National Housing Data Release

 

TD Economics

 

Data Release: See-saw pattern in sales and price activity continues

• Seasonally adjusted, month-over-month resale housing activity increased in September by 2.7%.  So far in 2011, sales hit their peak in January.  If we use this as a benchmark, sales are down by 2.6% in September. 
• Listings moved up M/M by 0.2% in September.  The increase in sales outweighed the greater number of listings, resulting in a higher sales-to-listing ratio.  The ratio now stands at 0.528, the highest reading of this measure in six months.  Even with the upward movement noted of late suggesting tighter conditions, the sales‑to‑listing ratio remains in balanced territory. 
• Unsold inventory needs approximately 6.1 months to completely exhaust – an estimate that has held steady so far this year. 
• On the price front, the national average residential resale price decreased M/M in September by 0.4%.  With the decrease, the national price tally rests at roughly $361K.  However, on a year-over-year basis, prices remain up by a significant 8.1%.
• For the Greater Toronto market, both resale prices and sales followed the national trend; sales were up M/M by 5.2%, but prices were up by -0.6%.  For the Greater Vancouver market, sales were up by 2.4%, but prices were down by -3.7%.  With the month's developments, the average resale price in Toronto sits at $469K, whereas in Greater Vancouver, the number sits at $757K.

 

Key Implications

• Several factors appear to have clipped the wings on resale activity this year, including: (1) new mortgage eligibility rules; (2) a wave of economic uncertainty emerging in recent months; and (3) a growing saturation of the first-time home buyer category.  Helping cushion the impact of these negative forces has been the persistence of low mortgage rates.
• While sales have receded so far this year, the same cannot be said for prices.  However, this outcome is largely expected as there is usually a lag between sales weakness and the corresponding price adjustment.  Still, it is important to stress that the significant price gains being recorded in British Columbia are skewing the national statistic.  If we strip away this province's outsized performance from the national total, the year-to-date price gain becomes more moderate at 4-5%.
• Going forward, we anticipate a tug-of-war action to take hold in the Canadian real estate market between low interest and mortgage rates and only modest economic, income and employment growth.  With both push and pull momentum, we expect both prices and sales to hold fairly steady, relative to current levels, over the next year.

 

Sonya Gulati, Economist

416-982-8063

 

 

DISCLAIMER

This report is provided by TD Economics for customers of TD Bank Group. It is for information purposes only and may not be appropriate for other purposes. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. The report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.

 

 

The Incredibly Shrinking Variable Discount

October 17, 2011

The Incredibly Shrinking Variable Discount

Just weeks ago you could find variable-rate mortgages at prime – 0.80% (P-.80%) or better. Consumers thought they were here to stay, but the tables turned…fast.

Economic troubles and lender profit motives have shrunken variable discounts beyond expectations. Banks are now commonly quoting prime rate, for example, with little discounting.

Once the last few holdout lenders with P-.50% disappear, discounted variables could move towards P-.25%…or worse. Some lenders even suggest that prime or prime plus could be the new normal.

Meanwhile, aggressive brokers are selling five-year fixed rates at 3.25% or less. That’s an unusually low 50 basis point premium to a variable. A spread that tight doesn’t come around often, and it makes you rethink all of the research suggesting variables are the way to go.

Popular research indicates that people have saved money on variable-rate mortgages:

• 88.6% of the time:
• Source: Floating Your Way to Prosperity, 2001, Moshe Milevsky, PhD; Study period: 1950-2000
• 90.1% of the time:
• Source: Moving Mortgages, 2008, Moshe Milevsky, PhD; Study period: 1950-2008
• 83% of the time:
• Source: Variable Rate Roller Coaster Still Hard to Beat, 2011, Douglas Porter and Benjamin Reitzes, BMO; Study period: 1975-2011

Odds like that make some people question the sanity of going fixed.

But there’s a little more to the story.

While variables have cost less than 5-year fixed mortgages a majority of the time in the past, favourites don’t win every game.

More importantly, assumptions are key when it comes to rate studies. Two important factors have impacted the research quoted above:

1. A multi-decade bias towards falling rates
2. Use of posted rates (instead of discount rates)

“Interest rates have been trending downward for two decades,” BMO Capital Markets Senior Economist Benjamin Reitzes told us in a recent interview. By default, he says, that’s tilted the table more in favour of variables than it otherwise would be.

