Real Estate Market Update

Real Estate Market Update | March 2018 

What a difference a year can make. Year-over-year we are seeing significant changes throughout real estate markets across Canada. In each of the four major markets I’ve reviewed, Sales have dropped and Active Listings are on the rise, which means Beauty Contests and Price Wars will dominate the marketplace. 

Year-over-year, Vancouver is -30% in Sales, Edmonton -12%, Calgary -27% and Toronto nearly -40%. These are noteworthy changes and deserve some evaluation but I don’t think the sky is falling. Markets change but we as professionals need to be able to change with them.

Calgary, AB

Comparing March 2018 to March 2017, sales are down just over 27% and inventory is up almost 25%.  This means as of March 2018, Calgarians are working with roughly 4.6 months of inventory.  There’s no doubt you are in a shrinking market which means there are fewer sales happening for the same amount of people.

Richard Robbins

Housing Market Inventory on the Rise

As expected, slow sales this quarter have persisted through March in the City of Calgary. This is not a surprise, after stronger growth in sales at the end of last year following the announced changes to the lending market.

First quarter sales totaled 3,423 units, nearly 18 per cent below last year’s levels and 24 per cent below long-term averages. Easing sales and modest gains in new listings caused inventories to rise and months of supply to remain above four months.

“Economic conditions are slowly improving, but it has not been enough to outpace the current impact of higher lending rates and more stringent conditions,” said CREB® chief economist Ann-Marie Lurie.

“We are entering the most active quarters in the housing market with more inventory, which could create some price fluctuations. However, the improving economy is expected to prevent overall prices from slipping by significant amounts.”

While prices trended down on a quarterly basis, they remained relatively unchanged over last year’s levels due to modest gains in the detached sector offsetting declines in the apartment sector.

The citywide benchmark price for detached product averaged $502,000 in the first quarter. This is slightly lower than the fourth quarter of last year, but comparable to levels recorded in the first quarter of last year. In March, the detached price reached $503,800, 3.6 per cent below pre-recession highs, but one per cent above the lows recorded during the recession.

“The market today is better than what we experienced at the peak of the recession,” said CREB® president Tom Westcott.

“You can find good value if you’re looking to buy a home, and you can also get good value if you’re selling. Being well-informed, in any economic condition, is the key, because there are differences in the market depending on what type of property it is and where it is located.”

Detached market inventories in the first quarter of 2017 were low compared to historical standards. This year, detached inventories have averaged 2,573 units over the first quarter, 10 per cent below first quarter averages recorded during 2015 and 2016.

Spring will have more inventory than last year, slowing progress on price recovery. However, the amount of price adjustment will vary depending on competing supply by location and product type.

-CREB

What to know if you’re considering a mortgage from an alternative lender.

Samantha Brookes has been warning Canadians to take a close look at the clauses in their mortgage contracts for years, but her refrain has become a bit more prevalent in recent months.

Since the Office of the Superintendent of Financial Institutions’ mortgage stress test was implemented in January, the founder of the Mortgages of Canada brokerage has seen “a huge influx” of Canadians who fail to qualify for a bank mortgage turning to alternative lenders that range from risky loan sharks to larger, more conventional companies like Home Trust.

While alternative lenders can provide a lifeline for Canadians who have run out of other financing options, Brookes said they come with pitfalls for those who don’t bother looking at the fine print.

“You need to read those contracts,” she said. “(With an alternative lender), the interest rates are higher, the qualifying rate is higher than if you were going with a traditional bank and they are going to charge one per cent of the mortgage amount (as a lender’s fee) for closing, so that means your closing costs increase.”

Alternative lenders tend to offer less wiggle room on their terms, so Brookes said that means you should pay special attention to another dangerous term she’s seen slipped into mortgage contracts: the sale-only clause.

It’s less common, Brookes said, but if left in, it might mean the only way you can break your mortgage is by selling your home. She usually makes sure it’s nixed from her clients contracts immediately.

She also advises mortgage-seekers to research a potential lender’s reputation, which can easily be done online. Looking up some lenders will reveal their involvement in growing strings of court cases, she said.

