Further evidence that the media, their doomsayers and our finance department are off the mark and overly negative with respect to the new, misguided mortgage rules. Randy 🙂
Canadians heed warnings on increased debt by Bank of Canada
TORONTO, Jan. 26 /CNW/ – Canadians are getting the message on cutting debt levels with growth in household credit now rising at its slowest pace since 2001, finds CIBC’s latest Household Credit Analysis Report.
Inflation adjusted growth in household credit in the third quarter of 2010 was the slowest in nearly ten years, while the 0.27 per cent increase in credit during November (the latest available data point) was the softest monthly reading in more than 15 years.
“After coming through the most leveraged period of consumer spending in recent history, Canadians are getting the message that they need to cut back on their debt levels,” says Benjamin Tal, Deputy Chief Economist at CIBC. “After rushing back to shop in 2010, consumers will take a well-deserved break in 2011. The softening in the monthly pace of job creation from an average of 31,000 in 2010 to 20,000 in 2011 will single-handedly slow growth in personal spending by more than 0.4 percentage points.
“But as important will be the change in the propensity to spend. With the U.S.-Canada saving rate gap at a 40-year high, and ongoing indications that monetary authorities wish to curtail the risky level of household debt, 2011 should see the beginning of an adjustment in the household balance-sheet.”
While overall credit growth has dramatically slowed, mortgage credit levels are still rising at close to seven per cent on a year-over-year basis, although in recent months that pace has also slowed. “A closer look at the monthly pattern reveals that the market is now growing by a monthly rate of only 0.4-0.5 per cent,” adds Mr. Tal, author of CIBC’s Household Credit Analysis Report.
“The reduced demand for mortgage credit is more notable among first time home buyers—a trend that is already visible in the brokerage channel. The recent changes to the market introduced by the Ministry of Finance recently are not significant enough to derail the market, but are sufficiently targeted to soften marginal borrowing. We estimate that the move to shorten the maximum mortgage amortization from 35 years to 30 years will cut the growth in mortgage originations by roughly two to three percentage points in 2011. Overall we expect mortgages outstanding to rise by close to five per cent in 2011 after an estimated 7.7 per cent increase in 2010.”
The report notes that mortgage arrears appear to have peaked in February 2010 and are now stabilizing. The arrears rate is currently at 0.43 per cent—up from 0.24 per cent in early 2006. Mr. Tal notes that while this is significantly higher than it was before the recession, this number is well below the arrears rates seen in previous recessions.
After rising since early 2008, consumer bankruptcies are also now in a clear downward trend with the number of bankruptcies now falling by close to 25 per cent on a year-over-year basis. On a cumulative basis, they are now falling by close to 19 per cent with Ontario showing the best improvement.
Despite softening credit growth, the report found that the debt-to-income ratio continued to rise in the third quarter of 2010. Debt increased by 1.3 per cent while income fell by 1.5 per cent. As a result the debt-to-income ratio climbed to a new record high of 146.
While Canadians’ debt continued to grow, Mr. Tal says that the cost of covering these debts is trending downward. “Debt interest payments now account for 7.2 per cent of disposable income—the lowest debt service ratio since mid-2006. While debt is still rising faster than income, it is no longer rising faster than assets. The net worth position of Canadians has improved in the third quarter in absolute terms and relative to income.”
“Our expectations that the housing market will stagnate in 2011 and might even see some softening in the second half, suggest that the estimated eight per cent rise in net worth in 2010 will not be matched in 2011. And with consumer spending dancing to the tune of changes in net worth this represents another source of slowing for consumers.”
While much of Canada’s GDP in recent years has been driven by highly leveraged consumer spending, Mr. Tal sees much different and more sustainable factors driving the economy this year. “The seemingly benign 2.4 per cent GDP growth projected for 2011 masks the dynamics of powerful economic forces pulling in different directions.
“The end result will be another year of only middling growth, but a new mix of economic activity as a vibrant business sector will gradually take over for an exhausted consumer and restrained government. Look for the Bank of Canada to start raising rates as early as May of this year, but the overall speed and magnitude of future rate hikes will be limited by the growing effectiveness of monetary policy and a modest recovery.”
Other key findings in CIBC’s Household Credit Analysis Report:
The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/hca-110126.pdf
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Month: January 2011
A house or apartment purchase may likely be the most important purchase you will make. The mortgage industry is an increasingly complex one, with a myriad of mortgage products available in the marketplace as well as dozens of lenders, many who do not work directly with the general public. Are you aware of and do you understand all of the available options? We will cover a variety of residential mortgage and property topics for both owners and investors, money saving tips and pitfalls to avoid. We will also deal with the new mortgage rules and their affect on buyers. Two or three top professionals will guide you through their area of expertise – mortgages, real estate and home inspection.
This course can save you money and provide you with useful information to make your purchase less stressful.
The course is intended for existing owners, first time buyers and investors who are looking to purchase one or two residential rental properties. It is not for commercial or sophisticated investors.
