Mortgages - Edmonton Housing Bust

Category: Mortgages

Tuesday, January 18, 2011

Back to the Future

Better late than never, our beloved federal Finance Minister, Dim Jim Flaherty, dropped a big ole lump of coal in the stockings of the CREA and CAAMP yesterday. Clawing back mortgage requirements again, much like they did a year ago. Harper and Co. seem to be trying to play this off like they’re saving the country from the bony grip of debt… blissfully omitting the fact they were the ones who spiked the punch bowl in the first place.

Basically the changes we’ll see come March 18th boil down to this:

1) Max amortization periods will be lowered from 35 years, to 30 years
2) HELOC’s are now limited to 85% of the homes value, down from 90%
3) CMHC will no longer back HELOC’s

What’s it all mean? Well, lets look at it point by point. First, the change to amortization length from 35 to 30 years. Basically what this does is lower the amount a borrower can qualify for. So lets say you qualify for $300,000 under the current rules, come March 18, you’ll only qualify for $280,000. Here is a visual aid that may help.

Obviously this graphic hasn’t been updated to reflect the new changes, but this effectively puts us back at the level we were at in March 2006. Back to the first step up our stairway to disaster as it were. In fact if the feds had reigned in their changes at that point we could have limited our bubble in Alberta to a much more modest level, and in all likelihood saved most the rest of the country from any at all. But alas, they really took the axe out in June 2006, and after that all bets were off.

Basically this is going to make the already shallow pool of first time buyers out there evaporate even more, and those that do stay in will have less to play with. Thus I imagine we’ll continue to see further tightening at the lower end of the market, and as those transactions are typically the oil that keeps the market running smoothly, we’ll eventually see it work it’s way up into the higher end as the gears start grinding.

Changes 2 & 3 deal with HELOC’s, and these aren’t really going to have a direct effect on housing… but they’ll have a serious effect on household spending. No only will people not be allowed to borrow as much, but with the CMHC no longer backing those instruments, the cost of financing is going to go up. And by that I mean above and beyond just the expected increases in interest rates.

When the CMHC still backed HELOC’s they basically game the system to more-or-less allow everyone to borrow money at similar terms. Unless one had VERY poor credit, the sums involved and your credit worthiness was largely a none factor and it allows everyone to enjoy the lowest of borrowing rates, thus borrow more money. Now with the government out of the game, it means lenders will have to obtain insurance for those loans privately, and now the more your borrow, and/or worse your credit history, the higher that interest rate you’ll have to pay, and the more you’ll have to pay indirectly for insurance.

I imagine that will have a pretty chilling effect on consumer spending. Particularly the under-40 crowd, which it seems all to ofter lives off consumer debt, and lives a little too well. I guess the good news out of this is that if you’re affected by the first change, at least you’re not affected by the other two… cause, lets fact it, you have no equity to borrow against!

At the end of the day I guess we should look at these changes as another step in the right direction. If we wanted to look a gift horse in the mouth we could say we’d still like to see amortizations ratcheted all the way back to 25 years, and down payments requirements raised to 10% (and that would REALLY throw the brakes on first-time-buyers)… but alas we’ll just have to wait on that. It’ll give me something to bitch about anyway.

5 comments

Wednesday, April 14, 2010

Midnight looming

Filed Under: Mortgages

Midnight is now looming for those hoping to come in under the wire before the new CMHC requirements take effect April 19th. To do so one would need to close their transaction by the stroke of midnight Sunday, less than 100 hours from now.

Judging from the unusual jump in resale prices last month it would seem that many aren’t leaving this for the last minute…. though sales weren’t anything special, so perhaps there could be a surge waiting in the shadows. Like most things, we won’t know until after the point. There will probably be a few stories in the news before then… but it’s been rather quiet thus far, or maybe the real estate barkers just don’t want this last wave of greater fools to be recognized and confuse their narrative of last week.

Anyway, with Monday fast approaching I figured it was a good time to take one last visit to the issue. The change that is getting the most press, and is most easily measured, is the requirement of borrowers to abide by a higher qualifying rate for all variable-rate mortgages as well as fixed-rate mortgages with terms of less than 5 years… thereby limiting the amount they can borrow.

Before lenders had employed qualifying rates in some cases for VRM’s, but there was no hard and fast rule governing it (though the 3-year fixed discount rate appeared to be the most commonly used)… come Monday it will now be the standard as the 5-year fixed posted rate.

