Research released by the Bank of Canada Thursday, not surprisingly suggests that Canada’s largest banks are slow to pass on cuts in the Bank of Canada’s policy interest rate.
“Canadian lenders appear to be extremely slow to pass on changes in the Bank Rate to their customers,” author Jason Allen wrote in the report entitled “Competition in the Canadian Mortgage Market.”
Researchers found that “in the short run, five of the six largest Canadian banks adjust their rates upward more quickly when there are upward cost pressures than downward when costs fall,” he said.
Having market power in Canada, “there is scope for banks to coordinate implicitly or explicitly,” Allen wrote.
If costs rise they all want to increase their prices, but if costs fall they wait before reducing rates “because all the banks can earn higher profits.”
Most Mortgage Brokers agree, calling the banks’ practice of holding off discounting for longer periods “common practice.”
Banks usually lenders hold off until after the end of the month before passing on lower rates because this is when renewal notices for maturing mortgages are printed and issued in advance of the maturity date.
“Renewal notices with a higher rate printed on them provide the illusion of a potentially bigger discount that can be offered to the client – a client who most times does not want to put in the effort in the mortgage transfer process.”
Rick Moran, Senior Mortgage Consultant with Invis, adds: “Great Advantage is taken of those clients that assume they are being offered the best rate at the time. We must educate the consumers to shop – contact your expert Mortgage Broker”.
Dave Larock, a broker with Integrated Mortgage Planners-TMG in Toronto said there is another group affected – borrowers who are just about to close their mortgage transaction. “Since most rate drop policies are in effect until seven days prior to closing, it is this group that misses the savings if rate drops are delayed,” he said. “From a lender’s perspective, this group is not very rate sensitive because they are so close to their funding date that switching lenders is usually not feasible, while mortgage applicants who are earlier in the process will eventually receive the lower rate through any standard rate-drop policy, provided that the rate decrease is sustained.”
The research also indicated that borrowers who use a mortgage broker pay less, on average, than borrowers who negotiate with lenders directly. This average discount is about an additional 19 basis points.
“The conclusions of the report are very reasonable,” said Jim Murphy, president and CEO of CAAMP. “They coincide with our own research at CAAMP on discounts. Mortgage brokers play a key role in offering choice to borrowers when making their most important financial decision.”
Larock said he agrees with the paper’s overall premise that more lending competition leads to better rates and choice for consumers and that in today’s market banks can coordinate implicitly or explicitly. “That’s just the nature of an oligopoly,” he said. “If Canada’s big banks were allowed to merge they would increase their market muscle at the customer’s expense. We need more lenders, not fewer.”
The report stated that Canada’s mortgage market represents “almost 40 per cent of total outstanding private sector credit, BOC researchers said in the quarterly Financial System Review.” It is dominated by the nation’s six major national banks plus a large credit union, the Desjardins Movement, and the Alberta province-owned ATB Financial.
The “Big Eight” controls 90 per cent of the assets in the banking industry. All offer the same types of mortgage assets, the great bulk of these being guaranteed by the federal government’s Canada Mortgage and Housing Corporation.
“The Canadian mortgage market is relatively simple and conservative, particularly when compared with its U.S. counterpart,” the report stated. “Many Canadians sign five-year, fixed-rate contracts for the life of the mortgage -- typically 25 years.”
Bruno Valko, director, national sales for Resmor Trust said there is an advantage because the mortgage broker marketplace is not dominated by a few big players.
“In the broker/wholesale channel, there’s more competition and lenders will move quicker to lower rates and attract business when the opportunity presents itself,” he said. “Furthermore, the scale of product offerings is greater, so in the event a person doesn’t qualify at the Big Eight, a broker can potentially offer solutions.
“And if we agree that the broker/wholesale channel moves quicker to lower rates when the opportunity presents itself, that's another advantage for consumers to choose mortgage brokers.”
Rick Moran, AMP, OMB # M08001997
Wednesday, February 23, 2011
Friday, February 11, 2011
Inside Mortgage Investment Corporations (MICs)
Some believe Mortgage Investment Corporations (MICs) are one of the best undiscovered income-producing investments in Canada.
We wanted to investigate that a bit, so we took the opportunity to chat with one of the pioneers of the Canadian MIC industry, Wayne Strandlund.
Wayne is the founder and CEO of $250 million Fisgard Capital Corporation. Fisgard is one of Canada’s larger MICs. Over the past 16 years, Fisgard has placed over $50 million in mortgages each year, and paid dividends averaging 10.79% net per year to its investors.
