right corner of my blog called “The Deal of the Week” which will give you a quick and easy way to see the best of what’s on offer. My first Deal of the Week will probably come as a surprise to my regular readers. Here’s why:

In today’s environment, I have advocated variable-rate financing as the best alternative for the majority of mortgage borrowers. Basically because with economic headwinds building at home and abroad, and inflation well under control, I think that the threat of dramatic rate increases is remote. My favourite plan of attack is for my variable-rate customers to use the money they save on interest to pay off their loan more quickly. One easy way they do this is by setting their regular mortgage payment at the equivalent fixed rate, because the excess portion of each payment goes straight to paying down principal. Having said that, I recognize that some borrowers are more conservative and don’t want to lose sleep worrying about volatility in the interest rate market. If you are part of the group that prefers the predictability of a fixed rate mortgage, then my inaugural Deal of the Week, should be right up your alley.

One of my lenders is now offering a three-year fixed-rate mortgage at 2.9% (which is well below the next best offer). Normally a deal this attractive comes with reduced features and flexibility (which are hidden costs) but in this case, the product comes with all of the standard bells and whistles. The only catch is that this is a limited time offer so if you want to take advantage of it, keep in mind that your transaction must close by October 15. Click here for full details.

With today’s prime rate at 2.75% and the average variable rate being offered at 2.10%, a fixed rate of 2.9% that is locked in for three years is a compelling alternative. If you're wondering if this offer is right for you, contact me and we'll take a look at your individual situation.

Lastly, I will update the Deal of the Week each Monday, so check back with us regularly to learn about other deals that are jumping off the page.

David Larock is an independent mortgage planner and industry insider specializing in helping clients purchase, refinance or renew their mortgages. David's posts appear weekly on this blog (movesmartly.com) and on his own blog (integratedmortgageplanners.com/blog). Email Dave

Mortgage fraud fallout working way through courts

Bob Aaron in Legal

Mortgage fraud may no longer be on the front pages, but the fallout from hundreds of past fraud cases is still wending its way through Ontario courts.

The most recent decision in this area of law was released in June by the Ontario Superior Court of Justice, and involved a mortgage fraud perpetrated on the Royal Bank of Canada.

The story begins in a Tim Hortons back in October, 2004. Angela Isaacs was having a coffee with her then-common law husband, Dexter Abrams, discussing the sorry state of their finances. Another customer overheard their conversation and introduced himself as Mike. He said he could help them and left his phone number if they wanted more information.

 A couple of weeks later the couple contacted Mike, who offered to pay $4,000 if one of them would co-sign a mortgage for an acquaintance who had trouble getting financing on a house.

Ultimately, Isaacs reached an agreement with a woman who identified herself as a mortgage broker named Marcia Briggs. She agreed to pay $6,000 to Isaacs for co-signing mortgage documents on a house being purchased by someone named Mark Forrest.

Briggs and Mike told Isaacs she would only be liable as a guarantor for six months and that during that time Forrest would be making all the payments.

Briggs later went to a Royal Bank branch and signed some bank forms, including a mortgage application for a house on John Stoner Dr., near the Toronto zoo.

Later she met with a secretary in a law office and signed a mortgage for $279,451.29 and other documents without any explanation or discussion.

The fraudsters never made any payments on the mortgage. Upon investigation, Isaacs discovered the true extent of the fraud:

Real Estate Roundup August 20th, 2010

Real Estate Roundup

Real Estate News

Canada's housing market can't stay hot forever (Canadian Business) 

HST a prime suspect in home-buying chill (Globe and Mail) 

Post-slump housing boom may have run its course (Globe and Mail) 

Housing to drag on economy (Globe and Mail) 

Toronto condo market hits ‘down’ button (Globe and Mail) 

Is Canada’s housing dip just a ‘giveback’ from the surge? (Globe and Mail) 

Canadian home sales sink 30 per cent in July (Globe and Mail) 

Selling the family home to buy a condo? (Globe and Mail) 

Toronto housing slump deepens (CTV) 

Major banks announce cuts to mortgage rates (CTV) 

Homebuyers shouldn't expect hot deals: experts (CTV) 

Home sales tumble (National Post) 

Canadian home sales drop in July (CBC) 

Toronto existing home market slows in August (Toronto Star) 

TD forecasts 10% drop in home prices (Toronto Star) 

Toronto's 'Clubland' no longer booming as condos move in (Toronto Star) 

‘Another day older and deeper in debt’ (Globe and Mail) 

U.S. targets mortgage market reform (Globe and Mail) 

Krugman warns Canada not immune (Globe and Mail) 

Paul Krugman: ‘Canadians borrow an awful lot’ (Globe and Mail)

Reverse Mortgage Financing - Is it Right for You?

David Larock in Home Buying, Mortgages and Finance

One of the most common observations made about the financial profile of average baby boomers is that too much of their net worth is tied up in their primary residence. While real estate investments have served boomers well over their lifetimes, with steadily appreciating values and tax free capital gains, this asset class is also relatively illiquid and has a future that some fear may not be as bright as its past. Reverse mortgages offer Canadians over the age of sixty the opportunity to tap into their existing home equity without having to sell and move. The proceeds are tax free and the loan does not require any scheduled repayment. That said, a reverse mortgage is still an expensive way to borrow money and in many cases, is not the best option on the table when emotional factors like selling the family home are excluded. Today’s post will explain how reverse mortgages work and will outline the strengths and weaknesses of this option.

A reverse mortgage is simply a loan that is paid back with home equity, instead of with ongoing cash flow. To use a basic example, assume that you own a home worth $500,000 and that your lender advances you $200,000 on a reverse mortgage with a rate of 5.5%. Your annual interest cost (in simple terms) works out to $11,000, and this amount is added to your mortgage balance. So at the end of the first year, assuming no change in the value of your property, your mortgage will increase to $211,000 and your equity will decrease to $289,000. Homeowners (and spouses) must be at least sixty years of age and the maximum amount of home equity that can be withdrawn is set on a sliding scale according to age (60 yrs = 25%, 70 yrs = 40%, 80 yrs = 55%). Reverse mortgages are available in most urban areas and are offered on most standard property types (house, townhouse, condo etc.), provided that the home being mortgaged is the borrower’s primary residence. These loans can be paid off at any time, although there are stiff penalties if you break your mortgage in the first two years of the contract.

The vast majority of Canadian reverse mortgage transactions have been funded under the Canadian Home Income Plan (CHIP) brand, which has been around for 25 years and is now part of HomEquity Bank, a newly minted Schedule I Canadian bank. There is finally a bit of competition from smaller players, for example, Seniors Money Canada, and this has corresponded with more reasonable interest rate charges. CHIP’s average loan amount is 35% of the property’s value, and CHIP states that “on average, the amount left over is more than 50% of the value of the home when it is [eventually] sold.” While a little surprising, this statistic is mostly a result of the steady increase in Canadian home prices over the past 25 years. (For illustrative purposes, we will now evaluate CHIP’s offering, since they are the dominant Canadian competitor.)