To get an idea of how big an effect this change will have, lets see how that change would play out using today’s rates from RBC… variable rate available at 2.14%… 5-year fixed posted rate, 6.10%. Using the above graph and an annual income of $75,000, if the 2.14% rate was used one could qualify for ~$590,000… as of Monday if you want to go the variable route the maximum one could qualify for is only ~$347,000. That’s a pretty big shave off of the amount of available credit, roughly 40% in fact.

Though, as I mentioned earlier, many lenders already used a qualifying rate to limit the amount one could borrow… most often the 3-year fixed discount rate, which is today hovering around 4.0%, which would have limited borrowers to ~$450,000. So, considering that condition, that would only cut the available credit by 23% to get down to $347,000… which is still a pretty big haircut, and puts the median home out of reach for most Edmontonians (and this while interest rates are still at historical lows).

There is a loophole though… but it comes with a price. That being, you can qualify for a bit more money, but you can’t take a variable-rate or short-term fixed mortgage. To do this you must take a 5-year fixed mortgage, and in this case you can use the 5-year fixed discount rate as the qualifying rate, rather than the posted rate. This would allow you to use 4.70% rather than 6.10%, qualifying you for $412,000 rather than $347,000.

Still a lot less than you could have gotten before, but a lot more than you will be able to borrow as of Monday with a variable-rate mortgage. The effect of this loophole combined with the elevated prices will be to funnel a lot more people into 5-year fixed mortgages as they seek to maximize their leverage and get as much house as possible (ignoring whether or not such maximization is in their best interest, as in all likelihood, they’ll be ignoring it too).

On one hand this will protect the borrowers from fluctuations in interest rates sure to come over the next couple years, and will limit their exposure come renewal by limiting leverage to a certain extent. I think they would have been better off to just do away with the loophole and make everyone abide by the posted rate, but it’s a step in the right direction… and such a move would have thrown the brakes on prices faster, which would not be politically popular, and don’t kid yourself, politics is very much a factor in all this.

There were other elements to the CMHC changes but they’re a little harder to quantify, like the new requirements on investment properties. Not only increasing the necessary down-payment from 5% to 20%, but also limiting the amount of rental income that can be used to obtain the loan. That not only greatly increases the barrier to entry, but also severely restricts the available leverage… that will scare off a lot of recreational speculators.

Mike Fotiou also posted a very interesting piece on the effects these changes could have on pre-sale units. It’s an angle I hadn’t really thought of, but is certainly something to be aware of if you have purchased a unit that is not yet complete. This is above and beyond the stories we’ve heard recently with pre-sale owners being unable to obtain financing upon completion when the lender assesses the unit’s value as less than the contract price.

5 comments

Wednesday, March 17, 2010

Weekly mortgage payments… don’t believe the hype

Filed Under: Mortgages, Personal Finances

You guys may recall a year ago I did a little piece on accelerated mortgages, and said weekly/bi-weekly payment schedules were grossly overrated. They will save you a tiny bit of money (emphasis on the word “tiny”), but are not the be-all-end-all that they are made out to be, and nothing that can’t be accomplished with monthly payments. It seems Garth Turner feels otherwise, and inevitably every time he tells people in his blog that they should go to weekly payments, I get deluged with e-mails asking why King Garth says one thing, and I say another.

To which I say, just cause he can work a keyboard, doesn’t mean he can work a calculator.

Admittedly, in my first piece I did make a small error in my calculations, as someone pointed out that I did not compound “half-yearly not in advance” as is custom on mortgages (at least fixed-rate ones anyway). The difference is very small, and really not material to the conclusion… but it is worth revisiting just for the sake of clarity and cause we’ve probably got a lot or readers that weren’t with us a year ago.

So lets say you’re mortgaging $300,000, at 5%, over 25 years. If you want to pay that off weekly, it would cost you $402.01 per payment, 52 payments per year, for a grand total of… drum roll please…. $20,904.52. If instead you went monthly, it would cost $1,744.81 per payment, 12 payments a year… for a total of $20,937.72.

So, going weekly rather than monthly, you would save a grand total of $33.20 a year… or $2.77 a month.

Yeah, that little. And if you don’t believe me, just do the math yourself on how much interest $402 would earn in a week… at 5%, it’s about 39 cents…. multiply that by six (total of three payments, one held for three weeks, one for two weeks, and one for one week, 3+2+1=6), so you have $2.34… and the difference between that and $2.77 is a rounding error due to the average month being longer than 28 days.

Then if you figured in the pittance in interest your bank pays you in interest on your balance that would be lost, it’s even a little less… and if you have a shitty account plan, it may not even cover the added transaction costs incurred with the 40 extra annual transactions… and that’s not even mentioning the time and headaches associated with timing issues that could arise when there are five payments due in a month, etc.

