The Real Estate is an industry with a high turnover rate (statistics flying around range from between 50 and 70 per cent dropout rate within the first few years). In Vancouver, REALTORS in the industry replaces itself every 5 years, mind you the top 10% remain fairly constant. I have just completed my third calendar year in the business, with over 100 successful transactions to date, I have firmly established myself in the top 10%.
New rules reduce the amortization period to 25 years from 30 years, raising monthly payment costs and the amount of income needed to buy a home. As a result, the number of first-time buyers requesting mortgages has declined by 15% over the summer, according to the Mortgage Brokers Association of BC.
Roland Kym
2011 Medallion Club Member ~ Re/max Executive Club & 100% Club Member
The Bank of Canada is unlikely to change interest rates in 2013, particularly with inflation so low, according to Scotiabank’s head economist.
“Under the current forecast, we don’t see interest rates in this country changing at all over the next year or so,” said Warren Jestin, chief economist at Scotiabank.
“Inflation is going nowhere fast. We may see some inflation in food prices or other areas but by and large the economy is too soft to generate inflation. There is no cost push in place.”
Jestin’s remarks came at the bank’s annual outlook event, held Wednesday in Toronto.
The global economy faces big challenges from the European sovereign debt crisis and the U.S. fiscal cliff, the slate of automatic spending cuts and tax hikes that will take effect at the end of this year unless lawmakers come up with a better plan.
At the same time, the global economy is changing, Jestin explained.
China’s economy may grow at 7.5 per cent for the next several years, rather than the 10-percent rate that it averaged over the last 25 years.
Growth is also likely to slow in India, Russia and Brazil.
“All these countries are expected to grow at a multiple of what we are going to expect in good years and bad in Canada, the U.S. Europe and Japan,” Jestin said.
China, for instance, is now the biggest automotive market in the world.
“The old paradigm was countries like china were low cost supplies of exports into the North American space. The new paradigm is they are the markets and the market opportunities and that is a very profound change.”
Global growth is likely to come in at about 3 per cent in the coming year, and “an increasing percentage of that growth will come from the emerging world.”
Still, “We’re reasonably optimistic about North America as we go through 2013 and 2014 and for all the challenges that we’re reading about, the opportunities are fairly substantial,” Jestin said.
Among the countries that use the common euro currency, many are in recession, or on the brink, with the exception of Germany.
“We will be talking about Europe as a debt problem five years from now. We will be morphing into different scenarios but the math doesn’t work,” Jestin said. “And if growth isn’t there, it’s not helping the revenue side of the equation.”
Though Canada’s economy has performed very well since the 2008 recession, it will now begin to slow as consumer spending and the housing gear down.
Housing markets in Vancouver and Toronto will see “a bit of a correction,” not a bubble bursting, Jestin said, adding that the economy and households in Canada are in far better shape than in the U.S. prior to the country’s housing bubble.
“We would only be more concerned about the housing market in Canada if we were to see a fracturing of job opportunities and declining employment. The fundamentals there remain pretty solid.”
The U.S. economy is likely to grow at a higher rate than Canada’s in the coming year or two, Jestin said.
The Canadian dollar is likely to remain close to par in the coming year, chief currency strategist Camilla Sutton said.
A soft landing for the Chinese economy, high oil prices, and Canada’s sound fiscal plan will help strengthen the loonie.
On the investing side, stock markets will remain volatile, though the improving U.S. economy should help boost equities, investment strategist Vincent Delisle said.
The main argument today against going variable is that the usual cost advantage over fixed-rate mortgages has declined to a small fraction of what it once was. Given all the financial uncertainties of today, many borrowers are happy to pay a nominal premium for the certainty of knowing they have locked in payments that would be unaffected if interest rates rise.
Will rates actually rise any time soon? “I just don’t see it, no,” said David Larock, a mortgage broker and ex-banker who recently did some hard thinking about his preference for fixed-rate mortgages in today’s environment.
What he decided was that global economic weakness will keep rates low for years, and that means variable-rate mortgages are still a viable choice. Mr. Larock said he’s able to offer his clients five-year variable-rate mortgages at prime minus 0.4 percentage points, or 2.6 per cent, while banks and some other mortgage brokers are in the range of 2.8 to 2.9 per cent. Five-year fixed-rate mortgages can be had for 2.99 per cent, including discounts.
Historically speaking, today’s spread between fixed and variable rates is a joke. The gap between variable-rate and fixed-rate mortgages in 2010 and 2011 averaged about 1.7 points, the Canadian Association of Accredited Mortgage Professionals said in its recently released annual consumer study. Mr. Larock said variable-rate mortgages have been cheaper than five-year fixed-rate mortgages 90 per cent of the time over the past 25 years.
“There’s always a chance that now might be one of those rare, exceptional times when a fixed rate saves you money, but you’re taking one-in-ten odds that you’re right,” he wrote in a recent blog post.
The big game changer for variable-rate mortgages was a pricing change introduced by the banks a couple of years ago. Where once they offered discounts of as much as 0.75 to 0.9 of a point off prime, the banks began to sell these mortgages at prime plus or minus a bit.
Mr. Larock said the vanished discount is a big reason why people have stopped favouring the variable-rate mortgage. “But if you look at it just in comparison to other options, it’s still the cheapest way to borrow money.”
CAAMP’s consumer study shows that the percentage of mortgages with a fixed rate rose to 65 per cent this year from 60 per cent last year, while variable-rate mortgages fell to 28 per cent from 31 per cent (hybrid mortgages make up the difference).
The move away from variable has been strongest among people buying homes this year; some people have also been converting variable-rate mortgages to a fixed rate, known as locking in.
The variable-rate skeptic will say that interest rates are at absurdly low levels by historical standards, and that rates can move sharply higher and still be in line with historical averages. This view is supported by all the stimulus injected into the global economy by central banks in the past several years. Eventually, it could cause inflation to snap back from today’s moribund levels.
Mr. Larock does see inflation making a comeback, but not any time soon. The bond market certainly isn’t suggesting higher rates.
The yield on the five-year Government of Canada bond, benchmark for fixed five-year mortgage rates, is pretty much where it was 12 months ago and well down from the 12-month high reached in March.
Another angle on this variable-versus-fixed-rate debate is something we’ll call financial uncertainty fatigue. It may just be that people are more open to five years of interest rate certainty than they were before as a result of all the financial and economic ups and downs of recent years.
The premium for mortgage rate certainty is minimal right now, and thus a good buy for many borrowers. But for the cheapest mortgage, go variable.
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Fast Fact on Vancouver Real Estate
Our colleagues at RateHub extracted all the good stuff and made it fun to read.
November 22, 2012
Alyssa Richard,