Here’s part one of a two-part interview…
Intro to MICs
Before we begin, let’s define what a MIC is.
A MIC is an investment that lets people pool their money to be lent out as mortgages. 100% of the net profits from those mortgages flow through to the investors.
MICs have been around since 1973 when federal legislation was enacted to promote private financing and make it easier to invest in mortgages.
MICs are one of the lesser known asset classes, despite yielding solid long-term returns and despite being RRSP, TFSA, RRIF and RESP eligible in most cases.
************
Q: To what extent would you say MICs are an undiscovered or underrated asset class in Canada?
Wayne: The MIC was established by federal legislation in 1973 but it didn’t take hold until the mid ‘90s when it really started to take off, principally because it was the most accommodating investment structure to replace mortgage syndication. Mortgage syndication had been damaged by a number of debacles at the time, most notable of which was ‘Eron.’ Eron had lost millions worth of investor money.
Thanks to the MIC, instead of owning a syndicated (often unregistered) interest in a mortgage, investors could now be shareholders in a non-taxed flow-through entity. MICs, with their strict audit and reporting regulations, are a more streamlined, transparent and effective way of investing in mortgages and real estate.
Early MIC managers didn’t give much thought to the MIC structure beyond its facility to raise investment money. Their focus was predominately raising capital not only through cash investment but also through various registered retirement and savings trusts such as the RRSP, RRIF, DPSP, LIF, LRIF, LIRA, IPP and RESP. Today we also have the TFSA and RDSP.
The MIC flourished after 1995. Today there are hundreds of MICs in Canada. Some have as little as $1 million capital, and are essentially “convenience MICs” of maybe twenty or so shareholders. You might find those MICs in real estate offices, for example, where their main function is to facilitate sales for the office’s marketing staff.
On the other end of the spectrum are the larger MICs which are basically mortgage banks with hundreds of millions of dollars and thousands of shareholders.
The MIC is now fairly well established, but underrated as an investment asset class. Not being particularly well suited to public trading, MICs have not been recognized by financial advisors and stock and mutual fund traders who prefer investments that are publicly traded and generate fees and commissions.
This lack of attention has nothing to do with the quality, security and dividend production of the MIC.
Q: What are the biggest differences between MICs today and MICs 15 years ago?
Wayne: Today there are many more MICs struggling for a share of a market that is not growing in lock-step with the increasing amount of mortgage money available through MICs as well as institutional lenders.
Fifteen years ago it was easier for a MIC to place money in secure mortgages than it is today. Competition for good mortgages is fierce, and growing.
MICs are practicing the same type of lending they were fifteen years ago. Despite the intense competition for quality mortgages and the recent global recession, most MICs have done well for investors. Yet, they have not received the recognition they deserve, despite outperforming many investments in terms of capital preservation and dividends. The MIC is still a niche investment, not well known or understood.
Securities regulation NI 31-103 was introduced in 2008 and made law in September 2010. It is too early to say, but I believe the new regulation will change the MIC industry. It could be that small MICs may not be able to meet the onerous requirements of the new regulation, including increased capital, bonding, disclosure, compliance and so forth, and simply close shop, or merge in order to survive.
The reasons for NI (National Instrument) 31-103 are still being hotly debated and rationalized based on whose ox is being gored, the small MIC struggling to raise a bit of capital or a giant bank’s brokerage house that is not particularly fond of anyone else playing in what the bank sees as its very own sandbox (the world’s investment money). At any rate it appears that the capital-raising field has been levelled by NI 31-103 and MICs as well as their managers and investment referral agents must now meet strict regulatory standards in order to raise capital through public markets. The positive outcome is that qualifying MICs will now become “institutionalized” in the eyes of the public, and will benefit from the legitimacy that comes with achieving new levels of licensing and registration. Short term pain, long term gain.
Q: From a general risk and return standpoint how would you say investing in a MIC compares to investing in (for example) a rental property, assuming the same dollar investment?
Wayne: A rental property may appreciate in value and may experience the tax advantages of depreciation and other expense allowances. A MIC is a “flow through” investment and, in fact, the MIC must distribute 100% of its net profit to its investors every year. It is not designed to accumulate profit and is not likely to increase in value as a rental property might.
