CMHC Housing Outlook Recap

I was graciously invited to attend the CMHC Annual Housing Outlook Conference by Lance Jakubec, Senior Consultant, Research and Information Transfer with CMHC.  He was an exquisite speaker, whom I have had the pleasure of listening to for the second time this year.  Engaging, energetic and informative.  His main objective was to promote and highlight the features of CMHC’s Canadian Housing Observer, a 150+ page document that covers an in-depth look at the housing marketing research collected by CMHC and other real estate bodies.

In fact, all the details provided by the CMHC Market Analysts at this year’s conference are available in the annual publication with additional data and related reports, articles and information.  This “best selling” book, by shear volume of publications distributed, is available for free in print and online.  Expect to see the 2012 edition to be available soon.

Here’s a summary, having three top economists and market analysts sharing some key findings from 2012 and what trends we should be expecting for 2013:

Carol Frketich, Regional Economist, CMHC Paul Fabri, Senior Market Analyst, CMHC Robyn Lake, Senior Market Anayst, CMHC

• Posted Rates are to remain between 5% and 5.75%; Variable to between 3-4%.  US expects rates to remain low into 2015.
• Employment levels are up, but have not seen the same increase in wages.
• Expect to see a positive interprovincial migration to BC for 2013 due to the unemployment gap widening unfavourably for Ontario and the price gap narrowing compared to Alberta and Ontario.
• We are still maintaining international migration, but it is shifting from investors to skilled workers.
• In 2036, Canada expects to have 1.5-Million Canadians aged 70-74 planning to live at home.  Plans need to be implemented now to develop homes that are accessible, easily adaptable, but not institutional – aka Flex Housing.
• Buyer’s Market expected at least until mid next year.  Currently sitting with 9 month supply available for sale.
• The flattening of housing prices are partly attributed to sales shifting from higher priced homes to more moderately priced homes.
• Biggest drop in single detached home sales have been seen in West Vancouver (-48%), Richmond (-45%), Vancouver West Side (-38%), White Rock (-38%), however homes in Shaughnessy, Point Grey and the University Endowment Lands have held firm with their prices.
• Supply of homes is elevated, but well below previous peak in the 1990′s.
• Home sellers are choosing to remove their listing rather than taking deep discounts.
• House prices are down moderately in all areas, except West Side Vancouver and Richmond noticing larger declines with -7% and -8% respectively, experienced mainly due to run-ups prior to the decline.
• An estimated 3.5-Billion will be spent on renovations in the lower mainland, with the expectation that home owners will try to “love it” rather than “list it”.
• Housing Starts are to remain consistent to this year’s 19,000, with household growth close to 17,000.
• Fastest growing household type is Multiple Family (more than one family living in a dwelling), with strong increases in Langley, West Vancouver, and White Rock.
• Townhomes are a potential growth market with interest coming from the baby boomers.
• Rental demand is expected to remain strong with rents rising moderately and vacancies at a low 2%.
• 20-34 Demographic experiencing higher rental rate due to mobility
• A higher percentage of adults are living at home with their parents in Vancouver in comparison to the rest of the country.  A surprising 12% of 30-34 year-olds still live at home versus 9% on a national average.  24% of 25-29 year-olds live at home nationally compared to over 30% in Vancouver.
• Investors are holding on to properties for longer periods of time (2-5 years) rather than flipping.
• The investors’ share is highest in the University Endowment Lands (48%), Downtown Vancouver, (43%), Langley (36%), City of Vancouver (34%), Port Moody (28%) and Surrey, Maple Ridge and City of North Vancouver (27%).
• New condo sales down by 52% with 11 months of supply; 1/2 as much from previous peak in 2008/09.
• Condo prices are holding well with an average price per square foot of $515, however, this does not include certain forms of discounts being offered by developers.

To learn more or get your free copy of the observer visit CMHC or call 604-731-5733.

Market Direction, still to be determined

The mortgage rules implemented by Financial Minster, Jim Flaherty, are believed to be taking a toll on a variety of buyers, including first time home buyers, business-for-self, and the high end homeowners, which has negatively impacted sales.

Vancouver’s September sales plunged 15.1% from the previous year. However, sales were up 2.5% from August, the worst month on record since 1998. Toronto has also taken a hit on sales, but similarly to Vancouver, housing prices have remained steady.

The Financial Post notes that the high-rise or condo sales across the GTA for the year are 19% above the long-term average, but the remaining high-rise inventory is the second highest on record. They also mention that the low-rise homes sales are now on pace for their second-worst year ever and 35% below the long-term average, which The Building Industry and Land Development Association (BILD) is attributing to high prices, a lack of product choice in ground-related housing, and constrained land supply. They also point out that the industry launched fewer new projects over the summer, which resulted in fewer home sales in September.

Although sales are dropping across the country, Calgary and Halifax have remained strong.

Early in the month, the feeling was that Canadians were heeding the warnings of the government on debt levels. However, mid-month Stats Canada announced that the second quarter household debt levels rose to 163%; the same household debt level the United States and United Kingdom reached just before the housing crash of 2008.

