Money For Nothing ! ...And The Fees For Free ?

Money for Nothing

Below is a great article that was written from one of my oldest friends who I have coffee with every Saturday morning while our daughters go to dance class....more things than mortgage rates have changed with us since 1985.

The article explains the question or the statement from people "Who are building all these houses? and Where are they coming from ? I have asked him if I could post it here on our blog and add some links to it which he has agreed to as I am encouraging him to blog his articles.

As published in the Guardian Newspaper May 13th, 2009 - written by Blake Doyle  You can follow Blake here on Twitter

Money for Nothing. That is what Dire Straits told us in their 1985 number one billboard hit. And in 2009 with banks posting mortgages rates of under four per cent for five-year terms, money is almost for nothing.

As apoint of comparison, a five-year fixed mortgage rate was almost twelve per cent in 1985.

While we are still dealing with the effects of cheap money and easy credit in the US housing market, what has been happening in the Island housing market?

Here is the anomaly in new dwelling construction on PEI. Our population has remained relatively stagnant for the last several decades. In 1985 we had 127,664 people living on PEI; while in 2009 we have (estimated) 140,402. During this time, mortgage rates have been declining and construction has been booming.

With a stagnant population and strong construction sector, why all the building? Some of this is seasonal construction (off-Islanders building cottages), much of this is urbanization (people centralizing to our cities; witness the declining demand for rural schools and hospitals), immigration factors, and as one astute commercial banker pointed out to me, "the density of dwellings is decreasing." This suggests that people are living alone as opposed to finding roommates to afford the traditionally higher mortgage rates.

At some point do we hit a wall? Even with the factors identified above, how long can construction be sustained when the population does not grow substantially? Or is there just a shift in how/ where people live?

This past April, RBC provided some economic data on the Atlantic housing market. While the Atlantic region remains buoyant with a good balance of buyers and sellers and housing affordability continues to improve due to rising income and lower rates, there are signals that the global pessimism is starting to reach us as sales of existing homes have dropped in recent months.

CMHC forecasts a decline in new construction for both 2009 and 2010. The average for the past decade is 757 new construction starts per year; in 2009 it is expected to be between 525-600 new starts. This month CMHC confirmed that new starts in April were only 23 down from 42 during the same period last year. Nationally, the decline was 53 per cent. A shift, but the sector is not shutting down.

The affects of the positive fundamentals cannot be overlooked. Mortgage rates are at 50-year lows. CMHC forecasts that prices will continue to increase, observing a 4.9% increase in prices between 2007 and 2008.

We should also consider that while the population remains flat, more people are working. In 1999 there were 60,200 people working, in April 2009 there were 68,600 people working. While there are 1.9 per cent fewer people working in 2009 than 2008, the labour participation rates appear to be increasing.

However, during the period since the Brothers in Arms album, it hasn't just been "guitar and MTV" for businesses. In 1985 the number of businesses that declared bankruptcy was 31; by 2007 that number had jumped to 297.

Looking at the components of our population growth a positive impact to our increasing population has been immigration. In 1985 PEI welcomed 116 newcomers; in 2007 that number had increased to 732.

While money in historical terms is "inexpensive" to access, borrowers still have to qualify to get this capital. The good news is that we can expect lower borrowing rates to last for several more quarters. If businesses, or persons, are carrying debt on instruments of higher cost (credit cards); this would be a great time to consolidate debts at a lower rate. Don't be shy to negotiate and don't just accept posted rates.

"Get your money workin' that's the way you do it". Keep the economy strong by building and investing through the construction sector. Take advantage of tax breaks and energy conservation incentives, and secure your financing when money is at these historic low rates.

 Tried to find the video to embed but seems it is locked down but you can go to youtube and see it here


Joel Ives

Joel Ives

CENTURY 21 Colonial Realty Inc.
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