Halifax Real Estate - A Modern Approach

By David Larock

Statistics Canada recently changed the way it calculates key economic data to bring its methods into line with agreed upon international accounting standards. As a result, the debt-to-income ratio for the average Canadian household shot up 11 per cent, literally overnight, to 163 per cent (a record high).

This has inspired lots of foreboding talk about how our “soaring” household debt-to-income levels are now higher than U.S. debt-to-income ratios were at the peak of their housing bubble. That may be technically true, but it is also totally misleading.

That’s because the standard method for calculating this ratio uses after-tax income, which isn’t a fair comparison because Canadian personal income taxes cover health care costs and American personal income taxes don’t. (To put this difference in perspective, according to my initial research the average American spends anywhere from 10 per cent to 20 per cent of their after-tax income on health-care related costs.)

While it has become fashionable to predict that Canada is headed for a U.S.-style housing crash, most economists still think that is unlikely and they use plenty of data to support their position.

To be clear, I readily agree that our household debt levels are too high and that’s why I have consistently supported the federal government’s attempts to reign in borrowing by changing the lending policies and regulations used by CMHC and OSFI. But that’s a far cry from believing that our debt levels are about to cause our houses to start spontaneously combusting. (Did I just give Maclean’s an idea for their next apocalyptic magazine cover … or have they used that one already?)

Before you start loading up on canned soup and fire extinguishers, consider this sampling of recent comments from the experts I read:

* A report by BMO economists in January 2012 first pointed out the flaw in using after-tax income to compare Canadian and U.S. debt-to-income ratio levels. Instead, they argued that using a debt-to-gross income ratio would provide a better apples-to-apples comparison. Using this revised methodology, BMO economist Sal Guatieri reported recently that Canada’s debt-to-gross income ratio (121 per cent) is still well below both the current (146 per cent) and peak (166 per cent) U.S. levels. That presents a very different comparison from the popular one being bandied about in much of the mainstream media.

* David Rosenberg, a well-known Canadian economist, wrote recently that our ratio of housing starts to the civilian population is “not far off the average of the last 10 years, whereas as in the U.S. back in the 2006-07 peak, that ratio was 25 per cent above the long-run norm.” In other words, Canada has not seen the kind of short-term spike in speculative real-estate investing/borrowing that we saw in the U.S. during the latter stages of their housing bubble.

* Mr. Rosenberg also notes that Canadian policy makers and regulators have been pro-active in responding to our rising household debt levels while their U.S counterparts were basically asleep at the switch until it was too late (hyperbole mine).

* Further to that last point, Benjamin Tal, an economist with CIBC, recently noted in an interview with Rob Carrick that overall Canadian household debt is now rising at its slowest pace in 10 years, while consumer debt levels are actually falling for the first time in 20 years. That kind of momentum makes for a trend in the right direction.

* In a separate report, Tal notes that the crash in U.S. house prices was far more extreme in cities with above-average levels of sub-prime lending, where prices corrected by an average of 40 per cent. This is more than double the average decline seen in U.S. cities with below-average levels of subprime loans.

“Eradicate subprime from the U.S. housing market and, instead of the most severe house price meltdown since the Great Depression, you get a soft landing.” By comparison, Canadian subprime loans account for about seven per cent of our total mortgage debt outstanding while U.S. subprime loans peaked at a little under 25 per cent of their total mortgage debt outstanding before their housing crash.

The bottom line: Like any informed observer who can see beyond his own short-term self interest to what is best for the whole economy over the long term; I am concerned about how ultra-low interest rates have pushed our household debt levels to record highs. But I reject the implication that we have driven over the debt cliff to financial ruin and are now in free fall just waiting to hit the ground.

David Larock is an independent mortgage planner and industry insider specializing in helping clients purchase, refinance or renew their mortgages. His posts appear weekly on his blog,

Think Different!

Think Different!

100% and 0 Down mortgages still available


The Canadian government stopped insuring 100% and 40 year mortgages through the CMHC on October 15th which was supposed to tighten mortgage lending and help avoid a US style housing crash. 100% or $0 down payment <http://www.ratesupermarket.ca/learn/mortgage/saving-for-a-down-payment/>  mortgages enabled Canadians to buy homes with no money down and many believed that this type of product would cease to exist, however, there are still ways you can purchase a home no down payment as reported in the Vancouver Sun <http://www.canada.com/vancouversun/news/business/story.html?id=498d78ce-90fb-4e71-a9de-095f1bee4ab5&p=2> .

There appears to be 2 major ways that home buyers can still get 100% financing for their dream home and they are:

1. Borrowing a down payment

The maximum amount Canadian lenders can provide for a mortgage is 95% of the home’s purchase price to still qualify for mortgage
insurance, which is guaranteed by the federal government (CMHC), however, people are still able to borrow their down payment, either from family and friends or even using their lines of credit or credit cards <http://www.ratesupermarket.ca/credit_cards/> , and their mortgage will comply with the new federal rules as long as the actual mortgage is no more than 95% of the home’s value. On these mortgages the CMHC, Genworth and AIG will not insure the borrowed down payment, only the 95-per-cent balance of the mortgage.

As far as the federal finance department is concerned, if a cash-back program has the effect of leaving a loan-to-home-value of 95 per cent, “this would not be precluded under the new measures”.

2. Cash-back mortgages

Cash-back mortgages offer the borrower anywhere from 4-7% of the home’s value as “cash back” on closing. Many of the big banks still offer cash back mortgages, and say that the cash is supposed to be used for closing costs or furnishings and they specifically will not allow borrowers to use the cash-back as a down payment. However, a common practice was for people to borrow the deposit from family and friends and then pay them back straight away with the cash-back.

My lender offers include:
Scotiabank offers a “free down payment” mortgage for borrowers who haven’t had a chance to save the minimum 5%
TD Bank offers a 4% cash back mortgage
Credit Union Atlantic – 5% cash back + set up new clients with a loan to pay closing costs
Laurentian Bank – Allow 5% cash back for Down Payment

The added benefit of cash back does come with a price as these products charge a higher interest rate that will be one or two percentage points over the discounted rate borrowers can obtain for other mortgage products. For example,TD <http://www.tdcanadatrust.com/mortgages/numbers.jsp>  is offering a discounted 5 year fixed rate of 6.14% while the equivalent 5 year fixed mortgage rate <http://www.ratesupermarket.ca/best_mortgage_rates/fixed_closed/>  with 4% cash back is 7.2% – which equates to almost $10,000 more in payments over the course of the 5 years (not taking into account the cash back).

Brokers have mentioned that zero-down options have never been a big part of his business, so the government’s rule changes were not going to have a huge effect on the lender’s business.

Good Info for you to pass on to your clients.
Let me know if you have any questions.

Contact me:

902.880.1490

andrew@modernapproach.ca

http://www.modernapproach.ca