IN THIS WEEK’S FACTS BY EMAIL:
- THE NUMBERS, THE NUMBERS – THE SHOCKER? RICHMOND!
- PRIVATE MORTGAGES – A BRIGHT FUTURE FOR THE MONIED INVESTOR
- US LLLPs – CRA TARGETS?
- QUESTIONS, QUESTIONS: ALL HOME BUILDERS NEED TO TAKE AN EXAM
- GREENHOUSE MADNESS GOING NATIONAL
- TOUGHER MORTGAGE RULES PUSH RENTAL DEMAND
- TRENDING DATA – A NEW WAY TO FIND CONFIDENTIAL INFO ABOUT YOU!!!
- TD BANK RAISES RATES
- LNG PIPE LINE APPROVED
- GRAPEVINE – ONE WAY TO EAT THE FOREIGN TAX
Q: Interesting legal details – supporting the views you expressed two weeks ago. Your forecast on a possible recession or slowdown because of new mortgage rules – is supported where?
A: Honestly, I am too much in love with myself to look for support of my opinions. Right or wrong I give you my best personal point of view guided by my real estate bend and years of experience (yup, I’m old). But here is David Rosenberg’s (https://www.gluskinsheff.com/davidrosenberg) Morning Letter about the recent Canadian policy changes with respect to real estate. Here’s his conclusion:
“…either way, these policy changes remove a key prop for the economy because the housing sector contributed two-thirds of whatever GDP growth that Canada incurred in the past year. So, more than ever, the onus is on exports and investment to carry the economy through, and that in turn means that the Bank of Canada will do whatever it takes to ensure that the Canadian dollar stays as ‘competitive’ as possible. The new policy measures also give the Bank of Canada more flexibility to cut rates now without adding fuel to the real estate market’s fire – and provide for stimulus via the currency.”
Q: I hear that owner/builders now have to take an exam. Is that true?
A: Yes, as of July 4, 2016, applicants for an Owner Builder Authorization will be required to meet all eligibility criteria and pass an exam to evaluate their knowledge and understanding of home building basics.
Adds ace Realtor Rick Hoogendoorn from Victoria: “… the whole owner/builder world has changed as they are now required to take a 100-question exam that most would not be able to pass. This will severely limit the number of one-off houses being built. I don’t know the exact details, but it might be worth some further research re: impact. It will consolidate the building of new homes to the larger builders.” Look details up here: https://hpo.bc.ca/owner-builders
LLLP. LLP, LLC, LP – And The CRA. U.S. Investors Must Read
For the last few years’ Canadian real estate investors have had a lot of different advice on which vehicle to place their investment properties in: LLLP, LLP, LP etc. Initially while we were advised NOT to use an LLC (CRA does not recognize it), but we could hold an LLC inside an LLLP. We then were urged to close all LLCs and hold all properties in an LLLP. Now the latest (potential/likely) change is explained by Cross Border Accountant ace Robert Clegg:
“Presently the CRA is of the opinion that Delaware and Florida LLPs and LLLPs would be considered corporations for Canadian tax purposes. (!!!) In the event a law firm provides an opinion that an Arizona LLLP could be considered a partnership for Canadian tax purposes it is not binding on CRA thus providing no guarantee. There is a significant risk that CRA would consider an Arizona LLLP a corporation for Canadian tax purposes. (!!!)
The CRA position is that a US LP is a partnership for Canadian tax purposes. The CRA is expected to provide relief where a US LLLP is converted into an entity recognized as a partnership for Canadian tax purposes (such as US LP) on or before December 31, 2018 provided that the LLLP was organized on or before June 30, 2016.
- Conversion of a US LLLP into a US LP is not a taxable event from U.S. tax standpoint – the position and liability protection of partners remain virtually the same.
- Conversion of a US LLLP into a US LP should not be a taxable event from Canadian tax standpoint – factual liability protection of Canadian partners in Canadian LP is expected to be unchanged because of conversion of US LLLP into US LP.
Major Point: Time to get your (tax) ducks in a row… As always we are not accountants, use an expert – like Robert or some such. Don’t wing it!
The Numbers, The Numbers – Vancouver – Totals
The fine Vancouver Real Estate Board reports that home sale and listing activity dipped (well) below historical averages in October. Residential property sales in the region totaled 2,233 in October 2016, a 39 per cent decrease from the 3,646 sales recorded in October 2015 and were 15 per cent below the 10-year October sales average.
