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Are Prices Really UP?

In BC total housing sales are down, inventory of places for sale is up ….and prices are up?.

This flies in the face of what we are used to seeing in our traditional markets which were strictly Supply vs Demand driven.

If supply is high and demand is low then prices drop. Likewise, if supply is low and demand is high then prices rise.

In an attempt to make sense of this, one must first consider the way statistics are reported. We all know the problems with using ‘average’ prices – where the price fluctuation from month to month depends on the price range of homes being sold. A month in which multi-million dollar homes selling will skew the averages up versus a month in which several cheaper homes are sold.

Similar to this – but a little more reliable – is using ‘Median’ prices to determine a rising or falling market. Here, a middle sale amount is chosen where 50% of the sales are above this number and 50% of places sold are below this number.

Here we can usually see a market shifting  – especially if there is a change to the demand side such as the government suddenly changing the rules around mortgage qualifications.   However, as with average prices, median values are also going to be affected by the price ranges of homes being sold in any given month.

This brings us to the Housing Price Index (HPI) – which operates the same way the Consumer Price Index works – taking a typical basket of goods (called a benchmark home) and monitoring the changing value of that basket or home.

The definition of a “typical” benchmark home takes into account various property attributes – above ground living area, age, lot size, # of bedrooms, bathrooms, covered parking etc. as well as its proximity to amenities.

However, what it does not take into consideration is the condition of the home.  Suppose the benchmark home in Coquitlam is defined as a 35 year old 2000 square foot, 3 bed – 2 bath home on a 7200 sq ft lot.  Also suppose that there are a number of these homes for sale – such as there is currently. Also suppose that demand is down (currently sales are down almost 40%).

The reality of our market right now is that the 35 year old properties that are selling for good prices are the ones that have been renovated – either partially or completely. And it is those renovated homes that are selling before the un-renovated homes…..and selling at prices higher than the ”benchmark” price.

Conclusion: when we see a report stating Benchmark prices are 2-3% higher than they were in July of 2017 one consideration must be given to the age and condition of the benchmark home as well as the market conditions today versus a year ago.  I am sure you will remember last year with a supply of houses so low that even ‘garbage ‘ properties were selling within 2 weeks for full price or more.

Today, if a homeowner spends $60,000 renovating their 30 + year old home, they can expect to get a substantial portion of that back on the sale price. Therefore it will sell higher than a similar home with no renovations and higher than a ‘benchmark’ home.

Policy Induced Demand Slide Does Little to Impact Supply

Vancouver, BC – April 12, 2018. The British Columbia Real Estate Association (BCREA) reports that a total of 7,409 residential unit sales were recorded by the Multiple Listing Service® (MLS®) across the province in March, a 24.6 per cent decrease from the same month last year. The average MLS® residential price in BC was $726,930, up 5.3 per cent from the previous year. Total sales dollar volume was $5.39 billion, a 20.6 per cent decline from March 2017.

“More burdensome mortgage qualifications are having the predictable effect of swiftly curbing housing demand,” said Cameron Muir, BCREA Chief Economist. “You simply cannot pull as much as 20 per cent of the purchasing power away from conventional mortgage borrowers and not create a downturn in consumer demand.”

Despite the decline in consumer demand, the supply of homes for sale remains low in most BC regions. Total active listings on the market are essentially unchanged from March 2017, and are at or near a 12-year low across the province. As a result, home prices are expected to continue an upward trajectory.

Year-to-date, BC residential sales dollar volume was down 1.7 per cent to $13.9 billion, compared with the same period in 2017. Residential unit sales decreased 9.4 per cent to 18,927 units, while the average MLS® residential price was up 8.5 per cent to $732,243.

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The Economic Fallout of Housing Price Shocks

“If the BC economy tanks, we know who / what to blame. Take a look at the following from the BC Real Estate Association’s economist;”

The desire of some well-meaning British Columbians for government to drive down the price of homes through demand-side policy may sound practical at first blush. However, when you consider the broad and deep economic toll that a negative shock to home prices would exact on both homeowners and renters, it quickly becomes apparent that such an approach is at best, a mug’s game. BCREA Economics analysis* shows that even a relatively modest negative price shock will produce significant consequences to the BC economy.

