The 40-year fix

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Longer payback loan fuels housing market


star-logo.JPG There’s a revolution going on in Canada’s housing market, one that is propping up prices and extending the boom. More buyers are choosing mortgages with longer payback periods.

By stretching payments over 30 to 40 years (instead of the usual 25), they can enter the market sooner or buy a better property.

Mortgages with longer amortizations have caught on like a house on fire (pardon the pun).

“About 60 per cent of first-time buyers are opting for a 40-year mortgage,” says Craig Alexander, deputy chief economist at TD Bank. His explanation: Houses are now less affordable because prices have grown faster than household incomes.

“Prices have gone up 10 per cent a year between 2002 and 2007, while historically they have gone up only 4 to 5 per cent a year. “If these longer amortization mortgages hadn’t been around, the housing market would have cooled down a lot sooner.”

There’s a “huge adoption” of 40-year mortgages in Toronto, Calgary and Vancouver, where people stretch for affordability, says Catherine Adams, vice-president of home equity financing at Royal Bank of Canada. “I think it’s given the housing market a boost and allowed prices to go up further than they would have otherwise.”

The Canadian Association of Accredited Mortgage Professionals did a survey last fall that showed the product’s appeal. Mortgages with longer amortizations grew to 37 per cent of new home loans – and 9 per cent of outstanding mortgages.

“That’s phenomenal, considering they have been around for only the last two to three years,” says association president Jim Murphy.

Competition in mortgage insurance has accelerated new product development by lenders. Canada Mortgage and Housing Corp., a federal government agency, used to have the market to itself.

Now it has three private-sector rivals from the United States (Genworth Financial, PMI Group Inc., AIG United Guaranty). Another big U.S. firm (Mortgage Guaranty Insurance Corp.) has applied for a licence, Murphy says.

Is there too much innovation in lending? And is Canada headed down the same road as the United States?

That’s the contention of Garth Turner, a Liberal MP and former business editor, who argues that lenders in Canada are flirting with a market collapse.

In his book, Greater Fool: The Troubled Future of Real Estate (Key Porter, $21.95) and his blog, www.greaterfool.ca, he says the net effect of 40-year mortgages is no different from U.S. subprime mortgages.

“Both make buying easier and cheaper. Both lower the bar for loan qualifications. Both augment mortgage debt. Both sustain an overvalued market. Both lead to asset inflation.

“Will they both end badly?”

While 40-year mortgages may have extended Canada’s real estate boom, most economists don’t foresee an imminent U.S.-style bust. “There’s no evidence that house prices are set to decline in Canada,” says Ted Tsiakopoulos, a CMHC market analyst in Toronto.

“Incomes are growing and we feel that’s the most important factor that will support price growth.” The forces behind Canada’s last housing crash in 1989 – high inflation, high interest rates and speculative buying – don’t exist now.

In particular, says Alexander of TD Bank, you don’t see house prices decline without significantly higher interest rates. He predicts Canada’s economy will slow until late 2009 and the Bank of Canada will cut rates by 1 to 1.5 percentage points.

“Falling interest rates are not consistent with the housing market running into major problems.” So, prepay your mortgage now if you can. Then, you’ll have some equity to fall back on when interest rates go up again in about two years.

Ellen Roseman’s column runs Wednesday, Saturday and Sunday. You can reach her at [email protected] by email.

15 comments ↓

#1 wolfey on 04.02.08 at 7:46 pm

so when does the 50 year mortgage star with the optional $5000 cash back

#2 wealthyrenter on 04.02.08 at 10:41 pm

I can’t wait to pick up a copy of Mr. Turner’s book. Most of my family lives in his riding.

I don’t think anybody can say for certain that the more “bubble-like” markets in Canada will implode. Frankly, I can deal with (but not agree with) the real estate industry’s mantra: high demand + no available land + low rates = real estate rising to infinity = buy in now.

However, the 40-year mortgage angers me. The lack of education surrounding this product, and the mainstream media’s reluctance to question this practice astounds me. This product is a slightly cruel form of debt slavery designed to trap relatively poorer Canadians into homes they can ill afford.

I just ran the numbers at the RBC site for a $300 000 home at 6%. This is a very modest first home in major centres in Canada. Most of my professional, GenX friends have >400K mortgages.

The total amount for this loan over 25 years is about $576K. The 40 year version of the loan runs at a total cost of $785K. The 40 year loan saves a family about $285 a month in payments, and you get to pay it off just before you die.

The shorter amortization gives you many years of cheap living and breathing room to save for retirement. The extra 210K saved with the 25 year option (even if stuffed into a GIC) will help to provide for a much more comfortable retirement.

Banking representatives are always quick to say that people with 40 year mortgages can pay down the debt quickly. However, how many people, so strapped for cash that they need to save $285 in monthly payments, will be able to pay off their mortgages early? Few, I would guess.

