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Expecting Rates To Stay Low? Well – The Big Boys Expect Them To Rise

Usually when CMHC worries (out loud) about ‘too low interest rates’ affecting the economy, what they are really doing is – forecasting higher rates. So, get ready for higher rates! After the new mortgage rules were brought in, I stated that – in our view – the government gave Canada’s big six banks an early ‘Christmas present’. They now can raise or lower rates anyway they want – they set the prime. We expected rates to rise and boy the banks did not take long to raise them.

Last week TD bank raised its variable rates.

This week RBC and TD raised some of its fixed rates (5 year term is now 3.05% – .30% higher).

Now, last THURSDAY in London, CMHC CEO Evan Sindall took it much further than hinting at higher rates. He did not mince words:

  1. Interest rates are too low! They are the culprit for our crazy housing market. (We do not disagree, having come to the conclusion two years ago)
  2. Canadian regulators should increase minimum down payments. He asserted that low down payments are the problem. (Ottawa hiked down payments for insured mortgages to 10 per cent for the portion of a home priced between $500,000 and $1-million last year. Now – to him – that is not enough, was only a first step.)
  3. Regulators should impose more mortgage-qualifying restrictions.
  4. Governments should kill all provincial programs that make it easier to buy a house for first time buyers
    (I.e. this month, Ontario said it would double the land-transfer tax exemption for first-time buyers in the province to $4,000.)
  5. Bring in a loan-to-income cap that would limit the size of a mortgage buyers could qualify for based on their incomes. (Countries such as the U.K. and Ireland have introduced loan-to-income caps to limit the effects of low interest rates.)

He is also spoiling for a fight with Canada’s lenders. He wants banks to share some of the risk of insurance. For instance:

  • Bring in a mortgage insurance deductible for banks.
  • End government-backed insurance when a loan falls to a certain threshold. Currently, insurance covers the entire life of a mortgage, typically 25 years.
  • Canada should experiment a “shared-responsibility” mortgages, where borrowers’ monthly mortgage payments would rise or fall depending on whether local home prices are going up or down.
  • Charge higher premiums for areas that have historically had higher mortgage defaults rates, he said, such as rural communities, Eastern Canada and the North.

The speech (made to a private high level banking group) was strong – even confrontational, speaking against taboos like affordability and adding that while in CMHC’s six stress tests it would survive (with huge losses), many would not. CMHC stress tests included scenarios of a U.S.-style housing correction, a drop in oil prices, a large earthquake and a severe economic depression.

However in my view, his warning that a sudden interest rate increase that spiked borrowing costs (a rise of 2.4% in the next 2 years), would cause a big drop (30%) in house prices and lead to the failure of many domestic financial institution – is remarkable! In my mind that raises some serious questions!

Why does he feel it necessary to share the stress tests at this time? Why do it in London? Why take on the banks? Why blame city and provincial governments to help first time buyers? Why?

We believe that governments around the world now expect rates to rise and possibly sharply. In fact every one of the recommendation he made (i.e. banks getting a risk deductible) would stop more buyers from buying! It would shrink the housing market and likely trigger the very collapse he is worried about. It would at least stall our housing markets further. His assertion that the CMHC would survive, shows where his true concerns lie and what he is expecting! It means higher rates are now definitely a larger possibility.

Major Point: The bond market in the last ten days had its largest crash since 1990. Remember, that our long term rates are not tied to the prime rate but rather the bond markets. Rates will be higher … Go fix your rates on your investments to the length of time you expect to keep your investment. Go to your mortgage broker and get yourself safe … assess your long-term investment portfolio. As we have been saying ad nauseum … don’t worry about the rate you pay, worry about your ability to qualify for even a renewal at all!



1. Pemberton, 1 bedroom condo. Price: $228,900;

2. Pemberton, solid two storey home with a large flat lot and fully fenced. Fine views. 3 BR, double garage. Price: $298,000


The North

UPDATE: ALASKA HIGHWAY NEWS: Eight early insights into next year’s Montney spending.

As oil and gas producers wind down the reports of their operating and financial results for the third quarter of 2016, we take a look at some of the early announcements for expected capital spending in the Northeast B.C./Northwest Alberta resource play next year.

