Kamloops Real Estate Blog

This article appeared on the Globe and Mail on January 23rd, 2011 and was written by Ted Rechtshaffen.

A few months ago I heard leading Canadian investor Eric Sprott speak, and he said a very basic thing that struck a chord. He said that you should not be afraid to connect the dots. The dots are usually in front of you, but people don’t often look beyond the single dot.

Today I am going to show six dots that we can all see. When we connect them, the conclusion is that the Canadian Mortgage and Housing Corp. (CMHC) has a realistic chance of putting the Canadian taxpayer at risk – unless meaningful changes are made.

The key piece of background is that right now, a young couple can put down $20,000 to buy a $400,000 house, or five per cent of the purchase price. Their mortgage will be insured by CMHC (the Canadian government, also known as you and I) in exchange for a fee paid by the young couple.

If that $400,000 house drops in value by 20 per cent, for example, which has happened before in Canada, it will be worth $320,000. But the couple will owe $380,000. Then the odds of them walking away from their house or defaulting on their mortgage become meaningful. Given that this young couple might be in the same position as 50,000 other young couples (about 3 per cent of the Canadian population) at roughly the same time, the odds of a surge in mortgage defaults is very real in Canada.

Here are the dots or facts that we can all see:

Dot #1: “The greatest risk to the domestic economy is household debt,” Bank of Canada Governor Mark Carney said in an interview with the CBC last week, again sounding the alarm bell on excess borrowing.

Dot #2: The ratio of credit market debt to personal disposable income rose to a record high of 150.8 per cent in the third quarter of 2011, Statistics Canada said last week, the third-straight quarter the figure has gone up.

Dot #3: Last week, Bank of Montreal offered a five-year mortgage rate of 2.99 per cent. The lowest rate offered in history. Yes, this rate is available to those interested in putting down 5 per cent.

Dot #4: Fannie Mae and Freddie Mac, two U.S. organizations started in 1968 as a government sponsored enterprise (although they became privately owned and operated by shareholders) – have a mandate to help Americans to become homeowners by increasing liquidity for housing lending, and where appropriate, taking on risk. These two organizations were bailed out by the U.S. government in 2008 after the housing market deflated and it is estimated that their bailout will eventually cost taxpayers as much as $124-billion (U.S.) through 2014. When the housing bubble burst in the U.S., the value of many houses fell by 50 per cent.

Dot #5: In November, the Economist magazine said that Canada is among nine countries in the world where house prices are overvalued by 25 per cent or more. It went on to say that Canada is one of only three countries where “housing looks more overvalued than it was in America at the peak of its bubble.”

Dot #6: CMHC is Canada’s national housing agency. Established as a government-owned corporation in 1946 to address Canada’s post-war housing shortage, the agency has grown into a major national institution. CMHC backed loans of $541-billion (Canadian) as of Sept. 30, 2011. At that time, the total equity of CMHC was $11.5-billion. This is 2.1 per cent in equity against its overall loan exposure. To put the $541-billion in perspective: If we go back to those imaginary 50,000 couples that bought a $400,000 house and put down $20,000, that represents $19-billion of mortgages.

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This article appeared in the Globe and Mail on 23rd of January, 2011 and was written by Dawn Walton. I thought this would be a good article for people who are considering buying a home in Kamloops. These low interest rates definitely make homes that may be slightly out of reach more tempting.

Household debt numbers are staggering, yet Canadians continue to pile it on lured by super-low interest rates.

But do consumers appreciate the true cost of borrowing? Not always, according to Adrian Mastracci, portfolio manager with KCM Wealth Management Inc. in Vancouver.

“We see a lot of people saying, ‘Oh my God. These rates. They are just giving them away.’ And they are – practically,” he explained, “But it is very easy to get yourself into thinking, I can afford this no problem not realizing that one day the piper is going to come knocking at the door and you’re going to have to pay a heck of a lot more.”

Taking on mortgage debt, which accounts for 69 per cent of total household credit, is particularly tantalizing right now as many big banks are offering 2.99-per-cent fixed-rate mortgages, the lowest ever.

Meanwhile, for the 11th consecutive time, the Bank of Canada left its key interest rate at 1 per cent, which marks the longest pause in rate hikes since the mid-1990s.

But at the same time, Federal Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney have been warning Canadians about taking on too much debt. Still, expectations are that household debt, loaded on by mortgages, credit cards, lines of credit and car loans, will continue to rise even though it is already at record levels.

In the third quarter, the debt-to-income ratio soared to 152.98 per cent, according to Statistics Canada. It’s been steadily marching toward the 160-per-cent barrier, a level that triggered trouble for the United States and the United Kingdom a few years ago.

“You still have to earn money, pay tax, and have enough money after tax to pay your loan, whatever it is, in whatever [tax] bracket you’re in,” Mr. Mastracci said.

Consider the implications of a non-deductible 5-per-cent loan.

For borrowers in the 35-per-cent tax bracket, consumers would need to earn 7.7 per cent to pay income taxes and still have 5 per cent left to cover the loan interest. For those in the 25-per-cent tax bracket, it would require 6.7 per cent earnings, while those in the 45-per-cent bracket, earnings would have to ring in at 9.1 per cent.

But what about those ultra-low mortgages?

“Don’t get lulled into saying ‘this is really cheap,’ ” Mr. Mastracci said, “It isn’t. Even at 3 per cent, you still have to earn 4.6 per cent – or thereabouts – in order to pay that 3 per cent after you pay the tax.”

Here are some borrowing tips:

• Don’t borrow more than you need, repay what you can fast and use any savings from getting a low rate to repay loans
• Shop around, negotiate and don’t take no for an answer
• Select the shortest amortization and most frequent payback you can afford
• Place emergency funds in an institution that you don’t owe money

Mr. Mastracci, who expects interest rates to start climbing in a year or so as the economy improves, noted that loans are the biggest impediment to retirement.

“The more debt you take on, the harder is to get out from under and ultimately save for retirement,” he said, “Just make sure you can afford it, that your cash flow can stand it.”

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