“If they are constantly in court fighting with consumers for money, are you willing to put yourself at risk with that kind of person?” Brookes recommended asking yourself.

Still, she said alternative lenders “that don’t end up in court every two seconds” are out there and can offer a good mortgage, if you do your research.

Broker Ron Alphonso has seen what happens when you don’t look into your lender. He recently heard from a couple who borrowed $100,000 via a paralegal posing as a broker, who then convinced the couple to give the money back to him so he could invest it on their behalf. Instead of investing it, the paralegal disappeared to Sri Lanka with the funds, leaving the couple on the hook for the money and resulting in eviction from their home.

“They got very, very poor advice,” Alphonso said. “Apparently the person that arranged the mortgage was an agent and paralegal that has since been disbarred. If they had a lawyer working for them, at least the lawyer could have said (before they signed the mortgage) maybe this isn’t right.”

Alphonso recommends seeking advice from a broker, who he said should also be questioned about how tolerant a lender will be if you were to default on one of your payments.

Some lenders quickly force their clients into a power-of-sale or foreclosure, while others will find a way to work out an arrangement that will allow them to keep their home.

“If you are already in some kind of financial problem and you go to a lender that is not flexible, you make the situation worse,” Alphonso said. “If you miss one payment, (within) 15 days you can be in power-of-sale.”

When that happens, he often sees people refuse to leave their home and try to fight the power-of-sale or foreclosure. They take the matter to court and end up spending tens of thousands of dollars in legal fees that can eclipse any remaining equity they might have in their home.

If they lose their case, which Alphonso said happens often, they end up with a massive lawyer’s bill, no equity to cover it and no place to live.

That’s part of why he said those seeking financing should have an exit strategy to get out of any mortgages they sign with an alternative or private lender with a higher interest rate.

“Your goal should always be to get to a lower interest rate,” he said. “If they don’t go in with a true goal of how to get out of this private mortgage, there will be a problem down the road.”

Alphonso recommended looking for an open mortgage, where you can prepay any amount at any time without a compensation charge or a prepayment limit that you would often find in a closed mortgage.

Open mortgages come with higher interest rates, but give buyers the option to switch to a cheaper lender if something happens. However, switching does often come with penalties, he said.

Because some agents and brokers don’t give enough information or fully explain penalties and clauses, he said the best way to keep out of trouble when seeking a mortgage is to ask lots of questions and understand what you’re getting into before signing on the dotted line.

-TARA DESCHAMPS, Globe & Mail

What Does Donald Trump Mean For Canada’s Housing Market?

U.S. President Donald Trump sent shockwaves through Canada’s economy this past week, first promising punishing tariffs on steel and aluminum imports, then at the last minute exempting Canada from those tariffs, at least temporarily.

It’s becoming painfully clear that Trump’s policies (or pronouncements, or whims, or whatever they are) have the potential to upend Canada’s economy, and with it, the lives of Canadians. So maybe it’s time for this real estate-obsessed nation of ours to pose a question that until recently seemed too obscure — or maybe just too weird — to ask: What does Donald Trump mean for Canada’s housing market?

It may seem counter-intuitive, but Trump’s aggressive protectionism might actually work to support house prices.

The Bank of Canada this week decided against yet another interest rate hike, and among its reasons was this statement: “Trade policy developments are an important and growing source of uncertainty for the global and Canadian outlooks.”

Analysts took that to mean the BoC is worried that Trump’s protectionist measures, such as the steel and aluminum tariffs or potential withdrawal from NAFTA, could harm Canada’s economy. And if Trump manages to scare the BoC into a more dovish outlook on the economy, it will mean fewer interest rate hikes in the months to come.

That might actually be good news for Canada’s heavily indebted mortgage borrowers, who are under increasing pressure these days. We’ve seen the BoC hike interest rates three times since last summer, and major mortgage lenders have followed suit. Meanwhile, new mortgage rules are forcing some homebuyers to scale back their ambitions.

The result is a slowing housing market, both nationally and in the two super-pricey markets of Toronto and Vancouver. And the Bank of Canada might now be getting worried about the impact of that slower housing market on Canada’s economy.

