Debt worries trump home sales

STEVE LADURANTAYE, GRANT ROBERTSON

From Tuesday's Globe and Mail

Published Monday, Jan. 17, 2011 10:11AM EST

Last updated Tuesday, Jan. 18, 2011 9:52AM EST

Finance Minister Jim Flaherty is betting that Canada's cooling housing market is strong enough without the fringe buyers who have been propping it up.

Housing has been key to Canada’s economic recovery; prices are now higher than they were prior to the recession, and construction activity has been healthy. But home sales are now under pressure from the threat of higher interest rates, and Mr. Flaherty’s latest move to curb 35-year amortizations stands to eliminate a number of potential buyers from the market.

Mr. Flaherty, citing concerns that Canadians are taking on too much long-term debt, said Monday the government would no longer insure mortgages that take longer than 30 years to pay off. Ottawa will also tighten the rules for existing homeowners who want to refinance their homes, by lowering the maximum amount Canadians can borrow to 85 per cent of the property’s value, and will no longer provide insurance on personal credit lines secured by homes.

The impact on home prices is expected to show up quickly. BMO Nesbitt Burns deputy chief economist Douglas Porter said resale prices could drop as much as 7 per cent within the next 12 months because of the change to amortization lengths, as buyers who would have opted to spread the cost out over 35 years are forced instead to take out borrow less in order to keep their payments affordable.

“You can make the case that existing home owners will see their prices go down,” he said. “You can go back to basic economics – it is the marginal buyer that really drives the market. If the buyer isn’t there, the price has to drop until you get down to the next buyer.”

Mr. Porter’s forecast underscores the difficult balancing act that faced Mr. Flaherty in deciding on how to change the mortgage rules. Canadian household debt is at record levels, and much of that debt is related to real estate -- so any serious action on debt had to focus on mortgages. But at the same time, the government does not want to go too far, and risk triggering a broad housing correction that would hurt both consumer spending and the economy.

The average Canadian resale home sold for $344,551 in December. Assuming an interest rate of 4 per cent and the minimum 5 per cent down payment, a 35-year mortgage would have monthly payments of $1,441. Shortening the amortization period to 30 years increases the monthly payment about 8 per cent, to $1,555.

Some expect the government is on safe ground. Toronto-Dominion Bank expects that average house prices will slip by 2 per cent and that 20,000 fewer sales will take place this year because of the change. Craig Alexander, the bank’s chief economist, said the housing market ended 2010 better than he expected, but the mortgage changes will keep a lid on growth.

“If you think of home prices over the last 10 years, that’s not a big drop,” he said. “And really, if someone can’t afford 30 years instead of 35 then I’m not sure they should be buying a house anyway. So it cools the market a little bit, but I don’t think it leads to significant weakness.”

The changes come as banks are concerned about slowing loan growth. But some bankers and analysts believe the changes will remove only the riskiest borrowers from the market.

Still, those same customers helped fuel rapid growth in new mortgages for the banks since the government expanded amortizations to 40 years in 2006.

“It’s fair to say that the changes being put in will work to slow loan growth by removing the marginal borrower from the market,” said Robert Sedran, a banking analyst with CIBC World Markets Inc. “We had already expected that loan growth to slow – not because we necessarily expected some government mechanism to come into play – but simply because at the pace at which debt levels were climbing we didn’t see it as sustainable.”

The Canadian Real Estate Association said changes made by the government last year that made it more difficult for applicants to qualify for mortgages have already slowed sales, and that prices have leveled off across the country through the autumn. Randall McCauley, the group’s vice-president of government relations, said the association is concerned that changing amortization rates is too blunt an measure for a market in transition.

“The amortization change is not a precise instrument – you can’t make a change and know it will have a certain effect,” said CREA vice-president of government relations Randall McCauley.

Mr. Flaherty acknowledged it’s difficult to gauge the effect of the change, but said the danger of debt loomed too large to ignore.

“This is not arithmetically predictable, precisely,” he said. “We expect some moderation in the market. We’re taking these steps in any event now because of our concern about higher interest rates down the road.”

The Canadian Association of Accredited Mortgage Professionals, which represents the mortgage brokerage industry, released a study late last year that showed mortgage debt in Canada surpassed $1-trillion for the first time in 2010. About 22 per cent of all new mortgages had amortization rates longer than 25 years, up from 18 per cent the year before.