While a rental property is likely to be an active investment involving hands-on management, the MIC is more a passive investment. It simply flows dividends through to its investors, in whose hands the dividends are treated as interest income for tax purposes. The MIC sometimes, but rarely, flows capital gains or losses through to its investors.
A MIC is likely to be purchased at a nominal $1 per share, for example, and end at a $1 redemption or wind-up value. It will provide dividend income throughout the investment period. In exceptional circumstances the MIC might experience a capital gain if, for example, the MIC buys a property or forecloses on a property, takes it into inventory, and sells it at a profit. The MIC may flow capital gains – and capital losses – to its investors, but these are relatively rare occurrences.
As stated, dividends paid to MIC investors are treated as interest income for tax purposes. Income from a rental property is taxed differently depending, for instance, on whether it is held personally or in a corporation. Investors should consult tax experts when choosing between a MIC and a real estate investment, such as rental property.
Q: Are there any major 3rd party distribution channels for the MIC? For example, do any big banks or investment brokers sell them to clients? If not, why not?
Wayne: To date most MICs have raised capital themselves with negligible support from financial planners, advisors and brokers. Most MICs do not trade on the public market, and therefore do not attract the attention of brokers who make a living through fees based on trading volume.
Also, most MICs raise capital by way of Offering Memorandum as opposed to Prospectus. This precludes certain investment firms from investing in them as a matter of policy.
Q: Will returns suffer going forward as more investors throw money at MICs, and as more MICs and private money join the fray?
“If there is a crisis of money in Canada, it is not that we don’t have enough, but that there are too few simple, understandable and reliable places in which to invest it.”
Wayne: MIC returns are normalizing. The high private interest rates that have fuelled double-digit MIC returns for nearly two decades are not sustainable in the borrowing world at the present time, particularly with the slowdown in construction and development which is traditionally an active lending market for several MICs.
Not only will MIC returns normalize due – at least temporarily – to a shrinking market for mortgage money, but also because more money is choosing the MIC investment resulting in what might turn out to be an over-supply in some cases.
The MIC’s advantage is that the average investor understands what real estate is and what a mortgage is. Investors appreciate that a MIC investment is uniquely Canadian and secured by real property located only in Canada. These are simple important facts that make the MIC such a comfortable, easy-to-understand “investment” compared to the thousands of impossibly complex financial products being pedaled daily on the public market. Simplicity is one of the MIC’s most popular attributes.
The law of supply and demand will prevail, and borrowing rates (hence MIC returns) will be influenced not only by bond yields but also by the sheer volume of money now seeking the relative safety of mortgages secured by Canadian real estate property. If there is a crisis of money in Canada, it is not that we don’t have enough, but that there are too few simple, understandable and reliable places in which to invest it.
Real estate – the mortgage security – is one of the last bastions of conservative long-term investing, and there is no indication of this changing any time soon. We may look for the MIC to become very popular as a mainstream investment and special purpose lender.
Q: Do you foresee more distribution channels evolving for MICs in the future?
Wayne: Yes. The world of Exempt Market Products – which includes qualifying MICs – is poised for growth. NI 31-103 will have the effect of institutionalizing MICs and MIC managers that meet the new requirements. As a result a broader spectrum of the investment community will invest in MICs, regardless of whether they are publicly traded or not. The so-called ‘liquidity’ touted by stock and mutual fund brokers is not what it’s cracked up to be, and more and more investors now realize that it’s much too expensive. Good old-fashioned fixed term investments are trumping liquidity in many cases.
Exempt Market Products are about to experience wide acceptance and popularity amongst mainstream investment dealers. EMPs are no longer the poor cousins of publicly traded stocks and mutual funds. The popularity of the MIC as an Exempt Market Product is growing and attracting the attention of institutional investors. The credibility of the MIC is greater than it has ever been.
Q: What would you consider a high default (impaired loan) rate on a typical Canadian MIC? (e.g. 2%?)
Wayne: MIC lending is private as opposed to conventional lending, so risk and reward must be viewed from that perspective.
The number of impaired mortgages as a percentage of the total number of mortgages in a MIC at any given time is one consideration.
The dollar volume of impaired mortgages as a percentage of the total dollar volume of the portfolio is another.
The level of impairment is also a consideration. For example, an NSF cheque is one level, non-payment of property taxes, insurance or strata fees is another, and non-payment of the mortgage on maturity yet another.
Ten percent of the number of mortgages in a portfolio (e.g. 40 out of 400 mortgages) is probably an acceptable ratio on the impairment scale, erring on the high side.