“Notably, household credit growth has decelerated for three consecutive months,” the Bank noted in its decision Wednesday.

Canada has been growing increasingly reliant on its housing market for economic growth in recent years, so a slowdown could take a real bite out of employment, and that, in turn, could mean a broader economic downturn.

The irony of it is that, if Trump were to abandon his protectionist measures and the BoC were to assume a more rosy outlook, it would likely mean more rate hikes ahead, and more downward pressure on housing.

All of which is not to say we should be hoping for Trump to slap Canada with massive tariffs or cancel NAFTA; a move like that would cause all sorts of economic damage of its own, regardless of housing. But if Trump pulls the trigger on his protectionist agenda, the Bank of Canada may well respond by freezing interest rates, and some analysts say it may even reverse course and start dropping them.

So a trade war with Trump’s America, while likely to be ugly, will at least help keep those property values from crashing. That may be the closest thing to a silver lining in this whole mess.

Daniel Tencer  Senior Business Editor, HuffPost Canada

The lowdown on low down payments – Mortgage insurance a must for those with high-ratio loans

Hot markets and cold feet might keep some people out of the housing market, but a lack of upfront cash doesn’t have to be an obstacle. While it’s long been the convention in the industry to start with a 20% down payment, the availability of mortgage default insurance means ownership is still possible with as little as 5% down, as long as the buyer meets industry standards of income and creditworthiness.

“What mortgage insurance allows people to do is to get into the market with today’s prices, with today’s low interest rates, once they have determined that home ownership is right for them,” says Mary Stergiadis, principal for Ontario business development at Canada Mortgage and Housing Corp. The insurance repays lenders if a homeowner defaults on payment.

People with insured mortgages can take advantage of the same interest rates as those taking out conventional mortgages, she says. And the insurance doesn’t cost as much as some people think.

Here’s how it works: With 5% down, the insurance premium is 2.75% of the mortgage. On a $400,000 property with $20,000 down, the mortgage insurance premium would be $10,450. That would bring the total being borrowed to $390,450. Assuming a fiveyear closed at 3.75% amortized over 25 years, the monthly payment would be about $2,000, including less than $55 a month for the insurance. The same property with 20% down would have a monthly payment of $1,640.

“What consumers have to ask themselves is what $60,000 means to them in terms of savings,” Ms. Stergiadis says, referring to the amount needed to reach a 20% down payment for this property. “How long would it take to save that additional down payment? Where will home prices be within that time? Where will interest rates be?”

(But note that the tax on the premium – 8% in Ontario – cannot be amortized and is due on closing.) The insurance rate goes down as the down payment goes up. For buyers with 10% down, for instance, the premium is 2%; with 15% down, it’s 1.75%.

A popular misconception is that this insurance applies only to the primary residence of the borrower. But it is also available for a second property, such as a home or condo in the city to cut a commute or to house an aging parent or a student. CMHC does not, however, insure recreational properties.

Private mortgage insurers, such as Genworth Canada and Canada Guaranty, also insure high-ratio mortgages. The rates offered match those of CMHC; consumers usually aren’t aware of differences, as lenders apply directly to the insurers once an offer has been made and accepted on a property.

Genworth estimates about 30% of Canadian mortgages are insured, down from historical levels of as high as 40%. That percentage tends to be lower in the GTA, says Jason Neziol, Genworth’s regional vice-president of sales for Ontario and the GTA. That’s because higher prices mean more people make larger down payments in order to quality for mortgage loans.

Mr. Neziol says private insurers play an important role in the market by providing more choice for lenders and helping to educate the public about options. “It gives options to consumers,” he says. “It’s good for lenders to have a choice in terms of what insurance providers would do.”

You don’t have to be a first-time buyer in order to qualify. Plus, even conventional mortgages, those with 20% or more down, can be insured. This can happen if a loan is slightly outside of a lender’s usual parameters.

And there can be a rental component. A buyer can purchase a duplex with 5% down, for instance, but must live in one unit. A 10% down payment is the norm for three-and four-unit properties, where one unit is owneroccupied and the others are rented out. The point, Mr. Neziol says, is to be aware of the many options available.

