Where are house prices in Vancouver / BC headed in 2008?

You may find this hard to believe but I’m hearing that we can still expect house prices to increase in 2008. I was at the Mortgage Broker’s Association of BC Trade show this week and attended the presentation of two well respected economists - Cameron Muir of the BC Real Estate Association and Benjamin Tal of CIBC World Markets. Mr. Muir expects house prices to continue rising, albeit at a slower growth rate of between 7-8%, not the 20% growth rate we are accustomed to seeing during the past few years.

Unlike our friends in Ontario and Quebec, British Columbia is less impacted by the slow down in the US economy. For us, the biggest impact will be in the softwood lumber industry, which is reeling from the high Canadian dollar and from lower US housing starts. Thankfully, the forest industry now accounts for only 3% of our economy. Commodity and energy prices are at its peak and the pulp and paper industry is holding its own. With Central Canada being hit hard by the US slowdown, the Bank of Canada will be forced to drop interest rates. This will have a positive impact on BC’s housing market.

The key driver to the housing market is employment. With the unemployment rate the lowest it’s every been at 4%, it’s no wonder that our housing market will continue to remain robust. Wages have also been rising faster than inflation. The correlation between employment and housing makes a lot of sense. As people become confident of the job situation, they will want to own their own home (or upgrade to a larger home if their income increases).

What I take away from this is that if you don’t own your own home, you should seriously consider getting into the market as soon as it is feasible. Don’t bet against the experts. Even if you’re thinking that there will be a bubble (and I don’t know of any Canadian economist predicting a bubble), I suggest you hedge your bets a bit. Buy your own home. Since you’ll be there a while, you’ll be able to ride out any possible downturn while you enjoy the benefits of owning your own home.

Canada’s Best Mortgage Lenders

Canadian Mortgage Professional (CMP) Magazine recently conducted a survey of the best non-bank mortgage companies in Canada. Here are the results for the following three categories:

A) Approval/Loan Turnaround times:

First Place: Macquarie Financial

Second Place: GMAC Residential Funding

Third Place: Optimum Mortgage

B) Interest Rates

First Place: Macquarie Financial

Second Place: FirstNational Financial

Third Place: Merix

C) Product Range

First Place: Firstline Mortgages

Second Place: GE Money

Third Place: Merix

 

While getting the best interest rate is important, there are other factors that are important as well. Time is of the essence in real estate transactions. This is especially true in a hot market. You could lose your deal if your lender takes its time in giving your the approval.

Product range is also an important consideration. A financial institution that offers a variety of mortgage options will likely have the right product to fit your financial plans.

Bank of Canada Leaves Key Interest Rate Unchanged

The Bank of Canada announced this morning that it will leave its key interest rate unchanged, as anticipated by most economists.

In its statement the Bank commented that its current key policy rate “is consistent with achieving the inflation target over the medium term.” The Bank forecasts that the Canadian economy will grow by “2.6 per cent in 2007, 2.3 per cent in 2008, and 2.5 per cent in 2009,” and that inflation will “return to 2 per cent in the second half of 2008.”

As a result of this decision, lending institutions in Canada are expected to keep their prime lending rate steady. However, people looking for a new variable-rate mortgage should note a recent mortgage rate trend – pricing on this type of mortgage has been adjusting upwards in recent weeks. Existing variable rate mortgages do remain unchanged but new variable borrowers are paying more.

If you would like to discuss how current trends in mortgage rates impact the best mortgage strategy for you, contact me at (604) 506-0397. I can obtain a mortgage pre-approval if you’re wanting to buy a home – with a “rate hold” of up to 120 days, you will know how much you can afford.

Top 5 New Developments for 2007

1) AIG Mortgage insurance products - For a long time, the mortgage insurance market had been dominated by CMHC and Genworth. With only two major players in the market, there wasn’t very much innovation and competition in the industry. AIG’s entry has been a catalyst for change in the industry. AIG brought in higher loan amounts, high-ratio mortgages for rental properties, 3% down payment mortgages and 5% down low down payment mortgages. Bridgewater Bank was the first lender to offer AIG insured products. AIG’s insurance is currently available mainly through non-bank lenders such as Firstnational, Firstline, AGF Trust

2) 40 year amortization - Given the high home prices in the Metro Vancouver area, the 40 year amortization mortgage is quickly becoming the standard amortization for mortgages.

3) 20% conventional mortgages - For many (not all) lenders, mortgages with 20% down payment/equity do not require mortgage default insurance anymore.

4) High-ratio investment property mortgages - Up until the Summer of 2007, investors needed at least 25% down payment to purchase an investment property. Now, it is possible to purchase an investment property with as little as 10% down payment. CMHC recently announced that they will insured investment properties without a downpayment. However, a lender has yet to announce that they will participate in CMHC’s zero down rental programme.

5) US Sub-Prime Meltdown - Canada’s subprime market has been hurt by the US Subprime problems. Lenders have tighted up, pulled back or increased their interest rates.

Variable rate mortgages are now priced at Prime less 0.50%

It’s getting harder to sell a variable rate mortgage (VRM) these days. A few months ago, you could get a variable rate mortgage at Prime less 0.90% (or even 0.95%). Now, all but a few lenders have bumped up their rate to Prime less 0.50%.

We have the US Subprime crisis to thank for this. Investors (who purchase these asset backed securities) are now thinking that there’s more risk to these securities than original thought. Consequently, they want to get a higher yield for this.

With the prime rate at 6.25% and the discount at 1/2 percent, a (new) VRM holder will be paying 5.75%. That’s not much of a discount to the current 5 year rate of 5.79%. That’s a far cry from when VRMs were at 3.0% compared with the 5 year mortgage rate of 5.4% in July of 2004. With no strong pressure for interest rates to drop, a VRM is, in my opinion, not an attractive proposition anymore.

Of course, there are other options besides at 5 year term mortgage (which most people seem to automatically take). If you really want peace of mind, you may opt for a 7 year mortgage at 6.0% or a 10 yr mortgage at 6.2%. The premium is quite small for a much longer term.

US Subprime Meltdown and its effects on Canada

It may still be too early to tell but so far, the effects of the subprime meltdown in the US has not significantly affected Canada.   To date, only two mortgage lenders (MCAP and GMAC Residential Funding) have indicated that they were putting a hold on their subprime lending programmes.   Many of subprime lenders are still operating with business as usual.  Even the Canadian arm of US-based Accredited Home Lenders continues to look for new business in Canada.  Accredited US has shut down its retail mortgage business and laid off 1600 employees.

It is important to note that the subprime market is very different in Canada.  Subprime loans account for less than 5% of total mortgage originations while in the US, the subprime market accounts for 22% of total mortgage originations.  The US market is also very competitive and this has resulted in lenders lowering their credit standards to increase market share.  Lastly, mortgage brokers in BC are highly regulated and need to comply with higher ethical standards to meet industry association requirements.

Nevertheless, Canadian investors (who buy mortgages issued by subprime lenders) could be spooked.  They may require a higher yield before they invest in the subprime market. This could mean higher interest rates for subprime borrowers or some (more) tightening of credit standards.