Canada's housing market among world's best

Canada's housing market among world's best Australia's market red hot, while Ireland hits the skids Last Updated: Thursday, December 23, 2010 2:48 PM ET .CBC News Canada's housing market was among only six in advanced nations that posted growth in 2010, according to the latest Global Real Estate Trends report issued by Scotia Economics.
With its asking price of close to $1.5 million, this home in Vancouver's Kitsilano area demonstrates why a new report calls Canada's housing market a top performer internationally.(Jonathan Hayward/Associated Press) But while the Canadian home market was among the best performing, it was also one of the most volatile, the report notes.
Home sales were unusually active during the winter and spring, but dropped off substantially during the summer, according to the report. It says that over the fall, sales returned to a more typical level.
"We are neither overtly optimistic nor pessimistic regarding the outlook for 2011," said Adrienne Warren, a senior economist with Scotia Economics.
'Overall, we anticipate a fairly lacklustre year for residential housing.'—Adrienne Warren, Scotia Economics She expects interest rates to remain low well into 2011, providing an inducement for first-time and move-up buyers, which will keep sales at a decent level.
However modest employment and income growth is expected to restrain the market somewhat.
"Overall, we anticipate a fairly lacklustre year for residential housing, with modestly higher sales volumes and flat inflation-adjusted prices," Warren said. "The bigger risk likely awaits in 2012, when more significant interest rate increases, combined with record-high home prices, will notably strain affordability."
Australia had the hottest real estate market in 2010, according to the report, with home prices rising nearly 10 per cent over the year.
Demand there was supported by low unemployment and a tight housing supply.
"While Australia's close trade ties with Asia and resource wealth will continue to underpin a solid pace of domestic activity, higher interest rates will worsen already strained affordability," Warren said.
France, Sweden, Switzerland and the U.K. also recorded growth in their housing markets.
Germany and the United States were flat in 2010, even as the U.S. market struggled to rebound from a 30 per cent price correction over the previous four years.
Ireland, Italy, Japan and Spain all recorded price drops. Ireland's market was the worst among the 12 nations tracked. It posted double-digit price declines in 2010. Weak demand, oversupply and high unemployment are expected to keep Ireland's housing market in decline well into 2011.

Bankers sound alarm on loans

John Greenwood, Financial Post · Thursday, Dec. 9, 2010

Some of Canada’s top bank executives are growing increasingly uncomfortable with the level of debt Canadians are taking on through long-amortization mortgages.

“I think all of us are looking at [what to do],” said Ed Clark, chief executive of Toronto-Dominion Bank, adding the current situation “is not a good thing.”Speaking in an interview, Mr. Clark said TD has already acted to slow lending but it’s now up to the federal government to take steps such as reducing maximum amortization periods on home loans to 25 years from 35 years or lowering loan-to-value ratios.“These are exactly the things that government should be doing and there’s been a lot of discussion,” he said. Bank of Montreal CEO Bill Downe said his organization is also doing what it can to rein in customer borrowing, but fixing the problem without hurting the economy is “the challenge for Canada.”

“I think [tighter mortgage rules] is consistent with maintaining healthy consumer debt levels,” he said, suggesting the changes could be included in the next federal budget.

Meanwhile, the Bank of Canada is again raising the alarm about the perilous state of household finances. In the December issue of the Financial System Review released Thursday, it singled out elevated consumer debt as a “key risk” for the Canadian economy.

Fuelled by rock-bottom interest rates and a rising real estate market, Canadians have been borrowing at a rate much faster than their income has grown — especially over the last two years — raising concern that they are becoming vulnerable to economic shocks such as rising unemployment and stagnant wages.

For the first time, the value of mortgages outstanding — the biggest chunk of consumer debt — recently topped $1-trillion, according to Bank of Canada statistics.

A spokesman for Canadian Bankers Association declined to comment on whether it is lobbying the government for tougher regulations.

“Banks have contributed with their own economic research to the ongoing public discussion about household borrowing and debt levels in Canada, and there is broad agreement that this is a matter that merits close attention,” said Terry Campbell, vice-president of policy at the Canadian Bankers Association.

