Moving couch

Bricks & Sticks

by Desi Auciello

Desi Auciello is the 2006 GTHBA President, and is also president of Cachet Estate Homes.

Home sweet cash cow

Date: July 21. 2006

The title of the most recent issue of the Clayton Housing Report - Home Sweet Cash Cow - certainly caught my attention, and I thought I would share with readers the very interesting findings on house values and home equity revealed in Clayton's monthly report.

Dr. Frank Clayton, by the way, is one of the foremost housing economists in Canada, highly respected within industry and government circles, and well known for telling it like it is. His "cash cow" data results from the Clayton Research/Ipsos Reid FIRM Survey.

Clayton notes that the average price of a home sold through the Multiple Listing Service in the first months of 2006 is up 75 per cent since 1999. Aided by this sharp appreciation, the average homeowning household in Canada currently estimates their home equity at $183,000, up $73,000 since 1999.

As an aside, Clayton thinks homeowners are conservative in their equity estimates so put an "at least" in front of the dollar values. Keep in mind, as well, that these are national averages -- the figures for the Greater Toronto Area would obviously be much higher.
So what are homeowners doing with all this wealth?

Clayton estimates that 1 in 5 homeowners borrowed against their home equity last year, most often through home equity lines of credit, which have the advantage of lower interest rates than unsecured borrowing, often as low as prime.

Interestingly, homeowners with mortgages are almost three times as likely as homeowners without mortgages to be tapping home equity, which Clayton attributes to their younger age structure where borrowing occurs more often.

And what are these homeowners doing with the money? About 20 per cent are renovating while a similar proportion borrowed to consolidate their debt into one (and in most cases, lower interest rate) package. Purchasing a vehicle (14 per cent) rounded out the top 3 purposes. Other uses included financial investments (10 per cent), finance homeownership (seven per cent), daily spending (7 per cent), education (5 per cent), small business finance (2 per cent), vacation/investment property (2 per cent), and other (13 per cent).

Clayton says that about one in four homeowners has a home equity line of credit, up from about 1 in 6 in 2000. The growth in this type of financing is directly related to the increase in home equity, as these lines are typically only available to those with at least 25 per cent equity in their homes.

Mortgage trends

In the same issue, Clayton notes that the shift towards variable rate mortgages is subsiding as rates rise ever so slightly. Variable rate mortgages increased from less than 5 per cent of all mortgages in 1999 to a peak of 29 per cent at the end of 2005, falling to 26 per cent by March, 2006.

In terms of dept repayment, most mortgage customers now make bi-weekly (60 per cent) or weekly (19 per cent) payments. Few mortgage holders, however, take advantage of their extra pre-payment options (e.g., the ability to make lump sum payments or increase regular payments from time to time. In 2005, only about 1 in 5 mortgage holders made any prepayments, with the amounts typically small, representing only about 2 per cent of outstanding mortgage debt.

Starts strong

Last week, Canada Mortgage and Housing Corporation released data showing that housing starts remained strong in June, while year to date housing starts have fallen slightly from last years record pace.

Through the first six months of the year, housing starts have declined by 6 per cent compared to the first six months of last year. Delving into the numbers a little deeper, we see that starts of single-detached homes are down 17.3 per cent while multiple family units (semi-detached, townhome and condo suites) are up 1.2 per cent.

Condominium construction remained on a record pace through June. Year-to-date starts for this housing type were up almost 18 per cent. The majority of these units are located within the former city of Toronto and popular nodes such as North York and the Mississauga city centre.

"Rising home prices have played a key role in declining demand for low-rise housing," according to Jason Mercer, CMHC's senior market analyst for the Greater Toronto Area. "Ground oriented home types have become too expensive for a large proportion of first-time buyers and some existing home owners as well."

"Many households have decided to purchase some form of condominium apartment, including those in traditional high-rise developments as well as stacked townhomes," continued Mercer. "These housing types are available at lower price points."