Managing Holiday Debt

Few foreclosures, no bank failures: Canada offers lessons

By Kevin G. Hall | McClatchy Newspapers

TORONTO — Maybe Canada has something to teach the U.S. about housing finance.

One in 4 U.S. homes is thought to be worth less that the mortgage being paid on it. One in every 492 U.S. homes received a foreclosure notice in November. For the fourth year running, analysts are speculating on where the bottom is for U.S. real estate.

No such worries up here in Canada — yet its system of mortgage finance gets little attention in the U.S.

Not a single Canadian bank failed during the Great Depression, and not a single one failed during the recent U.S. crisis now dubbed the Great Recession. Fewer than 1 percent of all Canadian mortgages are in arrears.

That's notable given that the recent U.S. economic turmoil was triggered by a meltdown in mortgage finance, forcing an unprecedented government rescue of Wall Street investment banks and the collapse of more than 300 smaller banks as the housing sector went bust.

How'd Canada avoid all that?

"This sounds very simple, but one of our CEOs has said we are in the business of making loans to people who will pay them back," said Terry Campbell, vice president of policy for the Canadian Bankers Association in Ottawa.

There's a certain amount of apples to oranges when comparing the two systems of mortgage finance. Canada's population last year was estimated at 34.3 million, while the U.S. population now exceeds 307 million. The U.S. economy is the world's biggest; Canada ranks ninth.

Canadian banks were recently named the best in the world by the World Economic Forum, but they're a much smaller universe of lenders — 71 that are federally regulated, compared with more than 8,000-plus U.S. lenders insured by the Federal Deposit Insurance Corp.

Even so, there's plenty to learn from Canada's conservative — yes, conservative — regulatory regime. It requires more rigorous loan underwriting standards and much bigger set-asides by banks for potential losses during market downturns.

Canada also lacks a big tax write-off for the interest that borrowers pay on their mortgages. They get a capital gains tax exemption on any profits on the sale of their primary residence, and that's it. Yet the rate of home ownership in Canada is equal to, or greater than the U.S. rate, and the lack of mortgage-interest deductions leads Canadians to swiftly pay down their mortgage debt.

"I'm not aware of any disparagement of the Canadian model or dismissal of the Canadian model. There are some interesting features to it," said Stuart Gabriel, a finance professor in the Anderson School of Management at the University of California-Los Angeles. "They've insisted all along on the more rigorous mortgage underwriting, and because of that never found themselves originating subprime and no-doc mortgages . . . some very basic items such as stringency of underwriting seem to go a long way."

Canada doesn't have an equivalent to Fannie Mae or Freddie Mac, which purchase mortgages from banks and pool them into bonds. The argument for Fannie and Freddie is that they take loans off of a bank's books, freeing them to lend more.

Canada has no such secondary market for mortgages, yet it hasn't hurt the ability of its banks to lend or significantly raised the cost for borrowers.

Canadian mortgages aren't non-recourse loans, meaning homeowners can't simply walk away from their mortgages. Even if they lose their home, they still owe their mortgage debt.

"You mail your keys into the bank here and guess what, you are not off the hook," said Gregory Klump, the chief economist in Ottawa for the Canadian Real Estate Association.

Lessons from Canada could prove useful. In the next few weeks, the Obama administration must, by law, outline its vision for what to do with Fannie Mae and Freddie Mac. They've been in government conservatorship since the summer of 2008. The administration must unveil its roadmap for how and when they're to be changed and moved out of government control.

By July, the administration must establish the new Consumer Financial Protection Bureau, whose chief functions will include policing mortgage lending and defining suitable mortgages.

The issue of mortgage-interest deductions probably will come up this year when Congress debates deficit reduction. A blue-ribbon National Commission on Fiscal Responsibility and Reform late last year recommended a serious scaling back of the U.S. mortgage-interest deduction as a means of raising more revenue and lowering deficits and debt.

Defenders of the popular U.S. mortgage-interest deduction call it a big driver of U.S. home ownership, which peaked in 2005 at 69.1 percent. (It fell to 66.9 percent late last year.)

But even without a mortgage-interest deduction, Canada's percentage of home ownership_ at 68.4 percent, according to the most recent Canadian census in 2006 and now thought to be higher — is comparable to U.S. home ownership rates.

"There's an incentive for them to pay off their houses relatively quickly, but the home ownership rates in Canada and the U.S. are comparable. The fraction of people who own their houses free and clear in Canada is much bigger," said William Strange, a professor of real estate at the University of Toronto's Rotman School of Management.