The banks first approached Ottawa asking for tighter lending rules at the start of the year. In February, Finance Minister Jim Flaherty gave them what they wanted, unveiling a list of changes to mortgage rules, including a requirement forcing all homebuyers to meet the standards for a five-year, fixed-rate loan even if they chose a variable mortgage with a shorter term. There were also rules lowering the maximum amount consumers could borrow against their homes to 90% from 95%.

The trouble was consumers barely noticed as the spending spree went on largely unabated. According Moody’s Investors Service Inc., household debt levels relative to income are following a similar trajectory as in the United States during the credit bubble.

Bank officials argue it’s unfair to compare the two countries because mortgage lending standards have always been much tougher in this country and there was never a major subprime mortgage sector.

Nevertheless, requirements did get loosened in the bubble years when the government allowed the amortization period on mortgages rise to 40 years.

“Originally, we said moving from 25 years to 40 years was a mistake,” Mr. Clark said. “We didn’t think it was a good idea. [When the crisis hit] the government moved back from 40 to 35 and I think from a public policy view, over the long run, it would better to get back to 25.”

He said it’s the responsibility of the government and not the banks to tighten the rules because it’s the government that regulates the market.

“If CMHC policy is 35-year [amortization], not 25 years it’s very hard for the industry to say, OK, let’s move to 25 years,” Mr. Clark said.

For his part, Mr. Downe said, he’s not trying to tell the Department of Finance what to do.

“I’m not prescriptive but I think those kinds of ideas [such as shortening amortizations] resonate,” he said in an interview earlier this week.

Moving to shorter amortizations would likely have a significant impact on the market. Statistics Canada finds 42% of all new mortgages are for amortization periods of more than 25 years.

Planning ahead key to getting top value when selling

KATE ROBERTSON

Special to Globe and Mail Update

Published Friday, Dec. 03, 2010 9:19AM EST

As with every exit strategy, experts advise owners to plan early if they think they will eventually sell their business.

According to the business monitor survey published for the first quarter of this year by the Canadian Institute of Chartered Accountants and Royal Bank of Canada, the top two challenges business owners believe they will face in selling are getting the right value for their company and finding the right successor.

Lawrence Wilder, a corporate lawyer with Cassels Brock, said that companies can get a start long before the actual sale date by staying on top of financial reporting and other bits of housekeeping.

“You certainly will get a better value if you have your ducks in a row than if you don't,” Mr. Wilder said.

Business owners who already have comprehensive financial and tax reports completed by third-party advisers will have a leg up on the due diligence process that eventually comes in an acquisition.

Once a business owner has decided to sell, he or she will have to hire an auditor, legal counsel, a business valuator (who does not take a commission on a sale) and, sometimes, a mergers and acquisition adviser (who does take a commission).

The team completes a company review, Mr. Wilder said. Everything from sales projections to employee and intellectual property agreements inform both the sales memorandum document that is used to market the company and the valuation of the business.

Some work with a business broker to market the company, but many owners want to maintain confidentiality during the process. Often, they rely on their adviser's networks to look for potential buyers.

“Most accounting firms have divisions that will assist in finding a buyer,” Mr. Wilder said. “They'll quietly market it around the street, and, very often, they won't name the company. They'll just say it has approximately x…revenues, and to please contact the accounting firm to get the name of the person who's selling.”

Interested buyers can then begin to negotiate the terms of the sale agreement to see if a deal can be made.

Even though the economy will have an effect on M&A activity, there are key factors every business owner should consider to maximize value when they sell, said Farley Cohen, a certified business valuator.

For one, it's important to have developed a business plan that goes beyond the owner's final day. said Mr. Cohen, chair of the board of the Canadian Institute of Chartered Business Valuators and a principal with Cohen, Hamilton, Steger & Co.

“The key thing to keep in mind is that value is prospective,” Mr. Cohen said. “It's looking into the future.”

Along with having comprehensive tax returns and financial statements that put the company in good standing, business owners must have answers for questions about how the company will continue to grow.

What assets and liabilities does the company have today and what are its prospects for the future? What is the value of the real estate and the equipment? How are sales expected to grow? Are there any unusual expenditures coming up?

Secondly, a business valuator will measure the internal risks of the company, which include how it is structured, how it is operated and by whom.