Five percent of the dollar volume (e.g. $25 million out of $500 million) is also on the high side. Impairment doesn’t mean a loss of interest or capital. At any time a MIC may have 10% of its loans in an impaired state, but that does not mean it will lose 10% of its capital. It may not lose any capital.
Impairment level takes into account the composition and relative risk of a MIC’s mortgages, and risks vary from one MIC to another. Some MICs underwrite conventional 1st mortgages (including insured mortgages), some MICs underwrite more risky 2nd mortgages, and some MICs underwrite the full spectrum of mortgages: 1sts, 2nds, land development, construction, mezzanine financing, and so forth. It is difficult to assign impairment ratios without carefully considering the portfolio mix. It’s the degree of impairment that one must consider.
************
Rick Moran, AMP, OMB # M08001997
We wanted to investigate that a bit, so we took the opportunity to chat with one of the pioneers of the Canadian MIC industry, Wayne Strandlund.
Wayne is the founder and CEO of $250 million Fisgard Capital Corporation. Fisgard is one of Canada’s larger MICs. Over the past 16 years, Fisgard has placed over $50 million in mortgages each year, and paid dividends averaging 10.79% net per year to its investors.
Here’s part one of a two-part interview…
Intro to MICs
Before we begin, let’s define what a MIC is.
A MIC is an investment that lets people pool their money to be lent out as mortgages. 100% of the net profits from those mortgages flow through to the investors.
MICs have been around since 1973 when federal legislation was enacted to promote private financing and make it easier to invest in mortgages.
MICs are one of the lesser known asset classes, despite yielding solid long-term returns and despite being RRSP, TFSA, RRIF and RESP eligible in most cases.
************
Q: To what extent would you say MICs are an undiscovered or underrated asset class in Canada?
Wayne: The MIC was established by federal legislation in 1973 but it didn’t take hold until the mid ‘90s when it really started to take off, principally because it was the most accommodating investment structure to replace mortgage syndication. Mortgage syndication had been damaged by a number of debacles at the time, most notable of which was ‘Eron.’ Eron had lost millions worth of investor money.
Thanks to the MIC, instead of owning a syndicated (often unregistered) interest in a mortgage, investors could now be shareholders in a non-taxed flow-through entity. MICs, with their strict audit and reporting regulations, are a more streamlined, transparent and effective way of investing in mortgages and real estate.
Early MIC managers didn’t give much thought to the MIC structure beyond its facility to raise investment money. Their focus was predominately raising capital not only through cash investment but also through various registered retirement and savings trusts such as the RRSP, RRIF, DPSP, LIF, LRIF, LIRA, IPP and RESP. Today we also have the TFSA and RDSP.
The MIC flourished after 1995. Today there are hundreds of MICs in Canada. Some have as little as $1 million capital, and are essentially “convenience MICs” of maybe twenty or so shareholders. You might find those MICs in real estate offices, for example, where their main function is to facilitate sales for the office’s marketing staff.
On the other end of the spectrum are the larger MICs which are basically mortgage banks with hundreds of millions of dollars and thousands of shareholders.
The MIC is now fairly well established, but underrated as an investment asset class. Not being particularly well suited to public trading, MICs have not been recognized by financial advisors and stock and mutual fund traders who prefer investments that are publicly traded and generate fees and commissions.
This lack of attention has nothing to do with the quality, security and dividend production of the MIC.
Q: What are the biggest differences between MICs today and MICs 15 years ago?
Wayne: Today there are many more MICs struggling for a share of a market that is not growing in lock-step with the increasing amount of mortgage money available through MICs as well as institutional lenders.
Fifteen years ago it was easier for a MIC to place money in secure mortgages than it is today. Competition for good mortgages is fierce, and growing.
MICs are practicing the same type of lending they were fifteen years ago. Despite the intense competition for quality mortgages and the recent global recession, most MICs have done well for investors. Yet, they have not received the recognition they deserve, despite outperforming many investments in terms of capital preservation and dividends. The MIC is still a niche investment, not well known or understood.
Securities regulation NI 31-103 was introduced in 2008 and made law in September 2010. It is too early to say, but I believe the new regulation will change the MIC industry. It could be that small MICs may not be able to meet the onerous requirements of the new regulation, including increased capital, bonding, disclosure, compliance and so forth, and simply close shop, or merge in order to survive.
