IN THIS WEEK’S FACTS BY EMAIL:
- 100 PROPERTIES IN THE USA AND CANADA UNDER $100,000
- VANCOUVER RENT STABILITY MAKES BEING LANDLORD ATTRACTIVE – DESPITE GOVERNMENT EFFORTS
- FOREIGN TAX DID NOT LOWER PRICES IN U.K., AUSTRALIA
- KAMLOOPS HOUSING MARKET LOOKS PROMISING
- OFSI CRACKDOWN AND REALITY: THE BIG GAP
- VACANT HOME TAX PLAN ALREADY SPREADING TO OCCUPIED HOMES
- A TRUMP WIN AND NAFTA?
- NEXT WEEK: A SUMMARY OF THE OUTLOOK CONFERENCE
Q: I enjoyed your presentations (both) on Saturday. With respect however, I am thinking of going to get into all cash? So many big forecasters are warning us.
A: I actually said that: “If you believe in deflation sell real estate and all stocks and get into cash.” I also said to sit on the sidelines for the next few months to see how things shake out. Further I did advise to sell losers and have some percentage of your assets in cash. I also mentioned that we saw oil and the Canadian dollar head sharply lower and a crash is certainly possible. I remain convinced however, that we have a propensity to shake things off and that after a downturn (psychological in nature) of maybe 6 months to a year, we could well march upward again. After that we will have our normal building cycles.
Actually one of the biggest bears – Jim Rickards (often quoted and so far, wrong) is predicting (in a Tea Party circular) that a major event is to happen this Friday. Since the date is so close I thought I’d share it: “The dollar will lose significant value to a new form of ‘World Money’ on September 30, 2016. This stern message from Rickards is sending people scrambling for dollar alternatives as his deadline quickly approaches. Here are some direct quotes: ‘This time, and on top of every other pressure our cash already has to face, there’s an exact deadline on the calendar. In a nutshell, it’s an event scheduled for Friday, September 30th. By my best estimate, what’s coming will go down around 4 pm.'”
WOW! Even the precise time. He has been wrong for years and he will be wrong this Friday.
Q: If Trump wins the election will that not hurt Canada? NAFTA treaty in danger?
A: Well, he has not won yet. But I think his argument will be mostly with Mexico, which had its Peso decline by 52% and is attracting not only US relocating plants but Canadian ones as well. If Trump wanted to fight with us, he faces 3 big guns: 1. We still supply the US with almost half of its oil. 2. We sell the US power in the 100 of millions of megawatts and the biggie: 3. Water – we have it to spare, they don’t. It is also idle speculation…
Vancouver Rent Stability Makes Being Landlord Attractive Despite Government Efforts
The Metro Vancouver apartment vacancy rate remains in the 1% range, rents are increasing and the demand never seems to stop. But there is another reason why more of us should consider becoming landlords: rental rates in the region have not seen an annual decline in 25 years. The only city even close to such stability is Toronto, which has seen a single rate decline since 1991, according to analysts by MIT professor Albert Saiz.
So, even with the steadfast work of governments against landlords, buying rental properties in Metro Vancouver and selected outlier markets of B.C. could be one of the most stable investments you could make. First, don’t worry about government-backed competition.
In B.C., the government has plans to build about 2,900 rental units under a $500 million fund largely snatched out of sales taxes on housing, but this should not have much effect on private landlords. First, the 500 units are largely aimed at seniors in rural markets of B.C. and, based on land costs, a $172,000 per-unit-subsidy will likely not encourage much rental construction. When we looked at recent federal-provincial affordable housing projects, the typical cost for a subsidized rental unit was much, much higher. In Kelowna this year, for example, development of 50 low-cost rental units cost federal, provincial and municipal governments $265,000 per unit. One-bedroom units for seniors is $667 per month, while low-income families will pay $990 per month for a two bedroom, which are not much lower than the Kelowna average.