Whether or not a management team has a chief financial officer and a vice-president of sales and marketing will affect how much value he or she can ascribe to the company.

The valuator will also look at how competitive a business's pricing is, the level of customer satisfaction and a company's awareness of its competitors.

“You have to know what's going on in your industry and act accordingly,” Mr. Cohen said. “If there's new machinery that everybody's using, you should have that. I don't want to buy last year's way of doing things. I want to buy this year's – or, even better, next year's.”

Lastly, Mr. Cohen will look at the external risks to the business, which are largely outside of most owners’ control. But any owner would be wise to ask himself or herself the same questions a business valuator will be asking.

“It's sort of like a house,” Mr. Cohen said. “When you're selling your house, you'll look to find out what your neighbour sold their house for.”

Special to The Globe and Mail

Brokers agree BoC rate hikes unlikely until late 2011

Taken from Canadian Mortgage Broker News
Friday, 3 December 2010



A poll released by Reuters reveals that primary dealers and global forecasters unanimously agree the Bank of Canada will hold interest rates at its next policy announcement, but the timing of the next hike in 2011 is up for some debate.

The Reuters poll, released on Dec. 2 showed 93% median probability that the Bank of Canada will keep its key rate at 1% at its policy announcement on Dec. 7, with all 44 forecasters polled predicting no move.

Among the 42 that forecast the central bank’s next hike, the majority saw it happening in the first half. The median forecast for the May 31 policy date has the rate rising to 1.25%.

But among the 12 Canadian primary dealers — the institutions that deal directly with the central bank to help it carry out monetary policy — the majority forecast rate hikes in the second half with a median prediction of a first hike in July.

When compared with a similar poll taken in October, the more recent survey showed rate hike forecasts had been moved deeper into 2011.

Thirty of the 44 forecasters surveyed say the central bank will still be at 1 percent after March 1, a more pessimistic view than the last poll.

Martin Marshall, Ontario Sales Manager with Homeguard Funding Ltd. (Verico) is firmly on side with the Canadian forecasters and thinks continued low rates could be a boon for brokers.

“The economy has still not fully recovered from the recession, both here in North America and in Europe,” he says. “To raise rates at this time would be premature and therefore I do not see rates rising until the second half of 2011,” he said.

“This is great news for prospective home buyers and even existing home owners. Rates are at historic lows and we may never see them this low again.”

Morgan Vaughan, a mortgage broker with The Mortgage Group Ontario sees a steady stream of business for brokers in 2011.

“With recent numbers coming out, I don’t see any reason to raise interest rates and I believe it means brokers will continue to be busy next year, especially with refinancing.

“The spring real estate market will be strong and even if there’s a one per cent increase in interest rates I don’t see it affecting too many people because of the recent changes that require buyers qualify for the five-year posted rate.”

“Given that the Bank of Canada had indicated that they didn’t want to see that great a divergence with U.S. rates and the Fed was actually doing quantitative easing, it made sense to push out the Canadian rate hike as well as opposed to adamantly defending a Q1 move,” David Watt, senior fixed income and currency strategist at RBC Capital Markets told Reuters.

“We’ve had a lot of recovery and we’re seeing some fade at the present time, so you get that caution that maybe the domestic side of the economy is not strong enough to offset the still sizable trade hit and currency strength.”

A report earlier this week from Statistics Canada showed the economy disappointed in the third quarter with the weakest growth rate in a year, while the economy shrank outright in September, adding pressure on policy makers to safeguard the patchy recovery.
Bank of Canada Governor Mark Carney in October gave a blunt assessment of the global and Canadian economic recoveries, saying the central bank would plot its next move with extreme caution.

According to CIBC World Markets senior economist Benjamin Tal at the recent CAAMP Forum, massive new monetary stimulus by the U.S. Federal Reserve to support a sagging U.S. economy also prolongs low rates south of the border, and Canada is seen not wanting to race too far ahead of its largest trading partner.

– John Tenpenny, Editor, CMP

Making a return on your mortgage

ROB CARRICK
Taken from the Globe and Mail
Published Friday, Nov. 26, 2010 3:47PM EST

The 5-per-cent return on safe investments is back.

It happened last week when major banks increased their posted mortgage rates. If you were lending money out for mortgages like a bank, you could get the same return.

