Home Ownership Still Affordable

Home Ownership remains within reach for most Canadians but is getting increasingly difficult for families with household income less than $50,000, finds CIBC World Markets Inc.’s new Home Ownership Affordability Index.

Today, Canadians spend 15.6 per cent of their average gross personal income on mortgage payments, which is about the same as ten years ago. When adding in hydro bills and property/municipal taxes, it rises to about 22 per cent of gross income. However, this amount varies widely depending on where you live, how much you make and how old you are.

“The vast majority of home owners in Canada regardless of their age have not experienced any worsening in affordability despite the rapid increase in prices,” says Benjamin Tal, senior economist at CIBC, in his latest Consumer Watch report. “The only sub-group of households that have seen some deterioration in their affordability position is older Canadians with average income of less than $50,000. Zooming in on this group we find that on average they spend close to 60 per cent of their gross income on mortgage payments, property taxes and electricity costs. This is three times the average ratio seen among households at the same age groups but with income of over $50,000.”

While these mortgage holders have seen their affordability drop over the last year, Mr. Tal notes that, unlike the U.S., this vulnerable group of Canadian mortgage holders is on the decline. This group accounts for only 13 per cent of all mortgages in Canada, down from 19 per cent five years ago. He adds that the least vulnerable mortgage holders in Canada – those over 35 with incomes over $50,000 – now comprise some 65 per cent of mortgages in Canada, up from less than 50 per cent of the market in 2003.

“The practical implication of this finding is that the composition of the mortgage market in Canada has, in fact, improved over the past few years,” adds Mr. Tal.

In addition to percentage of income spent on mortgage payments, he also looked at house prices and interest rates in determining affordability. When it comes to prices, he finds that Canadian homes are overshooting their fair value. “The average price of a house has risen by almost 23 per cent since reaching its recent cyclical low in January 2009, and it is now almost seven per cent above the level seen before the recession. This pace of appreciation has been quicker than justified by housing market fundamentals such as income, rent or demographic changes.”

Mr. Tal estimates that, on average, Canadian home prices are now around 14 per cent over their “fair” value. This translates into more than 1.5 million houses in Canada – about 17 per cent of all dwellings in the country. He calculates that about 760,000 of these are overvalued by more than five per cent. B.C. and Alberta house prices have overshot the most with nearly one in four homes in those provinces above their fair value.

“It is hardly a surprise that British Columbia has the worst affordability reading in the nation. But note that the gap between British Columbia and Ontario is not as large as most people think. Despite strong housing markets, Manitoba and Saskatchewan still enjoy the best home ownership affordability in the nation.”

The Canadian housing market has started to stabilize in recent months. Supply is on the rise with April’s new listings climbing by close to 3.4 per cent on a smoothed month-over-month basis. The current pace of monthly increases in new units is the fastest seen since early 1990. At the same time, unit sales are now falling on a month-over-month basis following a very strong increase in mid-2009. As a result, home prices are starting to respond, with the three-month moving average growth decelerating rapidly over the past six months.

“While the booming housing market is starting to come back to earth, the fact that prices are overvalued today does not necessarily mean that they will crash tomorrow,” says Mr. Tal. “After all, a violent market correction needs a trigger such as the sub-prime crisis which ignited the U.S. real estate meltdown, or abnormally high interest rates as was the case during the 1991 property crash in Canada.

“Fortunately, that is not on the horizon this time around. While the Bank of Canada is very clear about its intention to raise rates soon, an array of limiting factors including a strong dollar, the end of fiscal stimulus, a slower pace of economic activity in the U.S., and a more rate-sensitive household sector suggest that rates will only climb very slowly over the next two years.

Unlike the U.S., the extended period of low interest rates in Canada did not lead to a surge in the number of mortgage borrowers in this country. In …

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Bank Of Canada Increases Overnight Rate Target To 1/2 Percent

The Bank of Canada today announced that it is raising its target for the overnight rate by one-quarter of one percentage point to 1/2 per cent. The Bank Rate is correspondingly raised to 3/4 per cent and the deposit rate is kept at 1/4 per cent, thus re-establishing the normal operating band of 50 basis points for the overnight rate.