© Copyright (c) National Post

Mortgage 101: Where to start – The numbers behind the home

You’re 29 years old. You’ve been in a solid job for a couple of years and your partner has a good job, too, giving you a gross household income of $125,000 a year.

The housing market has recovered after the dip caused by tougher lending rules and prices continue to rise, so it might be time to act and leave renting behind. Interest rates are holding steady at still-low rates. And your parents are ready to gift you a healthy down payment.

Now it’s time to determine how much you can afford. Online mortgage calculators, of which there are many, will provide a rough idea. And this is where many people start. You could click on RBC Royal Bank’s calculator and punch in the numbers, which include your income and debt information. Other sites may ask for slightly different numbers, but the process is generally the same.

Your magic number for buying is $505,000. With a down payment of $75,000, a 25-year amortization and a five-year locked-in rate of 4%, your monthly mortgage payment will be $2,310.

While this may seem doable, mortgage professionals highly recommend more work be done before heading out to find that dream home. And they caution against jumping right to the maximum mortgage potential.

“We don’t want to put someone into a house just because it’s their maximum,” says Jennifer Bissonnette, a mortgage specialist at RBC. “You want to leave some wiggle room. You don’t want to live just to pay your mortgage.”

Online calculators are good tools, but they aren’t always realistic, agrees Laura Parsons, a financial expert at BMO Bank of Montreal. “It’s good to go there and have an idea. But there are many other components to consider.”

A chat with a mortgage professional will help put things in perspective. You might be asked about your plans to start a family, how much you are contributing to your RRSP, what your career goals are, how old your cars are.

This conversation will get you thinking about whether you really want to borrow $439,000, which includes the mortgage principal and mortgage default insurance. You should also consider the ramifications of rates rising in the future.

“Maxing out your borrowing is not always where you want to be,” Ms. Parsons says. “You can’t see into the future, but you have to have some idea of what to prepare for.”

There will be property taxes, homeowner’s insurance, utilities and regular maintenance. There may be emergencies, such as a leaking roof, a broken furnace or a flooded basement. There could be landscaping, snow removal costs or condo fees. All this needs to be rolled into the budgeting process. “You may have to buy a lawnmower,” Ms. Parsons says with a laugh. “A lot of people don’t think about these things.”

Mary Stergiadis, principal for Ontario business development at Canada Mortgage and Housing Corp., explains some guidelines for determining a target home price.

There’s total shelter costs, which include month-ly payments for principal and interest, taxes, heating and half of a condo fee, if there is one. (According to industry standards, half of the fee is seen to represent true shelter costs, while the other half includes things like condo maintenance.) This total is divided by monthly gross household income. As a general rule, the total monthly housing costs should be no more than 35% of gross household monthly income.

Then there is the total debt-servicing-ratio calculation, which adds other monthly debt payments to shelter costs. This total is divided by gross monthly income. Again, as a general rule, servicing these costs should be no more than 42% of gross household income.

CMHC has a suite of online calculators to help homebuyers crunch the numbers. “If they are over the ratios that are allowable within the industry, they would have to look at lowering the mortgage,” Ms. Stergiadis says.

At this point, you might think a less expensive property might be more reasonable. But it sometimes happens, though less often, that people find they qualify to borrow more than they expected. Once a target price has been established, it’s time to apply for a pre-approved mortgage.

A pre-approval will help you refine the process and know exactly what you have to work with when you find the right place and are ready to make an offer. A pre-approval entails a credit check and information such as the rate being offered (usually locked in for 120 days), as well prepayment options. Ask for details about such closing costs as land transfer taxes and legal fees.

A word of caution: A preapproval is not a final approval, so make sure you know what the condi-tions of getting final approval are and that you can meet them. If you go out and lease a new Mercedes before closing, you could end up with a nasty surprise about your ability to qualify. And don’t forget to save a little for that new lawn mower.