BCREA Market Intelligence Report: The Economic Fallout of Housing Price Shocks

2018 BC Budget

FOREIGN BUYERS AND TAXABLE TRUSTEES PROPERTY TAX;

Foreign Buyer’s tax for Residential properties has gone from 15% to 20%, effective today. The area this tax covers has been extended from just Greater Vancouver to : The Capital Region District, Fraser Valley Regional District, Regional District of Central Okanagan and Nanaimo Regional District.

The areas for each region can be found at https://www2.gov.bc.ca/gov/content/taxes/property-taxes/property-transfer-tax/understand/additional-property-transfer-tax/bc-areas

– If the property is farmland or commercial with a residential component, the tax applies on the residential component.

– Exemption for BC Provincial Nominee Program still applies.

SPECULATION TAX – NEW

1. The tax is meant to target foreign and domestic homeowners who do not pay income tax in B.C.

2. The tax will apply to same areas as foreign buyers tax apart from Okanagan, where it only applies to Kelowna and West Kelowna.

3. This tax starts in 2018 at $5.00 per $1,000.00 of assessed value and goes up to $20 in 2019.

Other details are not available at this time

PROPERTY TRANSFER TAXIncrease for Properties over $3 million.

1. Tax rises from 3% to 5% on value of homes over $3,000,000.00.

2. It remains at 1% on first $200,000.00, 2% on amounts between $200,000.00 and $2,000,000; 3% on amounts between $2,000,000.00 and $3,000,000.00 and 5% on amounts over $3,000,000.00.

PRE-SALE CONDO ASSIGNMENTS

1. Developers will collect and report information about pre-sale condo purchases; nothing else in budget about pre-sale contracts or assignments that we have seen.

B.C. HOME OWNER SECOND MORTGAGES 

1.    This program is now cancelled – don’t think it was used much anyway.

Consequences of government meddling in the real estate market

By now everyone is aware of the hot real estate market in Vancouver and the fact that it is difficult for Canadians to purchase. But there is a lot more to the story.

40,000 people per year are coming into British Columbia from outside Canada and CMHC says 90% of them are settling in the Lower Mainland. A further 10,000 are coming to BC from across Canada – and it is estimated 10% of those are settling in the lower mainland.

On top of this, Justin Trudeau just announced a new program that will be bringing 1 million new immigrants into Canada over the next 3 years. Traditionally, 20% of new immigrants to Canada settle in BC (2001) as of 2016 that percentage was down to 14.6%. So if my math is correct, that is another 50,000 people into BC annually (45,000 into the Lower Mainland) – on top of the 40,000 (36,000 in the Lower mainland) we usually expect each year – and all of them are going to need a place to stay.

According to CMHC, housing starts in the Lower Mainland as of June 2017 were just over 39,000 housing units and 95% of them were already sold. Already we are 47,000 housing units short.

Compounding the problem of the obvious housing shortage in the coming years, Trudeau’s government has decided he is going to ‘cool off’ the price escalations by making it harder for Canadians to qualify for a mortgage – in effect reducing demand.

How do you cool off a market that is strictly supply and demand driven? If the supply is low and demand remains constant then prices will rise. If demand is high and supply is low (or constant) then prices will rise.  I surmise that Trudeau’s theory is if he can restrict demand then prices will fall. Hence the new mortgage ‘stress test’ rules. Yet that is only restricting demand from Canadians – read on.

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THE NEW MORTGAGE CHANGES

Upcoming changes to mortgage lending guidelines, the rules of borrowing, take effect Jan. 1, 2018 and while there’s been a fair bit of press coverage on this, there is also a fair bit of confusion.

What is NOT happening

 Interest rates are not specifically rising Jan 1, 2018. Although there is a Bank of Canada meeting Jan 17th, which is the next time variable rate mortgage holders would see a potential change, the current expectations are that there will be no change to Prime rate anytime soon.

 What IS happening

 Maximum borrowing power for those with a 20 per cent or GREATER down payment is being REDUCED by 20% or more!    

WHY is this happening?