“Changing market conditions compounded by a series of government interventions this year have put home buyers and sellers in a holding pattern,” Dan Morrison, Real Estate Board of Greater Vancouver (REBGV) president said. Indeed, they have.
Unfortunately, we diverge from the Board’s use of the Benchmark price and continue to report to you (for 24 years) the average price. Unfortunately? Well, as a long-time member I love what the Vancouver Board represents. It is well managed, well led and a leader amongst the World’s boards. We also see that using the Benchmark price having value if you compare it from a mile-high perspective over a long period. But if you want to know what currently goes on in the market, we think the average price tells the changing market story SOONER!
For instance, the MLS® Home Price Index composite benchmark price for all residential properties in Metro Vancouver is currently $919,300. Not too far from the average price of $904,000. But the benchmark price is reported as 24.8 per cent higher than October 2015. The average price is up by only by 5% and down 17% over APRIL! The benchmark price serves a good purpose for consistency of reporting among boards but not ours as a service to investors. It turns down too slowly (North Delta reports an average price at a 10% increase, yet reports Benchmark prices increasing by 26.9%).
Sales of detached properties in October 2016 reached 652, a decrease of 54.6 per cent from the 1,437 detached sales recorded in October 2015.
Sales of apartment properties reached 1,178 in October 2016, a decrease of 23.7 per cent compared to the 1,543 sales in October 2015.
PLEASE NOTE: Correction Notice from the board:
Altus Group, the provider of the national MLS® Home Price Index (MLS® HPI), discovered a calculation error in their September 2016 reporting. This error resulted in variances of between 0.1 and 5 per cent in the benchmark prices the REBGV released for September 2016.
NOTE: We keep including the April average price (it was the high achieved in sales and prices in most markets). Some had their high in March and Richmond saw it in July but overall April was the one we picked. We believe that this reflects an accurate picture of the status of the Vancouver Market. It proves that government – once again – overreacted and brought in Draconian methods to kill a market that was in sharp decline in sales and prices since March already anyway!
Ontario has now recognized this in their own market and is backing off its Foreigner tax implementation, stating it will rather concentrate on ‘local speculators’! A tax on everybody?
|Oct. 2016||Oct. 2015||%||Apr. 2016||%|
|Total Avg Price||904,000||953,700||-05%||1,092,200||-17%|
|Total Det. Sales||673||1,437||-54%||1,971||-66%|
|Total Condo Sales||1,189||1,537||-23%||2,113||-44%|
|All SF Prices||1,619,000||1,580,600||+02%||1,811,900||-11%|
|All Condo Prices||562,900||495,000||+13%||570,000||-02%|
|Westside SF Prices||3,534,100||3,352,690||+04%||4,180,000||-15%|
|Eastside SF Prices||1,561,500||1,328,100||+18%||1,704,000||-08%|
|Richmond SF Prices||805,000||914,700||-12%||1,024,500 May||-21%|
|Westside SF Sales||79||164||-52%||229||-66%|
|Eastside SF Sales||66||149||-56%||219||-71%|
|Richmond SF Sales||63||194||-68%||209||-70%|
- Overall sales are down 38% over last October, BUT they are down 53% over last April.
- The total average price is down by 5% over last October, BUT by 17% since April.
- All prices (total averages) are up over last October but down over April.
Look at West Side, East Side and Richmond average SF prices and sales since April!
The most dramatic? The Richmond single-family price is down 21% since April and sales are down in SF by 70%! The condo market overall is faring better, where Richmond condo sales at 162 were even with October 2015 but well down from April’s 289 condo sales.
Our recommendation stands: As a buyer, stay on the sidelines and review the November numbers. Only buy the ‘deal of a lifetime’ or buy cash flow in the Fraser Valley where rents will cover the much lower mortgage and strata expenses. Vancouver WILL recover … it always does, but will find a new lower level first. Our call remains for a 20% decline overall, since April of this year. As an owner, sharpen your pencil (if you must sell).
The Numbers, The Numbers, Fraser Valley
The Fraser Valley real estate market remained active and unlike Vancouver sales were slightly higher than the 10 -year historical average for the month.