RBC economist, David Onyett-Jeffries shared his thoughts with the Toronto Star:

“Household debt levels remain the number one domestic risk to the Canadian economy…However, Canadians hold fewer high-risk mortgages and have more equity in their homes than Americans had at the time the housing bubble burst south of the border…We don’t anticipate any sort of crashing in the housing market. We view some moderation, but that’s to be expected.”

Other economists, such as Capital Economics’ David Madani, have concerns that young new homeowners will feel most of the effects. David states “I’m more concerned about the newer crop of homeowners that have little equity in their property. If there’s a correction, their equity goes up in a puff of smoke and they’re underwater.”

All buyers may have more interesting times ahead as the Government continues to drop hints of raising rates and considering the removal of CMHC (mortgage default insurance) from their portfolio as a mechanism to reduce risk to the Canadian tax payers.

The future of Vendor Take-Back Mortgages

By definition, a Vendor Take-Back Mortgage is a type of mortgage where the seller offers to lend funds to the buyer to help facilitate the purchase of the property. The take-back mortgage often represents a secondary lien on the property, as most buyers will have a primary source of funding from a lender.

Popular in the 1980’s when double-digit interest rates were the norm and it was harder to get lender financing approvals, vendor take-backs provided buyers and sellers a means to complete a purchase transaction. The Financial Post suggests we could see the return of vendor take-back mortgages from their article ‘Mortgages: You Can Take Them Or Leave Them’.

Vendor take-back mortgages are most common when the buyer doesn’t have a down payment or enough of a down payment. With the current housing prices and the potential for interest rates to increase, borrowers may have to rely on alternative mortgage financing to consider purchasing particular properties. Sellers may attract buyers by offering to finance a portion of the purchase at a competitive interest rate. However, this is only possible if there is enough equity invested in the property.

So why would anyone seriously consider a vendor take-back mortgage for a home purchase? Here are several reasons:

1. Buying Power – can help buyers buy a property that otherwise may not be affordable, such as larger homes with rental suites.
2. More leverage with funds – buyers wanting to invest in numerous properties without tying up cash can effectively increase their return on investment.
3. Easier to sell – the vendor can sell faster than waiting for someone to be fully qualified from a lender and they still can get a decent return on their money.
4. Tax deferral – lower upfront capital gains for the seller since 100% is not collected in the first fiscal year.
5. Lower Rates – vendor take-backs are usually lower rates for the buyer than going to other private lenders.
6. Lower fees – a vendor take-back mortgage may be able to increase the down payment and effectively lower or eliminate mortgage default insurance fees.
7. Family purchase – family home being sold to a family member with low or 0% interest loan.

However, there are also reasons why vendor take-back mortgages could not be a perfect solution:

1. Government restrictions - It’s not usually an option with 5% down. The mortgage plus default insurance costs (2.75%-4.25%) topped with the 5% vendor take-back mortgage, a borrower is more than likely over 100% financing, which is not a legal option in Canada.
2. Lender restrictions – Many lenders will not allow secondary financing behind their first mortgage, especially one that makes the property 100% financed.
3. Qualification – The lender will calculate a payment for the mortgage and one for the vendor-take back mortgage even if the vendor take-back loan is from family at 0% financing or a zero payment. This may add challenges to mortgage qualifying.
4. Closing costs - The buyer still needs to have funds available for all other closing costs such as legal fees, property transfer tax, and adjustments.
5. Limited equity – There has to be enough equity in the property to make the vendor take-back an option for the seller.
6. Vendor asset limitations – The vendor gains value by selling faster and earning interest on the money they have lent, however, they lose some liquidity from the sale of the home, which may be necessary in their future purchases.
7. Risk – It can be a risky investment for the seller, especially if they don’t know the buyer.

Will we see the return of the vendor take-back mortgage? It’s definitely possible if housing prices remaining high and interest rates start to climb. We may also see assumable mortgages become a hotter item, especially if homeowners invested in a 10-year mortgage at this year’s rock bottom rates ranging from 3.89%-3.99%.

If you have any questions regarding a vendor take-back mortgage, don’t hesitate to contact me for more information.

Home sales drop, prices steady

The Canadian housing market cool down is wide spread across the nation. Sales fell in 21 of the 28 metropolitan areas. In Vancouver, August posted the second worst month for home sales since 1998; a 21.4% decline from the month prior, 30.7% drop from August 2011 and 39.2% below the 10-year average, yet the slower activity did not have a major impact on price.

Although detached homes are mainly to blame for the slowdown, 1649 detached homes sold this month compared to 2378 in August of last year. Vancouver is still experiencing some exceptional sales stories; a tear-down home in West Vancouver sold for 2.8-Million, fetching nearly 1-Million over asking.

The City of Vancouver also topped 1-Billion dollars for building permit values for the first time in 5 years; 40% higher over the same 6 month period from 2011. With the market getting progressively more affordable, there is an environment for projects to be more viable, supporting growth and development.