So, as I’ve said, before you get talked into going to a weekly or bi-weekly payment schedule that any “acceleration” is due to the amount paid to the bank in a year, not the frequency of payments (as you are led to believe). Anything that can be accomplished with weekly payments, can just as easily be done with monthly payments. How often you pay makes virtually no difference… how much you pay on the other hand, makes all a HUGE difference

That said, if you typically carry a decent balance and don’t get hit up for transaction fees, by all means, go weekly. It’ll save you a couple bucks every month… save it up and at the end of the year you can buy yourself a case of beer and celebrate having knocked another year off your mortgage.

But if you want to pay off your mortgage quicker, there is only one trick, and that’s paying more in and decreasing your principle… you can cut them 365 cheques a year and it won’t pay it off any quicker… no matter what Garth says.

14 comments

Monday, March 8, 2010

Do lending changes have teeth?

Filed Under: Mortgages

Last month the feds announced there would be some changes to lending requirements effective April 19th. At the time I acknowledged they were a step in the right direction, but largely dismissed them as too little and too late.

The last few weeks there have been lots of questions concerning exactly what the specifics were to these proposed changes, particularly the move to using the 5-year fixed rate as the qualifying rate. This weekend we starting hearing reports about some of the specifics.

Basically it boils down to variable and short-term fixed (less than five years) borrowers will be required to use the 5-year fixed posted rate (as per the Bank of Canada)… those borrowing fixed rate with terms five years or longer will see no change, and will be evaluated according their their contract rate (which could be well below the posted rate).

For those uninitiated, perhaps a little background into just what all these different rates are (posted, discount, contract, qualifying). Perhaps an example is in order, lets use BMO… on their mortgage rate page they list 5-year fixed as 5.39%, this would be their posted rate… but they also offer specials, and on that page they offer a 5-year fixed rate of 4.09%, this would be the discount rate. The contract rate is fairly straight forward, it’s whatever rate you agree to with the lender, hence whatever rate is used in your contract. Finally the qualifying rate is the number that determines how you borrow.

Say you want to go the variable route, so lets use the 5-year variable rate of 2.15%, that would be your contract rate and would dictate your payments. Under the new rules, even with variable rate mortgage, you can only for as much financing as the qualifying rate allows.. and the qualifying rate will be the 5-year posted rate (currently 5.39%). So even though you’re borrowing at 2.15%, the amount you’re allowed to borrow is determined using the much higher rate of 5.39%. Lets take a look at what that does to the sums.

Lets say you make $75,000 a year, according to the new rules and a 5.39% qualifying rate, you could borrow a maximum of about $380,000… whereas if you used the 2.15% contract rate, theoretically you could have borrowed as much as $590,000. That’s a huge difference. So, under the new system while your payments will be determined by the contract price (as per usual), how much you can borrow is limited by the qualifying rate. So like I said, it’s a step in the right direction… unfortunately still far too little and much too late.

It’s worth noting that apparently at least some lenders did use a qualifying rate higher than the contract rate with variable borrowers before, often a 3-year fixed rate, whether discount or posted I do not know (though I imagine it was the former). In any case, it was lower than what it will be as of April 19th.

One interesting feature of these changes is that for terms 5-years of longer, that allows the qualifying rate to remain as the contract rate… this will have an interesting effect, in that even though 5-year fixed mortgages will not be the cheapest route, but it will allow the borrower to borrow the most money, as the discount rate (or whatever is negotiated) would be used rather than the higher posted rate. So, using our earlier example, instead of only being able to borrow $380,000, you could instead borrow as much as $450,000 using the 4.09% discount rate instead of 5.39% posted rate.

In a highly inflated market as most of the country finds itself, this will serve to make the already popular 5-year fixed even more desired (at least among those who desire more house, which seems to be most). Even given the inflated valuations, normally I would consider this exception as alright… but in the environment of “emergency” interest rates, this was a window that would have been wise to have shut and just made everyone be limited by the posted rate.

Alas, the damage is largely already done and rates will be going up soon anyway… beyond that, there will be a big rush to beat the new rules, and then another to beat the interest rates and new taxes in the spring, so the last of the greater fools will be throwing themselves over the cliff anyway.

So, I guess it doesn’t really matter. Just smile and nod as they get whipped into a frenzy yet again… if you feel the need to drop some cash, treat your primary sex provider to a fancy dinner and a night on the town. Maybe if you really impress them they’ll be open to inviting a secondary one… though personally, I have enough trouble disappointing one at a time! Have a good week all!

5 comments

Thursday, January 14, 2010

Circle the Wagons!