The fine Fraser Valley Real Estate Board processed 1,463 sales of all property types, a decrease of 17.4 per cent compared to the 1,772 sales in October of last year. Of the 1,463 sales processed last month, 389 were townhouses and 400 were apartments, representing a significant portion of October’s market activity. “Sales activity was healthy in October, especially in the townhome and apartment categories. With prices beginning to level off, it appears that buyers are becoming more motivated to explore the Valley’s available inventory,” said Charles Wiebe, Board President. Active inventory stood at 6,035 listings, the lowest level seen for an October in ten years.
Here is a breakdown of the many subareas of the Valley showing detached and apartment sales as well as benchmark and average prices achieved. Surrey SF sales were hit hard down between 44% and 64%. Get a quality local realtor for the area you are interested in and drilldown the local numbers.
|City of Surrey||Detached||Apt.|
|Combined||Oct. 2016||Oct. 2015||%||Oct. 2016||Oct. 2015||%|
Major Point: The crash in the sales of SF homes is duplicated in the Valley everywhere. Overall the market in the lower price ranges remains attractive for investors. Condos can be bought for well under $300,000 and will cash flow. With now some 1,200 people moving into Surrey there will be a continued demand for quality condos. In fact sales of condos and townhouses are steady to higher throughout.
A little bird told us that some developer(s) maybe/are working out:
- What percentage of a building foreigners bought in the past?
- What 15% tax would be the total amount they would have to pay now, if the same sales percentage was applied?
- Then divide that number amongst ALL the suites in the building – every unit price would rise by maybe 1-3% and offer foreigners their suite w/o tax. (Just a rumour.)
Major Point: Seems logical, but would likely work best in very large buildings.
Private Mortgages – A Bright Future For The Monied Investor
Do you want a higher return on your investments? With worldwide yields falling, and the prospects of savings rates rising in the next 3-5 years highly unlikely, many investors are looking for alternative ways to invest their money. Some have decided that with banks tightening up on their lending practices (primarily due to government intervention), being a private lender would be a good way to earn a higher yield and to have security in something that most investors can understand – real estate.
“This year we have had more people ask me if they could be a private lender and invest in mortgages,” says Kyle Green of Mortgage Alliance (604-229-5515, Kyle@GreenMortgageTeam.ca). “I have found that both the demand (from lenders tightening) and the supply (from investors wanting higher yield) in private mortgages has increased significantly during 2016. And, because the banks are tighter, a higher quality client is now looking for a private lender to be their partner.”
What exactly is a private lender? A private lender lends money in first or second mortgages to higher risk borrowers. Typically, the most important aspect of determining risk is what and where the property is and how much financing is placed against it – this is called the “Loan-To-Value” ratio. With major banks, they want to eliminate the risk of default during underwriting as much as possible by verifying income, credit, down payment, property value, etc. Private lenders assume that the borrower will default and instead look to the property and the equity in it to make sure there is enough to ensure they get their money back.
“Because of the high demand, we have actually created a program that will allow for an investor to choose the type of lending they would like to do, and our formula will give them an idea of what kind of return they can expect – a lower risk deal will earn a lower return, and higher risk deals will earn a higher return,” says Green. “By allowing the investor to appropriately choose their risk tolerance, they can be comfortable with each loan in their portfolio and only be sent potential mortgage applications that fit their specific criteria. Investors can expect rates that range anywhere from 6% (less than 50% financing on a house in say Vancouver) to 15% (a second mortgage on a condo in a small town). We’re really excited to be finally bringing this product to our investors as we continue to have clients looking for better yield.”
Private mortgages can be secured using RSPs as well by self-directing them to invest, so if you have RSPs you want to park in an investment vehicle with a higher return, private mortgages are a great way to do so.
|October 28, 2016||1 yr||2 yr||3 yr||4 yr||5 yr||7 yr||10 yr|
Tougher Mortgage Rules Push Rental Demand
The new regulations on those buying with mortgage insurance and tougher requirements for low-equity home buyers should prove a boon to the rental housing industry. Not only are there less home buyers but also less investors in rental housing, such as condos, because it is harder and getting even more difficult for investors to qualify for mortgages.
In B.C., for instance, it is estimated that the restrictions will knock about 30% of first-time buyers out of the housing market. The typical buyer will need to earn about $86,000 a year to afford a condo in Metro Vancouver under stricter mortgage qualification rules that came in this month, a 17 per cent increase from $73,000 under the existing laws. That will push some prospective buyers into the rental market instead.
