“Why join the navy if you can be a pirate?” -Steve Jobs
IN THIS WEEK’S JUROCK REAL ESTATE INSIDER FACTS BY EMAIL:
Kootenays, Penticton, Kelowna reports. Why it is vital to be careful now.
TIP OF THE WEEK:
How some banks calculate a prepayment penalty? How does yours do it?
- The Numbers – South Okanagan
- The Numbers, The Numbers – Okanagan – Kelowna
- Spotlight: The Kootenays
- Hot Property
- Best Mortgage Advice
It seems that in the last 3 years our main theme has been that there are 2 markets in Vancouver … one for the very rich and one for everyone else. Another main theme has been that we believed inflation was going to be visibly back in 2014 … and that higher prices would be the result of overprinting (or a worldwide Q1, Q2, Q3, Q4?) in the mad attempt to stave off inflation by adopting a ‘beggar thy neighbour’ money policy. (Let’s drive our currency down.)
At our Landrush and OUTLOOK conferences (Next one September 13) and here in our INSIDER we urged you to
understand, that playing with the uber-rich could be profitable if dangerous and we said it was not just a Canadian phenomenon … it would be worldwide.
Well, I am travelling in the last 6 weeks through Europe from one end to the other, touching over 12 countries and inflation is visibly
rising EVERYWHERE … nations are overprinting EVERYWHERE … real estate prices are rising EVERYWHERE and the rich
are buying upper end real estate EVERYWHERE.
In the mid-nineties in our speeches we said that overprinting would have the result that easy money would be created … that the easy money would get to
the very rich first that would then – and I quote: “drive up prices in Aspen, Whistler and Marbella, Spain first and then it would come to the rest of us later”. The rich were driving up paintings,
luxury items and while we could go along for the ride, we had to be cautious as to understanding their pretentious decisions … (Once they go, they
take values down.)
Ok, Ozzie, nothing new here … you were right so what? Well, this late July, there are 2 things that are new and we need to sit up and take note!
Before it was just I and a few others predicting inflation and the creation of 2 markets … So 1st note: Now you can read it
EVERYWHERE! From the NEW YORK TIMES to our local papers … all are reporting sales and are reporting of what ‘does it mean’. And 2nd note: Governments are taking note and are gearing up massively to clamp down on ALL investment real estate and while
they aim to hit the foreign speculator (hiding his or her money), they will hit mostly us as investors.
reported that there were nine Vancouver condos that sold for more than $4 million in the first six months of 2014.
Hartree: Since January of this year we sold 339 detached homes on MLS in West Van. Of those 101 were sold between $3 and $9 million. 2 markets: One is made mostly
of local buyers. Those may buy up to $2 million, and most of them under $1.5 million. The other is the truly offshore luxury buyer.
Watch out for new taxes on foreign investment, residency requirements and possibly, an outright ban on foreign investment. Also clamping down on ALL
investors through tougher and tougher mortgage regulations (already happening). I think our government will favour some sort of heavy duty new tax (as they
– like all governments are strapped for cash).
Outcome? Less foreign investment, less current investment by regular smaller investors that no longer qualify. Make sure all your property cash
flows … and if it does not think about selling.
The Numbers – South Okanagan
As we mentioned last week according to the fine BC Real Estate Association … the largest home salesclimbed 46 per cent in the SOUTH OKANAGAN and nearly 30 per cent in theOkanagan Mainline Real Estate Board area. In addition, home sales rose 36 per cent in the Kootenays and33 per cent in Chilliwack compared to the same month last year. So, let’s take a closer look at the South and shine a spotlight on Penticton.
Looking at the smaller markets of the South Okanagan it is clear the market started off sharply this year. By April. Oliver’s sales were
up 51%. In Osoyoos, there were 53 sales, up 65% from 2013.
In Oliver 13 single family homes sold in April for a total year to date of 32 sales. This compares to 5 single family sales in April 2013
and a total year to date last year of 11.
This week we picked the total South Okanagan market and shine a spotlight onto Penticton … the largest market in the South. We also take a peek at Kelowna and the Kootenays.
The whole South shows a sharp increase in sales (+32%), residential prices higher by 9% and listings down.
