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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,
The Halifax real estate market sure is a competitive one. Many of the full service brokerages are competing against new pricing models in the form of discount brokerages, namely ones offering a dramatically reduced commission. The objective of these companies is to attract home owners with a lower cost of selling their property. I have a very strong and long winded case against this kind of real estate model, which I will elaborate further.
The allure of a discount real estate company, for any property owner, is to save money while selling said property. That much is certain. But what many discounted realtors do is sell the owners on the concept of saving money, without fully explaining the logistics of how the real estate industry works.
Every transaction, by its very nature, has two ends - a listing end and a selling end. Nine times of out ten, there will be two agents involved - one who represents the seller and the other who represents the buyer. It should be noted that buyers don’t pay commissions to the buying agent almost 95% of the time because the seller, who is motivated to sell their home, ponies up the cash for both agents. This is called a cooperating commission. It acts as an incentive for a buying agent to move the property and work with the sellers through their listing representative. With this dynamic, both sides, as in a court room, have their respective agents working on their behalf. The legal liabilities for the agents are huge. At any point in a transaction, where money is lost or other elements impact the financial well being of either party, agents could financially be liable for a good deal of money.
What this creates is a highly developed sense of professionalism within the industry. The costs associated with paying licensed agents are justified in the legal protection, professionalism and services we provide.
In listing with a discount real estate service, yes a seller is saving money on their end. However, without offering adequate compensation to a buying agent, in lieu of the last paragraph and legal ramifications and potential risks for both parties, no buying agent has an incentive to bring in their buyers who don’t have to pay their agents anyway.
In discounting services, agents are essentially discounting themselves and their abilities as agents. They’re diminishing their worth. By slapping on a lower price tag for their services, the agents are essentially saying they aren’t worth that much. Agents who have success, whose clients love them from the quality of service provided, have no need to discount themselves as they know their worth and can deliver results.
Discount brokerage sales tend to be lower than those of full service brokerages. Properties will sit and become stale on the market because they’re only appealing to buyers who don’t have agents, whose population is exceedingly small. If a buyer can get their own agent for free, how many buyers do you actually think would go purchase property on their own? Not very many. And many of those who do are looking for a deal of their own.
In closing, yes a discounted model, like Giant Tiger or walmart, will save a seller money - if the home is sold. Essentially, you are saving 3-4% of nothing, instead of paying 4-5% of something.
If you’re thinking about selling your property, don’t just think about saving money. It’s a very basic instinct. The motivation should be to get the best legal protection, from the best professionals in the industry. Because when things go south and your money is on the line, you will breathe a sigh of relief that you paid the little extra to have good service.
Thanks for reading,
Andrew Murray, REALTOR
EXIT Realty Professionals
We are fast approaching the busiest market place for real estate in HRM. Despite talk from the nay sayers and others, the Halifax Real Estate market is still alive and well.
Starting in January 2012, the dynamism of listings and sales has never ceased or abated. Coupled with an excess of inventory and low interest rates, combined with a tick of demand as result of the ship building announcement and discovery of oil off our beautiful coastline, the housing market is both hearty and strong.
Though there was a small dip in the summer, as expected due to vacations and the exceptional weather we’ve been having, the Fall market is springing up even before a seasonal change. On MLS the number of homes listed daily is now equal to those with conditional offers. What’s more, even more inventory continues to flood the system in an attempt to grab more market share.
Though sales are up across the municipality, the highest demand rests on peninsular Halifax. I have had the pleasure of working with clients, after my recent breakthrough in this market, who have each sold their properties for 98% of asking price within two days on the market. This kind of demand is, heretofore, unprecedented.
My advice is, if you’re looking at selling your property and relocating, do so now. With the markets overseas continuing to be volatile and unstable, now is not the time to be greedy and wait. Take advantage of current market conditions and move now. You may make an additional 4% in a year, but that’s only if the market continues. Lessons learned, while situations that are benevolent last, more often than not they have a habit of tanking out.
Fortune Favours the bold.
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Andrew Murray, REALTOR
JUST LISTED - 6284 Yukon Street in a quiet West End Halifax neighbourhood.
You have never seen old meeting new in such a practical and classy way until you see this charming home. Located on a quiet cul de sac in a family friendly neighbourhood, this home boasts its old charm with many new upgrades. With natural gas, installed in 2009, the annual heating bill is exceptionally low. What`s more, the blown in wall insulation, completed in 2007, and new roof installed in 2004, makes this home even more energy efficient. Enjoy the relaxing atmosphere in the main living area, which has a wood insert fireplace, bar-like kitchen/dining area and large open foyer. Take a stroll into the private backyard, teeming with shrubs, fruit trees, vines, evergreens and perennials, or walk two streets away to bustling Quinpool road shopping and dining. 4 Bedrooms upstairs for young families! To make this property that much more affordable, it also boasts an R2 zoning, coupled with monthly rental income. This really is the way to live practically, but to do so with style.
One thing is for sure, the Halifax Real Estate market is still alive and well. Last week alone, there were as many listings sold as there were new listings. Despite speculation about a housing bubble, likely from negative press on the Toronto and Vancouver housing markets, the Halifax housing market continues to thrive.
The Halifax Peninsula is the hottest spot on the map. Property from single family homes to condos are being gobbled up within a matter of days. Many of these properties are in such high demand that bidding wars are a common place. Asking prices eventually sit lower than the actual sale price. This is good news for sellers in this area as they are likely to bank on a good return. For buyers, this is equally good as it indicates a healthy market place and a higher chance of incremental growth on the value of their homes. As the city continues its outward expansion, the centre of the city becomes more and more valuable.
Mainland Halifax has seen nearly the same kind of demand, with homes in former suburban areas lasting no more than a few weeks. Though significantly lower in price, these properties fetch a pretty penny for any seller.
The biggest spike, in terms of sales increase and price increase, is seen within the Sackville and Dartmouth areas. Properties in this area, formerly undervalued, are now the suburbs that Mainland Halifax used to be. As the core densifies, the outskirts are seeing large spikes. If you’re buying your first home, I highly recommend considering these areas as they are still affordable and have not yet reached their peak of worth.
Bedford continues to lead with the highest priced homes in municipality. As it continues to grow past the 102, old Bedford is solidifying its grasp on high prices and average turnover.
So, in essence, the housing market in Halifax is stronger than ever. Rates continue to hover low, making affordability less of an issue for first timers and anyone looking to downsize.
My only advice for buyers - use an agent. It costs you nothing in the form of commissions and the agent will do all the work and protect you from the other side. The listing agents have their sellers best interests in mind and will only do the paperwork for you, nothing else.
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