 To protect you from yourself. So says the current federal government.

 Not due to any material increase in risk or arears. In fact current mortgage arrears rates are hovering around 0.29%, and when Canada was subject to a massive global economic meltdown in 2008 our arears were just 0.41%.

 A high of 0.41% in 2008 based on clients who had qualified for mortgages under far more lax standards of 2007 and earlier. Since 2008 when the first round of lending restrictions were put in place, we’ve had annual restrictions added every year since.

 Who is affected?

1) Those that have no mortgage at all, but do have a pre-approval.  That pre-approval may or may not protect you for the first 119 days of 2018. A select group of lenders have confirmed they will grandfather existing pre-approvals under the 2017 lending rules for up to 120 days. However many lenders will not; for them Jan. 1, 2018 is a hard stop on the old lending rules. Still others are already enforcing the new rules. The question is what is your lender going to do? Not all lenders have announced their policies yet.  Find out where you stand by asking the following questions;

 Question#1: Do the new guidelines affect you?

 Question#2: If Yes to Q #1, is your pre-approval going to be grandfathered with the lender that holds it?

And  2)  Those that have a mortgage in place but you may want to;

– Increase your mortgage amount by even just $1?

– add on a secured line of credit for even just $1?

– move your mortgage to a new property in 2018?

 To add new money, or to move the mortgage to a new property, you’ll trigger a re-evaluation under the new rules, and many Canadians will not qualify for the very mortgage they currently have, even for something is seemingly simple as moving it to a new property – even with a reduction of say 10% or 15% of the balance… a mortgage they may have just taken a few months earlier.

 Your mortgage is most likely ‘portable’, but under the new guidelines it’s only portable with a complete re-qualification.

 Who is safe?

 Those simply renewing their current balances. None of these changes affect you if you are renewing your mortgage for the exact same amount with the same lender.

This explanation has been kindly provided by Dustan Woodhouse – Mortgage Broker

Housing Market Facing Headwinds Despite Strong Economy  

BCREA 2017 Fourth Quarter Housing Forecast

Vancouver, BC – November 28, 2017 The British Columbia Real Estate Association (BCREA) released its 2017 Fourth Quarter Housing Forecast today.

Multiple Listing Service® (MLS®) residential sales in the province are forecast to decline 10.4 per cent to 91,700 units in 2018, after an expected 8.8 per cent decrease this year. A record 112,209 unit sales were recorded in 2016. The ten-year average for MLS® residential sales in BC is 84,700 units. Strong economic and demographic fundamentals are supporting elevated housing demand. However, a number of factors are expected to temper home sales in the province next year.

“Housing demand across the province will face increasing headwinds in 2018,” said Cameron Muir, BCREA Chief Economist.”A rising interest rate environment combined with more stringent mortgage stress tests will reduce household purchasing power and erode housing affordability.” The 5-year qualifying rate is forecast to rise 20 basis points to 5.15 per cent by Q4 2018, and the new qualification rules for conventional mortgages will erode purchasing power by up to 20 per cent. “Given the rapid rise in home prices over the past few years, the effect of these factors will likely be magnified.”

The supply of homes for sale is now trending at or near decade lows in most BC regions. The imbalance between supply and demand has been largely responsible for rapidly rising home prices. The combination of weakening consumer demand and a surge in new home completions next year is expected to induce more balanced market conditions, producing less upward pressure on home prices. The average MLS® residential price in the province is forecast to increase 3.1 per cent to $712,300 this year, and a further 4.6 per cent to $745,300 in 2018.

To view the full BCREA Housing Forecast, click here.

The changing landscape for Canadian Home buyers

Starting in 2008, The Government has steadily reduced the maximum amortization rate from 40 years to 25 years. A 5 year amortization reduction has the equivalent effect on the amount of money a client qualifies to borrow as does a 1/2% interest rate hike.

