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Notable News of the Week: May 25, 2012

End your work week with our Notable News of the Week. gathers and summarizes the most interesting headlines, to keep you up-to-date with the latest from the Canadian mortgage and housing industry. Once again, the see-saw battle on debt, affordability and housing prices take centre stage.

A neighborhood’s nightlife as a measuring stick for real estate value – The Grid

Finding Toronto’s next hot real estate zone could be as simple as knowing where the most popular VIP nightclubs and restaurants are located in the city. For instance, in the King West neighbourhood lies many popular night clubs and restaurants situated among a few thousand condominiums – and for good reason. Young, twentysomething buyers want to live in vibrant, fun and cool neighbourhoods.

RBC and CBC exposed to the most mortgage risk – Ottawa Citzen

Historically high levels of household debt combined with fast-rising house prices pose a possible threat to Canadian bank credit portfolios, according to Fitch Ratings. The Financial Post reports that Canada’s six big banks have a combined $730B in mortgage exposure and $182B in home equity loan exposure. RBC and the CIBC are exposed to the most mortgage risk, while TD and BMO were found to be the least exposed. To gather the data, they compared the banks’ domestic mortgages relative to total loans. Despite the threat, Canadian banks have sufficient capital to withstand market stress, plus our bank ratings are among the best in the world.

Rise in debt fuelled by Canada’s low borrowing costs and commercial lenders – Bloomberg

The Bank of Canada’s low borrowing costs in the form of the key interest rate has helped escalate debt levels in Canada. Household debt levels relative to income have surpassed those in the U.S. and the U.K! Our household debt poses the biggest risk to our financial system and requires prudent lending practices to avoid a financial crisis.

OECD urges Canada to raise rates – The Globe and Mail

The Paris-based Organization for Economic Co-operation and Development (OECD) is urging the Bank of Canada to raise interest rates. They are suggesting benchmark increases of 0.25% starting in the fall and every quarter after until the overnight target rate is at 2.25% in an attempt to cool housing prices and contain inflation. That rate would still be considered low by historical standards, yet OECD says the increase would likely cause homebuyers to think twice before buying at current inflated prices. However, there are risks involved, a hike in mortgage rates could create a significant spread between Canadian and U.S. interest rates and put upward pressure on the already strong Canadian dollar.

Peter Jarrett, OECD’s senior economist says a modest interest rate hike is needed to slow the trend of rising Canadian debt loads. A rate hike would also help bring down inflation and cool overvalued markets. According to Market Watch, some Vancouver realtors are expecting the hike in interest rates later, rather than sooner. They believe the real estate bubble will not pop, but gradually let out air to reach a soft landing unlike the pop experienced in the U.S.

Home affordability the same or better than 20 years ago –The Globe and Mail

You may feel homes, particularly in Toronto, are on the pricy side, especially with property prices doubling in the last ten years. But national affordability is almost the same or better than it was 20 years ago, according to measures by the Bank of Canada and major economists. The results are due to falling interest rates and rising incomes. However, affordability does not measure home prices or total debt, it only measures how “easy” it is to make payments. Sal Guatieri, BMO senior economist says, “a 2.0% rate increase would put enough strain on affordability to slow the market meaningfully.” Research from BMO and the Canadian Association of Accredited Mortgage Professionals (CAAMP) confirms that 20% of Canadians believe a 2.0% rate increase would jeopardize their ability to afford their home.

Canadians can withstand housing downturn, but debt a concernWinnipeg FreePress

DBRS, a credit rating agency, is confident that Canadians can withstand a drastic drop in home prices. However, they warned that the increasing rise of unemployment and household debt is a greater concern. Those who are currently financially stretched and end up unemployed may be forced to sell their homes. DBRS said that when debt accumulates faster than average household income relative to the economy as a whole, home prices and borrowing spike. Such a change would hamper housing affordability and can leave you with limited room to deal with unexpected expenses.

Canadian household debt reached record levels of over 150% of disposable income last year, dangerously close to the 160% level that preceded U.S.’s housing collapse. Jim Flaherty has already tightened mortgage lending rules by shortening amortization periods and raising minimum downpayments. The CMHC and Office of the Superintendent of Financial Institutions could be preparing to do more.