The reasons for NI (National Instrument) 31-103 are still being hotly debated and rationalized based on whose ox is being gored, the small MIC struggling to raise a bit of capital or a giant bank’s brokerage house that is not particularly fond of anyone else playing in what the bank sees as its very own sandbox (the world’s investment money). At any rate it appears that the capital-raising field has been levelled by NI 31-103 and MICs as well as their managers and investment referral agents must now meet strict regulatory standards in order to raise capital through public markets. The positive outcome is that qualifying MICs will now become “institutionalized” in the eyes of the public, and will benefit from the legitimacy that comes with achieving new levels of licensing and registration. Short term pain, long term gain.
Q: From a general risk and return standpoint how would you say investing in a MIC compares to investing in (for example) a rental property, assuming the same dollar investment?
Wayne: A rental property may appreciate in value and may experience the tax advantages of depreciation and other expense allowances. A MIC is a “flow through” investment and, in fact, the MIC must distribute 100% of its net profit to its investors every year. It is not designed to accumulate profit and is not likely to increase in value as a rental property might.
While a rental property is likely to be an active investment involving hands-on management, the MIC is more a passive investment. It simply flows dividends through to its investors, in whose hands the dividends are treated as interest income for tax purposes. The MIC sometimes, but rarely, flows capital gains or losses through to its investors.
A MIC is likely to be purchased at a nominal $1 per share, for example, and end at a $1 redemption or wind-up value. It will provide dividend income throughout the investment period. In exceptional circumstances the MIC might experience a capital gain if, for example, the MIC buys a property or forecloses on a property, takes it into inventory, and sells it at a profit. The MIC may flow capital gains – and capital losses – to its investors, but these are relatively rare occurrences.
As stated, dividends paid to MIC investors are treated as interest income for tax purposes. Income from a rental property is taxed differently depending, for instance, on whether it is held personally or in a corporation. Investors should consult tax experts when choosing between a MIC and a real estate investment, such as rental property.
Q: Are there any major 3rd party distribution channels for the MIC? For example, do any big banks or investment brokers sell them to clients? If not, why not?
Wayne: To date most MICs have raised capital themselves with negligible support from financial planners, advisors and brokers. Most MICs do not trade on the public market, and therefore do not attract the attention of brokers who make a living through fees based on trading volume.
Also, most MICs raise capital by way of Offering Memorandum as opposed to Prospectus. This precludes certain investment firms from investing in them as a matter of policy.
Q: Will returns suffer going forward as more investors throw money at MICs, and as more MICs and private money join the fray?
“If there is a crisis of money in Canada, it is not that we don’t have enough, but that there are too few simple, understandable and reliable places in which to invest it.”
Wayne: MIC returns are normalizing. The high private interest rates that have fuelled double-digit MIC returns for nearly two decades are not sustainable in the borrowing world at the present time, particularly with the slowdown in construction and development which is traditionally an active lending market for several MICs.
Not only will MIC returns normalize due – at least temporarily – to a shrinking market for mortgage money, but also because more money is choosing the MIC investment resulting in what might turn out to be an over-supply in some cases.
The MIC’s advantage is that the average investor understands what real estate is and what a mortgage is. Investors appreciate that a MIC investment is uniquely Canadian and secured by real property located only in Canada. These are simple important facts that make the MIC such a comfortable, easy-to-understand “investment” compared to the thousands of impossibly complex financial products being pedaled daily on the public market. Simplicity is one of the MIC’s most popular attributes.
The law of supply and demand will prevail, and borrowing rates (hence MIC returns) will be influenced not only by bond yields but also by the sheer volume of money now seeking the relative safety of mortgages secured by Canadian real estate property. If there is a crisis of money in Canada, it is not that we don’t have enough, but that there are too few simple, understandable and reliable places in which to invest it.
Real estate – the mortgage security – is one of the last bastions of conservative long-term investing, and there is no indication of this changing any time soon. We may look for the MIC to become very popular as a mainstream investment and special purpose lender.
Q: Do you foresee more distribution channels evolving for MICs in the future?
Wayne: Yes. The world of Exempt Market Products – which includes qualifying MICs – is poised for growth. NI 31-103 will have the effect of institutionalizing MICs and MIC managers that meet the new requirements. As a result a broader spectrum of the investment community will invest in MICs, regardless of whether they are publicly traded or not. The so-called ‘liquidity’ touted by stock and mutual fund brokers is not what it’s cracked up to be, and more and more investors now realize that it’s much too expensive. Good old-fashioned fixed term investments are trumping liquidity in many cases.
