Total Confusion.  That’s the way Jules, a single mom from Fergus described her financial life.  She has a good job with the government making 60 k a year.   Three years ago,  Jules took out a tiny mortgage of 100 k with one of the major banks when her marriage broke down.  Later,  the bank rolled out a big line of credit for 30k and a visa for another 20k.  When she maxed out both, the bank gave her another line of credit for another 20k at a higher interest rate.   With a property worth $400,000 the bank was perfectly safe equity wise,  in advancing various credit.  But all the obligations, with different payment dateS and various  interest rates,put Jules into a state of confusion.  She maxed her credit out within three years putting kids thru university and her credit suffered.  When we arranged one mortgage with one payment, Jules was elated.   “ I didn’t know whether I  was coming or going. Sometimes I would pay the one line of credit twice by mistake.  It was a nightmare,”  she said. 

We have seen it so many times.  Homeowners are filled with pride when the bank sets up a big lines for them.  They think, wow I am a triple ‘A’ client.  But what they don’t realize is these lines of credit come at a high price in terms of interest.  And quite frankly it’s rare for us to see a homeowner who hasn’t maxed them out.    ‘ Just throw it on the line of credit’,  homeowners say.  Without huge disclipline, homeowners invariably get themselves in trouble. 

So for Jules, when we presented one mortgage, one payment at an interest rate of 2.6% she was extremely relieved.  “Thank goodness I have just one mortgage now and I am going to work toward paying it down as fast as I can.”  We have total confidence she will.   

LET’S GET REAL ABOUT THE PROSPECT OF A REAL ESTATE ‘CRASH’ 

“It seems a day doesn’t go by without the media hyping the suggestion that the housing market is going to crash” says Andy Charles of Canada Guaranty, a private mortgage insurer that competes with CMHC. 

A Chicago based credit rating agency, Fitch Ratings last week stated that our housing market is 20% overvalued and suggested the need for further government regulation to cool the real estate market. Compared to what we ask? There was no context to this assertion, no other facts and therefore NO CREDIBILITY, but our media picks up this ball of s       (yarn) and spins it as if it is the gospel.  

The Financial Post article further emphasized that what is driving house price increases in Canada right now is predominantly from three major cities, Toronto, Calgary and Vancouver.  All ‘hot’markets which continue to grow and sustain because of immigration and energy boom times. Factor these 3 major cities out and the rest of the national housing story becomes balanced and healthy. 

Yes real estate prices do seem to be getting very expensive even in our area don’t they? The problem is, in relation to what other markets? We need to look for international comparisons.  So let’s look first at the United States shall we. It should not surprise when an American entity like Fitch Ratings believes Canadian house prices are too high relative to America’s. Hey the U.S.A was out of control and nationally their house prices rose to insale levels in the run up to 2008. In contrast ours did not. Our ascent has been steady and gradual. In fact Canadian house prices did not recover to 1990 levels until 2005 (some 15 years later). While our average national house price is above the U.S. they will catch up. We recently returned from a vacation in Ireland which is currently suffering from the Celtic Tiger meltdown.  Home prices have dropped over 50 per cent (like Canada in the early ‘90s), and yet we found them very similar to current Canadian home prices. It was really quite schocking. 

So there you have it, two good international comparisons and bear in mind, Canada is much healthier fiscally speaking than America and Ireland. 

Housing remains affordable here and will continue to as interest rates will remain low likely another 5 years or longer in our view. Mr. Charles said his business is driven by the unemployment rate, which is also better here than Ireland and the U.S. and inflation remains low.  

Real estate continues to be ‘The Best’ tax free investment available for Canadians to accumulate wealth. For your next mortgage need, please speak with us whether or not you currently deal with a bank.