Here’s how: Just use the money in your registered retirement savings plan to finance your mortgage.

Mortgage negotiations Investing your RRSP dollars in your mortgage is a fringe strategy – let’s get that straight. Several financial institutions offer it, but not with much enthusiasm. It’s costly and time consuming to set up, and it locks you into returns that could be lower than what a diversified investment portfolio could earn over the long term. If your entire RRSP is invested in your mortgage, then there’s also a lack of diversification to worry about.

And yet, there’s a steady level of interest in this strategy. Mike Wise, a Calgary investment adviser, said most of the inquiries he gets are from people who want to use RRSP money as a source of funds to buy investment real estate. These people are often stretched financially and may not qualify for traditional mortgages.

The other group interested in the mortgage-RRSP strategy is made up of conservative investors who see their mortgage as a potential replacement for the low-yielding bonds and term deposits they own.

“That kind of person would be a jewel for this strategy,” said Mr. Wise, who 11 years ago put his own mortgage in his RRSP and wrote about it for Canadian MoneySaver magazine (read it here).

Charley Tsai, vice-president of wealth planning support at TD Waterhouse, offers this guideline on deciding whether it makes sense to hold your mortgage in your RRSP: “It’s worthwhile if the mortgage interest rate, net of expenses, would be greater than the investment return you would generate from your RRSP.”

Let’s deal with the “net of expenses” side of things first. Prepare yourself for a fee-for-all if you set up what banks call a non-arm’s length mortgage.

Start with the mortgage set-up fee and annual mortgage administration fee, which at TD are $250 and $225, respectively. Next, there are legal fees that can cost, in one mortgage broker’s estimation, anywhere from $500 to $1,000, depending on the specifics.

Now add mortgage insurance fees that will apply regardless of how much equity you have in your home. Genworth Financial, a private provider of mortgage insurance in Canada, says the insurance premium on mortgage amounts ranging as high as 65 per cent of the value of a home will be 0.5 per cent of the amount borrowed. Premiums rise as high as 2.75 per cent for mortgages that are up to 95 per cent of a home’s value.

You could face still another fee if you break an existing mortgage so you can move it into your RRSP. For that reason, the best time to adopt this strategy is when your mortgage comes up for renewal.

Negotiating the mortgage

When negotiating a typical mortgage, your goal should be to hammer the rate down as far as it will go. Just the opposite applies with an RRSP mortgage, because you are essentially paying interest to yourself, not the bank.

“If you’re doing this, you want to try and have as high an interest rate as possible,” Mr. Tsai said.

TD rules say you have to go with the posted mortgage rate for a non-arm’s length mortgage, but there’s still some manoeuvring room to bump up your rate high enough to make it an attractive investment for your RRSP.

Mr. Tsai said TD will allow you to select mortgage terms of one through 10 years. A five-year fixed rate would have put you at 5.44 per cent as of late this week; extending to six years put you at 5.7 per cent, seven years was at 6.09 per cent and 10 years was pegged at 6.4 per cent.

TD also allows a six-month convertible mortgage, which presents an interesting possibility if you see rates moving higher. You’d get a 4.45-per-cent rate for half a year, with an opportunity to benefit from any rate increases that happen between now and then.

But is it a wise investment?

Now to the question of whether it makes sense to put your mortgage in your RRSP from an investment point of view. If we take all the startup fees mentioned above, we end up with a cost of roughly $1,000 to $2,000 in the first year, assuming a $100,000 mortgage. Essentially, you could have a first-year fee of up to 2 per cent if you decide to pay your mortgage insurance upfront.

The cost looks more attractive in subsequent years, when the $225 annual admin fee works out to a fee of just 0.23 per cent.

These fees tell us that conservative investors earning 2 to 3 per cent in their retirement savings should not find it hard to get a better return from the mortgage-RRSP strategy.

“If you have fixed income in your RRSP and if it’s generating a very low yield, then this may be something worth looking at,” Mr. Tsai said. “The greater the difference, the more economic sense it might make to do this.”

Mr. Wise, the Calgary investment adviser, said the mortgage-RRSP strategy works best if you use the mortgage to replace the bonds and GICs in your portfolio while leaving your holdings in the stock market.