Added Klump: "The sooner you can get out of debt, the faster you can amass retirement savings."

Canadian banks generally provide 25-year mortgages, with 20 percent down payment. The first five years of the loan is a fixed rate, after which it adjusts to current market rates in five-year increments until the loan is paid off.

Should a borrower opt not to put down 20 percent on a home purchase, they must purchase mortgage insurance to cover the debt in the case of default.

U.S. borrowers are accustomed to fixed-rate loans of 15 years or 30 years, and U.S. mortgage bankers warn that the Canadian model of adjusting interest rates every five years may soon be less attractive.

"There is a lot of interest-rate risk that is being put on Canadian buyers. That has worked over the past couple of decades. Now that we're looking at increased borrowing demands by national governments, everyone is projecting interest rates going back up," said Jay Brinkmann, the chief economist for the Mortgage Bankers Association. "As these Canadian mortgages reset, (borrowers) might start looking longingly at a U.S. system" that provides longer fixed interest rates on mortgages.

In some ways, the U.S. is already adopting big parts of the Canadian model.

"I think the U.S. system may be eliminating certain types of loans . . . I think we're seeing greater emphasis on down payments," said Brinkmann, who's careful to call it a return to past practices and not the Canadian model.

Lenders, he said, are shying away from second mortgages. And there are greater demands for private mortgage insurance, even on refinanced mortgages.

Facing Scrutiny, Banks Slow Pace of Foreclosure

Taken from The New York Times

January 8, 2011

By DAVID STREITFELD

PHOENIX — An array of federal and state investigations into the way banks foreclose on delinquent homeowners has contributed to a sharp slowdown in foreclosures across the country, especially in hard-hit cities like this one.

Over the last several months, some banks have been reluctant to seize homes from distressed borrowers, economists and government officials say, as they face scrutiny from regulators and the prospect of sanctions when investigations wrap up in the coming weeks and months.

The Obama administration, in its most recent housing report, said foreclosure activity fell 21 percent in November from October, the biggest monthly decline in five years. Here in Phoenix, foreclosures fell by more than a third in the same period, reflected in the severe drop in foreclosed homes being auctioned on the courthouse plaza.

“There’s no product, just nothing to buy,” complained Sean Waak, an agent for investors, during a recent auction.

The pace of foreclosures could be curtailed further by courts. In a closely watched case, the highest court in Massachusetts invalidated two foreclosures in that state on Friday. The court ruled that two banks, U.S. Bancorp and Wells Fargo, failed to prove they owned the mortgages when they foreclosed on the homes.

If the slowdown continued through this month and into the spring, it could be a boost for the economy. Reducing foreclosures in a meaningful way would act to stabilize the housing market, real estate experts say, letting the administration patch up one of the economy’s most persistently troubled sectors. Fewer foreclosures means that buyers pay more for the ones that do come to market, which strengthens overall home prices and builds consumer confidence in housing.

“Anything that buys time, that reduces the supply of houses coming onto the market, is helpful,” said Karl Guntermann, a professor of real estate finance at Arizona State University.

It is not that borrowers have stopped defaulting on their mortgages. They are missing payments as frequently as ever, data shows. But the lenders are not beginning formal foreclosure proceedings or, when they are, do not complete them with an auction sale. And in the most favorable outcome for distressed borrowers, some lenders are modifying loans so foreclosure becomes unnecessary.

The drop in foreclosures began in late September when some lenders were revealed to have been using so-called robo-signers to process thousands of foreclosures without verifying the accuracy of the data. As the investigations into the problems proceeded, the uncertainty caused many lenders to become more cautious.

Their foreclosure procedures, the banks have repeatedly said, are sound. But preliminary results of several of the investigations have indicated substantial problems. Coordinating many of the inquiries is the Financial Fraud Enforcement Task Force, established by President Obama.

“The administration is committed to taking appropriate action on these issues where wrongdoing has occurred,” said Melanie Roussell, an administration spokeswoman.

The diminished supply of foreclosed homes has already had an effect on prices at the auctions on the courthouse plaza here, bidders said.

Houses change hands on the plaza with a minimum of ceremony. Three sets of trustees hired by the banks sit a few feet apart, their backs to a statue of a naked family looking for all the world as if its members had just been cast out of their home. The trustees call off properties in a monotone to bidders clustered around them. Winners must immediately hand over a $10,000 deposit in the form of a cashier’s check.