With Penticton taking almost 50% of the sales it also saw the largest price June while the rest of the South markets prices rose by a more sedate 9% in
June. But they DID rise … as did sales … a stronger summer lies ahead.
Major Point: The South Okanagan Real Estate Board reports that
sales in Penticton are up by 27%, prices (in June over June) up a whopping 21%(!), active listings down
9%. Big winner? Single family home prices soaring 19%, condos rise also but only by 5%. Looking at the monthly and y-t-d numbers it is clear that the
market is undergoing a dramatic change. Y-t-d prices are still trying to catch up to the strong monthly performance.
The Numbers, The Numbers – Okanagan – Kelowna
Sales in the whole Okanagan Mainline Real Estate Board (Kelowna, North, Shuswap) are up a strong 28% overall
(including all commercial sales, trailers etc.), residential sales are only higher by 14% in June. But active listings are down by 11%. (In Kelowna over
24%) Overall sales in the Central region (Kelowna, Westbank) are up by a fine 25%, and also up 28% in theNorth Okanagan (Vernon, Armstrong) but they soared by 46 % in the Shuswap (Salmon Arm)! Residential sales are up also, but not as strong
Not as exciting a turnaround in this – a much larger market overall. Sales nicely higher, listings down a tad, but prices just marginally higher over June
2013. Realtors are telling us that well priced properties sell well. INVESTORS NOTE: They also say that investor buying is down because
many buildings in Kelowna have been designated as ‘owners only’ by both developers and strata councils. This takes a lot of people out of the market that
otherwise would invest for future moving into or straight investment. STRATA COUNCILS NOTE: In fact this practice keeps values down for
Spotlight: The Kootenays
The Kootenay Real Estate Board reports sales well above levels from June 2014. Sales of 268 units in June 2014 were up 36 per cent
compared to last June. Sales of all property types numbered 304 units in June 2014, an increase of 32 per cent from June 2013.
“June home sales in the Kootenay region continued on the recovery path that began early last year, adding
a seventh consecutive double-digit year-over-year increase
to the string of recent gains,”
said Cathy Graham, President of the Kootenay Real Estate Board. “Home sales also marked the best month of June in seven years, and activity over the first half of the year hit a six-year high.”
The average price of homes sold in June 2014 was $302,482. Prices increased by 6 per cent from June 2013.
Active residential listings
stood at 3,237 units at the end of June, edging down less than half of one per cent from the end of June 2013.
There were 12.1 months of inventory at the end of June, down from 16.5 months a year earlie
r and just above the long-run average for this time of the year. The dollar volume of all home sales totaled $81.1 million in June 2014, rising 44 per cent
from year-ago levels to the best level of any month in nearly six years. The total value of all properties sold was $86 million, up 41 per cent from June
The charts tell the story – best sales in 7 years. The bottom is on place throughout the Kootenays. We see in the Cranbrook – Kimberley areas a clearing
out of foreclosures and steadily increasing sales. The average price of $303,000 is not as high as the one achieved at the all-time high
in May 2010 of $321,000 but well off the bottom of November 2013 of $236,300! Up 21% in 7 months! Well, we told you so last fall. Skiers … pick your
favorite interior mountain, there are still bargains galore. Review the recommended ski resorts (first issue in January 2013 and 2014).
1. SQUAMISH, strip mall,
well maintained commercial mixed strip mall on 1.39 acre. Fully leased, cap rate of 7.4.Price $2.2 million;
2. Port Alberni, commercial
building with good visual exposure. 4,080 sq. ft. building with 2 separate units. Newer metal roof, newer paint and some updates have been done. Price:
3. Port McNeill REDUCED! 33-Unit building for $882,000!! Posted earlier at a price of $986,700. 1-
Bachelor, 9- 1 bedrooms, 18- 2 bedrooms and 5- 3 bedrooms. This works out to $26,727/door;
4. Chilliwack – 3 bdrm, 1.5
bath, 1300 sq. ft. townhome. Price: $104,500 court ordered sale.
All subscribers can feature their deals on their password protected website. (Forgot
password? Call Lubna at 604-683-1111.) They can also offer to place their preferred contact info there. For details and contact info go to the website.