If putting your mortgage in your RRSP leaves you light on equities, take the mortgage payments flowing into your retirement plan and invest them in stocks, funds and so forth. In fact, investing each successive mortgage payment gives you a nice little dollar-cost averaging program.

Making mortgage payments into your retirement plan does not affect your RRSP contribution room. So you can further diversify your retirement savings using the money you annually add to your RRSP, separate from your mortgage.

One of the challenges in putting your mortgage in your RRSP is to find a trustee for the plan. In addition to TD Waterhouse, the online brokerages CIBC Investor’s Edge, RBC Direct Investing, Scotia iTrade and ScotiaMcLeod Direct Investing all allow this. Bank of Montreal says it no longer offers this program. If you have an investment adviser, he or she should be able to find a trust company to hold your mortgage RRSP.

Don’t forget the usual strategizing if you’re putting your mortgage into your RRSP – amortization period, biweekly versus monthly payments and so on. An interesting question arises here: Do you put the priority here on getting your mortgage paid off as quickly as possible, or on building your RRSP?

“If I can get a fixed income investment in my RRSP that will give me 5 per cent, I think I’d want to keep that as long as possible,” Mr. Wise said.

---------

HOW TO DO IT

Investing your registered retirement savings plan in the mortgage on your home is not for everyone, but it can generate steady returns that beat what bonds and term deposits offer.

Step One

Find a bank, investment dealer, trust company that offers this service; some investment advisers may also be able to help you set this up.

Step Two

Tally up fees – expect to pay a set-up fee, an annual mortgage administration fee, legal fees to set up the RRSP mortgage, mortgage insurance fees and possibly discharge fees if you're breaking your current mortgage.

Step Three

Pick mortgage terms. Expect rules guiding the rate you can use, the mortgage terms available and so forth.

Step Four

Use the money you're paying into your RRSP to diversify your RRSP investments, possibly by making regular purchases of stocks or equity funds and ETFs

WHAT YOU SHOULD KNOW

Four things to keep in mind about investing your retirement savings in your mortgage:

1. You can invest RRIF money in your mortgage, but you must have enough cash on hand to fund the required minimum annual RRIF withdrawal.

2. Some banks will allow you to use RRSP money to buy a residential investment property, while others allow this only for an owner-occupied residence.

3. It may be possible to invest in a mortgage on someone else's property.

4. You'll need mortgage default insurance even though you're lending to yourself and even if you have a lot of equity in your home.

New buyers are admirably wise, survey suggests

Many first-time home buyers understand the power of the big down payment
By Peter Simpson, Vancouver Sun November 20, 2010 Although Generations X and Y are vastly different (I have daughters from both demographic cohorts so, believe me, I know all too well), when it comes to listing the impediments preventing them from buying their first homes, the members of these two generations are as similar as the Sedin twins.

A survey conducted at the 16th annual seminar for first-time homebuyers -organized by the Greater Vancouver Home Builders' Association and presented by the Homeowner Protection Office, branch of B.C. Housing -revealed that high prices and insufficient down payments were the culprits, no different than the responses gleaned from the survey conducted at, say, the fourth annual seminar in 1997.

Alas, the high cost of developable land, exacerbated by an ever-increasing array of taxes, fees, levies and development charges imposed on new homes by all four levels of government, seems to be a constant challenge throughout what is arguably the most popular geographic region in the country.

That aside, what are the needs and expectations of today's typical first-time homebuyer? I will run through the survey responses and compare them with responses from last year, when the new-homes market was mired in a 10-year low, and from 2007, when the market was riding a 14-year high.

The survey results, tabulated by Canada Mortgage and Housing Corp., reveal that most potential first-time buyers are between the age of 25 and 34 and rent accommodation away from parents. They plan to purchase a home within a year and will be buying with a spouse/ partner. They prefer a two-bedroom apartment or townhouse between 800 and 1,199 square feet. Their target price range is $300,000 to $399,000 and most have down payments of at least 10 per cent of the purchase price. They value highly the benefits of warranty protection. Half the respondents indicated they will apply RRSPs towards their down payments, and more than half believe the HST will make it difficult for them to buy a new home, although if they buy a new home priced below $525,000, the HST has little impact. And, of course, there is no HST on the purchase of a resale home.

