Brett Nodwell’s Real Estate Blog

Variable or Fixed Rates? Which is Best?

Sun, 8 Aug 2010 13:59:52 -0400

From Canadian Mortgage Trends:
If you had to pick one rate for the rest of your mortgage life, and your only two choices were a 5-year fixed or a 5-year variable, which would you take?
Most mortgage professionals (us included) would take the variable, citing long-term low inflation and historical rate studies, like those found here: Fixed or Variable…
But that doesn’t mean 5-year fixed rates are irrational. On the contrary, longer-term fixed rates are quite suitable for borrowers who can’t withstand interest rate shocks. Regardless, rarely a week goes by that we don’t see mortgage professionals paraphrasing studies that show variables are better 88-90% of the time. (In reality, 77% of the time is more accurate, assuming you negotiate good discounts. See this).
Those are good odds any way you slice it.
Yet, people routinely lose sight of the fact that 5-year fixed rates win out 10-23% of the time. That’s important to remember—especially in an environment like today, where prime rate has climbed while fixed rates have become increasingly competitive.
To see how the two rates stack up long-term, have a peek at the historical chart below. It shows simulated mortgage rates going back 30 years. The rates are simulated because today’s discounts are applied to past data. The chart’s intention is to roughly approximate how fixed and variable rates might have performed over time with aggressive discounting. Moshe Milevsky, the father of Canadian mortgage research, performed his own simulated look-back here.

In the above chart, the blue line represents the 5-year fixed rate while the white line represents a future moving average of the variable rate.
At any given point, the white line shows what variable rates would have averaged over the following five years. This enables a comparison of fixed and variable rates at specific points in time, using standardized rate discounts.
Naturally, discounts like 0.70% off prime and 1.70% off posted haven’t been around for 30 years. In addition, lender spreads and monetary policy have changed over time, which adds a challenge to normalizing rates (like we’ve done).
Nonetheless, “prime” and “posted” have long been the basis for variable and fixed-rate pricing. The only question is, what discount you choose to apply (it can be argued that past rates could have been significantly more discounted than they were).
At a minimum, the chart shows various times when highly-discounted fixed rates might have performed better than variable rates. That’s true even in cases where the fixed rate was notably higher than the variable rate to start. This seems to happen most often just as prime rate starts increasing from a trough in a rate cycle. With respect to today’s rate environment, it just so happens that prime rate has started increasing from a trough in a rate cycle.
Long story short, variables are still a great bet for many. But, if you:
• Have a tight budget
• Are nervous that prime rate could exceed analyst rate estimates in 18-24 months
• Find an amazing deal on a 5-year fixed
…then no one can blame you for paying more for the insurance of a fixed rate. You might get an earful from variable-rate proponents citing their probabilities, but as George Boole once said: “Probability is expectation founded upon partial knowledge.”

Government of Canada Takes Action to Strengthen Housing Financing

Tue, 23 Feb 2010 11:37:37 -0500

Jim Flaherty, Minister of Finance, announced several steps to support the long-term stability of Canada’s housing market and continue to encourage home ownership for Canadians.
The Government will therefore adjust the rules for government-backed insured mortgages as follows:
• Require that all borrowers meet the standards for a five-year fixed rate mortgage even if they choose a mortgage with a lower interest rate and shorter term. This initiative will help Canadians prepare for higher interest rates in the future.
• Lower the maximum amount Canadians can withdraw in refinancing their mortgages to 90 per cent from 95 per cent of the value of their homes. This will help ensure home ownership is a more effective way to save.
• Require a minimum down payment of 20 per cent for government-backed mortgage insurance on non-owner-occupied properties purchased for speculation.
"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, and acting to help prevent some lenders from facilitating it," said Minister Flaherty. "If some lenders aren't willing to act themselves, we will act. These measures demonstrate the Government is committed to taking action when necessary to support the long- term stability of a sector that is so vital to our economy and the financial well-being of Canadian families."
These adjustments to the mortgage insurance guarantee framework are intended to come into force on April 19, 2010.

