Retrieving Balanced and Healthy Home Market

By Elli Davis, August 3, 2012

Balance by Mark Kelly

The global financial situation is not looking good, frankly speaking. It’s not about Europe and its debt crisis anymore. The contagion has spread worldwide since our economies are so deeply interconnected. Some ties are stronger than others, but generally speaking there is no country that can feel safe — or is there? Is there a possibility that a country has managed its investments and policy successfully and is doing well even though others are suffering?

An Apple a Day Keeps the Doctor Away

One of the basic laws of nature is balance. We have day and night, changing tides, black and white — you name it. Therefore I assume things can’t be all bad. There must be a tiny light of hope somewhere, a country that can prosper even though times are hard. Think about it this way. You eat healthily and drink a lot of water, exercise daily, and get enough sleep. Of course, you slip sometimes and munch a whole cake or eat fast food but overall, your body is in very decent condition. Suddenly a flu or other viral infection starts spreading through your office, and many of your colleagues must stay at home, take pills and sweat, but you feel okay. Your immune system is resistant and even though you might feel a bit more tired, you can continue to work as before. Now swap a human being for a country, a heathy lifestyle and exercise for responsible government, and a global crisis for a virus. You begin to see the picture.

Balanced Diet

When half the office is lying in their beds, sleeping off their fevers, those who withstood the infection are taking control over the business. I come back to the economic jargon. Countries that were not smashed by the crisis are the ones who have the big word now. Look at Germany. It wasn’t the healthiest of all the European countries. Its debt levels were pretty high as well -(many cakes and fast food lunches) but it realized this soon enough and went through a pretty tough detox. Angela Merkel is a new aspiring iron lady and Germany is flourishing in today’s tough circumstances. Remember my thought about balance in nature? Here it is nationally: a European country that prospers even though it’s in the epicentre of the Euro crisis. Do we have more of these healthy countries? I believe so.

Canada has been attracting investors for some time now. We have a responsible government that listens to the market and behaves accordingly. We experienced slight turmoil back in 2008 as a reaction to the economic crisis in the U.S. However, analysts agree that we have almost recovered from post-crisis syndrome and are able to function well now. We have our occasional pancakes with maple syrup, but overall we are one of the healthier economies.

Given the circumstances in Europe, investors are steering away from risky businesses and trades and are looking for a way to invest their money wisely. High yields have stopped being the number-one priority. Prices are in fact dropping but value stays unchanged. Investing in bonds that have been doing well even when times are hard is now more important than ever. Yields change, and so do the prices of a bond; the true value investors are looking for is a country’s capability of surviving the turmoil, making responsible choices, and keeping up the good work. The most valued bonds are those of Germany, Sweden, Norway, Australia, and Canada. However, Canada has a huge advantage compared to the other countries: its size. Therefore Canada is attracting top investors that are investing big money in our government bonds despite lower yields.

Summer Cottage by MyMrMa

So why is it good to have big investors buying up our bonds? Let me explain. There is a certain good you want to have, whether a house, condo, or a summer cottage. It’s not just you who would love to own it but many other people as well, so you start competing for the price. This is the best possible scenario for the owner. The higher you bid, the bigger his profit. The same applies for government bonds, but the situation is reversed. Government bonds are issued and sold when a country needs to borrow money to function. The higher the debt and the greater the uncertainty and inability of a country to take care of its own situation, the higher the yield: borrowing costs will rise. So you have a bond of a certain value and if no one is willing to buy it at the given price, the bond issuer adds a small yield and keeps adding until the yield is great enough for investors to buy it.

Bonds usually carry some risk, so the riskier investment, the higher the yield and the more money you have to pay. Therefore it’s good to have a big group of investors willing to buy your bonds. Their interest in what you are selling makes the yield lower, and pushing the yield down saves you money. When we all apply it to the Canadian situation, we end up with a large group of wealthy investors who are willing to buy our government bonds at very small yields. This interest is saving us a lot of money and helps us to improve our current economic situation. Our government has the trust of investors, they believe Canada will prosper no matter what would happen, and therefore they prefer to keep their money in our bonds.

This is a very good and reassuring signal that things are right and our economy is healthy. We are among the most trustworthy nations in the world.

However, even the best of us slip occasionally and it haven’t been different in Canada. Using my food parallel, I would say some of us have been eating way too many pancakes with far beyond a healthy amount of maple syrup. Those in the condo market have gained some serious weight and they should start exercising now otherwise some health problems might develop.