Following are the survey findings, rounded to the nearest percentage. In parentheses are the percentages from last year, then from 2007. There were 230 first-time buyers participating.

- 63 per cent (63; 77) of respondents cited high housing costs as the major obstacle preventing them from buying their first home; 30 per cent (32; 36) said an insufficient down payment was a stumbling block, while 22 per cent (22; 20) indicated they can't seem to find the home they want.

- 55 per cent (65; 62) of respondents currently rent accommodation, while 23 per cent (23; 25) live with parents. The remainder indicated various living arrangements -relatives, friends, co-op housing.

- 58 per cent (68; 59) will be purchasing their first home with a spouse/partner; 27 per cent (23; 33) said they will be buying their first home alone; 9 per cent (5; 6) said they will be buying a home with another family member, such as a brother or sister. Friends pooling resources is another scenario.

- 29 per cent (32; 28) said they plan to buy within six months, while 36 per cent (44; 40) indicated they would buy within one year; 17 per cent (14; 21) said their timeline is the next two to three years.

- 26 per cent (29; 30) said they plan to purchase a town house, 25 per cent (30; 27) a single-detached home, 24 per cent (24; 20) a low-rise condominium apartment and 19 per cent (19; 18) a highrise condominium apartment. Yes, there are many affordably priced single-detached homes available today, satisfying the need of many buyers for a patch of land they can call their own. Others appreciate the lock-it-and-leave-it lifestyle offered by maintenance-free townhouses and apartments.

- As similarly documented in previous years, there was no clear preference for location, although municipalities mentioned most were Burnaby, New Westminster, Surrey, Langley and Vancouver.

- 7 per cent of the respondents indicated their maximum price is under $250,000 (12 per cent last year; no comparables for 2007); 11 per cent (18) said $250,000-$299,000; 20 per cent (22) said $300,000-$349,000; 17 per cent (14) said $350,000-$399,000; 9 per cent (9) said $400,000 to $449,000; 8 per cent (10) said $450,000 to $499,000; and 22 per cent (13) said they will pay more than $500,000.

- 2 per cent (4; 11) said they have less than 5 per cent of the purchase price to use as a down payment; 20 per cent (20; 17) said they have 5 per cent down; 21 per cent (23; 31) said they have 10 per cent down; 12 per cent (15; 7) said they have 15 per cent down; 24 per cent (19; 12) have 20 per cent down; and 17 per cent (19; 21) have 25 per cent or more of the purchase price for a down payment. Buyers are advised to ask their lender, mortgage broker or realtor for advice on mortgage-qualifying rules.

- 10 per cent (7; 11) said they intend to buy a home smaller than 800 sq. ft; 19 per cent (19; 20) said 800-999 sq. ft; 18 per cent (20; 20) said 1,000-1,199 sq. ft; 12 per cent (18; 16) said 1,200 to 1,499 sq. ft; 10 per cent (9; 13) said 1,500 to 1,799 sq. ft; 10 per cent (12; 7) said 1,800 to 2,000 sq. ft; and 13 per cent (11; 9) said more than 2,000 sq. ft

- 15 per cent (9; 15) said they need only one bedroom in their first home; 44 per cent (48; 53) said two bedrooms; 28 per cent (33; 23) said three bedrooms; 7 per cent (7; 4) said four bedrooms; and 3 per cent (1; 3) said more than four bedrooms.

- 93 per cent (94; 93) said it was important their new home is protected by warranty insurance. Less than 2 per cent said it wasn't important. How can a solid home warranty not be important?

- 9 per cent (11; 11) of seminar respondents were under the age of 25; 49 per cent (49; 49) were between the ages of 25-34; 10 per cent (23; 22) were 35-44; 19 per cent (19; 8) were 45-54; 7 per cent (5; 6) were over 55. Some of the older respondents were starting over after marital breakups.

When it comes to choosing a realtor, first-timers will rely heavily on referrals from family or friends. Other information sources aren't even close. Asked how they will find a realtor, 63 per cent (71; 66) of the respondents indicated a referral from family or friends; 11 per cent (10; 8) said they will choose a realtor with whom they are somewhat familiar; 7 per cent (2; 5) said they will work with a well-known real estate firm; 4 per cent (6; 5) said Internet research and 4 per cent (3; 3) indicated a realtor's advertising presence would influence their choice of a realtor to help them search for a first home.

