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.

Forecasts from the Big 5 Banks Indicate a Downward Trend

It’s unanimous. Interest rates are on its way down. Here’s what the Big 5 Banks are forecasting:

1) TD Canada Trust – 3/4% drop in the prime rate (see TD Economics Commentary dated Jan 24, 2008)

2) RBC – 1% drop in the prime rate (see RBC’s Central Bank Watch dated February 2008)

3) CIBC – 1% drop in the prime rate (see CIBC World Markets Interest and Exchange Rate Forecast for Feb 5, 2008)

4) BMO – 1% drop in the prime rate (see BMO’s Econofax dated Jan 22, 2008)

5) Scotia Capital – 1/2% drop in the prime rate (see Scotia Bank’s Forecast Update dated Feb 5, 2008)

With rates expected to decline significantly in the short term, you need to sit down with your mortgage broker to design the right strategy to take advantage of lower rates. One option is to switch to a variable rate mortgage. If you are currently locked-in on a fixed rate mortgage, it may be worthwhile to switch and absorb the prepayment penalty (if any). Your mortgage broker should be able to advise you on how to properly time your transaction so you obtain the maximum benefit.

What Features To Look For in a Variable Rate Mortgage

With interest rates poised to drop over the next few months, variable rate mortgages have been gaining popularity. For individuals looking to purchase or refinance their mortgage, it is important to understand what features to look for. Here are the top three:

1) Ability to lock-in your mortgage and the lender’s best interest rate – Most lenders allow you to convert your variable rate mortgage to a fixed (i.e., locked-in) mortgage. However, not many lenders guarantee whether you will get their best interest rate or their posted rate when you convert. You need this guaranty. Rates can sometimes move quickly so you don’t want to have to haggle with your lender for their best rate (which could be up to 1.5% lower than the posted rate) when rates are moving up. At this point in time, your options are limited since it can be costly to switch to another lender.

2) Introductory rate – Some lenders offer mortgages with an introductory rate. There are pros and cons to taking a mortgage with an introductory interest rate. Your payments are lower initially, then increase after a few months. To some, this is a benefit. However, there is a cost to this. I’ve had the opportunity to review a major bank’s introductory rate offer. For this scenario, the borrower was offered an introductory rate of Prime less 1.01 for the first 90 days and Prime less 1/4 for the remainder of the term. My offer was a variable rate at Prime less 0.6%. I compared the total interest cost of each offer and it turns out that the mortgage with the introductory rate would cost the borrower approx. $3200 in interest over 5 years.

3) Interest Rate Compounding – Standard mortgages are compounded on a semi-annual basis (in simple terms, interest is charged on interest every 6 months). There are some variable rate mortgages where the compounding is monthly. Monthly compounding is more costly.

Getting the best mortgage is all about getting the best advice. This is advise you can only get from your mortgage broker.