Exempt Market Products are about to experience wide acceptance and popularity amongst mainstream investment dealers. EMPs are no longer the poor cousins of publicly traded stocks and mutual funds. The popularity of the MIC as an Exempt Market Product is growing and attracting the attention of institutional investors. The credibility of the MIC is greater than it has ever been.
Q: What would you consider a high default (impaired loan) rate on a typical Canadian MIC? (e.g. 2%?)
Wayne: MIC lending is private as opposed to conventional lending, so risk and reward must be viewed from that perspective.
The number of impaired mortgages as a percentage of the total number of mortgages in a MIC at any given time is one consideration.
The dollar volume of impaired mortgages as a percentage of the total dollar volume of the portfolio is another.
The level of impairment is also a consideration. For example, an NSF cheque is one level, non-payment of property taxes, insurance or strata fees is another, and non-payment of the mortgage on maturity yet another.
Ten percent of the number of mortgages in a portfolio (e.g. 40 out of 400 mortgages) is probably an acceptable ratio on the impairment scale, erring on the high side.
Five percent of the dollar volume (e.g. $25 million out of $500 million) is also on the high side. Impairment doesn’t mean a loss of interest or capital. At any time a MIC may have 10% of its loans in an impaired state, but that does not mean it will lose 10% of its capital. It may not lose any capital.
Impairment level takes into account the composition and relative risk of a MIC’s mortgages, and risks vary from one MIC to another. Some MICs underwrite conventional 1st mortgages (including insured mortgages), some MICs underwrite more risky 2nd mortgages, and some MICs underwrite the full spectrum of mortgages: 1sts, 2nds, land development, construction, mezzanine financing, and so forth. It is difficult to assign impairment ratios without carefully considering the portfolio mix. It’s the degree of impairment that one must consider.
************
Rick Moran, AMP, OMB # M08001997
Canadian Real Estate Association Changes 2011 Forecast
Canadian Real Estate Association Changes 2011 Forecast
Canadian home sales this year will be better than previously thought, helped by improving consumer confidence that will partially offset the anticipated deterrent of interest rate hikes, the Canadian Real Estate Association predicts.
CREA released a revised forecast Tuesday that estimates there will be 439,900 existing homes sold in 2011, down 1.6 per cent from 2010, but better than the nine per cent decline that CREA had forecast at the end of last year.
The real-estate association is also taking a more positive view of pricing, with the national average price now expected to rise by 1.3 per cent in 2011 to $343,300. CREA had earlier predicted that the national average home price in 2011 would fall by 1.3 per cent from last year to $326,000.
CREA's January sales data won't be released until next week. But recent reports on building permits and housing starts -- two indicators of how much new housing will be available for sale in future -- indicate a measured start to 2011.
Canada Mortgage and Housing Corp. reported Tuesday that the pace of new-home construction in Canada increased slightly last month, rising to 170,400 units, up from 169,000 in December on a seasonally adjusted annual rate.
That puts the country on a pace for about 10 per cent fewer housing starts than last year.
Krishen Rangasamy, an economist at CIBC World Markets said housing starts will likely soften over the coming months as home prices moderate and the Bank of Canada resumes its tightening cycle by mid-year.
A moderation in housing starts is a sign that supply is contracting in line with reduced demand, which could avoid an unhealthy glut of available houses on the market if demand declines when interest rate hikes are announced.
Some economists have warned that a combination of higher interest rates and new mortgage rules that go into effect March 18 could put a chill on demand in the later months of this year.
CREA predicted Tuesday that some sales that would have been made later in the year will likely occur in the first quarter, as a result of the new rules. A previous change in mortgage rules last year contributed to extremely strong first-quarter demand as buyers sought to beat the deadline.
"This is expected to produce a milder version of the volatility in sales activity that we saw last year which resulted from additional transitory factors," said CREA's chief economist Gregory Klump.
Last year, sales were also pushed ahead to the first part of the year as buyers in two provinces -- British Columbia and Ontario -- rushed to avoid a switch to the harmonized sales tax on July 1.
Those factors exacerbated the effect of interest rate hikes last summer and the market reached a trough in July.
Robust first quarter expected
Following last year's pattern, sales will likely be robust in the first quarter as buyers enter the market before the tighter mortgage rules take effect and then drop off in the second quarter.