On a recent afternoon, one bidder, Pam Mullavey of Infoclosure, found herself in a bidding war with Chris Romuzga of Posted Properties for a 2001 house that had fetched $644,000 at the very peak of the boom.

This time around, the bank set the floor at $271,000. Ms. Mullavey and Mr. Romuzga rapidly pushed up the price in varying increments of $100 and $500. Mr. Romuzga’s client had planned to pull out at $307,000 but asked him to keep bidding as Ms. Mullavey sailed on. Her winning bid was $310,100, well above what a similar house might have fetched just a few months ago.

“Sometimes I wonder why people are bidding so much,” Ms. Mullavey said.

For Mr. Romuzga, it was the fourth time that afternoon he had been outbid. Only once had he secured a property.

The investors’ frustration could be a good thing for Phoenix homeowners, who have seen values fall 54.5 percent since 2006. In the last few months, home prices have started to drop again. A decline in foreclosures, economists say, could break the fall.

Cameron Findlay, chief economist with the mortgage company LendingTree, said that the shifting behavior of lenders had helped change perceptions about the foreclosed.

“Initially, society’s view was to run them out of the house,” he said.

That resulted in vacant and dilapidated homes, which blighted neighborhoods and drove potential buyers away.

“People should be hopeful the modification programs work — for their own benefit,” said Mr. Findlay.

More than four million households are in serious default and vulnerable to losing their homes. Lenders maintain that cases of borrowers improperly foreclosed are extremely rare.

But the Federal Reserve, which is investigating lenders’ policies in conjunction with other banking regulators, has found significant weaknesses in risk management, quality control, auditing and compliance.

Another investigation is being conducted by the Federal Housing Administration, which is examining whether loan servicers are exhausting all legally required options before foreclosing on government-insured mortgages. An agency spokeswoman said that initial reviews indicated “significant differences” in efforts by servicers to keep borrowers in their homes.

A third investigation is being conducted by the Executive Office for U.S. Trustees, part of the Justice Department. It is looking into documentation errors by lenders and their law firms in homeowners’ bankruptcy filings.

At the state level, there is a joint effort by all 50 state attorneys general, with the specific goal of changing the face of foreclosure in America by making it more difficult for lenders to act against homeowners. The effort, led by Iowa’s attorney general, Tom Miller, is in flux as several prominent attorneys general left office and their replacements decide whether to make foreclosure reform a priority.

There have been many attempts during the housing crash to stem the flow of foreclosures, only fitfully successful. Some experts think neither federal reforms nor any agreements brokered by the attorneys general will make much of a difference.

“Whether it is really true that there are millions of foreclosures that could be avoided if servicers were just more willing to do more modifications that make sense — meaning overall losses would be less than would otherwise be the case — is far from clear, and in fact highly unlikely,” said Tom Lawler, an economist.

Loan servicers are not set up to identify the true financial picture of each borrower having trouble, Mr. Lawler said, and cannot easily figure out who is likely to stop paying without a modification and who will keep sending a check every month.

The courthouse plaza bidders in Phoenix do not believe their livelihood is threatened. By the end of January, several bidders predicted, lenders would gear up and foreclosures would once again be abundant.

In the meantime, Tom Peltier watched unhappily as a house started at $68,000 and quickly spiraled up. He finally locked it in at $98,500. “That was about 20 grand more than I wanted to pay,” said Mr. Peltier, who planned to rent it to his sister as soon as he moved out the former owner.

My First Mortgage

Published On Sat Jan 1 2011

Dana Flavelle
Business Reporter

The rate on a five-year mortgage was a whopping 11.75 per cent the year I decided to buy my first house.
The price of a small semi-detached in south Riverdale was $160,000, modest by today’s standards.
And the cost of carrying the loan — about $1,200 a month — on a journalist’s paycheque made me wonder if I would ever go on another vacation, buy a designer dress, or eat out.
Still, I dove in to the market fearing, like many people at that time, that real estate prices in Toronto would soon soar out of the average person’s reach.