1. Here’s the effect;

  • in 2007 a buyer with 10% down and a $100,000 gross annual income could get a maximum mortgage of $630,000 (at 4.99% amortized over 40 years) – payments of $446.26 per month.
  • In 2008 with the 5 year interest rate falling to 4.14% and the amortization period reduced to 35 years – that buyer would qualify for the same amount of mortgage, with payments of $449.08 per month.
  • In 2010 when interest rates dropped to 3.49% – the amortization maximum was reduced to 30 years with that same buyer still only qualifying for the same amount of mortgage – with payments of $447.09
  • In 2016, PRE October – that same buyer with a maximum amortization period of 25 years and an interest rate of 2.49% STILL only qualifies for a $630k mortgage.

2. In 2012, the feds introduced legislation impinging on the almost 3 million self-employed workers’ ability to get a ‘stated income’ mortgage. Under this law (B-20) they can borrow only 65 per cent of the purchase value – without requiring default insurance from Canada Mortgage Housing Corp., Genworth Canada or Canada Guaranty. If you have less than 35-per-cent down, your mortgage now has to be insured under specific guidelines. And here’s another twist – CMHC will allow a stated income application as long as you have been self-employed for less than three years. More than three years and you have to qualify according to your net taxable income. Line 150 on your tax return – which despite the ability to carry a large mortgage payment, accountants cleverly work the numbers – legally – to show a lower income with the objective of reducing the already too large income tax load.

3. 2014 additional tightening of rental income calculations – basement suites and additional properties)

4. New rules are in place now regarding the ‘portability’ of your mortgage. If you are attempting to escape the sometimes criminal payout penalty banks charge, by porting your mortgage to a new property and combining that with an additional mortgage to meet the purchase price, you may now have to re-qualify under the new tougher mortgage guidelines.

Government Says It Has Concerns About Their Role With CMHC

Canada Mortgage and Housing (CMHC) may be one of the most profitable crown corporations we have in Canada. They guarantee the lender won’t lose money if they finance a buyer/property more than 75% of its value.

Our government says it has concerns about their role with CMHC  ( essentially a mortgage insurance company) – a role in which taxpayers are technically liable for the borrowers’ actions and behaviour. Yet CMHC currently has premium reserves on hand to withstand up to a 40% market devaluation).

Their average insured loan amount is $173,120 and the average Loan to (current property) Value = 53.1%.  Not much of a risk so far.

The average credit score of the borrowers is 733 (good) and the average Gross Debt Service ratio (GDS) is 23.7%. Note that banks will qualify you for a mortgage with up to a 45% GDS

The Federal government (CMHC) backs these mortgages through two sorts of lenders – Traditional lenders (Banks) and Mortgage Finance companies (‘monoline lenders’).

It has been the Monoline lenders that have driven the interest rates down as they had lower overhead and were smart enough to ‘bulk insure’ their non-high ratio mortgages, resulting in substantial savings that they passed on in the way of lower interest rates.

This advantage has been eliminated by the Federal government by creating policy to heavily restrict the monoline lenders competitive edge. It is curious that when the government decided to enact stiffer regulations and restrictive legislation that they called only on the banks for consultation. Of course it is not a stretch to imagine that the result of this consultation and deliberation is a set of new regulations which threaten the very existence of monoline lenders.

The ‘Nanny State’ reasoning is to protect us from ourselves – at least that is what we are told. Part of the excuse for doing this is that the average Canadian’s debt to income ratio is way too high at 167%.

Federal regulators, and most mainstream media, would have us believe that at 167% it could effectively destroy households.

Dustan Woodhouse gave a great example of the reality of Canadian finances if interest rates double;

1.      The average household debt figure is largely irrelevant to the financial success of our individual household(s)

2.      What is my own debt-to-income ratio? And am I worrying about it at, say, 500%?

Would it sound reasonable to take on a $2,000 mortgage payment with a household income of $100,000?

Is it fair to say that the same $100,000 per year household income could support a $2,600 monthly housing payment?

The $2,000 per month payment represents a monthly payment at today’s interest rates on a $500,000 mortgage balance. The $2,600 per month payment represents a monthly payment at double today’s rates (when that $500,000 mortgage balance comes up for renewal). this household with their $500,000 mortgage balance and a $100,000 household income has a debt-to-income ratio of 500%.

