Toronto Real Estate and Neighbourhoods Blog | Move Smartly

Fixed Rates Move Up and Variable Rates Look Better By Comparison (Monday Interest Rate Update)

Dave Larock in Monday Interest Rate Update, Mortgages and Finance, Home Buying, Toronto Real Estate News

Editor's Note: Dave's Monday Morning Interest Rate Update appears on Move Smartly weekly. Check back weekly for analysis that is always ahead of the pack.

Five-year fixed-mortgage rates moved higher last week as lenders continued to respond to the recent run up in Government of Canada (GoC) bond yields, which have risen from a low of 1.13% on May 1, 2013 to a high of 1.63% on June 12, 2013.

Fixed-mortgage rates have been at ultra-low levels for a long time, so it’s not surprising that the vast majority of borrowers have been opting for the comfort and familiarity of the ‘banker’s favourite’ five-year fixed term (here is a post I wrote that explains why I call it that). But after the recent increases to five-year fixed rates, I think there is an increasingly compelling case to be made for the variable rate instead.

Here are five reasons why I think the five-year variable rate is worth a fresh look:

1. For much of the past year, the spread between five-year fixed and variable rates was less than 0.25%, which meant that it would take only one increase by the Bank of Canada (BoC) to make five-year variable-rate mortgages more expensive than their fixed-rate alternatives. After the latest round of fixed-rate increases, this spread is now greater than 0.50%, which gives variable-rate borrowers a wider ‘margin of safety’ between variable and fixed rates.
2. If you’ve recently agreed to purchase a home or have a renewal coming up, you need a mortgage at a specific future date. If the vagaries of bond-market investors happen to push up five-year GoC bond yields at the same time that you need a mortgage, opting for a five-year fixed rate locks in that short-term yield spike for the next five years. Conversely, variable rates don’t move until the BoC raises its overnight rate and this happens much less frequently, and on a more measured and considered basis.
3. When borrowers dismiss the variable-rate option, the most common justification I hear is that they’re worried they won’t be able to afford future rate increases. Most of these same borrowers are surprised to learn that they can only qualify for a variable-rate mortgage if they prove that they can afford a doubling of rates over the next five years. That’s because lenders now qualify variable-rate applicants using the BoC’s Mortgage Qualifying Rate (MQR) which currently sits at 5.14% (here is a post I wrote that explains the MQR in detail). If you can pass the MQR’s stringent test, then you should feel confident that you can afford substantial, and even unlikely, future rate increases. Variable-rate mortgages also come with the option to convert to an equivalent fixed rate term at any time with no penalty. While the conversion rates offered by different lenders can vary widely, this free lock-in option gives you the ability to eliminate further variable-rate risk.

Toronto Real Estate Roundup - June 14 2013

Realosophy Team in Media Roundup, Realosophy News

New This Week from Realosophy.com

Condo News

Canada’s housing construction still booming, thanks mostly to condos (Toronto Star)

Sky-high Toronto condo numbers renew fears of overheated market (Globe and Mail)

Bank of Canada warning on Toronto condominium market focuses attention on investors (Toronto Star)

What sells condos? Grocery stores (Globe and Mail)

Other Real Estate News

Housing's Up, but Is Foundation Sound? (Wall Street Journal)

Home prices rise 2%: A crash isn’t forecast, but neither are big gains (Globe and Mail)

Firms leasing less office space in new Toronto towers (Globe and Mail)

Historicist: The Birth of Leaside (Torontoist)

Living With Less. A Lot Less. (New York Times)

Wraps come off plans for the Gardiner Expressway (Globe and Mail)

Startup drugs (Pando Daily)

Realosophy Realty Inc. Brokerage is an innovative residential real estate brokerage in Toronto. A leader in real estate analytics and pro-consumer advice, Realosophy helps clients buy or sell a home the right way. Email Realosophy

A Look Behind Canada’s Near Record-Breaking Employment Report (Monday Interest Rate Update)

Dave Larock in Monday Interest Rate Update, Mortgages and Finance, Home Buying, Toronto Real Estate News

Editor's Note: Dave's Monday Morning Interest Rate Update appears on Move Smartly weekly. Check back weekly for analysis that is always ahead of the pack.