The global economic recovery is proceeding but is increasingly uneven across countries, with strong momentum in emerging market economies, some consolidation of the recovery in the United States, Japan and other industrialized economies, and the possibility of renewed weakness in Europe. The required rebalancing of global growth has not yet materialized.

In most advanced economies, the recovery remains heavily dependent on monetary and fiscal stimulus. In general, broad forces of household, bank, and sovereign deleveraging will add to the variability, and temper the pace, of global growth. Recent tensions in Europe are likely to result in higher borrowing costs and more rapid tightening of fiscal policy in some countries – an important downside risk identified in the April Monetary Policy Report (MPR). Thus far, the spillover into Canada from events in Europe has been limited to a modest fall in commodity prices and some tightening of financial conditions.

Activity in Canada is unfolding largely as expected. The economy grew by a robust 6.1 per cent in the first quarter, led by housing and consumer spending. Employment growth has resumed. Going forward, household spending is expected to decelerate to a pace more consistent with income growth. The anticipated pickup in business investment will be important for a more balanced recovery.

CPI inflation has been in line with the Bank’s April projections. The outlook for inflation reflects the combined influences of strong domestic demand, slowing wage growth, and overall excess supply.

In this context, the Bank has decided to raise the target for the overnight rate to 1/2 per cent and to re-establish the normal functioning of the overnight market.

This decision still leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in light of the significant excess supply in Canada, the strength of domestic spending, and the uneven global recovery.

Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments.…

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Canadian Parents Need To Do Their Homework On RESPs

Over the last few weeks, thousands of Canadian high school students have been deciding on whether or not to accept university and college entrance offers. Given that total expenses for a four-year degree can run as high as $60,000 or more, some families may be struggling to find the funds to finance post-secondary education.

As the costs of a post-secondary education increase, BMO advises Canadians to consider opening a Registered Education Savings Plan (RESP).

RESPs allow a parent or guardian to save money for their child’s university or college education. They offer several advantages, including:

– Tax-free growth (while the investments remain in the RESP)

– Up to $500 a year in Canada Education Savings Grants ($7,200 lifetime per child)

– A wide range of investment options

– Lower tax rates when the growth and grants are withdrawn for post-secondary education purposes (taxed at the student’s marginal tax rate)

However, simply opening an RESP is not enough. “Given the mounting costs associated with a post-secondary education, it’s critical that parents not only open an RESP as early as possible, but contribute to it regularly as well,” says David Sharone, Product Manager, Registered Plans and Solutions, BMO Mutual Funds.

BMO Financial Group offers the following RESP savings tips for parents and their campus-bound children:

– Give the gift of an education – Encourage family members and close friends to contribute to your child’s RESP on birthdays and holidays instead of, or in addition to, conventional gifts

– Know your limits – Parents, or young couples with plans to have children, should work together to determine a monthly budget that accounts for long-term savings, with a focus on RESPs

A paper bag lunch is all gravy – Bringing a lunch from home every day can save upwards of $100 per month, resulting in extra funds which can be used to increase your pre-determined RESP contributions…

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Bank Of Canada Outlines Core G-20 Agenda To Reduce Systemic Risk

G-20 leaders are working towards global reforms that will put the world’s financial system on a more solid footing, Bank of Canada Governor Mark Carney said today.

In a speech to the International Organization of Securities Commissions meeting in Montreal, Governor Carney outlined the G-20’s core agenda to reduce systemic risk and create a more resilient global financial system.

The global financial crisis exposed the fallacy of composition that strong individual financial institutions collectively ensure the safety and soundness of the system as a whole,” Governor Carney noted. “Even the most vigilant, microprudential regulatory regime can be overwhelmed by systemic risks.”

