This weeks top stories include how there will be massive changes to the criteria involved in qualifying for a mortgage, how Canadians are sinking further and further in debt, how first time homebuyers are questioning whether or not there was a substantial change to the mortgage rules, what Toronto is doing to balance its budget, how inflation has had a drastic increase in the last month and how we will see a heavy increase in real estate sales before the new mortgage regulations take effect.
Lately there have been ample warnings of consumers overextending themselves in Canada especially when it pertains to their mortgage. Finance Minister Jim Flaherty stated this week that there would be changes to the structures for obtaining mortgages in Canada, making it tougher for homebuyers to qualify. All borrowers must now be able to meet their payments at the five-year fixed rate regardless if the buyer is obtaining a lower variable rate mortgage.
The announcement made this Tuesday came with new changes to refinancing options for your mortgage as well. Previously, consumers that wanted to refinance their mortgage could do so up to 95% of the value of their home. This is no longer the case as you will only be able to refinance up to 90% starting on April 19, 2010. Also, as of April 19th, you will be required to put a minimum down payment of 20% for government backed mortgage insurance on non owner occupied properties (rentals and investment properties).
Flaherty commented by saying, “There’s no clear evidence of a housing bubble but we’re taking proactive, prudent and cautious steps today to help prevent one. Our government is acting to help prevent Canadian households from getting overextended.” Flaherty went on to say that the measures would have some stabilizing effect on the housing market and that the changes would leave an affordability option for first time homebuyers. His concern is still that Canadians are at risk of overextending themselves with low interest rates that are set to climb.
The decision to change the current mortgage rules came after weeks of warnings from many analysts who felt that the housing market was on the verge of a bubble with home prices increasing too fast and not being sustainable. This mixed with the laid back mortgage rules that are currently being used were paving the path for trouble. I feel that given the prospect of higher interest rates and the recent rise in housing prices, the measures announced are prudent and will aid in stabilizing the housing market. What do you think? Please comment below.
With the recession technically over, you would think that Canadians would be well on their way to getting back on their feet. Unfortunately, this was not the case. Canadian households sank even further in debt during the 2009 year, creating the highest debt to income ratio ever seen in the country, according to The Vanier Institute of the Family’s annual assessment on the Current State of Canadian Family Finances, which was released on Tuesday.
The latest study shows that the average Canadian households debt was up to $96 100, which created a debt to income ratio of 145% last year. Under the current scenario, roughly 1.3 million households are at risk to have dangerously high debt loads by 2011. The effects of our latest recession will test the resilience of many Canadian families while numbers for employment, wage increases and a return of net worth slowly lag.
The report also outlined that 59% of respondents would be in financial difficulties if their paycheque were delayed by one week. Personal debt is running rampant in Canada with a 50% increase in late payments of 90 days or more on consumer’s mortgages last year. 40% more credit card holders also fell three months, or more, behind on their credit card payments within the last year. What do you think? Are we overextending ourselves?
After Tuesday’s big announcement that the government has tightened lending rules in Canada, you would think that people would be frantic to find that home before April 19 but that is not the actual case. The changes don’t effect first time home buyers in any way more than a prudent measure to make sure that the consumer can still afford their mortgage five years from now.
This will be done by qualifying the borrower at the five year fixed rate. This may effect those of you that were thinking of maxing themselves out on that dream home using today’s 1.95% variable rate but all in all this will help you keep that home five years from now. The main question on my mind is, which five year rate should we be qualifying at? Most mortgage lenders have a discounted five year fixed rate mortgage in the 3.79% range but the same lenders have a five year fixed rate mortgage at the posted rate of 5.5%.
This is not the only question that boggles me. What if the homebuyer is taking the five year fixed rate anyways but is still maxing out their available loan amount. How will they be prepared for the shock to come years from now? These rules are mainly focused around investment purchases and refinances. The new rules state that you must put 20% down in order to qualify for an investment property, which will hold down everyone that’s going crazy purchasing more than one condo at a time with just 5% down.
On the refinance side, you now can only refinance up to 90% of the property’s value instead of the original 95% that we are currently using. This will cause turmoil a few years down the road for consumers that have purchased with 5% down but have not yet paid off another 5% by the time of renewal. Which in some cases will happened when the CMHC mortgage insurance fee’s are tacked in. This would mean that the consumer would have to come up with the deficiency out of his or her own pockets, which many people will not have handy.
Benjamin Tal, senior economist with CIBC world markets states, “It’s not a huge deal. It was a balancing act for the government, which wants to be seen as responding to the mortgage market but not derailing it.” I agree with Mr. Tal on this comment but I don’t think that this was completely thought through. What will come of those that haven’t paid down their mortgage to 90% by the time they refinance? What do you think will happen? Please comment below.