New regulations coming in November 30 (SEE PREVIOUS FBE) will prohibit mortgages on investment properties from being covered by government-backed insurance, which will make financial institutions less willing to lend to condo investors. Combined, the changes will and COULD up demand for rental units while shrinking the supply of new rental investors.
Here is what happens after November 30.
Effective November 30, 2016, mortgage loans that lenders insure using low loan-to-value ratio mortgage insurance must meet the eligibility criteria that previously only applied to high-ratio insured mortgages.
These changes will not apply to low-ratio mortgage loans written before October 17, 2016…
- a mortgage insurance application was received; or,
- the lender made the loan; or,
- the borrower entered into a legally binding agreement of purchase and sale for the property against which the loan is secured.
The new low-ratio mortgage insurance eligibility requirements also do not apply if, during the period beginning on October 17, 2016 and ending on November 29, 2016, at least one of these three criteria is met and the loan is funded before May 1, 2017.
Major Point: We don’t agree with the new mortgage restrictions: they freeze first-time buyers off the real estate ladder and are, we believe, using a sledgehammer to fix what really is a minor problem. After all, studies show that even buyers with high-ratio mortgage loans have a default rate of about 1 in 300. However, for landlords, the mortgage restrictions will keep rental demand high and vacancy rates low.
“Trending Data” Can Affect Mortgage Eligibility
Since September, major credit rating agencies have been tracking whether mortgage applicants have paid off their credit card balances each month. This means homebuyers’ credit card history may earn an advantage when looking for a mortgage. Or not.
Previously, lenders reviewed basic information such as your total debt and whether you were on time with your payments when deciding whether to make a home loan. But they didn’t know whether you were paying off your credit card or other revolving debts in full or carrying a balance month-to-month.
That changed in September, when two of the major credit rating agencies, Equifax and Transunion, began offering what’s known as “trending data.”!
Lenders now have access to a comprehensive view of a borrower’s debt management habits, specifically how much someone paid off each month on those accounts over the past two years. And they may reward those who regularly pay more than the minimum on revolving debts or pay them off in full.
Major Point: The change was driven by U.S mortgage giant Fannie Mae. It found that, all other things being equal, borrowers who paid off their credit card every month were 60% less likely to become delinquent than borrowers who make only the monthly minimum payment.
Vancouver Tops List Of 5 Cities For Real Estate
The annual Emerging Trends in Real Estate 2017 report (www.pwc.com/ca/emergingtrends) from PWC Canada ranks Vancouver as the No. 1 Canadian city for residential investment, but some of the others in the Top 5 may be surprising. Here is PWC’s take on Canada’s best housing markets, based on interviews with real estate professionals:
1. Vancouver – This year’s report names Vancouver as the top investment, development, and housing market in Canada. Millennials are driving up Vancouver’s rental market, searching for new, and higher-quality units near amenities and close to transit. Rental units are in incredibly short supply, with vacancy rates consistently around or below 1% for the past five years.
“Vancouver continues to outpace the country in terms of growth,” says John Bunting, partner and BC real estate leader, PWC Canada. “Higher density developments will drive the residential market in most areas of the market while the demand for rental units will see growth due to a high demand from an ever-growing number people priced out of home-ownership. Record low rental vacancy rates are expected to continue.”
2. Toronto – The lack of development supply for all residential is contributing to the market’s rapidly rising house prices. Due to the high cost of moving, more homeowners are choosing to stay put and invest in renovations. Toronto’s condominium inventory has hit a ten-year low and demand remains strong, so expect to see more high-rise multi residential projects enter the pipeline.
3. Ottawa – The residential market is seeing little movement. Demand for new homes is down sharply since there aren’t enough families interested in buying single-family homes. Ottawa housing starts have fallen for three straight years, and some developers are currently shelving their development plans for up to five years. (PWC believes this is setting the stage for higher resale housing prices.)
4. Winnipeg – Winnipeg’s economy is expected to see sustained growth this year and beyond. Building activity should remain healthy over the short term, propelled mainly by nonresidential projects that will help offset a slowdown in the residential market.
5. Montreal – Montreal continues to absorb the city’s condo stock, and “pure” condominium plays have given way to mixed-use developments. More of these are on the horizon, especially around transit hubs, and the trend is increasing cooperation between investors and developers.