Filed Under: Mortgages

Seems the feds wondering aloud about tightening up mortgage lending requirements has predictably got the dander up of those in the real estate/lending industries up. Rapidly they have began circling the wagons, and now we’re starting to see the PR counter assault.

The builders, lenders, and brokers wasted no time squealing when the rumours first started to circulate, and today we saw one of the first of their more official responses with CAAMP pumping out a special report to protect the shield and tell the world (and more specifically Jim Flaherty) there is apparently no need for concern and that everything is rosy.

Not sure words can really do justice to the simple gesture of rolling ones eyes as far back in their sockets as humanly possible. It’s about as blatantly slanted a ‘report’ as one is likely to find. One must wonder how many showers it took Will Dunning to feel clean after signing his name to such tripe.

The report could have offered some real insight, but instead resorted to cherry picking data that met their pre-determined narrative… and even at that, it needed to employ some amazingly convenient assumptions just to get that far. Loaded with vague language, and immediately dismissive of anything that would poke holes in their rice paper castle of a hypothesis.

Most glaring was their refusal to discuss the potential effects of fixed rate mortgages going up to a significant degree… instead, conveniently assuming they will go no higher than 5.25%, a level WAY below the long term average, and overly optimistic even in the era of rock bottom rates of the last decade.

Or that the rush of buyers trying to ‘take advantage’ of the all-time low rates this last year has effectively left us with a made-in-Canada version of the ARM disaster that contributed to the US housing collapse. Rather than lender offered teaser rates, we had record low market rates bound to rise to a significant degree when these loans come up for renewal in five years.

And thanks to nearly half of all first-time-buyers flocking to 30+ year amortizations and other exotic arrangements, come renewal they will have made up minimal equity and will thus bear the full brunt of higher market rates. If that’s not scary enough, according to today’s report somewhere between 50-60% of the record sales this year (or any year) are made by first time buyers.

But of course such talk doesn’t further their agenda, even if it was in the long-term interest of the market (and their own members) to tighten lending… that would cause short-term pain to the mortgage brokers out there, and CAAMP can’t have that. But why should they be different than anyone else whose sight can’t seem to extend past the end of the current quarter.

9 comments

Thursday, January 7, 2010

The Perfect Storm

Filed Under: Alberta, Canada, Historical Prices, Mortgages, Personal Finances, United States

Greetings all! We’re going to do something a little different today, and that’s very interesting… or at least I think it’s interesting. I’m going to take a look at the changes the CMHC made, how it affected lending and even touch on why what happened here wasn’t all that different than what happened in the US. I was meaning to get this done a bit faster, but turns out it’s a little more time consuming than I thought it would be, ’tis complicated stuff.

Before we start, I compiled this little graph as something of an all-in-one backgrounder for this post. The contents are nothing that hasn’t been discussed ad nauseam already on this blog. This is just so you can consult for reference. So here that is.

This is all concerning Edmonton. We have median household incomes, median single-family-home prices and average 5-year fixed rate mortgage interest rate. Incomes and home prices are inflation adjusted, and are in 2007 dollars. Why 2007? Well, that’s what the data set came in for incomes, and to compile the final graph I could not adjust it… and frankly it’s close enough to today’s dollars, All figures in this post are in 2007 dollars.

Enough of that, on to the good stuff. This is a graph documenting the changes in CMHC lending standards, and it’s effect on how much money a person could qualify for. These percentages hold true whether you make $1/year or $1,000,000/year, so income level have no effect on this measure.

We set our base effect (0%) as the maximum amount one could qualify for going into 2006 when amortizations were limited to 25 years. We’re using 6% as a steady interest rate through the entire period. We know in reality they float, but for theoretical and practical purposes we’ll use 6%, and as we could see in the first graph interest rates were generally right around 6% from ’03 through early ’09 (and are likely to return there once the “emergency rates” expire).

For example a person, lets call him Dave, is making $60,000 a year, could qualify for about $250,000 in financing assuming he has no debts in January of 2006 or any time early. Just for example purposes, and to use a nice round number.

In March ’06 we saw the first mandated change, and that was extending amortizations to 30 years. That change allows Dave to qualify for ~7.5% or ~$18,500 more than he did before. They also dropped the need for a 5% downpayment, unfortunately the effects of that can’t really be quantified. We’ll discuss it’s grander effects a bit later, but for our purposes here we just kind of ignore it.

So we jump ahead a few months to June. Here Harper and Co. really open the flood gates. Sure they again extend amortizations another 5 years, now to 35… but the real coup de gras was insuring interest-only mortgages. That one blew the doors right off.