The year was 1987. I had a steady full time job, and a downpayment thanks to generous parents and a federal Registered Home Ownership Savings Plan. And I was tired of paying $800 a month in rent to live in a tiny one-bedroom apartment. I was helping pay down someone else’s mortgage.
We take it for granted now. Single women buy houses on their own all the time. But at that time, it was still a relatively unusual phenomenon.
My first stop was the bank, to get pre-qualified for a loan. I remember being shocked at how much I could afford to borrow. The rule of thumb, then as now, was you could carry up to 32 per cent of your gross monthly income in mortgage, property taxes and heating bills.
I would definitely need a roommate.
Even with a big loan, my budget at $160,000 was low by Toronto standards. The average house price was about $180,000 that year, according to Toronto Real Estate Board historic data.
House hunting proved to be a daunting experience.
I can’t remember now how many places I looked at; one in particular caught my imagination. A quaint little cottage in the Beaches, at $225,000, was way out of my reach. I still drive by it occasionally and think how perfect it would have been.
Reality dictated that I would end up in what was then called “south Riverdale,” at that time a somewhat dodgy area trying to capitalize on its proximity to the more fashionable Riverdale to the north.
There was a bar at the end of the street. And a biker club a few blocks away.
A colleague dubbed the neighbourhood “Leadville” in honour of the Canada Metal Ltd. plant a couple of blocks away. Now shuttered, the plant had left a legacy of contaminated soil. Not the kind of dirt you’d want your children eating off their fingers after a day in the backyard.
But the house, a three-bedroom semi in good condition, was listed for $169,000.The price fit my pocketbook. It was clear after months of looking that I wasn’t going to find anything better.
After some dickering, a conditional offer, and a home inspection, the deal was sealed for $160,000. A few months later, I moved in.
It was the best investment I ever made.
Not long afterwards, interest rates began falling. House prices continued to rise.
Two years later, just as the market was peaking, I got married and sold my little starter home for $225,000. Taking the proceeds, and with the help of our combined incomes, we invested in a bigger detached home in a nicer area.
The recession in the early ’90s took some of the shine off real estate for a few years.
But eventually prices resumed their upward trajectory. Mortgage rates continued to decline. Our family expanded to include two kids and we moved again, this time borrowing even more than our original mortgage.
Interest rates were so low we could afford to carry a lot more debt. Banks had become far more flexible about negotiating the rate of interest, especially for borrowers with good credit ratings or equity in their homes. And borrowers could spread their payments over a longer period, further reducing the monthly payment.
The bank fell all over itself trying to get us to borrow even more than we needed to pay for the house, saying we could use it to finance a cottage, a car, or vacation.
Today, a five-year mortgage carries an average rate of just 5.44 per cent, according to the Bank of Canada.
Starter homes like my first little semi-detached on Bertmount Ave. now fetch $469,000.
With prices so high, and interest rates so low, no wonder Canadians are carrying record debt loads.
And you can understand why Bank of Canada Governor Mark Carney frets. How will Canadians manage, and the housing market fare, when interest rates, inevitably, rise again?