Last Friday the latest Canadian employment report was released by Statistics Canada and it smashed expectations. Not surprisingly, bond yields shot higher on the news and lenders increased their five-year fixed-mortgage rates shortly thereafter.

Let’s start by taking a look at the highlights from the latest employment report that got everyone so excited:

• Our economy added a total of 95,000 new jobs in May. This is the second highest single-month result in the last thirty-five years (the highest was 95,100 new jobs in August, 2002).
• Ontario accounted for roughly half of the new jobs with more than 50,000 new positions created.
• The private sector accounted for almost all of the new jobs, adding 94,600 net new positions.
• 76,700 of the new jobs were full-time positions.

The immediate investor response to this employment report was predictable. Markets are made at the margin and an employment report that comes in ten times higher than the consensus forecast can certainly be expected to push bond yields higher over the short term.

Investors were quick to speculate that a surge in our monthly employment data may be a signal that our labour market is entering a tightening phase. Since there is an 80%+ correlation between rising labour costs and rising inflation, higher interest rates won’t be far behind if this tightening trend comes to fruition. But does this sudden spike in employment signal the onset of higher inflation or is it just a one-off blip?

As I read about the details in the report, I began to suspect the latter. Here are the factors that led me to that conclusion:

Toronto Real Estate Roundup - June 7 2013

Realosophy Team in Media Roundup

Housing Market

Has Vancouver’s housing market hit bottom? (Financial Post)

This is not your 1990s housing market (Globe and Mail)

Sales, prices, listings down. What’s up with Toronto’s high-end homes? (Globe and Mail)

Why are home prices so high and when will they fall? (CBC News)

‘Downside risk’ in housing prices, led by Toronto condos: Scotiabank (Global News)

Toronto home sales fall in May but prices still rising (Globe and Mail)

Canadian homes among most overvalued in OECD ranking (Globe and Mail)

Other Real Estate News

2013 Mortgages: A Canadian Market Overview [Infographic] (Rate Hub Canada)

7 reasons your house may not be selling (Toronto Star)

Financial problems plague Bixi Toronto (Montreal Gazette)

Realosophy Realty Inc. Brokerage is an innovative residential real estate brokerage in Toronto. A leader in real estate analytics and pro-consumer advice, Realosophy helps clients buy or sell a home the right way. Email Realosophy

Dance Studio Found to be Thunderous Upstairs Neighbour

Bob Aaron in Legal

One of the most common complaints from condominium residents is noise coming from neighbouring units. In the last 40 years, more than 100 condominium noise cases have gone to trial in Ontario courts.

The latest of these involves an application by Elizabeth Dyke against Metropolitan Toronto Condominium Corporation 972 to require the condominium to enforce its noise bylaws. The building is a 349-unit high-rise on Wellesley St. E. near Yonge St.

Earlier this year, Dyke was living on the 8th floor of the building with her daughter, and used a nearby unit as her law office (she has since retired).

In February, 2010, two new tenants moved into Ste. 911, the unit above the Dyke residence. The wife explained to Dyke that she was a professional dancer and sometimes used her condo as a practice area.

The noise from upstairs escalated over the months and by July, 2011 the tenant was using her unit as a full-time professional dance studio.

In August Dyke reported the nuisance to the police, and began complaining to the property manager.

During the fall of 2011, Dyke made numerous complaints to the management and security desk. Reports from the security personnel described the sound as similar to the constant banging of a hammer.

Are Higher Mortgage Rates on the Way? (Monday Interest Rate Update)

Dave Larock in Monday Interest Rate Update, Mortgages and Finance, Home Buying, Toronto Real Estate News

Editor's Note: Dave's Monday Morning Interest Rate Update appears on Move Smartly weekly. Check back weekly for analysis that is always ahead of the pack.