Here I split the line just so we can see the effects of the amortization extensions (green line), as other wise they would be lost in the effect of interest-only payments. The move to 35 year ams would have allowed Dave to borrow another ~5.5% above and beyond. So he could now borrow 13% or $32,500 more than he could five months earlier.

We follow that green line a little further, and in November the feds started insuring 40 year amortizations. That allows Dave to borrow another 4.1% (notice the diminishing returns on the 5 year extensions?), and that’s 17.1% more than he could borrow less than a year prior. For a guy making $60,000/year, that’s another $42,750 in financing he could qualify for. No small increase.

Of course that’s nothing compared to what the interest-only option offers. That route offered 28.9% more financing (or about $72,000 for Dave). Now we consider that this financing wasn’t just available to Dave, but to everyone in Canada.

We recall that real estate in Edmonton (and Alberta as a whole) was pretty hot in ’05. It was the talk of the town, everything was selling and the economy was cooking… then we hit ’06 the feds take an axe to lending standards, and over the first six months all these hormonal consumers find themselves with greatly increasing levels of available financing.

Now go back to the first graph, and notice that is right when real estate prices start going vertical. It’s not a coincidence. Real estate was on hot, but a controlled burn and sustainable… but all this suddenly available financing just threw gas on it… and at this point it just became a perfect storm.

Obviously when available financing increases in a big way… so does the pool of potential buyers. I apologize that you need to use your imagination a little with this graph. The incomes breakdowns are only available on an annual basis, so gains made over the year really cannot be represented other than those jumps. Really we’re only focusing on 2006 though, the rest are just there for reference sake.

This is a graph of the percentage of households that can qualify for $200,000 of financing at 6% interest (again, assuming no other debts). Up until ’05 it was steadily around 57% of households as incomes were stable. Then in ’06, incomes jumped an impressive 8.5% ($4800) YoY… this yield a 3.8% improvement in households that qualify. It’s important to note that relationship. If we follow the blue line further (it’s conditions are held constant with 25yr ams) we could see another 4.2% ($2600) YoY improvement in incomes in ’07, yielding a 3% improvement in qualifications.

Now we compare that to the effects changes in lending standards had on qualifications. Extending amortizations to 30 years increased qualifications by about 2.6%… 35 years was another 2.4%… and finally 40 years was another 1.5%. So if amortizations were merely lengthened from 25 year to 40 years it would have increased qualifying households by 6.5% in total. In Edmonton that represents about 32,000 households, which is by itself a VERY big one year increase in potential demand.

But again, like the prior measure, it was the interest-only option that blew the doors off. That option rocketed up the qualifying population to 74.4%, an increase of 14.1% over what it was just five months prior, and representing an influx of roughly 69,000 households that wouldn’t have otherwise qualified for that much financing.

Obviously that figures is theoretical, as credit scores would disqualify several, most already own, some aren’t looking, etc etc. So, you can just throw out that 69,000 figure. But assuming standard distribution the percentages should be fairly accurate over what had previously been available… in fact, if anything they’re understated.

You see, typically the required downpayment would be a limiting factor to buying. So, even if one could qualify for sufficient financing to purchase, they still needed to have a downpayment and this kept many potential first time buyers from buying… but one of the first lending requirements stripped was effectively removing the need for downpayments by allowing them to be borrowed. This not only further opened the door, but opened it to much riskier borrowers, ones without a established savings and those without skin in the game.

Obviously that effect can’t be easily quantified, but it was just one more control eliminated that allowed the housing market to bubble out of control. People no longer needed to plan or save to earn the right to buy… they could just pop down to the bank, piggyback a couple loans and have themselves a house. Hell, they didn’t even have to be able to cover closing costs.

That’s why those that argue that the mere absence of widespread “subprime” loans means we’re not in a bubble like the US is missing the forest for the trees. Look at their overall effect… they allowed people to a) borrow more money than they would otherwise have, and b) allowed more people to borrow money. So maybe we didn’t have as many “subprime” loans… instead we just kept lowering the bar for prime until it had the same effect.

They had an influx of new demand, and with it an expanding pool of available financing (of which lowering interest rates only further expanded)… that will heat up real estate markets, and then it just becomes a vicious cycle and feeds itself until all fundamentals have been so far bypassed the only thing supporting the market is it’s own momentum… and when that runs out, Wile E. Coyote meets gravity.

That’s not to say the effect of these new loans, or “innovations” should be ignored, their entrance into the market will certainly an increase in prices and new equilibrium… the problem is they also often cause overheating of the market and drastic overshooting of the that new equilibrium (remember these innovations also come with increased risk).