The Governor outlined three principal strategies to mitigate systemic risk: increasing the resiliency of financial institutions; enhancing the robustness of financial markets; and reducing the interconnectedness between institutions and between institutions and markets. “These changes are radical, not incremental,” the Governor said.

Creating more resilient institutions requires more and better capital, improved balance sheet liquidity, and enhanced risk management, he noted. “The final capital proposals will make the global system look more like Canada’s. For the world as a whole, however, the changes will be substantial.”

Continuously open financial markets are essential, and require policies and infrastructure that reinforce the private generation of liquidity in normal times and allow for central bank support in times of crisis. The cornerstone of sound infrastructure is clearing and settlement processes with risk-reducing elements and greater transparency of trades and financial instruments.

To reduce interconnectedness among institutions, regulators should institute staged intervention regimes, and banks should develop plans to unwind themselves in an orderly fashion if they were to fail. There must also be methods to replenish the capital of a financial institution under stress without the use of taxpayer funds. “One promising avenue is to embed contingent capital features into debt and preferred shares issued by financial institutions,” the Governor noted.

At their recent meetings in Busan, South Korea, G-20 finance ministers and central bank governors refocused on the core reform agenda of capital, resolution, and market infrastructure, Governor Carney told the audience. “Later this month in Toronto, G-20 leaders can be expected to harden that resolve,” he said. “The time for debate and discussion is drawing to a close. Policy-makers now need to decide and to implement.”…

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Rates on the Rise: What’s In Store for Home Owners & Prospective Buyers?

The much anticipated announcement last week from the Bank of Canada raising its overnight rate has Canadian homeowners and those shopping for a home now wondering what they should be doing as interest rates begin to climb.

“While short-term interest rates are not expected to rise rapidly, they are expected to increase about three percentage points by the end of next year,” said Sal Guatieri, Senior Economist, BMO Capital Markets. “The era of historically low mortgage rates is coming to an end.”

So, what does this mean for home owners and prospective buyers? Is it too late to protect yourself? “The Bank of Canada’s recent rate announcement might leave some homebuyers believing they’re too late to take advantage of historically low mortgage rates,” said Jane Yuen, Senior Manager of Mortgages, BMO Bank of Montreal. “We continue to offer our low-rate 5 year fixed mortgage with maximum 25 year amortization, now at 4.25 per cent. We encourage customers to lock-in now as pressure builds for rates to rise.”

BMO advises Canadian home owners and prospective buyers to stress test their financial budget using a mortgage payment based on a higher interest rate. Here are the top tips to consider to ‘stress test’ your budget today so you don’t become ‘stressed out’ later:

Take a shorter amortization:

– The shorter the life of the mortgage, the less you pay in interest.

– Cutting your amortization period by five years from 30 to 25 years could save you over $53,000 in interest. You will be mortgage-free faster and your monthly payments will only increase by $84.

Make a larger down payment:

– Providing a bigger down payment is an excellent way to help you pay less interest over the life of your mortgage.

Make sure you can afford what you signed up for:

– Stress test your financial budget using a mortgage payment based on a higher interest rate.

– Total housing costs (mortgage payments, property taxes, heating costs, etc.) should not consume more than one-third of household income.

Make pre-payments when you can:

Pay weekly or bi-weekly instead of monthly.

Take advantage of prepayment privileges:
Increase your mortgage payment (principal and interest) by a percentage over the current payment. At BMO this option can be exercised once each calendar year, at any time, without charge.

Pre-pay a percentage of the original mortgage principal each calendar year. At BMO this option can be exercised in minimum amounts of $100 without charge, some conditions apply.

Always make sure you save for a rainy day:
If you are up to your maximum in debt, you may not be well prepared for the leaky roof along the way.

Think carefully about fixed vs. variable:
While variable rates mortgages have been a winning strategy over the long term, fixed rate mortgages (currently at historic lows) come with the peace of mind of being insulated against rate increases.…

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BMO Urges Business Owners To Take Advantage Of Incentives On Eve Of Tax Deadline

With one day left for small business owners to file their income tax return there are still ways for entrepreneurs to take advantage of various tax-saving strategies.