Canada Sales at Record in July

Fri, 21 Aug 2009 10:53:21 -0400

A News Release from The Canadian Real Estate Association:
OTTAWA – August 14th, 2009 – National resale housing market activity continued climbing in July 2009, with sales posting the largest year-over-year gain in two years. It was also the first time on record that sales activity topped 50,000 units for the month of July in any year on record.
According to statistics released by The Canadian Real Estate Association (CREA), a total of 50,270 homes traded hands via the Multiple Listing Service® (MLS®) of Canadian real estate boards in July 2009. This is up 18.2 per cent from the same month last year, and stands 3.9 per cent above the previous record for the month of July set back in 2007.
On a seasonally adjusted basis, national MLS® home sales posted a sixth consecutive month-over-month increase in July, climbing 2.5 per cent from June to reach 42,539 units. Seasonally adjusted activity now stands 61.2 per cent above the decade-low in January, and just 1.4 per cent below the all-time peak May 2007.
“Sales activity started off the third quarter on a strong footing,” said CREA President Dale Ripplinger. “The difference in the resale housing market now, compared to the beginning of the year, is night and day, and nowhere is this more evident than in the West. Homebuyers recognize that interest rates and prices have bottomed out, and are taking advantage of excellent affordability before prices and interest rates move higher.”
Resale activity in July 2009 was up from the same month last year in about 60 per cent of local markets. Year- over-year gains in Toronto (28 per cent), Vancouver (90 per cent), Montreal (19 per cent), Calgary (22 per cent) and Edmonton (28 per cent) contributed most to the national increase in activity.
Demand is rebounding sharply in some of Canada’s priciest housing markets, which continues to skew the national average price upward. The national MLS® residential average price rose 7.6 per cent from one year ago to $326,832. Only seven local markets posted new average price records in July. The strong rebound in sales activity, not price, in some of Canada’s most expensive markets is skewing the national average price upward, just as a sharp decline in activity in these markets skewed the average lower in late 2008.
The price trend is similar but more muted for the weighted national MLS® average price, which compensates for changes in provincial sales activity by taking into account provincial proportions of privately owned housing stock. The weighted national MLS® average sale price was up 4.6 per cent year-over-year in July 2009.
The weighted average price increase for an aggregate of 25 major markets reveals a similarly muted trend compared to its unweighted counterpart. The major market weighted average price rose 2.8 per cent year-over- year in July 2009, compared to an increase of 8.3 per cent for the unweighted major market average price. The major market weighted average price compensates for changes in sales activity in major markets by taking into account the proportion of privately owned housing stock in each market in relation to the major market aggregate.
The supply of homes coming onto the MLS® market remained down from year-ago levels. Down 13 per cent from year-ago levels to 73,444 units, this represents the seventh year-over-year decline in as many months in the number of new listings.
Rebounding demand combined with fewer new listings is beginning to draw down the overall supply of homes on the market. There were 219,982 homes listed for sale on the MLS® systems of real estate boards in Canada at the end of July 2009, down 12.4 per cent from July 2008. It is the third consecutive year-over-year decline in active listings, and the largest in more than six years.
The number of months of inventory is equal to the supply of active listings at the end of the month divided by the number of sales that month. It represents the number of months it would take to sell current inventories at the current rate of sales activity. Nationally, there were 4.4 months of inventory in July. This is up slightly from June, but remains one of the lowest figures over the past two years, and well below the recessionary peak of 12.8 months in January 2009.
The seasonally adjusted dollar volume of all residential MLS® sales set a new record in July 2009, climbing 5.5 per cent from the previous month to reach $13.8 billion.
“Home sales through the MLS® systems in July provide clear evidence that sentiment about making major purchases continues to improve,” said Chief Economist Gregory Klump. “Activity may level out over the rest of the year as home prices and mortgage lending interest rates creep higher.”
“The number of new listings coming onto the market is down from last year and the rebound in sales activity is paring inventories, so the number months of inventory is on the wane,” said Klump. “These trends are supporting average prices. Average prices dropped sharply over the second half of 2008 but have rebounded since then, so average prices are expected to continue climbing over the rest of the year.”