For example, in Edmonton prior to the boom typically 60% of households could finance and amount equal to the median home value in the, city and that number was steady for many years… at the peak even using the most exotic financing arrangements, only 39% could. If you limited to the loosest of what is offered today after the feds tightened standards that would drop to 36%. A very big shift, and unsustainable.

Today with “emergency” interest rates and prices having fallen from the peak and figuring in continued income growth the median home can currently be financed by about 50% of households. Better than it was, but still a ways to go before getting back to 60%… and interest rates shoot up much (even back to historical norms) it would take a great big bite out of that improvement (not to mention if amortizations get shortened to 30 years or tighten up downpayment rules).

The exact causes here may have varied between nations in name, but the effects were all the same. One must focus on the big picture and not tiny details. The lending bar was lowered… the amount of available credit exploded… demand explodes… supply is pinched short term… prices start rising… and the bubble becomes self feeding. Then add to that our human behavioural economics… mob mentality, speculation, irrational exuberance, etc, and it’s a lethal brew.

About the only thing that actually is different here is we don’t have to worry about our entire financial system collapsing as a result of the housing bubble popping… you see, the taxpayers have been on the hook for this one all along. Lucky us!

15 comments

Thursday, November 12, 2009

Fixed vs. Variable

Filed Under: Canada, Mortgages

This has been a much requested topic, and one I would have touched on sooner but I made the mistake of over-thinking the question initially. It wasn’t until BMO came out with a report last month, that I realized it was far simpler an analysis… in fact, incredibly simple.

Now, obviously all the variables cannot be accounted for as we know banks generally lend variable at rates of prime-plus-, or prime-minus-, thus leaves an infinite number of possible combinations… but with a little intuition we know that whatever the rate is relative to prime would merely result in a shift in data. So, you can use your imagination, we’ll be doing all the calculations using the average five year rate straight against the prime rate.

Here is a look at how the two have moved over time. Obviously track very similarly, though prime is generally lower (but not always). These are spot rates though, and to get an idea of how the two stack up in practice over time we much take into account how they perform relative to each other over their 5 year terms, and even over the entire life of the mortgage.

This is a more useful presentation of the data, comparing the 5-year fixed rate at any given moment against the moving-average of prime over the next five years. You’ll notice it is remarkably similar to the graph from the BMO report, that’s cause it’s the exact same data, except their’s only goes back to 1975.

As we can see, in general variable has provided the more beneficial choice the vast majority of the time, as BMO noted, 82% of the time since ’75, even higher at 89% going back to ’51… and it has exclusively been the better choice since 1987. That is not surprising though, as rates have going down generally since 1981.

The times fixed has been the better option has been during periods immediately proceeding large spikes in interest rates. Beyond that, during periods of generally rising rates (the period up to 1981) even when fixed is the less preferable option, it tracks much closer to how variable performs.

So, as rates have for all intents and purposes hit absolute bottom, such info is worth considering going forward as rates are sure to rise above current levels in the years to come. That goes for whether you’re buying, or if your mortgage is coming up for renewal. This may be an ideal time to hedge your bets and go fixed, at least while rates are still near record lows.

Here is a bit of a different perspective of the previous data. Any time the line goes into the red area, fixed was the cheaper option… conversely, when it’s in the yellow, variable was the cheaper option.

We kind of already discussed this, but this just gives you an idea of the proportional difference in these cases. It went as high as 4.4% into fixeds favour, and as low as 8.8% into variables. Over the presented period, the average was -1.33%, and median of -1.14%, both in favour of variable.

So, on average there is certainly something to be gained by going variable, but it’s usually only a 1-1.5% advantage. So in times of uncertainty, such as now, you need to carefully weigh the potential positives and negatives of either route when you make a call like this.

This is another take, assuming if a person went fixed or variable at the start, they stayed with it through the remaining renewals for the full life of the mortgage. Here we can see how payment advantages from prior periods can compound over time. This is because at different rates, you also pay off different amounts of principle during any given term (except the final term of course)… basically, the lower the rate, the more principle you will pay off.

So if you make the right choice in one period, it will pay off for the remaining life of the mortgage… conversely if you got the other way, you’ll be paying for it for the rest of the mortgages life. This measure is a measure of how much is saved relative to the more costly option.

We can see that over 25 years (five terms) the scale of the advantage is much larger. Going as far as 28% in favour of variable. But again, remember this is over periods when the majority of the life of the mortgage would be while rates on going down.

We’re not in that situation today, in all likelihood rates are heading up at least a point or two in coming years, thus, pay particular attention to the data in the 50′s and early 60′s when in a similar situation. During that period, the results were much more mixed.