  • Seven Generations Energy plans to spend up to $1.6 billion in 2017, targeting a 50 percent increase in its Montney production. The spend will include operating an average nine rigs and drilling about 100 wells in its core Nest 2 area in the Alberta Montney. This is an increase from Seven Generations’ capital spending in 2016, which is expected to come in at between $1.05 billion and $1.1 billion. The 2017 capital program will also include engineering and partial construction of the company’s third natural gas processing plant at the north end of the Kakwa field.
  • Tourmaline Oil is planning $1.35 billion in capital spending in 2017, which includes development work on the properties it recently acquired from Shell Canada. Tourmaline plans to operate a 17-rig program next year, up from 12 rigs previously. The capital spend includes drilling of 300 wells (gross), completion of the Doe BC 2-11 gas plant, completion of the Spirit River 3-10 gas plant expansion, compressor expansion at the Wild River 14-20 gas plant and construction of the new Sundown pipeline lateral. Approximately 45 of the 300 planned wells in 2017 will be on the Shell Canada assets, the company says.
  • ARC Resources says its planned $665-million capital spend in 2017 is focused on keeping its core Montney areas at or near capacity, in a program weighted to crude oil and liquids-rich natural gas development. The company plans to drill 79 wells across its Montney portfolio next year; 59 in Northeast B.C. and 20 in Northwest Alberta. ARC’s capital spend will also include about $175 million on gas processing and liquids handling, completing a new facility at Dawson, and proceeding with plans for a facility expansion at Parkland/Tower.
  • Painted Pony plans a capital program of approximately $319 million in 2017, which includes the acceleration of construction of a 100 mmcf/d expansion at the AltaGas Townsend processing facility that was originally expected to occur in 2018. Painted Pony plans to drill and complete 61 net wells on its Montney acreage next year.
  • Paramount Resources plans to drill up to 24 and complete up to twelve two-mile Montney wells at Karr-Gold Creek by mid-2017, with the first of the new wells scheduled to be brought on production in the first quarter of 2017. Capital costs to drill, complete and equip these wells are expected to average approximately $10.5 million.
  • Kelt Exploration has announced an initial capital expenditure budget of $134 million for 2017, which includes drilling 16.5 net Montney wells. However, the company expects to complete 24.3 net wells next year, as there are estimated to be 7.8 net drilled but un-completed wells from 2016. Kelt plans to commence development pad drilling and continue delineation testing on its Montney assets next year.
  • Delphi Energy recently announced a $40-million Montney joint drilling program with an unnamed “existing working interest industry partner” to speed up development in its liquids-rich natural gas play at Bigstone in northwestern Alberta. The deal, which is expected to be completed before the end of 2016, would see the drilling of 5-6 wells before July 15, 2017.
  • Chinook Energy plans a first quarter 2017 capital program of $9.7 million to complete and tie-in three new Montney wells that are expected to be drilled by the end of 2016.

The above excerpted from the “Alaska Highway News”.


REITs: The Big Skinny On Fat Trusts To Buy Now

Let’s face it: residential real estate investors will be dealing with uncertainty over the next few months. Tougher mortgage rules, mortgage rates inching up, falling sales and prices in Metro Vancouver and the Fraser Valley; the wild card of the Trump triumph and its effect on bonds and long-term mortgage rates.

That is why you could look at buying certain residential-weighted real estate investment trusts (REITS), at least to tide you over what could be a long winter of discontent. We are profiling only residential-link REITs here because we believe that homes remain the safest real estate investment.

With the help of Keystone Financial (www.keystocks.com) we present residential-weighted REITs that pay dividends and rate the potential to power through the current volatility:

  • Killam Apartment REIT (TSX-kmp.un). Price: $12.20; yield: 4.92%; Market cap: $895 million. Killam, a former corporation, only became a REIT in January 2016 but owns 13,882 rental apartments and 5,100 manufactured home sites, 60% in Atlantic Canada, the rest in Ontario and Alberta (22%). It has a large war chest and is spending a minimum of $50 million a year on acquisitions. We like Killam because it concentrates on newer apartments (3.8% rise in NOI in the 3Q) and it is investing in Ottawa and Halifax, both prime rental markets. A near 5% return in dividends is not bad, either.
  • Morguard North American REIT. ((TSX:MRG.UN) Price:$12.59. Yield: 5.96%; Market cap:$634 million. Morguard is active in Canada, but owns 30 U.S. rental buildings totaling 13,470 units, which generated 62% of NOI this year. It owns 15 rental buildings in Ontario, Alberta; and owns in seven states, including Texas and Florida.
  • Canadian Apartment Properties REIT: (TSX: CAR. UN) Price: $29.97. Yield: 4.17%. Market cap: $3.8 billion. CAR is one of Canada’s largest landlords, with 47,400 rental suites, 50% in Ontario, 23% in Quebec, 10% in B.C. and 6% in Alberta. We like CAR because it is quick thinking. Last year it bought 19 apartment buildings in Metro Vancouver; this year it cut rental rates in Calgary and Edmonton to keep vacancies up. Rated by most analysts as ‘hold’ we put it in the ‘buy’ column.
  • Pure Multi-Family REIT: (TSX: RUF.U) Price: $6.10; Yield: 6.15%; Market cap: $325 million. A small-cap REIT that concentrates on high-quality U.S. rentals, holding 4,440 units in Texas and Arizona, we think Vancouver-based Pure will see stronger performance into 2017 as the U.S. economy improves and rental demand increases.

Major Point: NOTE: REIT and other asset prices often decline when interest rates rise, because higher interest rates reduce the present value of future cash flows: the interest cost, same for stock dividends. If future cash flows are expected to fall for any reason, then rising interest rates would result in lower values of a REIT. That is the common wisdom and one that we have shared for a number of years. However in the latest rise and fall of rates the direct correlation is somewhat inconclusive (particularly the time between 2014 and early 2015). The possible reason: You have to look at the economy as a whole. Rates may be rising but what is the reason? Are corporations spending more money, are they hiring? Values grow where people go…Perhaps added economic activity helps occupancy rates and rental increases. So check out your REIT for precisely…Where and what they own. Rates are rising, but some REITs will do better than others.


Per-door Prices Holding Firm In Alberta Rentals

Calgary’s rental vacancy rate is expected to spike to 8% this year – a 25-year high – and rise to 5% in Edmonton, and landlords in both cities are offering incentives and lowering rent. But don’t expect to see a fire sale of apartment rental buildings. In fact, per-door prices are holding firm or even rising compared to a year ago and capitalization rates are still in the 5% range.

We looked at four recent sales in both cities. In Calgary, the per-door price ranged from $215,000 to $443,000 for projects of more than 140 units each, with cap rates averaging 4.8%. A study by Colliers found that the overall per-door price in Calgary including smaller buildings, is $139,000 this year, unchanged from 2015.

In our Edmonton sample, the per-door price was lower and in a tight range from $182,000 to $183,000 but the cap rates were higher, with nearly all in the 5.5% range. Colliers pegs the overall per-door price in Edmonton at $136,000, down from $139,000 in 2015. (There may be some deals out there: Colliers recently sold a 178-unit complex at $75,000 per door and with an 8% cap rate.)

The average two-bedroom rent in Edmonton is expected to hold at $1,265 this year in Edmonton, but drop about $100 per month in Calgary, to $1,332 according to a Canada Mortgage and Housing Corp. forecast.

Major Point: Calgary and Edmonton landlords are not rushing to sell, which will keep the per-door prices higher than the downturn would suggest. Bottom line is there are still income-producing assets which are rare in Alberta’s commercial sector. Too soon to buy yet, however. Wait until there is a clearer signal in the New Year on the price of oil…and study sales and listing numbers. We will.


B.C. Outlier Markets Outperform Metro Vancouver

While MLS sales in Metro Vancouver and the inner Fraser Valley are tanking this fall, they are rising by double-digits in many outlier cities. An example is Chilliwack, where 3,889 homes sold in the first 10 months of this year, up 45.9% from the same period in 2015. In comparison, MLS sales in Greater Vancouver increased just 0.7% and were up 24% in the Fraser Valley in the same period.