Even though the Canadian economy is stuck in low gear, exports are expected to increase, but should still remain below the pre-recession peak until 2014.  In light of the global storm, the Bank of Canada held the interest rate steady at 1% and we still remain one of the top 7 best housing markets in the world, among Switzerland, Germany and Hong Kong.

“With core inflation tracking well below the Bank of Canada’s Q3 forecast, the housing market softening and the Fed stepping harder on the monetary accelerator, rate hikes in Canada remain at least a year away,” said economist Robert Kavcic, at BMO Capital Market.

RBC predicts that there will be better economic growth, targeting around 2.1% and rate hikes should be expected in 2013.

Scotia bank believes Canada’s strong and diverse economy will see the housing market heading for a soft landing. A once buoyant market has shifted to slow growth, however, Scotia has invested 3.1-Billion dollars to purchase ING Direct, a lender with a substantial investment in Canadian funds. This will help Scotia to diversify from their heavily reliance on foreign currencies.

TD noted that higher rates are still needed to cool the housing market. The combination of tighter rules and anticipated modest rate increases should see a a 10% correction on home prices, down from their original 15% prediction.

“Although a correction in housing prices and a slowdown in residential construction spending would have some negative effects on economic growth in the near term, the introduction of more stringent mortgage regulations should help limit the impact of excess leverage on mortgage performance and bank balance sheets,” Fitch said.

The Canadian Real Estate Association (CREA) cut their sales forecast for 2012 from 475,000 homes to 466,900 homes. In 2013, another 1.9% decrease is expected with home sales of 457,800. The average home price is expected to increase more modestly this year to $365,000, a 0.6% increase from the previous 2.2% prediction. 2013 is expected to see a decrease of 0.1% to $364,000.

It’s not all bad for the month of August, but if this seems too overwhelming and you have not heeded the warnings from the government on overspending and taking on too much debt, Ottawa has issued a “toolkit” to help Canadians get out of debt, it’s available online now.

The Market Slow Down; Gearing Up

July and August have been relatively quiet compared to what we have experienced in the mortgage industry earlier this year. However, comparatively speaking, a distinct impact has been felt over these past few weeks. We are starting to hear, and see, the effects of the new mortgage rules enforced by the government of Canada and FICOM.

Upon reviewing the headlines, the common tone was “chilling”. Canada’s market was, and is, experiencing a steady fall, with Vancouver seeing the lowest sales drop since 2000. CREA recorded a 2% drop for July. With Vancouver’s market heading for retreat, RBC has declared that Toronto is not experiencing a bubble.

US was hopeful for the start of a recovery with sale prices increasing in June even though sales dropped, but July told a different story with existing home sales and new home sales up 2.3% and 3.6% respectively, but with housing prices dropping along with housing starts.

The global economy is believed to be far removed from the early days of an upturn while the European markets have a dark outlook. One can easily feel the tension, doubt, pessimism and uncertainty constantly overshadowing any positive announcements put forward; the positive outlooks are few and far between.

However, Mr. Carney has announced that we, as Canadians, should experience domestic strength with moderate growth. Inflation dropping to 1.3% in July confirmed that interest rates would remain low for the time being. However, RBC and TD have taken it upon themselves to raise their 3-year fixed rate 0.2 percentage points to 4.05%.

Time magazine recently stated that Canadians are now richer than Americans for the first time, but not surprising, when factoring in the 2008 financial crisis’ effect on many Americans’ net worth.

CMHC is projecting a softer market with no major decline and CIBC weighed in with their expectation that the 25-34 demographic will edge off the housing downturn. “This is actually the first generation that the parents are better off than the kids and those parents will write a nice cheque,” said Benjamin Tal, deputy chief economist at CIBC World Markets.

Many commenters opposed Tal’s projection mentioning the “sandwich generation”, taking care of aging parents and costly family expenses and managing their own retirement investments will have little funds to support the necessary down payments required for the 25-34 demographic wanting to enter the market.

A Leger Marking study for CIBC supports the Tal commenters, proving that over 50% of Canadian’s aged 50-59 are planning to work after retirement to supplement their income; they have less than $100,000 in savings.

Even though some believe that the new mortgage rules will help Canadians manage their debt better, many others believe it has the potential to easily over-extend homeowners while qualified and secure young families will not be able to get the financing approval they need. RBC released this week that Canadian homes have become less affordable during Q2, which could encourage many potential buyers to choose to rent instead.

With all things considered, we are still nearing record levels of home ownership in Canada, 70%, the same percentile US hit before the big bust.

For mortgage brokers, we have yet another lender looking to exit the mortgage market and broker channel. ING direct, a 15-year-old e-bank, has Scotia, National Bank and TD lined up as potential buyers.

Are these all signs of bigger, more challenging times to come? Quite possibly, but also note that we are currently one of the strongest economies on the globe today, and if we navigate these pressures successfully, it could lead to unprecedented change for Canada’s global position and economic power.