 

© Copyright (c) National Post

Downsizing a home can open the door to investment opportunities

Whether it’s an overabundance of space or a waning desire to do the upkeep on a large property, there are many reasons why people decide to downsize their homes.

Moving from a family home into a smaller property such as a bungalow, condo or apartment is first and foremost a significant lifestyle change. But with the right guidance, downsizing can also create several investment opportunities.

Downsizing reduces many costs including taxes, maintenance, heat and electricity. “So right away people can save money,” said John Deakin, real-estate broker at Deakin Realty. “And freeing up capital or eliminating your mortgage altogether is hugely desirable. It’s surprising how many people are still paying mortgages into their 70s and beyond; it’s often a short-sighted mistake.”

When a homeowner frees capital attached to a principal residence, there are several opportunities for investment.

“Every case is different, of course, but generally the best situation for everyone is to have no mortgage on the roof over their heads as soon as possible,” Deakin said. “This provides security but also frees your home to become an investment vehicle as you can put a secured line of credit against the home and use that money for investment, thereby making those funds taxdeductible.”

When it comes to investing that capital, people have a wide range of options. Owning a residential revenue property is one of them, although Deakin cautioned it’s not an avenue best suited to everyone.

“There are a lot of people who shouldn’t own revenue-generating real estate because they can’t handle the unpredictability of it – and the amount of time and attention it can require,” he said.

“If your plan is to buy a rental building, you should be someone who already knows about buildings and can be active in maintaining one. It becomes a hobby that generates nice returns.”

Being inexperienced in this field can also lead to poor choices regarding the tenants you accept.

“It often happens that people rent to tenants they really shouldn’t,” Deakin said. “They feel empathy towards someone in a rough spot who just needs some help because their credit isn’t great, and so on. These situations often don’t end well for owners.”

Aside from owning a rental building, there are other somewhat less daunting options for investing in real estate after downsizing your home.

One alternative is to find a smaller property or rental to live in, and rent out your family home.

“This is a great option for empty nesters,” Deakin said. “Doing this eliminates closing costs and it’s a much easier transition into owning a rental.”

Knowing the property inside out is a big advantage when it comes to renting it.

“It’s not like buying a building blind and six months in you realize the basement is leaking. Having lived there, your familiarity with the home is a big plus.”

It can be very rewarding financially over the long term as well which, of course, is the ultimate goal.

“Let’s say you have a four-bedroom, three-bathroom home, with a two-car garage and 2,600 square feet, for example,” Deakin said. “You can end up getting a nice monthly rent for it – say $3,000, depending on other factors such as condition and location.”

When switching your principal residence into an income property, it’s important to establish its value. That’s because the difference between your purchase price and the value of the property when you switch it over is tax-free when it comes time to sell it.

“The first year or two after you convert it into a rental, the income isn’t hugely significant,” Deakin said. “But three or four years later, the income grows as your mortgage balance goes down – and interest on that mortgage is 100-per-cent tax-deductible because it’s considered an investment.”

Another income-generating option to consider when downsizing would be to purchase a duplex or triplex and live on the lower floor, while renting out the other levels.

“Living in a one-level space is a smart decision because the people looking to downsize are usually of a certain age,” Deakin said. “So moving to a smaller space that has no stairs, or a limited amount of them, will allow people to live there for longer than would typically be the case in a multi-floor property.”

If none of these options are suitable for your situation, it’s also possible to sell your large home, move to a smaller property and use the remaining capital to purchase a second property as an investment.

“In this instance, the same principle applies regarding your mortgage,” Deakin said. “You always want to have no mortgage on your primary residence. Instead, your mortgage should be on the investment property.”

The only reason you would put any kind of a mortgage on your primary residence would be to offset the purchase price of the investment property, which can be done through a secured line of credit, he said.

While these are all valid and realistic investment options when downsizing, Deakin emphasized that there are many other avenues to consider outside of real estate as well.

“I help a lot of people who are in this situation and many of them just aren’t in the head space to be owning real estate,” Deakin said, “and that’s fine. There are several investment options to explore outside of property. It’s all about finding something that is realistic and provides security for you and your family.”

© Copyright (c) The Montreal Gazette