October numbers are even more revealing for Metro Vancouver where government intervention has nearly crashed the market. In October, MLS sales at the Greater Vancouver Real Estate Board were down 38.3% from October 2015 and were down 16.5% in the Fraser Valley.

Major Point: The outlier cities seeing the biggest sales and price increases this year are: Victoria, up 31.3% with combined average prices up 11.8% to $521,000; Vancouver Island, up 30.7%, with combined average prices up 12.4% to $383,200; Okanagan Mainline, up 28.8% with average prices up 12.7% to $409,500; Kamloops, with MLS sales up 24.5% and average prices 5.6% higher at $343,700; and the South Okanagan, where MLS sales have increased 23.5% from a year ago and the average combined home price is up 11.1% to $365,700.


Vancouver’s Empty Home Tax: How It Will Work (And Not)

Vancouver City council has approved an empty home tax of 1% tax of the assessed value of the home. This means the owner of a vacant $2 million house would pay $20,000, plus property taxes, if they left the house empty. Targeting an estimated 10,000 vacant homes (mostly condos) in Vancouver, the empty home tax will apply to properties that are not an owner’s principal residence or being rented on a long-term basis. Vacant residential land will also be subject to the tax!!

Most Vancouver homeowners, including snowbirds or owners away on sabbaticals or for work and who leave their home empty, will not have to pay the Empty Homes Tax. Principal residences are not subject to the tax, nor are properties that are rented for six months of the year or more, in periods of at least 30 consecutive days.

There are also these eight exemptions to the Tax:

  • The registered owner uses the property for at least six months of the year for work within the City of Vancouver, but claims a principal residence elsewhere;
  • The registered owner, occupying family member, or tenant is undergoing medical or supportive care;
  • Ownership of the property changed during the year;
  • The owner is deceased and a grant of probate or administration is pending;
  • The property is undergoing major renovations, or is under construction or redevelopment, and permits have been issued;
  • The property is subject to strata rental restrictions.
  • The property is under a court order prohibiting occupancy; and,
  • The property’s use is limited to vehicle parking, or the shape, size or other aspect of the property precludes the ability to construct a residential building.

In 2018, all Vancouver homeowners will be required to complete a self-declaration concerning the status of their property in the 2017 calendar year. These declarations will be subject to a vigorous audit and enforcement process, the city claims. A false declaration could result in fines starting at $250 per day and rising to a maximum of $10,000 per day of the continuing offence.

Major Point: There are a number of problems that could make the empty home tax ineffective. For starters, many strata buildings have “no rental” clauses, which means vacant condos couldn’t be rented even if the owner wanted to. Further, the tax does not apply to homes that are sold during the year: in Vancouver nearly 11,000 homes sold in the last 10 months alone.

There is also a question around vacant residential land: will owners be forced to build on it or sell it? The tax is really aimed at those holding multiple homes, and some of these may be convinced to rent the property out. In fact, with Vancouver home prices stalling or reversing, this is more likely than during the market peak this spring.


Lipstick And Flips: Where To Spend On Upgrades

Even with the slowdown in price increases in Metro Vancouver, the average home price is up 10.8% across BC as of October. This is a $60,000 increase based on the average home price and makes buying and flipping property, especially in smaller markets, a potential moneymaker.

The trick is to buy the home and fix it up and flip it, but the trick is not to spend a lot on the fix part – you don’t want to get dragged into an extensive and expensive renovations.

So here are some quick lipstick fixes that can add value without costing a lot of money:

  • Plants and garden: Purchase an inexpensive edger to go around the house, and plant flowers and plants on each side of the house. Spend a bit on a lawn treatment to showcase a nice, green lawn without weeds.
  • Plumbing: This is not as expensive as it once was, because of modern plastic tubing. Appraisers heavily consider plumbing when assigning value, so you will should see profit from this investment. Also, spice up the kitchen with new faucets (they are not that expensive.). Change door knobs on cupboards and drawers.
  • Light fixtures: Don’t buy the cheapest possible fixtures, spend the money to pick out lights that complement the property and fit with its overall aesthetic. Cheap light fixtures are unattractive to buyers.
  • Paint: This is the best and lowest-cost lipstick available and can make the most dramatic difference. Go with neutral colours.



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