Seminar attendees were asked to indicate their most desirable features. The list was provided for them but respondents were free to add items to the list. Features deemed most desirable, in order, were energy efficiency, healthy indoor-air quality, finished basement, home office, in-house secondary suite, flex/adaptable features, earthquake-resistant design, green building and laneway housing unit.

During the next month, I intend to contact a few of the folks who attended the seminar this year, last year and in 2007 to find out if they bought homes and, if so, how their lives have evolved since they lost their property virginity. In a future column, I will share what I learned from the first-timers.

Peter Simpson is president and chief executive officer of the Greater Vancouver Home Builders' Association. E-mail peter@gvhba.org.

Homeowners unfazed by long amortization

'People will always decide what's easiest for them'

By Garry Marr, Financial Post November 10, 2010

Canadians plan to take longer to pay off their mortgages but they don't expect it to affect their retirement plans. Something just doesn't add up.

A new study from the Canadian Association of Accredited Mortgage Professionals shows consumers are taking advantage of longer amortization lengths at previously unheard of levels. Statistics released this week show 42% of new mortgages in the last year went for an amortization period of more than 25 years.

It's a huge jump when you consider that just five years ago, you couldn't even get an insured mortgage backed by the government that was amortized for more than 25 years.

The reason for the longer amortization periods is simple -- you can qualify for more mortgage when your monthly payment is lower because it is spread out over 35 years instead of 25 years.

Within the same survey by CAAMP, consumers were asked about their retirement expectations. Those with extended amortizations plan to retire on average at 61.9 years. Those amortizing their mortgage for less than 25 years plan to retire on average at 61.5 years.

"This data on expectations does not prove that actual retirement will be unaffected by recent trends in housing and mortgage markets," says CAAMP in its study. no kidding.

"But it does suggest that consumers' evaluations of their life-cycle options have not been materially altered."

Are consumers being entirely realistic about their future?

Will Dunning, chief economist with CAAMP, says the percentage of Canadians retiring with a mortgage is small enough that it is difficult to track.

"We find a lot of people taking [longer amortizations] are making additional payments," says Mr. Dunning, adding previous studies have shown people "aggressively" try to repay their mortgages.

Victor Fiume, president of the Canadian Home Builders' Association, says Canada is just catching up to a trend that has taken place in other jurisdictions.

"In many, many countries across the world, paying off a home is a multi-generational kind of thing. It doesn't happen in this generation. A lot of the stuff that goes on in England is multi-generational because the houses are so expensive," says Mr. Fiume.

There is no arguing the increased flexibility a longer amortization mortgage gives you, but increasingly some consumers do find themselves getting into financial trouble because they have bitten off too much mortgage, says Patricia White, executive director of Credit Counselling Canada.

"People will always decide what is easiest for them," she says. "But you have to plan in advance to make accelerated payments. You need to make some conscious decisions about how to get rid of that mortgage debt faster."

Canadians always do better when they have direct withdrawals from their bank accounts and less discretionary power about paying down debt, adds Ms. White.

Vince Gaetano, a principal broker and owner at Monster Mortgage, agrees people who choose the longer amortization and the lower payment rarely take advantage of that extra cash flow to make additional payments later on. "It's a very small group of people who do that," he says.

He thinks consumers going for the longer amortization are banking on their homes rising in value faster than any gains they get paying their mortgage off earlier.

"Real estate over time will appreciate at more than 2% to 4% per year," says Mr. Gaetano.

"People are saying, 'It won't affect my retirement because I plan to retire with a home that will appreciate in value in addition to the amount I pay it down.' It's not a bad strategy if you are in a market that gives you consistent appreciation, but you are not going to get that in every market in Canada."

But there is no getting around the fact the people who take a longer amortization will take longer to repay their loan.

The CAAMP study found consumers going longer than 25 years, were done with their mortgage at age 53 on average, compared with an average of 47 years for those going less than 25 years.

If you are going for a longer amortization, you better hope your home goes up in value because you are going to have fewer mortgage-free years in which to save. It's hard to believe that won't affect retirement plans.

gmarr@nationalpost.com