The dotted area is of mortgages and/or terms have not year completed, and the further right you go, the younger the mortgage, and thus the more the data will respond to future data. Those plots/figures have not been included in any figures I’ve discussed, they’re just there in case you were interested in such things.

Finally I just threw this one in for shits and giggles, this is what they’d look like if we had 30-year fixed rates like they do in the US, rather then our preference for the 5-year terms. This is using the Canadian data as I’m too lazy to look up the US numbers, and from experience their 30-year rates are close, if not often lower then our 5-year rates (no wonder our banks are so profitable huh?!) and prime would be very similar.

We can see here the results are more muted then the prior graph. During periods of increasing rates, fixed performs better, and during ones of lowering rates, variable does. No surprise, that’s what intuition would suggest.

I know real estate is still ugly in the states, but you gotta figure in a lot markets prices have returned to their long term trendlines, if not dipped below. That combined with this current interest rate environment, there may never be a better time to buy if you’re a potential first-time buyer south of the border. Even if prices slide a bit further, you’ve locked in at a sweetheart rate, and thus probably still better off.

We north of the border on the other hand, are at the opposite end of the curve, still near the top (or in some cities, right at it) of the bubble. We still have a world of hurt to come before we return to market conditions that are ripe for those looking to enter the market, buying in now is more a debt trap then anything.

Anyway, hope this answered some of your questions about the historical performances of fixed vs. variable rates. But, if you have any more, fire away!

7 comments

Wednesday, August 19, 2009

Albertan’s continuing to fall behind

Filed Under: Foreclosures, Mortgages

Sorry, this will be a bit of a quick one, I’ve been crazy busy, so the blogging is a luxury I don’t really have time for… that’s why the updates are going to be a little slow coming the next couple weeks. Anyway, the CBA released their latest (June) mortgage arrears figures… and no surprise, we’re up again and have now eclipsed the 0.60% mark.

That’s up from 0.58% last month, and 0.26% a year ago. Even the low interest rates and resulting hot housing market in June couldn’t reverse the alarming trend in arrears, as we again draw closer to the previous high water mark of 0.69%.

Nationally arrears stand at 0.42%. Alberta continues to extend it’s ‘lead’ as the next highest rates were in Atlantic Canada and Ontario where they held from May and came in at 0.46% and 0.43% respectively. Saskatchewan now has sole possession of the lowest rate at 0.22%, and Manitoba is next at 0.25%.

13 comments

Monday, July 27, 2009

Arrears continue ascent

Filed Under: Foreclosures, Mortgages

Had been preparing an update on the affordability numbers, but then noticed the latest arrears figures were out, so we’ll knock that one out first and leave affordability for later this week.

As the title implies, there has been no slowing this spring, and as of May we were up to 0.58%, up from 0.25% a year ago, and 0.54% in April. Also getting increasingly removed from the long term average of 0.37% and nearing the record heights reached hit 1997 (0.69%).

It will be interesting to see if the increased sales in June will have any effect on these figures. Obviously the strong sales in May did not appear to, but we should also remember the full effects of the the employment turmoil in the new year were really starting to show up.

Lets take a look at the rest of the nation. Obviously looks to be in a league of their own at the moment, particularly isolating the West. Saskatchewan and Manitoba continue to enjoy the lowest rate in Canada, coming in at 0.23% and 0.24% respectively.

B.C. will be interesting to watch, and their numbers are really starting to pick up since prices started going down there, and it would not surprise me in the least if they are soon tracking very similar to Alberta, and eventually even worse. As bad as it may have got here, the affordability factor there is/was MUCH worse.

In the East, everyone has seen increases since the financial crisis, but much more gradually. Here I’d say Ontario will be interesting to watch going forward considering the hit the manufacturing core has taken.

So, that’s about it for today, should give you guys something to do if you can tear yourself away from JK Wedding Entrance Dance. Gotta admit, even as a person with a cold black heart, and whom hates few things as much as weddings and dancing… even I must admit there is a certain undeniable charm about that video. Any who, now back to more manly things, like sports, scratching and beer.

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Friday, June 26, 2009

Arrears… in arrears

Filed Under: Foreclosures, Mortgages

The sad state of the news media really hit home this week… literally it seems for me. I’ve been pointing out how the real estate groups have been plastering their ads all over the place, and also seem to get some to get more then their fair share of favourable press as a result.

Well, it isn’t just real estate that gets such treatment.

I usually try to watch the six o’clock local CTV news, or at least have it in the background. Well, Monday I was surprised to see an ad for the Town of Westlock displayed prominently. Normally such things may have gone overlooked, but as I grew up in the area, this caught my attention.