There are no guarantees or warranties here. Please review the disclaimer on your deal section.
BEST MORTGAGE ADVICE
Do you know how your bank calculates its penalties?
Most borrowers are familiar with the standard penalty, which is a 3 month interest penalty. This 3 month penalty applies for all variable rate terms and is
the minimum charge for anyone breaking a fixed rate term before expiry, and is fairly easy to calculate – take your mortgage amount, multiply it by your
interest rate on your mortgage and divide that number by 4 to get the 3 months interest cost. But not everyone is familiar with IRD (Interest Rate
Differential) penalties and how they are calculated. Even fewer are aware of how banks can manipulate these penalties. An IRD penalty can apply if it is
greater than the 3 month interest penalty for any fixed rate term.
The point of an IRD is to protect the bank’s profits (surprise, surprise!). Many banks bundle up mortgages and securitize them, which is essentially
selling them. This means they lent out money at around 1.5% more than a current bond yield for the same term, and that spread is their underwriting and
administration costs and profit margin. If a bank lends money to you at 6% (high by today’s standards but only 6 years ago these were going rates), they
probably paid about 4.5% for the money. So if interest rates drop and now you can get a new mortgage for only 3%, it would make sense for you to always
break the mortgage unless this IRD penalty was in place. For the bank, without this IRD penalty it would put them underwater on that mortgage – they are
paying someone else 4.5% to borrow the money they used to fund your mortgage, and the 3 month interest penalty wouldn’t make up for the difference between
3% and 4.5%. Interest rate Differential penalties are in place to ensure that in an environment where interest rates are falling, the banks are protected
from borrowers re-doing their mortgage at lower rates and leaving the bank holding the bag.
So now we understand why banks have IRD penalties. But why then, if interest rates have NOT dropped, do IRD penalties still occasionally kick in?
“Banks are very smart,”
says Kyle Green of Mortgage Alliance (778-373-5441, firstname.lastname@example.org).
“Back in early 2009 refinances were all the rage. Many borrowers were getting out of their high fixed rate mortgages and going variable, with the
intention of riding the wave downwards as rates fell. But the banks caught on quickly and changed the way that they discounted their mortgages. The
easiest way to look at how to calculate an IRD penalty is that it is the difference in interest between your current rate and current market rates for
the same term remaining. So if you have a 2.99% 5yr you took 2 years ago, the penalty would be 2.99% vs a current 3 yr term (2.79 %?) over the
remaining 3 years. This is how all non-bank lenders (lenders without posted rates, only discounted rates like First National, Street Capital, Merix,
etc) calculate their penalties. The key is that the rate being used to calculate the penalty is what you would actually get as a new customer.”
So how do the major banks’ penalty calculations differ? Major Banks have posted rates and they “discount” those rates, which gives them
room for manipulation. “We just had a client who had a 2.99% rate with a major bank from about 2 years ago,” says Green.
“Most short and medium length terms haven’t really moved much since 2 years ago, so you would expect a 3 month interest penalty. The problem lies in
the calculation of the penalty. Originally when the clients obtained their mortgage they got a discount of 1.4% off posted to get 2.99%. Now the
lenders’ 3yr posted is 3.44%, and the discount of 1.4% comes off to determine the rate used to calculate the IRD which is 2.04%. The problem with this
calculation is that a new mortgage for a 3yr term would NEVER get as low as 2.04% in today’s market, yet this is the rate the lender uses to determine
the penalty. Instead of paying ~$5,500 penalty as the client expected (and was actually quoted by her bank originally), the penalty shot up to $12,000
even though rates have remained stagnant during this time. If the clients were with a non-bank lender they would have saved over $6,500 in penalties to
break their mortgage.” (!!!)
Of course there are many reasons to use a bank over a non-bank lender, like product (most non-bank lenders don’t have “re-advanceable” mortgages with HELOC’s), rates (although most non-bank lenders tend to be just as or more competitive)
and relationships. But do you know how your bank calculates their penalties? The decision to use a broker to get access
to a non-bank lender could save you thousands in just penalties alone. Good advice KYLE!
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responsibility for any subscriber’s actions.