To be fair, there are some young workers that will experience rapid pay increases in the early stages of their careers. The 40 year product is a reasonable decision for them. The rest of the “great masses” of first time homebuyers are left with few prospects of rising wages, rising property taxes, rising home maintenance costs, and the costs of raising children. We are trying to start a family, and I hear that children never put a strain on family finances! LOL.

I am not criticizing home ownership. Having a home is a wonderful thing that has benefits that are far beyond financial. It only makes sense to me if the ratio of home cost to family income is reasonable, and can be carried for 25 years or less.

#3 Sphinx on 04.02.08 at 11:15 pm

So Ted Tsiakopoulos with CMHC says “Incomes are growing and we feel that’s the most important factor that will support price growth.” , I’m not sure what he’s smoking!!, how much % of income growth if any would support housing price yearly appreciation of 10% from 2002 – 2007. CMHC spinning hard to prop the canadian housing bubble, which goes against its mandate

http://www.cmhc.ca/en/corp/about/whwedo/index.cfm

Now comes another idiot, Alexander of TD Bank who crack me up, he says “you don’t see house prices decline without significantly higher interest rates”, well Mr. Alex, how about you just look south of the border if you have time! US is going through a crash of the “mother of all housing bubbles” and the interest rate was 5.25% last summer now dropping like a rock, and house prices still crashing in most of the major cities, and about to bring their financial system down, ours with it, and may be the whole world system as well.

It really scares me how we have these incomptent fools at CMHC and banks who have no clue about economy, in total denial, and given an outlet like the Toronto Star to voice their idiocy without a challenge from the reporter.

I’ve no doubt the market will correct if not crash, happened before, will happen again….history never gives up that habit of repeating itself.

Sphinx

#4 jason on 04.02.08 at 11:43 pm

I was just going to say the same thing, Wolfey. What is stopping the lenders from introducing 50 year + or interest only loans to keep fueling the soaring housing prices? Living in Saskatoon, I have been witness to a huge increase in housing prices, especially those that fall into the so called “entry level” catagory. Each month it seems like prices climb another $20,000 , and talking to some realtors I am told that I am fool for waiting on the sidelines as by this time next year the housing prices will have almost gone up by 50% again.

Garth, I was hoping you could give me some of your advice. I know you have said earlier that the Saskatoon housing market in general was undervalued, but how much higher do you see our market prices going before they start to slow? Some individuals have said that we have potential to surpass homes in Calgary and Edmonton in value and edge closer to Vancouver and Toronto. The thing is, while housing prices and rents soar, our average incomes have largely remained unchanged. Those in construction related and realty fields are seeing this boom translate into extra wealth, but for the average joe income levels have remained largely the same as during the pre-boom years and the higher cost of living is really starting to put strain on some individuals.

Here is my current situation. Being a university grad I have a fair chunk of student loan debt that I have been whittling away at slowly but surely. My original plan was to wait until 4 years from now, when the remainder of my student and business startup loans where all paid off, and buy a condo here in the city. Now that the prices have skyrocketed, however, I am starting to panic and am wondering if I should buy now and risk being somewhat financially stretched over the next couple of years or continue through with my original plan. A couple of realtors I have talked to have said my best plan is to roll my student and business loans into my mortgage, and get into the market now. The problem with that, is that according to my numbers the amount owing on my loans would almost tripple in value doing this. That being said, I was told with a certain amount of confidence by the realtor that the small condo I was looking at currently priced at $200,000 would likely be well over $300,000 come this time next year.

Like I say, I am really getting stressed out by the current housing market. I really like the apartment I am in right now, but home ownership is something that I have always wanted to attain and right now I feel as if with each passing day that dream falls further and further out of reach. The only way I could get in now is to go the forty year mortgage + consolodated loans route, but by my numbers the amount of interest a person has to pay by going down this road is astronomical. That being said, with the rents around the city ever increasing, should a person still consider going this route for fear that the market continues to run rampant until the high cost of living forces one out of town all together?

Any thoughts on the Saskatchewan market would be much appreciated.

Thanks,
Jason

#5 Justin on 04.03.08 at 12:18 am

QUOTE: ““There’s no evidence that house prices are set to decline in Canada,” says Ted Tsiakopoulos, a CMHC market analyst in Toronto.”

Well what does Ted think would qualify as evidence? Let me guess…falling prices! I think that was the same criteria they used in the U.S.

These people at the CMHC are negligent in my view and are in breach of their fiduciary duty as the underwriters of mortgages which carry a risk. They regularly publish forecasts and predictions which are wrong and they fail to provide any disclaimers or warnings to consumers about inherent risks.