And what do you know, the very next night, the CTV news had a great big puff piece on the Town of Westlock. So, that’s about as much circumstancial evidence as I need to convict on charges that buying ad time is all one needs to do to get your ass kissed publicly.

Not that Westlock isn’t a wonderful town, it is… if you’re looking to score drugs. So yeah, it’s a bit of a shithole, but I say that with love… and just to show I haven’t forgotten my roots, it’s not half the shithole Barrhead is!

Ahh… the pathetic state of main stream media. Anyway, enough babbling, on to the real show.

So, as my faithful readers already know, I’ve been tracking the mortgage in arrears figures for a few months now. Usually I’m right on top of it… and usually there release if greeted with a great big ‘Meh’ from the media.

Of course, this has been the month from hell at work for me, so while I did mention these numbers last week in the comments I didn’t get around to doing a full post until tonight… and because of Murphy’s Law, earlier this week suddenly Alberta having the highest arrears rate in the country was of course suddenly news… even despite our knowing this two months ago… and now to all the googlers out there now I look like a follower, those farkin’ sneaky bastages!

As has been the trend, arrears rates in Alberta continue to shoot up at a rather high pace. As of April the rate stood at 0.54%, up from 0.50% in March and 0.24% a year earlier.

As mentioned, this is the highest in the nation, and by a growing margin, Atlantic Canada in the next highest region coming in at 0.45%. Nationally the rate is 0.40%, and Saskatchewan has the lowest rate at 0.21%.

It is worth noting that apparently only about 60% of lenders are represented in these arrears figures, and are typically the more established outlets… so the actual figures are probably a bit higher as many of the higher risk outlets are not represented. That said, this data is still pretty good, and should be fairly representative historically.

We’ve been over this before, so if you’re that interested you can search the archives. This month I’m going to do a comparison of how arrears relate to foreclosures.

This is a four month moving average of foreclosures in Edmonton and Calgary from foreclosurescanada.com. Yeah, it’s pretty erratic. If I have time I’ll do it with a moving average and that will clean it up a bit. They do their measure weekly, so some months get four weeks, others five, and it makes things a bit jagged.

Regardless, we can clearly see there was a BIG spike come the 4th quarter of 2008. Now lets compare this to the number of mortgages falling in arrears over the same period. That’s mainly what we’ll be looking at. Oh, and that’s not really an ‘Alberta’ number, that’s just Edmonton and Calgary combined… but it’s late and I’m not gonna fix it, so just keep that in mind. In any case, it’s more the relative values we’re concerned with anyway, and insofar as that goes, this is fine.

Though, it is interesting to note how Calgary is having significantly more foreclosures then Edmonton. Historically Calgary was proportionately higher, but now they’re damn near double. They had largely tracked together, and that they suddenly decouple in the second quarter of 2008 only to resume tracking but at a much lower level… this makes me suspicious of the Edmonton numbers from then on. Very odd, especially considering the market conditions.

Obviously one would expect a correlation, as a mortgage falling three months into arrears will signal the beginning of the foreclosure process. We can see that the upward trend for both started in a small scale in the second half of 2007… no surprise, as that’s when the prices started to fall.

But it wasn’t until 2008 that arrears really started to take off, and decoupled with foreclosures. It’s interesting that while arrears climbed steadily, foreclosures leveled off in the winter of ’09 and then declined in the spring… only to itself rocket up in the fall.

We should probably be wary of this observation (re: foreclosures) in light of our earlier one of Edmonton’s numbers suspiciously dropping at that time, which would account for the drop. Now, if my suspicions are valid, intuition would suggest that the foreclosure level probably would have remain somewhat flat over this time while arrears were still rising… only to eventually shoot up themselves.

Again in 2009, arrears continues to grow, while foreclosures have leveled off… so it will be interesting to see what happens in the second half of ’09 with these figures. There appears that there could be some seasonal differences, while arrears keeps growing, banks for some reason appear less likely to foreclose in the spring… which are typically strong periods for sales and prices, as we’ve seen this year, and last, despite general downward trends.

It’s an interesting observation that the strength of the market doesn’t appear to have near the effect on the mortgage holders as it does the lenders. Mortgage holders appear as likely to fall behind at any time, whereas banks seem less likely to initiate foreclosure when the market is ‘hot’.

It is worth mentioning that I believe these measures are calculated differently. Foreclosures are the numbers instigated over any given four week period… whereas arrears is more an accrued figure consisting of all mortgages that are between 3 months behind on payments or more but not yet foreclosed upon. In other words, a property in arrears may be counted as such for several months, whereas a property in foreclosure will only be counted once.

20 comments