We constantly receive enthusiastic feedback from the vast majority of participants. Some of the comments from past attendees include:
True information on buying and mortgaging, very thorough,
very comprehensive, instructors – all good mannerisms and demeanor,
very informative and easily understood, excellent speakers – very knowledgeable in their respective fields,
well presented, would recommend this class for future real estate investors or current owners,
very worthwhile course, great information & good handouts,
explained mortgage options and pitfalls, learned a lot about the topic,
thank you for an informative class- great course, I really enjoyed this,
very informative (lots of info), honest insights from real experts, thorough information,
people with first hand experiences sharing their knowledge,
professionals of the industry, very helpful advice, very personable – all were easy to ask questions,
When: Thursday February 17th & 24th 2010, 6:30 to 9:30
Where: John Oliver High School,
Cost: $79.00 Phone: 604-713-4550 Course ID: JO 18394
1. Lower purchase and refinance demand will depress mortgage volumes, sparking greater rate competition as lenders battle for less business
2. A small portion of home buyers will sprint to buy homes with a 35-year amortization before March 18, followed by downward pressure on home prices after March 18 as the amortization reduction removes market liquidity
3. Negative personal consumption and wealth will result thanks to equity take-out restrictions, rising rates and softening home prices
4. Unsecured debt usage will increase as homeowners are restricted from accessing as much of their equity, leading to even greater bank profits in unsecured lending
5. Default rates will see no material improvement
6. No significant improvement will occur in the number of risky borrowers, due to no change in TDS limits or Beacon score requirements
7. HELOC rate discounts will be less frequent as some non-bank offerings disappear and HELOC funding costs inch higher
8. Banks will pick up mortgage market share
9. More private lenders will offer high-interest uninsured 2nd mortgages to 90% LTV
10. If amortization restrictions accelerate falling home prices, we’ll see somewhat greater default risk and more negative equity situations among low-equity homeowners
The following article from mortgagetrends.com is an interesting and accurate summary of how our Finance Department helps their big bank buddies.
Having numerous years of work experience at the big bank level, I found it disturbing that many of the decision makers in the area of mortgage lending were very political but financially unsophisticated. And now this same crowd is unjustly influencing government decisions that negatively affect the public.
“In one epic and brilliantly calculated move, bank CEOs like TD’s Ed Clarke and BMO’s Bill Downe convinced Canadians they had consumers’ interests at heart, and convinced the Finance Department to:
1) Overlook credit card debt, a market that’s yielded double-digit growth for banks and funded $260 billion of purchases last year
2) Ignore the risk of unsecured lines of credit (ULOCs) so banks can continue offering them to their customers when 85% LTV refinances aren’t enough [Brokers don’t generally sell ULOCs.]
3) Quash broker’s primary source of growth (first-time buyers) with amortization restrictions
4) Cut off consumers’ ability to refinance profitable high-interest consumer debt into low-interest mortgage debt
5) Eliminate HELOC competition from non-deposit-taking lenders which rely on securitization (HELOCs have been massive money-makers for banks, with 170% growth over the last decade. HELOCs now account for 12% of household debt. Banks like TD, BMO, and RBC are largely unaffected by the new HELOC rules because they don’t depend on securitization. )
6) Increase HELOC funding costs at banks with broker channels (like Scotiabank and National Bank—both of which securitize some of their readvanceable products, according to sources)
7) Brush aside the consultative recommendations of CAAMP aimed at permitting well-qualified borrowers to retain mortgage flexibility in exchange for tighter borrower qualification standards
In short, the big bank CEOs orchestrated a virtuoso performance for their shareholders, at the expense of sensible mortgage holders. It’s moves like this that justify every crumb of their $5 to $15 million+ compensation packages.
Rob McLister, CMT“
Mortgage brokers say tightening rules on unsecured consumer debt, not mortgage lending rules is the answer to lowering household debt
January 17, 2011 (Vancouver) – Finance Minister Flaherty’s announcement this morning of tighter mortgage rules continues to emphasize mortgage debt as the culprit for record levels of household debt. However, these changes affect high ratio mortgages only, a very small part of the mortgage market. The real issue says the Mortgage Brokers Association of BC (MBABC) is growing consumer lines of credit, consumer loans, car leases and credit cards, and the unsecured lending practices of these lenders, not what homeowners are doing with secured mortgage debt. The new rules will primarily affect new and younger homebuyers, a demographic which does not typically shoulder high consumer debt.
Mortgage lending is not creating the problem of record levels of household debt, consumer debt is, according to the MBABC. By the time consumers need to refinance their mortgage, consumer debt already exists. A mortgage refinance can often be a solution to a homeowner’s debt issue, and these new changes reduce the effectiveness of this solution. It does not, however, resolve the main issue of consumer debt, which started the problem to begin with.
“Household debt loads are directly related to these unsecured debt factors, not mortgage lending”, says MBABC President Joanne Vickery. “Further tightening of mortgage rules is not necessarily the right answer. Consumers need to have the discipline to change their financial habits and to not take on debt that they cannot afford.”
“Consolidating household debt and rolling it into a mortgage is a smart option for an initial solution”, says Vickery “provided that any savings are then used to pay down the mortgage or invested into a retirement savings vehicle. Consumers cannot, however, continue to use their home as an ATM; they must change their habits on acquiring consumer debt.”
Vickery advises homeowners and those looking to buy a home to contact a qualified MBABC mortgage broker for assistance with determining home affordability as well as long-term debt planning and debt management.
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