IN THIS WEEK’S FACTS BY EMAIL:
- B.C. CONDO REPORT
- WHY STRATA FEES ARE RISING: WHY MORE MAY RENT THAN BUY: HOW LANDLORDS ESCAPE RENTAL RATE CAPS
- EMPTY HOME SURVEY MISSED A LOT OF DOORS
- VICTORIA MARKET GETTING FRISKY
- MORTGAGE FRAUD A MEDIA MYTH?
Next Week A Special Report On The Fabulous Landrush Conference
CDs are available for the whole conference at $48.88 (your discount is $40 from the regular price of $88.88 – use the Coupon code LR16 – Order Now)
B.C. Condo Report
WHY NEW PRICES AND STRATA FEES ARE RISING: WHY MORE MAY RENT THAN BUY: HOW SOME LANDLORDS ESCAPE RENTAL RATE CAPS
The rise of the condominium in Metro Vancouver is inevitable simply because of land supply and population growth. Canada’s third largest urban region by population is also the smallest geographically. Vancouver covers just 115 square kilometers, compared to 365 sq. km in Montreal and 630 sq. km in Toronto, or Calgary that sprawls over 825 square kilometers. Metro Vancouver, covering 2,900 sq. km has the smallest regional footprint of any major urban centre – and that is before you take away the Agricultural Land Reserve and First Nation reserves.
What we have left is tight space for a ballooning population with residential land selling for more than $5 million per acre. That is why condos dominate the housing market and will for as long we live here. But we are about to see the big changes in the Metro Vancouver condo market, some of which have already started.
The first is rising prices for new projects: both condo apartment and townhouse prices increased about 20% last year in the Metro region, with some Vancouver values up 30% or more. With the high prices being paid for multi-family land, combined with demand for units, prices will keep ascending. Last week, as just one example, an investor paid $5.2 million for a 7,987-square-foot lot at 5110 Cambie Street with potential for redevelopment into perhaps 20 condos. In a candid remark to the Urban Development Institute last year, a Vancouver developer conceded that speculation played a larger part than comparables when deciding on how to price a new condo project.
Resale condo prices are also about to jump, because it is now easier for condo owners to vote to sell their entire building to developers. Investors will help drive the price of what were the most affordable old wood-frame units much higher.
But condo strata fees are also primed for a big increase. Neil Hamilton, a senior property advisor with Vancouver’s Macdonald Realty, notes that Metro Vancouver strata fees are around 40 cents per square foot, while they range from 50 cents to 80 cents per square foot in Metro Toronto and most of Ontario. “BC strata fees are not at the level they should be” and he expects a sharp increase as B.C. Depreciation Reports (now being ignored by half of all strata corps) begin to interest buyers and lenders because high prices make the risks so great. These reports will expose how far behind some stratas are in their fees to cover repairs and maintenance and the result will be catch-up increases.
Finally, we are about to see a big switch to the rental market for both condo buyers and developers.
At the Vancouver Real Estate Forum this week, a panel of developers and investors moderated by Mark Kenny, COO of Canadian Apartment Properties REIT, broke down the real costs of buying a condo versus renting a new Vancouver apartment: it uncovered the reason why more young people – the prime condo buyer segment – will very likely become and stay renters.
In downtown Vancouver, the panel said, it costs 79% more per month ($1,919) to buy a one-bedroom condo than to rent an apartment ($1,313). At the two-bedroom level, it costs 108% more to buy ($4,064 per month on average) than to rent ($2,347). The gap is narrower across Metro Vancouver; 60% more to buy than rent a one bedroom and 73% more expensive to buy ($2,371) rather than rent ($1,722) a two-bedroom.
The study was based on the current rent for a purpose-built rental apartment compared to the monthly payments for an average MLS condominium bought with a 20% down payment, a 3.75%, 5-year mortgage with 25-year amortization; and with condo fees of from $250 (1 bedroom) to $350 (2 bedroom). A flaw in the panel’s scenario is that, since most young condo buyers would likely put down less than 20% ($80,000 in today’s market) they would also be paying much higher mortgage payments, which would make renting even more appealing.
The big lesson to take away from this is: become a landlord with two-bedroom units in a duplex or four-plex, non-strata. Based on the expert panel, the unit should generate more than $1,700 per month and, without strata fees, could see positive cash flow. Also, as more young people turn to rent rather than buying, you should have no lack of tenants.
Landlords Escape Rental Rate Caps
The big drawback with being an apartment landlord is that annual rent increases in B.C. are capped at 2.9% this year, while utility rates, taxes and other costs are rising faster. A long-term tenant can enjoy grandfathered rent for years, paying far below current market values. Good for them, not so hot for the landlord.
But some Vancouver area landlords manage to raise rents above the levels set by the Residential Tenancy Act. Last year the allowed rental increase was 2.5% but rents in Metro Vancouver increased by 3.9%, according to a survey by HQ Realty’s David Goodman, one of the top multi-family agents in the province. In the downtown, much of the west side of Vancouver, in Richmond and the Tri-Cities, rents increased by 5%.
Landlords can raise rents to market level when a tenant vacates, regardless of thresholds, but some landlords use a “fixed closed-term rental” agreement for one year. This obliges the tenant to vacate after one year or negotiate a new-tenant lease agreement if they wish to stay in the apartment. The landlord may not raise the rent above the Act threshold, but at least it allows the option to do so.
Empty Home Survey Missed A Lot Of Doors
There has been plenty of coverage of the City of Vancouver survey that found that only 4.8% of all homes and just 1% of houses in the city were vacant. According to the city, the ratio is the same as it was back in 2002. The city found 10,800 vacant homes in a survey of BC Hydro use in 224,000 homes: 90% of the vacancies were condos.