However, CREA predicts that the market will gain traction in the second half of this year as economic conditions, job and income growth and consumer confidence improve, in contrast to 2010 when economic growth softened.
"Even though mortgage interest rates are expected to rise later this year, they will still be within short reach of current levels and remain supportive for housing market activity. Strengthening economic fundamentals will keep the housing market in balance, which will keep home prices stable," Klump said.
The Bank of Canada has forecast that housing will be a minor net negative for the economy this year, although it also cautions the market is a potential key downside risk for the economy.
It is expected to maintain its key lending rate at a low one per cent until at least the second half of the year, as some global economic uncertainty lingers. The key lending rate has the most immediate impact on variable-rate mortgages whereas home owners with fixed-rate mortgages won't be affected until renewal time.
The Royal Bank, CIBC and TD said this week they are raising the posted rate for a five-year closed mortgages by 0.25 percentage points to 5.44 per cent.
I remain your best option with 5 year funds available at 3.99%.
Rick Moran, AMP, OMB#M08001997
Canadian home sales this year will be better than previously thought, helped by improving consumer confidence that will partially offset the anticipated deterrent of interest rate hikes, the Canadian Real Estate Association predicts.
CREA released a revised forecast Tuesday that estimates there will be 439,900 existing homes sold in 2011, down 1.6 per cent from 2010, but better than the nine per cent decline that CREA had forecast at the end of last year.
The real-estate association is also taking a more positive view of pricing, with the national average price now expected to rise by 1.3 per cent in 2011 to $343,300. CREA had earlier predicted that the national average home price in 2011 would fall by 1.3 per cent from last year to $326,000.
CREA's January sales data won't be released until next week. But recent reports on building permits and housing starts -- two indicators of how much new housing will be available for sale in future -- indicate a measured start to 2011.
Canada Mortgage and Housing Corp. reported Tuesday that the pace of new-home construction in Canada increased slightly last month, rising to 170,400 units, up from 169,000 in December on a seasonally adjusted annual rate.
That puts the country on a pace for about 10 per cent fewer housing starts than last year.
Krishen Rangasamy, an economist at CIBC World Markets said housing starts will likely soften over the coming months as home prices moderate and the Bank of Canada resumes its tightening cycle by mid-year.
A moderation in housing starts is a sign that supply is contracting in line with reduced demand, which could avoid an unhealthy glut of available houses on the market if demand declines when interest rate hikes are announced.
Some economists have warned that a combination of higher interest rates and new mortgage rules that go into effect March 18 could put a chill on demand in the later months of this year.
CREA predicted Tuesday that some sales that would have been made later in the year will likely occur in the first quarter, as a result of the new rules. A previous change in mortgage rules last year contributed to extremely strong first-quarter demand as buyers sought to beat the deadline.
"This is expected to produce a milder version of the volatility in sales activity that we saw last year which resulted from additional transitory factors," said CREA's chief economist Gregory Klump.
Last year, sales were also pushed ahead to the first part of the year as buyers in two provinces -- British Columbia and Ontario -- rushed to avoid a switch to the harmonized sales tax on July 1.
Those factors exacerbated the effect of interest rate hikes last summer and the market reached a trough in July.
Robust first quarter expected
Following last year's pattern, sales will likely be robust in the first quarter as buyers enter the market before the tighter mortgage rules take effect and then drop off in the second quarter.
However, CREA predicts that the market will gain traction in the second half of this year as economic conditions, job and income growth and consumer confidence improve, in contrast to 2010 when economic growth softened.
"Even though mortgage interest rates are expected to rise later this year, they will still be within short reach of current levels and remain supportive for housing market activity. Strengthening economic fundamentals will keep the housing market in balance, which will keep home prices stable," Klump said.
The Bank of Canada has forecast that housing will be a minor net negative for the economy this year, although it also cautions the market is a potential key downside risk for the economy.
It is expected to maintain its key lending rate at a low one per cent until at least the second half of the year, as some global economic uncertainty lingers. The key lending rate has the most immediate impact on variable-rate mortgages whereas home owners with fixed-rate mortgages won't be affected until renewal time.
The Royal Bank, CIBC and TD said this week they are raising the posted rate for a five-year closed mortgages by 0.25 percentage points to 5.44 per cent.
I remain your best option with 5 year funds available at 3.99%.
Rick Moran, AMP, OMB#M08001997
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