Looking ahead, rates are no longer able to drop over one percent. The most we can realistically hope for is an extended period of horizontal rate movement. (The BoC can still cut rates slightly, but the European and American crises and sub-2% core inflation won’t delay hikes forever.)

As a result, Reitzes says, "Going forward, borrowers won't see the same advantage to variable rates as they have in the past 25 years”

The second factor that’s largely ignored when citing rate research is the actual mortgage rates used for backtesting. Each of the three studies above uses posted rates in their historical analysis.

Reitzes states that this practice distorts the results somewhat. "Discounts off posted rates were not as prevalent historically.” Nowadays, however, “Most people get a (rate) discount if they are credit-worthy borrowers.”

That matters, because the rate discount you get obviously impacts the likelihood of your mortgage outperforming other options.

Here’s an example.

• If you look at data from 1970 to 1995, the average difference (spread) between 5-year fixed and variable rates was 126 basis points.*
• The average difference today is roughly 50 basis points.

That’s a remarkable 76 basis points lower than historical rate spreads. That makes a huge difference in research conclusions.

If you theoretically backtested with the same spreads as today (i.e., 25 bps off prime for variables and 204 bps off posted for 5-year fixeds), you’d find that fixed rates outperform considerably more often.

According to Milevsky, “…The historical probability of doing better with the floating rate mortgage…hovered around 70% to 80%” when the borrower used deep discount rates (based on a 1965-2000 study period).

Using today’s discounts, that 70-80% drops to just 53%, based on our findings from 1970 to 2006. (Obviously today's spreads would not have applied historically but, as Milevsky maintained in his research above, that is beside the point.)

In other words, the fixed/variable decision would have been a coinflip, based on today’s spreads.

(Click to enlarge)

This isn’t meant to imply that fixed rates now have an insurmountable edge. If the Bank of Canada drops rates unexpectedly, a variable could easily beat all other terms over the next five years.

A variable may also prevail for other reasons. See:

• The Fixed/Variable Mortgage Conundrum
• IDEAS for Choosing Fixed or Variable

That said, if the BoC’s next rate move is up (which is the highest probability outcome, say economists), the boring old 5-year fixed could certainly outperform. That’s true even when compared to a variable with payments set at the 5-year fixed rate. (We’ll post a scenario like this soon.)

The nice part is this: If you go fixed and variables end up winning, you’ll likely be out far less money than in most prior years.

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* Data source: Bank of Canada. (We chose 1970-1995 because 1970 is as far back as we have clean 5-year fixed rate data, and 1995 was before rate discounting started taking off. Yes, people actually used to pay posted rates.)

Note: If you’re already in a discounted variable, the conclusions drawn here may not apply to you. For guidance on locking in, always consult a mortgage professional.

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Rob McLister, CMT

Posted at 12:38 AM in Mortgage Tips & Advice | Permalink

 

 

 

 

The European Debt Crisis could save you money on your mortgage

The European debt crisis could save you money on your mortgage! This European sovereign debt crisis could lead to substantial interest savings on your existing mortgage. The liquidity concerns that the European banks face (similar to the US Banks in the fall of 2008) has created a unique situation, where short term money (variable rate mortgages) become more expensive and where longer term money (US and Canada bonds) become less expensive hence lower fixed rate mortgages. Fixed rate mortgages are at an all time low. Since 1975, 83% of the time Canadians would have been better off choosing a variable rate mortgage, I believe we are now in the 17% zone. If you are locked into a fixed rate mortgage at a rate that is higher than 3.75% or currently in a variable mortgage but will be up for renewal in the next 24 months we need to sit together and explore the substantial savings that are possible even with any mortgage penalties. Call or email today and let’s work together and start the savings. Interested in what our current rates are?  Visit our website at http://www.rightmortgagetips.com/.  While there sign up for our Rate Advisor to receive rates to your email on a weekly basis. Visit our blog and follow twitter to stay up to date with economic  forecasts from the media and our lending partners. We always offer no obligation, no cost mortgage reviews.  Regards, Lisette Amalfi, AMP Mortgage Broker/Owner Mortgage Alliance Oac Mortgages Phone: 905-529-1199 Toll Free: 877-529-1199 Fax: 905-628-7917 Follow us on Twitter We Blog Our Website