Major Point: In Squamish, the development of 32 “affordable housing units” by the federal and B.C. governments announced in June, pencils out to $393,700 per apartment, a mix of studio, one-bedroom two-bedroom units. (As a comparison, the average resale condo apartment in Squamish sells for $354,000.)
Note: Foreign Tax Did Not Lower Prices In U.K., Australia
While the new B.C.’s tax on foreign home buyers had an immediately negative affect on housing sales in Metro Vancouver, it will likely not have any lasting effect on housing prices, if what happened in Britain and Australia happens here when similar taxes were brought in.
Since April, 2015, the United Kingdom has charted a capital gains tax of up to 28% on the sale of property owned by foreigners. Yet a report by Desjardins Economic Studies shows that U.K. house prices have increased 5.3% and London house prices – which the tax was really aimed at – were up 15.2% in the first quarter of 2016, a year after the tax came in. This is the 14th highest increase among major cities in the world.
In December of 2015 new restrictions were implemented in Australia, including fees ranging from $5,000 to $10,000 that are now required for foreigners buying property. Additional fines were also introduced that would punish those that breach the rules, to the tune of $135,000 or up to three years in prison. In June 2016, New South Wales and Queensland added new taxes of 4% and 3%, respectively, on foreign buyers. (Most of these local restrictions are just one new homes.)
However, foreign buyers are not permitted to buy any housing in Australia without the permission of the Foreign Investment Review Board, which restricts purchases of resale housing to temporary residents only.
But all the restrictions on foreign buyers in Australia have not resulted in a decline in house prices.
House prices in Melbourne and Sydney increased by 9.8% and 9.7%, respectively, in the first quarter over Q1-2015 according to data from Knight Frank. In fact, these increases are close to the highest levels in five years in those regions.
The B.C. government started tracking foreign home buyers on June 10 and the new 15% tax went into effect on August 2. Government data shows that, in Metro Vancouver, there were 2,034 home sales worth $2.3 billion, that involved foreign buyers between June 10 and August 31. That represents about 9.3% of the nearly 22,000 transactions that took place during that period. It also represents 11.5% of the $20.6 billion that changed hands during that period.
Note: After the tax was implemented, between August 2 and August 31, there were only 60 home sales in Metro Vancouver that involved foreign nationals.
Major Point. As we said in early August … Let’s look at what the foreign tax really is: a massive government tax grab that will soon spread from Metro Vancouver to the rest of B.C. and likely to every major city in Canada. It will do little to reduce housing prices, which is supposed to be the aim, but it will curtail new home construction and make it harder for typical Canadian homeowners to sell their property. Add Robertson’s vacant home tax and we have a pie with all the wrong ingredients!
Kamloops Housing Market Looks Promising
As we have argued before, there is no housing crisis in Canada once you get out of Vancouver and Toronto, and B.C.’s third-largest city is a good example.
With diversified economy, relative proximity to the Lower Mainland, great skiing, golfing and lakefronts, Kamloops is also a solid and stable real estate investor destination.
The average home price in Kamloops was $419,000 in August. This is lower than the B.C. average of $569,393, and even the Canadian average of $456,722.
The number of people employed in the Thompson Okanagan Region rose from 251,300 in July 2016 to 253,300 August 2016 and the unemployment rate was down to 6.8% in August, from 6.9% in July.
The Kamloops rental vacancy rate was pegged at around 5% last year for apartment units, but with little new rental construction and a growing population, we suspect it is lower now.
Two bedroom rents are in the $1,000 per month range.
Major Point: This week a quick search found 21 two-bedroom stratas in Kamloops priced under $200,000 and 8 priced under $150,000, including MLS 136099, a two-bedroom townhouse with rentals allowed, listed at $142,000; and MLS 135947, a two-bedroom with a tenant place ($800 per month) for $103,000.
For those with deeper pockets, a new 250-acre development surrounding Thompson River University in Kamloops may be enticing. The Reach (reachkamloops.com) project has 90 developable acres for sale, including sites for 3 million square feet of housing. The Thompson Rivers University Community Trust is leading the sale of the land.