After months and months of warnings on the budget shortfalls expected in Toronto, we have finally had a chance to see the books and it’s not as bad as previously expected. Maybe it was all a ploy to prepare us for the cuts that were coming but it definitely isn’t as bad as forecasted.
Residential property taxes will rise by 4%, which is quite a bit higher than Mayor David Millers 2006 promise of tax hikes which was suppose to be relative to inflation. We will also see an increase in swimming pool fee’s, summer camps and even on street parking fee’s. This leaves the city to do its part of laying off 270 employees, using a $170 million surplus from last year as well as increasing tax dollars towards library services by 1.8% while dropping the amount of tax dollars spent on the Toronto zoo by 6%
The city has also forecasted a decrease in TTC ridership this year but is still asking us to pay an extra 8.2%, which is $512 million through our property taxes, to help fund the TTC. I am a TTC rider during the week but have not seen a reason to dish out more money. I already put $3 in the fare box every time I ride the rocket and now I must put another $1+ through property taxes for every ride taken.
The TTC has had wonky books for the past few years as ridership is dropping at the same time that costs are soaring. 15 months ago the TTC increased bus service by the highest amount in history while logging a decline in the number of passengers riding. I look at numbers all day for a living and these ones just don’t add up. The TTC has a payroll of 12 500 people but transports the same amount of people it did 20 years ago when it had 25% less employees. You do the math.
Another part of the budget outlines how Toronto is reducing business taxes. This has been estimated at $257 million since 2006 but this is not the actual case. Toronto businesses will pay 1.3% more tax this year than they did in 2009 where the same hike took place. Yes, commercial and industrial property tax is rising less quickly than the residential sector but we are still paying double in taxes when compared to Mississauga and Vaughan. This is causing businesses to leave Toronto all together which, leaves the city with less tax revenue. What do you think? Please comment below.
January is when Canada’s inflation rate shot through the roof according to Statistics Canada. The consumer price index saw an increase of more than 0.5% and rose to 1.9%, which is the largest increase in more than a year. All provinces across the country experienced inflation with Atlantic Canada leading the way with the largest gains.
The Bank of Canada’s (BoC) core index rose 2%. The annual inflation rate went from -0.9% to 1.9% in a period of four months. Analysts had expected inflation to rise last month but were not expecting such a sharp increase. BoC governor Mark Carney will likely not read the increase as an underlying trend that would give him reasons to raise interest rates
before the July date previously set.
Inflation is currently adjusting due to gasoline prices and is being seen as temporary. January of last year was when gas prices were at a low due to a reduction in demand as the recession took its toll. The cost of filling the same tank of gas this year is 23.9% higher than the same time last year. When you take energy out of the inflation picture, the inflation rate was a little more appealing at 1.3%
Other main contributors to inflation in January came from a rise in property taxes, higher costs when eating out at restaurants and a hefty increase in car insurance rates. This was offset by a reduction in the cost of mortgage interest, women’s clothing, fresh vegetables and natural gas. Property taxes were up 4.3% and renters saw an increase of 1.4% overall. In the current low interest rate environment, the interest that Canadians are paying on their home mortgages is a source of disinflation, which saw a decline of 5.5% in the month of January.
Many analysts are speculating that there will be a rush of homebuyers trying to beat the rise in taxes and more stringent mortgage regulations before they both take effect. This is leading to expectations of a large rise in home sales within the housing market just as we thought it was cooling off.
January finally saw a bit of a pull back after a record run where home prices and sales are up drastically from the January the year before. Analysts are now saying that many homebuyers will push to beat the new regulations that were brought forth by Finance Minister Jim Flaherty this week and will come into effect on April 19, 2010.
Analysts also believe that there will be a rush to beat the new Harmonized Sales Tax (HST), which is set to take effect this year in Ontario and British Columbia. This is expected to lead to a spike in the first half of this year with a hefty pullback in the second half of this year. The supply of homes available on the market have increased as of recently as more home owners were enticed to list their homes with home prices rising.
This hefty prices mixed with multiple offers on most homes caused home buyers to pull back from buying a home in January which was the fist month over month sales decline seen since December of 2008. The decline of 2.8% was nothing to be concerned about but did come as analysts are tracking the market to search for an asset bubble.
Gregory Klump, chief economist at the Canadian Real Estate Association (CREA) stated, “The monthly decline reflects waning pent up demand. You’re also seeing continued price increases eroding affordability. It’s actually unfolding exactly as we predicted.” No matter what, the outlook remains the same across the board. Things will heat up for the near term and then cool off for the remainder of the year. Do you agree? Please comment below.
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