The securities industry can’t get away with this but the CMHC is responsible for far more wealth being put at risk by Canadians. And in the end, their policies and practices are contributing to declining affordability of housing.

Garth, would you please take this issue up in the House of Commons and with the press on behalf of Canadians who are being a done a disservice by the CMHC?

And thank you for giving us a voice!

#6 Al on 04.03.08 at 1:32 am

“speculative buying – don’t exist now”

That was my favorite part of the whole article, and precisely where the CMHC cheerleader lost all credibility.

#7 homeinboca on 04.03.08 at 9:25 am

Longer amortization mortgages have been around in Europe and other countries for years. Most people pay off their mortgages well in advance of the typical term – I believe the average mortage is paid off in 11 or 12 years, so I am sure most people won’t take the entire term.

#8 SMWhite on 04.03.08 at 12:05 pm

homeinboca, Europe also has a couple thousand years on Canada, they actually do have land shortage issues hence the higher prices, yet they are also having housing bubble issues. So what your saying is at the age of 25 – 35, I buy a house at 300K – 400K and pay it off in 11 – 12 years.

On a 40 year that youngsters are now almost forced to take, your only going to start paying off principal after 8 years(8 years interest; 32 principal on a 40 year as to 5 years interest on a 25 year) so the next 5 years I just smack down 60K – 80K a year, right, that’s your answer, glad you put in some deep thought into that one.

CMHC are doing their best to keep pushing air into the bubble to support the banks in their quest for profit even against the advice of the Bank of Canada governor.

Ted Tsiakopoulos is a “shill”, plain and simple, discount anything coming out of his mouth. The banks are lying, they are desperate for your paycheck, they need capital cause they don’t trust one another anymore, so they make outlandish claims on future projections so as to not be alarmist and scare the herd. What are their repercussion, if they go tits up they then have the Canadian tax payer bail them out if they falter.

This has been the greatest ponzi scheme ever and once the USA falls Canada will finally trip, will we scrape our knees or fall flat on our face and end up in traction?

Once again, we haven’t even had the US fed admit to a recession, they hinted at it yesterday that there “might” be risk. If people think the manufacturing sector is hurting now, you ain’t seen nothing yet.

Low interest rates means more money in the supply, can we all agree on that?

Isn’t that what is driving this? The largest employer in Canada is the government and they haven’t been getting 10% raises over the past 7 years, have they?

#9 wayne on 04.03.08 at 4:58 pm

“Speculative buying doesn’t exist now”? I’m only familiar with Vancouver but of the questionable comments from the experts this one lept off the page a smacked me between the eyes.
I’d like to hear a fuller explanation for that comment because if there isn’t one I’d be reluctant to believe anything coming from CMHC.
Perhaps I’m naive but I thought CMHC existed to assist homeowners not banks and realtors.

#10 Drachen on 04.03.08 at 6:53 pm

Perhaps I’m naive but I thought CMHC existed to assist homeowners not banks and realtors.

Not for some time now. Do you THINK that accepting worse and worse terms on their insurance actually helps home owners? It only drives prices up further and leaves taxpayers on the hook for the excesses of the banks. The banks don’t care who they give a loan to and they could care less if you lie on your application (in fact many encourage you to lie behind closed doors). THEY are not on the hook, CMHC will bail them out and if their client lied well that’s not the BANK’s problem…

IMO when all this blows up there should be a serious investigation, they should bust as many people as they can on loan application fraud, flip them against their bankers (if they were ‘encouraged’ to lie) and flip the low level bankers against higher ups, let’s see how far up the food chain the fraudulent behaviour goes.

Nothing short of that is in the public interest.

There has also been a LOT of questionable behaviour on the part of the CMHC, they either need a serious pruning or perhaps they should be eliminated altogether because if they have consistently for the past few years taken the path which is LEAST in the public’s interest.

#11 P* on 04.04.08 at 12:03 am

Jason (#4 above): I realize I’m being an absolute elitist urban-centric prick when I say this, so please forgive me in advance… but it’s freaking Saskatoon!

“Some individuals have said that we have potential to surpass homes in Calgary and Edmonton in value and edge closer to Vancouver and Toronto.”

My guess is that Saskatoon will see some impressive short-term gains in real estate, and will probably continue going up as the correction comes for the larger cities, but you won’t see absolute valuations approach the inflated numbers seen in Calgary/Vancouver (and if you do, sell!). My understanding is that smaller cities tend to lag the real estate curve a bit (but past performance is no guarantee of future results).

You need to look at your area as it sits right now: if buying makes sense relative to renting (for both financial and esoteric reasons — if it’s a near thing financially, then the “pride of ownership” could tip the scales for your own calculation), then buy now, and don’t be too worried about what gains/losses may be in store in the market (though generally if buying compares favourably to renting, there isn’t much “downside”). There are a number of helpful websites and calculators around, as well as various rules of thumb (e.g.: if the cost of an equivalent house/condo is 150X monthly rent or less, it would probably be a worthwhile buy; over 300X times monthly rent, and the property value is probably inflated — in between and it could be swayed by other factors).