“It’s not too late to maximize tax incentives that can ultimately help small business owners boost their bottom line,” said Mark Shoniker, Director, Commercial Banking, BMO Bank of Montreal. “From choosing the right payment method to maximizing income-splitting, entrepreneurs should work with a tax expert – such as a Chartered Accountant – to make the most of the tax strategies available to them.”

Mark Shoniker is available for interviews with media on last-minute tax tips and strategies to save this season.

Small business owners can also check with their financial institution for tax information. BMO SmartSteps for Business ( is an online tool providing tax tips to entrepreneurs as well as a customized plan to make their banking more efficient, while taking care of financial needs that go beyond their businesses.

Key tax tips for business owners found on BMO SmartSteps for Business include:

Income splitting

Family-run businesses can capitalize on income-splitting by hiring a spouse or children as employees, since a reasonable salary is deductible. They pay the tax themselves, and if they pay at a lower rate, there could be tax savings for the overall family.

Take caution to ensure their pay is reasonable, their roles in the company are clearly defined, and their performance is well documented.

Deductions for small businesses

A small business tax deduction can reduce the combined corporate tax rate on the first $500,000 of active business income to as low as 12 per cent.

The deduction may be available if your company qualifies as a Canada Controlled Private Corporation (CCPC), carrying on an active business in Canada.

Exemptions for capital gains

Small business shares can qualify for a lifetime capital gains exemption of up to $750,000. Some rules apply, however, including that the claimant must have owned the shares for at least two years before selling.

Remuneration options

Small business owners who have incorporated their business have greater flexibility in determining how to be compensated, such as choosing to pay themselves a salary, dividend, or both.

For example, a reasonable salary can create personal RRSP room, provide a deduction for the business, and help bring taxable income below the $500,000 threshold for the small business deduction. On the other hand, a dividend may be taxed at a lower rate for the owner than a salary or bonus, but would not be deductible for tax purposes.

It is important to note that with corporate tax rates poised to decline in Canada, knocking down profit to below $500,000 by taking out salaries may not be the best strategy. Instead, small business owners could pay the corporate tax rate instead of the top personal rate, and wait until funds are needed before paying a dividend.

“Entrepreneurs can always benefit by dusting off their books and doing a little spring cleaning,” added Mr. Shoniker. “Evaluate your goals, review your tax strategy with a CA, and use BMO SmartSteps for Business for tips on boosting efficiency and productivity.”…

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Renovation Spending In 2009 Up By $4.5 Billion Across 10 Major Centres

An estimated 2.1 million households in 10 major surveyed centres indicated they completed renovations last year according to the Renovation and Home Purchase Survey released today by Canada Mortgage and Housing Corporation (CMHC). The average cost of renovations was approximately $12,100.

The Renovation and Home Purchase Survey reports on actual renovation expenditures made in the previous year, as well as intentions to buy or renovate a home in 2010 in the following 10 major centres: St. John’s, Halifax, Québec City, Montréal, Ottawa, Toronto, Winnipeg, Calgary, Edmonton, and Vancouver.1 The survey provides timely information on renovation market trends.

“More than $25.8 billion was spent on renovations in 2009 across the 10 major surveyed centres, an increase of about $4.5 billion compared to 2008,” said Gustavo Durango, Senior Economist at CMHC. “As well, when Canadian homeowners were asked about their renovation plans for this year, 43 per cent indicated that they intend to spend $1,000 or more by the end of 2010.”

Half of the households surveyed reported that the cost of renovations undertaken in 2009 was in line with what they had budgeted, while 35 per cent said that they went over their planned budget for the renovation. Twenty-seven per cent of households that undertook a renovation project hired a contractor for a portion of the work. Twenty five per cent of renovations in 2009 were completed by “do it yourselfers”. However, many households (42 per cent) chose to contract out the entire renovation project.