The 500% debt-to-income household has things under control; they know that ~$1,000 of that ~$2,000 payment is principle reduction, a forced savings plan. Although few in Canada actually have a debt-to-income ratio this high; in fact, Bank of Canada research shows that just 8% of Canadians have a debt-to-income ratio above 350%.

But how do things look for the federal government’s debt-to-income ratio?

Let’s have a peak at your (or our collective) “house’s” debt to income ratio. And since the metric does not factor in equity, net worth, savings, or any assets at all when applied to us, we’ll leave them equally absent from this conversation.

Federal Gross income: $291.2 Billion
Federal Gross Debt: $1.056 Trillion

This appears to be a 363% debt-to-income ratio.

Why that’s twice our individual household debt-to-income ratio. And isn’t my mortgage debt capped for complete payout at 25 or 30 years – the maximum amortization allowable. Tell us again about the actual amortization timeline of the current national debt.

Is it the monoline lenders that have driven the interest rates so low that now the Canadian population can afford a $500,000 to $900,000 mortgage? They are actually more prudent than the banks.

Between 2013 and 2016, the characteristics of Median borrowers look like this;

Traditional lenders (*1) Mortgage Finance companies (*2)
Credit score 739 742
90-day arrears rate (%) 0.28 0.14
Household income (annual) $80,912 $84,404
Loan-to-income ratio (%) 304 357
Total debt-service ratio (%) 35.3 37.2


Despite the research clearly indicating a more prudent approach to the business by Company #2 than that of their competition (Company #1).

Taking into account the relative youth of Company #2 (about a decade) vs the age of Company #1 (~150yrs) the variation of the equity (loan-to-income) held by each of its clients is more than reasonable and understandable. The narrow difference in total debt-to-service reflects the generally conservative nature of Canadians and further supports the prudent processes in place at Company #2.

Why is our government effectively trying to legislate Company #2 out of business?

Why is our government consulting only with Company #1 when the government’s own research demonstrates the people at Company #2 are doing twice as good a job when it comes to avoiding problem clients?

Yet despite all of the recent government interference in the real estate market, in British Columbia after a momentary slowing last fall, the market is in full throttle once again.

CMHC Premiums Increase March 17, 2017

Effective March 17, 2017, CMHC’s standard mortgage loan insurance premiums will be changing as follows:

Loan-to-Value Ratio Standard Premium (Current)       Standard Premium (Effective March 17, 2017)
Up to and including 65% 0.60%                      0.60%
Up to and including 75% 0.75%                      1.70%
Up to and including 80% 1.25%                      2.40%
Up to and including 85% 1.80%                      2.80%
Up to and including 90% 2.40%                      3.10%
Up to and including 95% 3.60%                      4.00%
90.01% to 95% – Non-Traditional Down Payment 3.85%                      4.50%

Interesting to note that during the first nine months of 2016

    • Nearly 50% of CMHC’s transactional mortgage loan business were for loans of less than $300,000
    • Nearly 95% of CMHC’s transactional mortgage loan business were for loans of less than $600,000
    • Less than 1% of CMHC’s transactional mortgage loan business were for loans of more than $850,000

As at 30 June 2016, the rate of arrears (loans that are more than 90 days past due over the number of outstanding insured loans) was 0.32% , a decrease from year-end 2015.

Claims paid during the second quarter of 2016 totalled $91 million, an increase of $2 million (2.3%) from the same quarter last year primarily due to the transactional homeowner product.

An interesting comparison is the United States’ delinquency rate for all residential real estate loans. In the first 3 quarters of 2016 it was 4.84%, 4.56%  and 4.30% (3rd quarter), respectively.

In the U.S. 3.1% of home owner loans were “seriously delinquent” in March, 2016 (defined as loans that are at least 3 months delinquent or in foreclosure proceedings). It was expected that this rate would be reduced further by the end of 2016.

The seriously delinquent rate was below 2 % in the US from the 1950’s up to the Great Recession (Dec. 2007 to June 2009 – where it rose to 20%!)

 

However, even the 2% rate is over 6 times higher than CMHC’s  0.32% rate. At this low delinquency rate, it makes one wonder if the 2017 increase in premium rates is just another tax revenue stream.