When the Bank of Canada (BoC) met for the last time before Governor Carney leaves for the Bank of England, it did not change its interest-rate bias as I had speculated that it might in last week’s post. In fact, the BoC’s commentary was a little more general and more vague than usual.

In the end, the Bank favoured a steady-as-she-goes approach as it begins to transition from outgoing Governor Carney to incoming Governor Stephen Poloz. With that in mind, I think it’s unlikely that Governor Poloz will make any significant changes to the Bank’s monetary policy right off the bat - so it now looks like the BoC’s upward interest-rate bias will be with us for a while yet.

The big story relating to Canadian mortgage rates last week was the continued surge in our five-year Government of Canada (GoC) bond yields, which have risen 33 basis points over the past month (from 1.15% on May 1, 2013 to 1.48% at close of business last Friday). To put that current yield level in perspective, over the past 12 months the five-year GoC bond yield has remained below 1.50% on all but a handful of days and we haven’t breached the 1.50% threshold since mid-February.

Marginal changes in bond yields are caused by many factors but I think the largest single influence on this recent GoC bond-yield run up has been a reduction in the fear premium that investors are willing to pay for AAA-rated assets that guarantee a return of capital. Fears of a systemic shock to the world economy, often referred to as a “tail-risk event”, have been on the wane of late. As a result, large institutional investors in search of greater returns have been rotating their massive portfolios out of ultra-safe, ultra low-rate government bonds and back into equity markets.

This selling pressure has pushed GoC bond yields up and we are now left to wonder whether this trend is just a temporary blip or the first signal that a long-term rise in our bond yields, and by association our fixed-mortgage rates, has now begun.

While there is no way to know for sure, if it’s true that the recent run up in five-year GoC bond yields is being primarily driven by diminished tail-risk fears then I don’t think we’ve seen the last of sub-1.50% yields.

Here is a look at the most pressing concerns that still surround the world’s four largest economies. These are the main reasons why I think that fear will push greed back out of the market’s driver’s seat before too long:

Toronto Real Estate Roundup - May 31 2013

Realosophy Team in Media Roundup

Real Estate News

How Canada's housing downturn threatens to shake up real estate commissions (Globe and Mail)

New Toronto tall building design guidelines aim to protect views of sky, sun, heritage (Toronto Star)

Proposed Walmart near Kensington Market has residents fuming (Toronto Star)

Worried about the housing market? Five strategies for peace of mind (Globe and Mail)

In Toronto, real estate prices pose a puzzle: Why so high? (Globe and Mail)

Ottawa’s retreat from mortgage market sends CMHC insurance sales tumbling (Globe and Mail)

Real Estate: Seller’s remorse can be a costly thing (Toronto Star)

Homeowners: Don’t be caught flat-footed when interest rates rise (Globe and Mail)

Realosophy Realty Inc. Brokerage is an innovative residential real estate brokerage in Toronto. A leader in real estate analytics and pro-consumer advice, Realosophy helps clients buy or sell a home the right way. Email Realosophy

A Closer Look at Toronto’s Condo Market

John Pasalis in Toronto Real Estate News and Condo Buying

If you’re a condo buyer in Toronto it’s certainly tough to make sense of what’s really happening in the market. In the same day one can read a story about the condo market being on solid ground thanks largely to the strong demand for condo rentals followed by a story about the condo boom coming apart at the seams.

I thought it would be worthwhile to expand on a post I wrote last month on the condo market, this time taking a closer look at actual numbers to give readers a better picture of what has actually been happening in Toronto’s condo market over the past year.

While most mainstream media outlets focus on reporting changes in sales and average prices there’s actually a more important metric that gives us a more accurate picture of how balanced the market is. The sales-to-inventory ratio is one of the key metrics we use when analyzing the market because it takes both supply and demand into account giving us a more accurate picture of how balanced the market is.