Bank of Canada Rate Remains Stable

Tue, 21 Jul 2009 15:09:38 -0400

A News Release from Ottawa/CNW Telebec:
The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1/4 per cent. The Bank Rate is unchanged at 1/2 per cent and the deposit rate is 1/4 per cent.
The global economy has suffered an intense, synchronous recession and considerable excess supply has opened up. There are now increasing signs that economic activity has begun to expand in many countries in response to monetary and fiscal policy stimulus and measures to stabilize the global financial system. However, the recovery is nascent. Effective and resolute policy implementation remains critical to sustained global growth.
The dynamics of the recovery in Canada remain broadly consistent with the Bank's medium-term outlook in its April Monetary Policy Report (MPR). Stimulative monetary and fiscal policies, improved financial conditions,firmer commodity prices, and a rebound in business and consumer confidence are spurring domestic demand growth. However, the higher Canadian dollar, as well as ongoing restructuring in key industrial sectors, is significantly moderating the pace of overall growth.
Some of the early strength in domestic demand represents a bringing forward of household expenditures, which modestly alters the profile of growth over the projection period relative to the April MPR. The Bank projects that the economy will contract by 2.3 per cent in 2009 and then grow by 3.0 per cent in 2010 and 3.5 per cent in 2011, reaching production capacity in the middle of 2011.
Total CPI inflation declined to -0.3 per cent in June and should trough in the third quarter of this year before returning to the 2 per cent target in the second quarter of 2011 as aggregate supply and demand return to balance. Core inflation held up at 1.9 per cent in the second quarter of 2009. The Bank still expects core inflation to diminish in the second half of this year before gradually returning to 2 per cent in the second quarter of 2011.
While the underlying macroeconomic risks to the projection are roughly balanced, the Bank judges that, as a consequence of operating at the effective lower bound, the overall risks to its inflation projection are tilted slightly to the downside.
Conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target. Consistent with this conditional commitment, the Bank will continue to conduct longer-term Purchase and Resale Agreements based on existing terms and conditions and according to the accompanying schedule: http://www.bankofcanada.ca/en/notices_fmd/2009/notice_270709.pdf.
The Bank retains considerable flexibility in the conduct of monetary policy at low interest rates, consistent with the framework outlined in the April MPR.
A full update of the Bank's outlook for the economy and inflation, including risks to the projection, will be published in the MPR on 23 July 2009. The next scheduled date for announcing the overnight rate target is 10 September 2009.

Everything is Possible

Sat, 28 Feb 2009 11:44:01 -0500

I found this interesting video that I thought I would share with you. I think it applies well to those few of us in the real estate industry who have the professional training and knowledge to get the job done for you!

Canadian Budget Changes

Fri, 20 Feb 2009 12:08:51 -0500

I'm working to compile my own list, but for now here is something that was e-mailed to me:

• A new Home Renovation Tax Credit (HRTC) is being introduced. The HRTC is a 15% non-refundable tax credit for eligible expenditures made in respect of eligible dwellings which would generally be considered to be an individual’s principal residence. Eligible expenditures include labour and building materials for a renovation that is of an enduring nature. The HRTC applies to expenditures, in excess of $1,000 but not more than $10,000, made after January 27, 2009 and before February 1, 2010 pursuant to an agreement entered into after January 27, 2009. Renovations (which can be on a condo, second home, cottage etc and applicable to most trades and products) done before Feb 1st of next year is eligible for up to $1350 in tax credits. Has to be done by Feb 1st next year ,you have to show receipts for all the work, renovations have to be over $1000 and you earn the tax credits over this amount and up to $10000 (which amounts to a max of $1350 in total).
• The withdrawal limit under the Home Buyers’ Plan increases to $25,000 from $20,000 in respect of withdrawals made after January 27, 2009. Straight increase. All other conditions remain the same. This will help first time home buyers jump into the market a little sooner. The trade off is that first time homebuyers can put more down to purchase a home against potentially withdrawing money from an RRSP and realizing any losses due to recent underperformance of most marketable investments.
• A new First-Time Home Buyers’ Tax Credit is being introduced which is based on an amount of $5,000 for first time home buyers who acquire a qualifying home after January 27, 2009. The non-refundable tax credit is calculated by reference to the lowest personal income tax rate for the year. The credit will also be available for certain acquisitions of a home by or for the benefit of an individual who is eligible for the disability tax credit. This credit will amount to a maximum of $750 towards closing costs for a home purchase. This comes off of any income taxes owing but cannot add to any refund (i.e. if you owe $500 in taxes after completing your return, this can reduce that amount owing to $0 and not result in a refund of $250). Only applicable to first time home buyers.