Related

• More first time stories

The rate on a five-year mortgage was a whopping 11.75 per cent the year I decided to buy my first house. The price of a small semi-detached in south Riverdale was $160,000, modest by today’s standards. And the cost of carrying the loan — about $1,200 a month — on a journalist’s paycheque made me wonder if I would ever go on another vacation, buy a designer dress, or eat out. Still, I dove in to the market fearing, like many people at that time, that real estate prices in Toronto would soon soar out of the average person’s reach. The year was 1987. I had a steady full time job, and a downpayment thanks to generous parents and a federal Registered Home Ownership Savings Plan. And I was tired of paying $800 a month in rent to live in a tiny one-bedroom apartment. I was helping pay down someone else’s mortgage. We take it for granted now. Single women buy houses on their own all the time. But at that time, it was still a relatively unusual phenomenon. My first stop was the bank, to get pre-qualified for a loan. I remember being shocked at how much I could afford to borrow. The rule of thumb, then as now, was you could carry up to 32 per cent of your gross monthly income in mortgage, property taxes and heating bills. I would definitely need a roommate. Even with a big loan, my budget at $160,000 was low by Toronto standards. The average house price was about $180,000 that year, according to Toronto Real Estate Board historic data. House hunting proved to be a daunting experience. I can’t remember now how many places I looked at; one in particular caught my imagination. A quaint little cottage in the Beaches, at $225,000, was way out of my reach. I still drive by it occasionally and think how perfect it would have been. Reality dictated that I would end up in what was then called “south Riverdale,” at that time a somewhat dodgy area trying to capitalize on its proximity to the more fashionable Riverdale to the north. There was a bar at the end of the street. And a biker club a few blocks away. A colleague dubbed the neighbourhood “Leadville” in honour of the Canada Metal Ltd. plant a couple of blocks away. Now shuttered, the plant had left a legacy of contaminated soil. Not the kind of dirt you’d want your children eating off their fingers after a day in the backyard. But the house, a three-bedroom semi in good condition, was listed for $169,000.The price fit my pocketbook. It was clear after months of looking that I wasn’t going to find anything better. After some dickering, a conditional offer, and a home inspection, the deal was sealed for $160,000. A few months later, I moved in. It was the best investment I ever made. Not long afterwards, interest rates began falling. House prices continued to rise. Two years later, just as the market was peaking, I got married and sold my little starter home for $225,000. Taking the proceeds, and with the help of our combined incomes, we invested in a bigger detached home in a nicer area. The recession in the early ’90s took some of the shine off real estate for a few years. But eventually prices resumed their upward trajectory. Mortgage rates continued to decline. Our family expanded to include two kids and we moved again, this time borrowing even more than our original mortgage. Interest rates were so low we could afford to carry a lot more debt. Banks had become far more flexible about negotiating the rate of interest, especially for borrowers with good credit ratings or equity in their homes. And borrowers could spread their payments over a longer period, further reducing the monthly payment. The bank fell all over itself trying to get us to borrow even more than we needed to pay for the house, saying we could use it to finance a cottage, a car, or vacation. Today, a five-year mortgage carries an average rate of just 5.44 per cent, according to the Bank of Canada. Starter homes like my first little semi-detached on Bertmount Ave. now fetch $469,000. With prices so high, and interest rates so low, no wonder Canadians are carrying record debt loads. And you can understand why Bank of Canada Governor Mark Carney frets. How will Canadians manage, and the housing market fare, when interest rates, inevitably, rise again?

Related

• More first time stories

The rate on a five-year mortgage was a whopping 11.75 per cent the year I decided to buy my first house. The price of a small semi-detached in south Riverdale was $160,000, modest by today’s standards. And the cost of carrying the loan — about $1,200 a month — on a journalist’s paycheque made me wonder if I would ever go on another vacation, buy a designer dress, or eat out. Still, I dove in to the market fearing, like many people at that time, that real estate prices in Toronto would soon soar out of the average person’s reach. The year was 1987. I had a steady full time job, and a downpayment thanks to generous parents and a federal Registered Home Ownership Savings Plan. And I was tired of paying $800 a month in rent to live in a tiny one-bedroom apartment. I was helping pay down someone else’s mortgage. We take it for granted now. Single women buy houses on their own all the time. But at that time, it was still a relatively unusual phenomenon. My first stop was the bank, to get pre-qualified for a loan. I remember being shocked at how much I could afford to borrow. The rule of thumb, then as now, was you could carry up to 32 per cent of your gross monthly income in mortgage, property taxes and heating bills. I would definitely need a roommate. Even with a big loan, my budget at $160,000 was low by Toronto standards. The average house price was about $180,000 that year, according to Toronto Real Estate Board historic data. House hunting proved to be a daunting experience. I can’t remember now how many places I looked at; one in particular caught my imagination. A quaint little cottage in the Beaches, at $225,000, was way out of my reach. I still drive by it occasionally and think how perfect it would have been. Reality dictated that I would end up in what was then called “south Riverdale,” at that time a somewhat dodgy area trying to capitalize on its proximity to the more fashionable Riverdale to the north. There was a bar at the end of the street. And a biker club a few blocks away. A colleague dubbed the neighbourhood “Leadville” in honour of the Canada Metal Ltd. plant a couple of blocks away. Now shuttered, the plant had left a legacy of contaminated soil. Not the kind of dirt you’d want your children eating off their fingers after a day in the backyard. But the house, a three-bedroom semi in good condition, was listed for $169,000.The price fit my pocketbook. It was clear after months of looking that I wasn’t going to find anything better. After some dickering, a conditional offer, and a home inspection, the deal was sealed for $160,000. A few months later, I moved in. It was the best investment I ever made. Not long afterwards, interest rates began falling. House prices continued to rise. Two years later, just as the market was peaking, I got married and sold my little starter home for $225,000. Taking the proceeds, and with the help of our combined incomes, we invested in a bigger detached home in a nicer area. The recession in the early ’90s took some of the shine off real estate for a few years. But eventually prices resumed their upward trajectory. Mortgage rates continued to decline. Our family expanded to include two kids and we moved again, this time borrowing even more than our original mortgage. Interest rates were so low we could afford to carry a lot more debt. Banks had become far more flexible about negotiating the rate of interest, especially for borrowers with good credit ratings or equity in their homes. And borrowers could spread their payments over a longer period, further reducing the monthly payment. The bank fell all over itself trying to get us to borrow even more than we needed to pay for the house, saying we could use it to finance a cottage, a car, or vacation. Today, a five-year mortgage carries an average rate of just 5.44 per cent, according to the Bank of Canada. Starter homes like my first little semi-detached on Bertmount Ave. now fetch $469,000. With prices so high, and interest rates so low, no wonder Canadians are carrying record debt loads. And you can understand why Bank of Canada Governor Mark Carney frets. How will Canadians manage, and the housing market fare, when interest rates, inevitably, rise again?