Major Point: A key reason for optimism about Vancouver may simply be the high number of people moving in to the Metro region. Vancouver’s population is forecast to expand by 34,500 to 36,400 persons each year from 2016 to 2018, above the five-year average. Since 2005, an estimated 158,000 new households were added in Metro Vancouver. However, the psychological impact of falling sales and lower prices we expect in the next 3 months: We advise stay on the sidelines … buy only the ‘deal of a lifetime!
Green Housing Madness Now Going National
We know that we are all supposed to be onboard with sustainability and to applaud every government initiative to force us to go green, no matter how hare-brained. Like in Vancouver, where big diesel-powered trucks idle down alleys collecting little green bags of organic material. Or green building codes that ban doorknobs and jack up the price for what should be simple windows and light bulbs. Or Ontario’s misguided green energy policies that have driven normal Hydro bills to record highs.
Well, brace yourself, because the type of green madness that has helped to push the price of new Vancouver houses into the stratosphere is about to become national policy.
According to CBC, the federal Liberal government is expected to introduce changes to the national building code that will require builders to include more net zero homes — buildings that produce as much energy as they use — in housing developments in the next 15 years. The government is also expected to announce incentives for homeowners to retrofit their existing homes so that they use less energy. We know it all sounds great, but, in many cases the incentives do little to offset the cost and the resulting energy savings have a long, long payback period.
Net zero homes use solar panels on the roof to run a high efficiency electric furnace. They are built with additional insulation, triple-glazed windows and other features to help retain the heat produced by the house. These measures increase the cost of an average house by 15%, or about $90,000 for a typical $600,000 new house. That is larger than many down payments and enough to keep some buyers out of a buying a new house.
Major Point: Sustainability should not force people to travel great distances to afford a house, or to ship specialized building products – such as windows – from other countries. It appears that the mantra of going green often trumps common sense.
1. PIPELINE APPROVED! The federal government APPROVED a massive liquefied natural gas project on the coast of British Columbia on Tuesday. Pacific NorthWest LNG would entail a pipeline across the province and a terminal to export liquefied natural gas from northern B.C. It has been billed as the largest private-sector development in the country’s history.
- The plan has solid support at the provincial level.
- Pacific NorthWest LNG has come to terms with some but not all local First Nations communities.
- The environmental movement is not on board.
- Petronas, the state-owned Malaysian energy company that leads the consortium behind the project, will have a definitive say.
Major Point: The project was a shoe-in for approval had Harper stayed as Prime Minister. That Trudeau approved it (after voicing opposition during the election) shows the government recognition, that if we want to continue to have revenue in an aging spoiled nation we need money!
2. TD RAISES RATE
We said earlier last month that the new mortgage rules were an early Christmas present to the big banks. They now can raise or lower rates as they desire…having now the sole power – without competition to do so.
Didn’t’t take very long! TD raised the rates within 14 days after the announcement. The first of all the banks to do so (Likely having been elected to the lead by its peers).
It raised the interest rate on variable-rate mortgages. The TD Mortgage Prime rate to 2.85 per cent from 2.7 per cent, effective last Tuesday.
Note: Customers with fixed-rate mortgages were unaffected by the change and TD’s prime rate for other products with a variable interest rate, such as lines of credit, was also not affected as that rate remained at 2.7 per cent. Did you know the bank has 2 prime rates?
JREI forecast this. Brace yourself – it is only the beginning! Another nail in the coffin of new mortgage production and home sales…and by extension accelerating our drive towards recession.
1. New Westminster, R2115511 renovated 1-bdrm, wood frame older unit. Price: $199,000
2. New Westminster: R2116401, 2-bedroom concrete close to Douglas College. Price: $229,000;
3. Nanaimo, Honeysuckle Terrace – property with great potential for someone to renovate. Good lot in a decent neighbourhood. Price: $334,900;
4. Port McNeil, full duplex in Port McNeil. One set of tenants paying $850 a month. Could be great investment. Price: $282,000.
WE RESERVE THE RIGHT to accept or not to accept a specific deal. What makes it a deal? We look for: Low down payments, special discount, and owner carries mortgage, etc. Also note…we do not vet any deal, we just think it may be of interest. You MUST do your own due diligence. Please get contact info from your password-protected website or e-mail Max at firstname.lastname@example.org … and read the disclaimer!
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