“with the rents around the city ever increasing, should a person still consider going this route for fear that the market continues to run rampant until the high cost of living forces one out of town all together?”

Ah, but the rents probably aren’t going up as fast as the property values are. Do they have rent control in Saskatchewan? Maybe you should write your MPP to get Ontario-style tenant protection…

Run the numbers and do some research yourself, but if you like the apartment you’re in now, I’d probably recommend continuing to rent, save, and see what happens. Don’t trust realtors for advice on future movements in the real estate market: they have too many conflicts of interest to always say it’s going up. And taking their “priced out forever” appeal to fear, remember two things. First, that that kind of thinking logically leads you to skip the starter home/condo step and go straight to whatever home you’ll need for whatever family you plan to eventually have, so it looks like you may already be priced out. And second, that the market can’t price everyone out forever, or there would be no buyers to sustain it. That, unfortunately, doesn’t mean that it has to turn around and come down (though that’s what I believe is most likely to happen even if it takes a few more years), but it does mean that it has to stop going up, and probably sometime soon.

Finally, you say “but home ownership is something that I have always wanted to attain” and I have to ask: what is it about home ownership, exactly, that you want? Does a condo (which you say you’re looking at) fulfill that criteria, beyond the simple fact that you own it?

#12 Rob on 04.04.08 at 7:20 am

Garth, could you use your position in government to set up Ted Tsiakopoulos with a sinecure. He’d do less damage that way.

#13 Joanne on 04.06.08 at 4:39 am

Jason & P*, above:

I’m in Saskatoon, too –moved here from Toronto to take a job at the University of Saskatchewan three years ago — and I, too, have to say it’s freakin’ Saskatoon! .

The idea that a little town the size of Windsor or Oshawa is going to have housing costs parallel to those of Toronto or Vancouver, or even Calgary or Edmonton is absurd. We supposedly have higher prices than Edmonton now: I think that’s likely to change within 3 to 5 years. If rents or prices get too high people will leave: they don’t make enough, business doesn’t have a high enough profit and the whole damn’ ball of wax will fall apart.

At the moment the problem is that apartments are being converted to condos at a great rate, driving out tenants, lowering the vacancy rate and raising rents. And there is no rent control of any kind, which makes the problem worse.

That said — I’m not buying. I’m in a similar situation, paying off student loans — and I’m really not keen on having my only investment be a converted apartment in Saskatoon, which has a historically rotten track record for property values. It’s bad to be priced out; it sucks to have to move for a condo conversion; it’s far worse to owe 300,000 on a condo that’s worth 125,000.

#14 jas503 on 04.07.08 at 9:06 pm

With the thread on Saskatoon going, I couldn’t help but chime in. I am a U of S grad and grew up in small town Sask. There was a severe lack of work for professionals with my training in Sask so I eventually ended up in the Edmonton area. We were fortunate enough to move here 4 years ago, right before the rapid run-up in prices. Another stroke of luck was signing papers to build about two years ago. By the time my new house was ready, the old one was worth only $20K less.

Anyway, myself and almost everyone else I knew from Saskatchewan was looking closely at Saskatoon. The price differentials a year ago meant mortgage free living for those that benefited from the rapid runup in Alberta. The challenge was finding a job with similar pay.

I eventually had an offer a few months ago (for almost $10K less) but when I looked at home prices, Edmonton had come down from its peak and Saskatoon was still on the way up. How can this be with BILLIONS of dollars to be spent on oil sands upgraders. Wait until supply catches up to demand – there is no shortage of land in Sask.

Anyway, it is now true that Saskatoon prices are higher than Edmonton – all I can say is “do not buy”. All the Albertan and British Columbian speculators have been actively flipping in Saskatoon and first timers are buying into the hype.

This is the peak in Saskatoon or very close to it. I expect the declines to hit in the fall similar to what happened in Edmonton last year.

Buy at your own risk.

#15 Brian Poncelet, CFP on 04.11.08 at 9:53 am

Hi Garth,

I think this summer will tell finally what will happen to the “market” (read stocks, or real estate). If Jeff Rubin (from CIBC world markets) is right about predicting a rise to $1.50 per litre of gas this summer. Then, the 40 year mortgage is going to be one of many people’s problems. This I believe, will be the final straw.

Currently oil is about $108 per barrel gas prices are about $1.12 per liter. In 2005 after Hurricane Katrina oil was about $78 per barrel and gas peaked at about $1.25 per liter. Driving season is about three months away.

regards,

Brian