Mortgage Markets: OFSI Crackdown And Reality: The Big Gap
The Office of the Superintendent of Financial Institutions (OFSI), the federal financial regulator, is proposing new rules for mortgage insurance companies to “better access the risk” in hot real estate markets (like Metro Vancouver). OFSI released its draft advisory last Friday and has called for input by the end of October and plans to bring the new rules in by January 2017.
The new regulations will likely make it even tougher for those buying with mortgage insurance, and not only because insurance premiums will increase. Borrowers could be stuck with steeper premiums, higher interest rates and/or more rigid underwriting. That’s especially true if they have lower credit scores, low down payments and are attempting to get longer amortizations. This means more borrowers being declined, a trend that is already well underway.
But there is a huge gap in how OFSI figures home affordability, which relies on price-to-income ratios. The ratios include first-time buyers, move-up buyers, move-down buyers, vacation home purchasers, and investor-held housing and, incidentally, foreign buyers who have often have no relation to local income. The “affordability indexes” also takes a market average, which includes only homeowners, and divides it by the average income figures, which includes all employees in a marketplace.
The reality is, only 69% of the population owns their home, and a large portion of the population will never own a home, so including them in the affordability calculation skews the true affordability.
A more accurate affordability picture emerges if we look just at those who are buying with insured mortgages, namely those who will be affected by the new OFSI rules.
Frontier Centre used 2015 data from Genworth Canada – Canada’s largest private mortgage insurance – to do just that. The data showed that insured borrowers in Canada’s major cities are quite prudent and responsible in handling their mortgage debt.
In almost all of the markets, these insured mortgagors bought homes with multiples between 3.0 and 4.2 their incomes, with buyers in Greater Toronto and Metro Vancouver putting down higher down payments as a percentage than buyers in other markets, which only makes sense.
The overall price-to-income ratios in Vancouver, Toronto, Montreal and Calgary were 9.6, 6.0, 4.3 and 3.6, respectively, according to data summarized by the Frontier Centre using all unit types and average incomes.
In Metro Vancouver, Genworth data shows that in 2015 the average insured mortgage was for $429,903 and the average income of the borrower was $105,468, and the average down payment was 8.2%.
Across Canada, the average Genworth insured mortgage was $336,431, the average down payment was 8.2% and the average income was 3.4%.
According to data from Manulife Bank, Canadian homeowners hold just $181,000 in mortgage debt (excludes the 18% of homeowners that have no mortgage) and CMHC recently reported that mortgage defaults on its high-ratio insured mortgages remain a very low 0.34%.
Yet OSFI sent a letter in July to all federally regulated financial institutions reiterating their mandate to “tighten its supervisory expectations” of residential mortgage insurance underwriting and emphasize that they expect “all financial institutions to exhibit rigour in the verification of a borrower’s income.”
Major Point: The federal government has run up a $630 billion debt that is increasing by $3.3 million per hour, every day. We suggest that OFSI, instead on hassling mortgage holders, should be recruiting them to advise Ottawa on how to sensibly manage debt.
Vacant Home Tax Plan Already Spreading To Occupied Homes
Vancouver’s proposed vacant home tax has not even come into effect and the city is already planning to extend it to homes that aren’t vacant! According to the city, the plan is now to also include homes or suites rented through Airbnb, with a maximum fine of $10,000 for those who tried to avoid the tax!
The tax would include investor condos rented through Airbnb, or basement suites, for example, in private homes that are rented through the web-based rental service.
Major Point: As we have repeatedly warned, no tax is temporary and no tax is regional and no tax is unfair enough to not attract the attention of government. This one is particularly objectionable. The city of Vancouver is now urging its citizen to snitch on their neighbours. We will now be creating a new industry of people showing that someone lives in the home (drive cars from back to front, cut the lawn, turn on the lights etc.) and a whole new layer of lawsuits. Of all the taxes this is the stupidest.
Plots Of The Week
- 100 homes under $100,000 in Canada and
- 100 homes under $100,000 in the US (primarily Washington and Phoenix)
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