There are a number of holes in the survey, perhaps the largest being that some of the 9,700 empty condos counted could be in older buildings that do not allow rentals, meaning they are likely owned by absentee investors who can’t rent them even if they wanted to.
Other problems with the survey include:
- Houses awaiting demolition (an average of 940 houses are demolished every year) that had the power cut off were not counted as vacant.
- Homes that were used just in the summer were not counted as vacant.
- Since the study was based on hydro usage, if a caretaker or cleaner came once a week and used power (or if lights were on a timer) the house would not be counted as vacant.
- The survey did not include data from 2015, a record sales year which saw the biggest price increase in Vancouver history.
- The rise of AirBNB rentals could mean that normally vacant homes could be counted as occupied.
Major Point: The survey, which the city released to show “stability” in city vacancies, proved nothing. And, in the end, what does it matter? If someone owns a home and pays the taxes they should be able to do what they want with it. I know many Canadians who would be surprised that their little-used condo in Phoenix or Palm Springs was causing a heated debate about local affordability.
Olde Victoria Market Getting Frisky
In our Real Estate Outlook conference last year and our Outlook issue this January, Victoria was singled out as a prime real estate opportunity. This was echoed last week by comments from Colliers International and a panel of Victoria developers and realtors. In a nutshell, a lot of people are moving into Victoria from across Canada and they are helping to drive residential sales volumes close to 10-year highs. Tourism numbers are setting near record numbers, hotel occupancies are at a robust 70.2% and the tech market is booming. Chard Development reports that it is pre-selling new condo projects fast. Its latest, the Duet, sold right out.
Major Point: The reports showed that Victoria saw a net increase of 2,500 people last year from other provinces, about 1,200 more from within BC and 300 or so from other countries. This is translating into a 4% annual population growth (Vancouver is around 2.2%) and a 30% spike in residential sales in 2015 compared to a year earlier.
Mortgage Fraud A Media Myth?
A deep study by Fortress Development argues that, despite all the media coverage, mortgage fraud accounts for a miniscule amount of the Canadian mortgage market.
Mortgage Professionals Canada (formerly CAAMP) conducted a survey of 2,000 homeowners across Canada in 2015, and 6% of mortgage holders admitted to “stretching the truth” on their mortgage applications. FCT, one of Canada’s leading providers of title insurance, indicated in a 2014 release that “transactions where real estate fraud is suspected by our underwriters still constitutes less than 1% of our overall business.”
The Law Society of Upper Canada has the closest thing to a time series for mortgage fraud incidences, as they report on lawyer investigations related to mortgage fraud. The number of complaints increased for three straight years, from 28 in 2009 to 34 in 2010, 48 in 2011 and 52 in 2012. The complaints declined to 36 in 2013, before rising to a six-year high of 54 in 2014 (the last year annual data was available). The executive director of the Law Societyadvises that their objective is to complete investigations within 18 months of a complaint. Their professional regulation division reports on the number of active cases and lawyers allegedly involved in fraudulent mortgages on a quarterly basis. In Q1-2013, there were 88 active cases involving 76 different lawyers, which increased to 103 active cases involving 83 lawyers as of Q1-2015. Despite the increases in cases involving mortgage fraud, it should be kept in mind that there are 5.71 million households with mortgages in Canada, of which 590,000 purchased a home (new or resale) over the past year, according to data from Mortgage Professionals Canada. Fifty-four cases over 590,000 new mortgages represents less than 0.01% of the total market.
Fortress also conducted a survey of Canadian mortgage brokers and agents in January 2016. One of the questions asked, “How concerned are you with mortgage fraud in Canada?” Of respondents, 14.3% said they were very concerned and the problem was rampant, and 23.8% indicated they were somewhat concerned, but not a huge problem. On the flip side, 42.9% were not overly concerned, they don’t see fraud happen regularly, while19% are not concerned at all, that they never see it happen.
“Some will argue that mortgage professionals wouldn’t admit to seeing fraud as it would bring unwanted attention to their profession, however, it also makes sense for a mortgage professional to raise an alarm bell and eliminate the problem, if a problem existed. Having a cloud of mistrust over your industry is not positive for a mortgage broker’s business,” Fortress notes.
Veritas Investment Research also took notice of the increased media attention on mortgage fraud in the fall of 2015, and set about conducting their own analysis, sending secret shoppers out to 10 independent mortgage brokers, posing as prospective borrowers. When the “shoppers” floated the idea of exaggerating their income on the mortgage application, not a single broker supported income falsification for submission of an application to the ‘A’ lenders (Scotiabank, TD Canada Trust and National Bank), while three of the 10 were “ok with this type of income falsification with a ‘B’ lender” reported Veritas.
Major Point: Fortress also found that most of the mortgage fraud that was detected (about 67%) was ‘shelter fraud’ linked to buyers who fudged their income levels to buy a home and those who said they were buying for themselves when they actually planned to rent it. The more egregious fraud types like ‘fraud for profit,’ ‘title or identity theft,’ and ‘straw borrowers’ accounted for 18%, 8% and 8% of frauds, respectively, based on the responses of the mortgage professionals polled. With the default mortgage rate at less than 0.03%, there is apparently no mortgage fraud crime spree in Canada.
Best Mortgage Rates This Week
April 4, 2016
1. Abbotsford, 1 BR condo, Price: $58,900;
2. Quesnel, 2 bedroom suite, near hospital downtown, owner may carry a first mortgage of $60,000. Price: $74,900;
3. Chilliwack, 2 bedroom, Price: $66,500.
These are from the 100 properties under $100,000 we handed out at Landrush. If you want a copy write to firstname.lastname@example.org
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