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• More first time stories

The rate on a five-year mortgage was a whopping 11.75 per cent the year I decided to buy my first house. The price of a small semi-detached in south Riverdale was $160,000, modest by today’s standards. And the cost of carrying the loan — about $1,200 a month — on a journalist’s paycheque made me wonder if I would ever go on another vacation, buy a designer dress, or eat out. Still, I dove in to the market fearing, like many people at that time, that real estate prices in Toronto would soon soar out of the average person’s reach. The year was 1987. I had a steady full time job, and a downpayment thanks to generous parents and a federal Registered Home Ownership Savings Plan. And I was tired of paying $800 a month in rent to live in a tiny one-bedroom apartment. I was helping pay down someone else’s mortgage. We take it for granted now. Single women buy houses on their own all the time. But at that time, it was still a relatively unusual phenomenon. My first stop was the bank, to get pre-qualified for a loan. I remember being shocked at how much I could afford to borrow. The rule of thumb, then as now, was you could carry up to 32 per cent of your gross monthly income in mortgage, property taxes and heating bills. I would definitely need a roommate. Even with a big loan, my budget at $160,000 was low by Toronto standards. The average house price was about $180,000 that year, according to Toronto Real Estate Board historic data. House hunting proved to be a daunting experience. I can’t remember now how many places I looked at; one in particular caught my imagination. A quaint little cottage in the Beaches, at $225,000, was way out of my reach. I still drive by it occasionally and think how perfect it would have been. Reality dictated that I would end up in what was then called “south Riverdale,” at that time a somewhat dodgy area trying to capitalize on its proximity to the more fashionable Riverdale to the north. There was a bar at the end of the street. And a biker club a few blocks away. A colleague dubbed the neighbourhood “Leadville” in honour of the Canada Metal Ltd. plant a couple of blocks away. Now shuttered, the plant had left a legacy of contaminated soil. Not the kind of dirt you’d want your children eating off their fingers after a day in the backyard. But the house, a three-bedroom semi in good condition, was listed for $169,000.The price fit my pocketbook. It was clear after months of looking that I wasn’t going to find anything better. After some dickering, a conditional offer, and a home inspection, the deal was sealed for $160,000. A few months later, I moved in. It was the best investment I ever made. Not long afterwards, interest rates began falling. House prices continued to rise. Two years later, just as the market was peaking, I got married and sold my little starter home for $225,000. Taking the proceeds, and with the help of our combined incomes, we invested in a bigger detached home in a nicer area. The recession in the early ’90s took some of the shine off real estate for a few years. But eventually prices resumed their upward trajectory. Mortgage rates continued to decline. Our family expanded to include two kids and we moved again, this time borrowing even more than our original mortgage. Interest rates were so low we could afford to carry a lot more debt. Banks had become far more flexible about negotiating the rate of interest, especially for borrowers with good credit ratings or equity in their homes. And borrowers could spread their payments over a longer period, further reducing the monthly payment. The bank fell all over itself trying to get us to borrow even more than we needed to pay for the house, saying we could use it to finance a cottage, a car, or vacation. Today, a five-year mortgage carries an average rate of just 5.44 per cent, according to the Bank of Canada. Starter homes like my first little semi-detached on Bertmount Ave. now fetch $469,000. With prices so high, and interest rates so low, no wonder Canadians are carrying record debt loads. And you can understand why Bank of Canada Governor Mark Carney frets. How will Canadians manage, and the housing market fare, when interest rates, inevitably, rise again?

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.