Across the surveyed centres, 76 per cent of households who undertook renovations in 2009 paid for the work from savings, a slight increase from 75 per cent in 2008.

The main reason given by households for renovating in 2009 was to update, add value or to prepare to sell (52 per cent). Thirty-two per cent said the main reason for renovating was that their home needed repairs. The top three renovations completed last year were: remodelling rooms (34 per cent); painting or wallpapering (29 per cent); hard surface flooring and wall-to-wall carpeting (27 per cent).

Of the 10 major surveyed centres, the highest percentage of homeowner households that renovated in 2009 was in St. John’s at 59 per cent, followed by Ottawa at 58 per cent, and Halifax and Winnipeg (both at 55 per cent). The centre with the lowest proportion was Montréal at 45 per cent.

Renovation intentions for 2010, across the 10 surveyed centres, are highest in St. John’s, where 55 per cent of consumers indicated they plan to undertake renovations costing $1,000 or more. This is followed by Halifax, Winnipeg and Ottawa (all at 50 per cent). The proportion of potential renovators is lowest in Québec City and Montréal (both at 39 per cent).

On the home purchasing front, six per cent of all households indicated they bought a home in 2009, unchanged from 2008. The largest share of homebuyers was in Edmonton (nine per cent), followed by St. John’s, Quebec, Ottawa and Winnipeg (all at seven per cent). The lowest share of homebuyers was in Toronto (five per cent).

Five per cent of households across the surveyed centres intend to purchase a home that will be used as a primary residence in 2010.

Home buying intentions are strongest in Edmonton where seven per cent of households reported that they are considering buying a home this year, up from six per cent in 2009. Purchase intentions are the lowest in St. John’s and Ottawa at four per cent (these were the only jurisdictions reporting lower intentions than last year, a decline from five per cent in 2009).

As Canada’s national housing agency, CMHC draws on more than 60 years of experience to help Canadians access a variety of high quality, environmentally sustainable and affordable homes. CMHC also provides reliable, impartial and up-to-date housing market reports, analysis and knowledge to support and assist consumers and the housing industry in making vital decisions.…

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New BMO Survey Reveals Where Ontario Business Owners Stand on HST

A new BMO survey shows that Ontario business owners are apprehensive when it comes to how they will be affected by the introduction of the harmonized sales tax (HST) on July 1.

The survey, conducted by Harris/Decima, found that 51 per cent of Ontario business owners expect the impact will be negative, while 33 per cent believe it will have a positive effect.

“The Ontario Government estimates that the HST will save businesses in the province about $4.5 billion annually,” said Sal Guatieri, Senior Economist, BMO Capital Markets. “The savings will encourage investment, helping to boost productivity and the province’s competitiveness.”

“Businesses in Ontario will be affected by the implementation of HST as it will lower costs and should encourage investment in the province,” said Mark Shoniker, Director, Commercial Banking, BMO Bank of Montreal. “But businesses will also have to make some adjustments so they are ready for the changes that will come with the HST.”

Tips and Advice on Preparing for the HST Include:

Revise Your Budgets

Some items you would normally purchase and recover under the provincial sales tax (PST) may not be recoverable with the HST, which could affect your budget. Conversely, most businesses that now sell GST-taxable goods and services, including exports, will be able to claim input tax credits (ITCs) for any HST paid on assets and expenses.

Adjust cash flow forecasts

Purchases that are currently exempt from PST, such as telephone equipment and computers or office supplies, will now include HST which can be claimed as an ITC. The cash flow for your business may be affected because of the time interval between paying for the HST and getting the ITC refund. Take this lag into consideration and revise the projections for your cash flow.

Modify invoices

All invoices should be changed to include the new tax rate on applicable goods and services. They should state the proper rate, your GST/HST registration number and any other information that should be indicated according to Canadian Revenue Agency regulations.

Review eligibility for credit

Businesses that make less than $2 million in annual revenue from taxable sales are eligible for a $1,000 credit from the Ontario government. If your business falls into this revenue category, fill out a form to receive the credit.…

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