Feast

It all started with a hole in the market. Canadian cities and towns were split into charming neighbourhoods with detached and semi-detached houses, and occasionally there was a taller building in a city centre with hotel rooms and few apartments. However, a lifestyle change affected the housing market as well and gradually more and more people wanted to live in a condo, right in the middle of the city — in the centre of fun and liveliness. There were not enough condominiums and apartments to satisfy the demand, so developers started to shift from constructing neighbourhoods to constructing high-rise buildings. Suddenly almost every developer saw it as a chance to liquidate their ideas and rushed into the condo market.

This whole situation would be fine unless a moment came when everyone who wanted to live in a condo and could afford it were living in one. After that moment comes, prices will need to drop a bit. Or, as a second option, investors and developers should move their activities elsewhere. The condo situation was pretty predictable. Analysts and economists knew what would happen; they just didn’t know when. Back to pancakes: the first bite tastes so good, while the next two pancakes are a pleasure, and third comes as an overindulgence and all the consecutive pancakes just make you more and more sick. You know the time of a full stomach will come eventually; you just don’t know how many you will manage to eat before it happens.

Finance Minister Jim Flaherty is an intelligent person. He saw the stomach stuffed with condominiums coming so he decided to act. He could either take away the plate with pancakes or make the pancakes less tasty. Since we live in an era where you are free to do whatever you like (well, almost whatever you like), he couldn’t deprive you of the pancakes. What he could do and what he did was hide the maple syrup. The once delicious and mouthwatering pancakes turned into a bland disk of flour and only the most persistant pancake lovers are eating them now. You are asking: “What happened with the maple syrup?”

Maple Syrup Hiding Act

Maple Syrup by Sterling College

Mortgage rules are the maple syrup. The substance that makes everything easier, tastier, and more approachable — well, not any more. Mr. Flaherty decided that the feast has lasted for too long and a spring detox wouldn’t be a bad idea. He, after discussing his ideas with leading economists, came up with four rules that should cool down the overheated condo market and ease your stomach as well.

Rule number one:
AMORTIZATION PERIOD REDUCTION

Mr. Flaherty thought the 30-year amortization period was long. Shortening it would be beneficial for both sides: consumers and banks as well. Look at all your payments and the interest rate. Calculate how much would you save on interest rates if you payed up your debt sooner. Yes, I know: the monthly payments will rise, but it will rise by something like $50. That is two pizzas a month. It’s not that much. And bear in mind how much you will save in the long run. Banks will have their money sooner and therefore they can invest again. So the new amortization period will be a maximum of 25 years.

Rule number two:
REFINANCING

The next safety measure from Mr. Flaherty’s office is lowering the amount of money you can borrow to refinance. It will drop down to 80 per cent from the previous 85 per cent of the value of your property. Most Canadians have their money invested in a property they live in. This measure will therefore motivate us to wisely consider signing up for a loan that is backed by a property we live in. It will promote saving and careful behaviour.

Rule number three:
HOUSEHOLD DEBT LEVELS

The third rule is dealing more with your personal spending than housing. To get CMHC insurance, you should not spend more than 39 per cent of your gross household income on mortgage payments, property taxes, and heating, and you can spend maximum of 44 per cent of your income on housing expenses and debt payments. This rule was designed to protect people who revised their possibilities and decided to take a mortgage while being fully able to pay monthly payments without restricting themselves too much.

Rule number four:
INSURANCE LIMIT

House by Steve Baker

The last rule will only affect a small group of people. If you ere considering buying a house that costs more than $1 million, you won’t be able to get government-backed insurance.

Finance Minister Jim Flaherty is often addressed as a man who constantly changes the rules of the housing market. He shuffles the numbers around every once in a while. It’s not easy for me or other realtors to play a game in which the rules are fast-changing, but I’m glad there is still a game to play, and whatever changes might help to make the game better are good ones.

The housing market has been rising and flourishing since 2008 and the U.S. financial crisis. We made it through, we picked ourselves up, and we have been doing whatever it takes to make our country prosperous. The housing market is said to be rising too fast. But the numbers are never good. Progress and growth are either too slow or too steep, prices are either skyrocketing high or miserably low, and nothing is ever moderate. No one is going to say it’s great or that it’s the right growth percentage or that you are selling for the right price.

What I believe in is balance. There are moments where prices are high and days where they fall down. One year is extremely favourable and the next one will be miserable. The housing market has been growing fast in recent months, but it will cool down. Whether it will be because of the maple syrup hiding act (new mortgage rules) or because investors realize the condo market is no longer profitable. We have one of the most stable economies and more importantly one of the healthiest economies in the world. A couple of pancakes can do no harm, right?

Posted in Toronto Real Estate News | No Comments »