To see how this works, imagine that 500 condos sold in April and at the end of the month there were 1,000 condos available for sale. In this case the ratio of sales (500) to inventory (1000) would be 50%. This level of balance between supply and demand is roughly what we are seeing in Toronto’s freehold market. There are not enough homes coming on the market for sale to meet the demand from buyers. This is why we are still seeing a lot of bidding wars for Toronto houses.

Now imagine in May sales dropped to 100 and there were still 1000 condos available for sale at the end of the month. In this scenario the ratio of sales (100) to inventory (1000) would be 10%. This level of balance between supply and demand is similar to what we are seeing in many US cities. Weak demand relative to the number of properties available for sale.

The market is considered to be balanced when the sales-to-inventory ratio is between 15%-25%. Anything above 25% favours sellers and below 15% is a buyer’s market.

The chart below shows the sales-to-inventory ratio for detached houses and condo apartments in the Greater Toronto Area.

Out With the Old Bias, In With the New Bias? (Monday Interest Rate Update)

Dave Larock in Monday Interest Rate Update, Mortgages and Finance, Home Buying, Toronto Real Estate News

Editor's Note: Dave's Monday Morning Interest Rate Update appears on Move Smartly weekly. Check back weekly for analysis that is always ahead of the pack.

When the Bank of Canada (BoC) meets this Wednesday I think there is a good chance that it will remove the interest-rate tightening bias that it has kept in place, in one form or another, for more than a year now.

Simply put, the cost of maintaining that tightening bias now clearly outweighs the cost of removing it.

When BoC Governor Mark Carney first started warning Canadians that our borrowing rates would rise more quickly than most were expecting, he cited rising household debt levels, and more specifically, increased borrowing against residential real estate, as the primary threats to our domestic economy. He acknowledged this most recently in a speech last week, saying that the BoC’s rate-tightening bias was designed “to complement efforts of the federal government and OSFI to achieve a constructive evolution of household debt.”

Over the past several months however, our rate of household debt growth has fallen precipitously and Governor Carney said in the same speech that he now “expects residential investment to decline further from historically high levels”.

If it’s true that the BoC and the federal government now believe that the combined threat of housing and credit bubbles is off the boil, their next big worry must surely be our faltering economic growth. And if increased consumer spending isn’t regarded as a healthy form of economic stimulus because it will re-accelerate our household borrowing rates, then businesses are going to have to take up the charge. In the words of Governor Carney, “the challenge for Canada is to rotate the sources of growth toward net exports and business investment.”

So why hasn’t this happened? After all, this isn’t the first time that Governor Carney has implored businesses to use either their cash-rich balance sheets or the BoC’s ultra-low borrowing rates to invest in productivity enhancements and expansion.

Toronto Real Estate Roundup - May 24 2013

Realosophy Team in Media Roundup

Mortgages

Mortgage Rules Help Fuel Rent Hikes (Canadian Mortgage Trends)

Take-back mortgages help young buyers when banks say no (Toronto Star)

Canadians are paying off mortgages quickly — so is Ottawa’s crackdown really necessary? (Financial Post)

Home Buying

In Toronto, the market’s sweet spot is the humble bungalow (Globe and Mail)

Slowdown? Nearly half of Canadian homeowners eager to buy property (Globe and Mail)

Should I buy that condo now, or wait for prices to fall? (Globe and Mail)

Other Real Estate News

Condos becoming part of Toronto’s affordable housing tool box (Toronto Star)

How smoking at home reduces property values (Toronto Star)

The rental-housing shortage is now a national disaster. It needs Ottawa’s help (Globe and Mail)

Realosophy Realty Inc. Brokerage is an innovative residential real estate brokerage in Toronto. A leader in real estate analytics and pro-consumer advice, Realosophy helps clients buy or sell a home the right way. Email Realosophy