House Prices – Why Most ‘Experts’ Have it Wrong

A steady stream of experts in the mainstream media have been predicting a fall in Canadian real estate prices. How can prices be so high? And how can they keep on rising? Surely we are due for a correction!

Some nationally known authors such as Garth Turner have been preaching doom and gloom for over 10 years now, Turner for so long that he has actually missed the entire bull market….and yet he still gets press attention, even after being dead wrong for so many years..

Most of these so-called experts make a fundamental mistake when examining the Canadian real estate market – they confuse Cause and Effect. The high prices in Toronto and Vancouver, you see, are not the Cause of the market – they are the Effect.

So when they decry high prices in Canada, they are missing the point..they are attacking the Effect of the market, not the Cause – a fundamental mistake.

The causes of the bull market we have enjoyed in Canada for the last 15 years or so are three fold:

1.) low interest rates

As long as interest rates remain low, the market will continue

2.) a decent economy

As long as the Canadian economy remains decent, and there are jobs being created, the market will continue

3.) continued immigration into Canada

Here I am talking about the Greater Toronto Area (GTA), my area of expertise, although the same rule applies for any Canadian cities where there are large numbers of people moving into the area.

As long as government policy facilitates continued immigration into Canada’s large cities, the market in those cities will continue.

If we look at these three Causes – the Causes of the real estate boom in Canada, there is still room for optimism. Our Federal Government is loath to increase interest rates, as it boosts the Canadian dollar too high, killing our manufacturing industry vis a vis the United States. The U.S., with its current set of problems, has indicated that it will retain low rates for at least the next two years, so the outlook for Canada’s rates remains low for the foreseeable future.

As for a decent economy, the Canadian economy actually seems to be improving; everywhere I look these days in my home town of Mississauga, or anywhere in the Greater Toronto Area, there are ‘help wanted’ or ‘now hiring’ signs….so the economy, in spite of some global macro issues, seems to be on the right track.

And finally, unless there is a change in government policy, Canada continues to welcome new immigrants from all across the globe. All these folks (reportedly 100,000 per year moving into the Toronto area) need somewhere to live, and many arrive in Canada with money to buy property. God bless ’em..

So there is my take on the Canadian real estate market. Sure, there are issues of absolute affordability, but we in the GTA have only to look at Vancouver to see that much greater prices are indeed possible, as long as the three causes of the market remain in place. If any of these change – is rates start rising, if the economy goes in the tank, or if immigration dries up – then the market will slow. Until then, the future is bright. Whenever you read a self-proclaimed ‘expert’ in the mainstream media saying that the market will fall because prices are ‘too high’, know that they are mixing up cause and effect; they are addressing the effect of the market, not the cause.

Bank of Canada Leaves Interest Rates Unchanged

Mark Carney and the Board of Governors announced today that they are leaving  Canada’s key monetary policy rate unchanged at 1.0%. Correspondingly there will be no change to Canadian Prime rates at the current time.

Background:

The Band of Canada indicated that both the Canadian and global economic recoveries have proceeded largely as expected, however there are still risks: The Canadian recovery faces risks if the Canadian dollar continues its high flying ways (a strong currency makes it difficult for our exporters to do business).

The U.S. recovery faces challenges due to tapped-out  consumers in that country.  High debt levels are constraining spending.The global expansion faces risks from so- called “peripheral” economies – those seeking continued support via various bailout programs.

Carney noted that, although commodity prices have come off their highs recently, the Bank expects them to remain at elevated levels for the foreseeable future.

One new factor is the effect of  the March disasters in Japan, which have caused temporary supply chain disruptions throughout developed economies.

Canadian growth is expected to soften slightly in the 2nd quarter of 2011, with a rebound in the second half of the year.Total CPI inflation is running at a hefty 3%+, but is expected to moderate due to currency effects.

Carney gave no real clues as to when to expect rates to begin increasing, but they are coming – the Bank indicated that some of the considerable monetary stimulus currently in place will be eventually withdrawn.

It now looks like the expected July rate hike is off the table and and any interest rate increase will be pushed out further into the fall.  Mr. Carney will probably want to get at least a preliminary look at how 3rd quarter GDP unfolds before making any decision to hike rates.

Implications

With no change to prime rates today, or in the foreseeable future, Canadians should be tempted to resume spending, which could translate into continued use of credit by consumers. With mortgage rates continuing at historic lows, some bump to the housing sector is expected.  This could lead to increased mortgage (and house-buying) activity.The beat goes on……

What Are 50/50 Mortgages?

There’s something new on the Canadian mortgage scene – hybrid mortgages – also known as 50/50 mortgages – they include an equal mix of fixed-rate and variable-rate components within a single mortgage. This means you get the best of both worlds – the security of fixed repayments with the flexibility and lower cost of a variable rate.

Although in recent times, most mortgage experts have considered a variable rate mortgage as the obvious choice to save consumers money over the long term, with fixed rates remaining near historic lows, a 50/50 mortgage may be something to consider.

In a nutshell, since it’s extremely difficult to accurately predict rates over the long term, a 50/50 mortgage offers interest rate diversification, which can help reduce your level of risk.

If you opt for a  50/50 Balanced Mortgage, half of your mortgage is locked into a five-year fixed rate and half is at a five-year variable rate. You can lock in your variable-rate portion at any time without paying a penalty. As well, each portion of the 50/50 mortgage operates independently – like two separate mortgages – yet the product is registered as only one collateral charge.

The 50/50 mortgage product is well-suited to a variety of borrowers, including those who:

• Would normally go fully variable but are afraid prime rate is at its bottom
• Aren’t comfortable being locked into a fully fixed rate
• Can’t decide between a fixed or variable mortgage

Some features of the 50/50 mortgage include:

• 20% annual lump-sum pre-payment privileges
• 20% annual payment increase ability 
• Portability (the option to transfer your existing loan amount to a new property without penalty)

This information is courtesy of Sarah Makhomet,  my good friend and expert mortgage broker at Dominion Lending. As always, if you have questions about the 50/50 mortgage product and whether it’s right for you, or any other mortgage-related questions, we welcome your comments!