With reduced buying power next year, expect house hunters to scoop up everything under $500,000.
Paul D’Abruzzo, an investment advisor with Rockstar Real Estate, says that while most people will qualify for less money on their mortgages, they won’t be completely shut out of the market. They will simply adjust their demands.
“If somebody was preapproved for $500,000, their new approval will be $400-450,000, so they will lose 10-20% of their preapproval amount,” he told CREW. “It won’t shut people out, it will just move them lower. If some were on the brink of getting approved, you’ll lose some there, but lower-priced properties will do very, very well.”
In Toronto, that will put single-family detached homes even further out of the reach than they are now, but the popularity of condos will keep soaring.
“In Toronto, with everybody’s sightline coming down, condos will be the most popular,” said D’Abruzzo. “In the GTA, like Mississauga or Vaughan, it will be condos and maybe townhouses.”
Single-family detached homes will become difficult, but not impossible, to afford. The Greater Toronto Area’s fringes still have moderately priced detached houses for sale, and even with the new mortgage rules, that won’t change.
“In Hamilton, Kitchener and St. Catharines, $400,000 gets you a detached home,” he said, “so you’ll see a continued trend of population spreading out into the horseshoe.”
According to D’Abruzzo, 2018 will not be kind to sellers—at least not through the first few months—but he recommends being patient.
“Right now, people are trying to get their places sold before the mortgage rules kick in,” he said. “Next year, inventory will be crap in January and February. If anyone is scared or fearful and waiting to sell their house, patience is the solution right now. Just wait and see, because nobody knows for sure what it will be like.”
Akshay Dev, a sales agent with REMAX Realty One, echoed that wait-and-see approach. While nobody will miss out because of too much time on the sidelines, Dev says Toronto’s chronic housing shortage will continue working in sellers’ favour next year.
“Whatever correction was needed is done, and in the spring we should see the market picking up and being strong,” he said. “In the Toronto area, there’s a huge shortage of housing, so it’s still going to be a seller’s market, but I don’t expect crazy bidding wars. Sellers will still get the prices they’re expecting.”
Contrary to popular belief, first-time buyers won’t have trouble purchasing starter homes, especially because cheaper abodes will be in high demand. However, they might live in those homes longer than the historical average.
“Historically, we’ve seen that when people graduate from their first buying experience, it takes anywhere from three to five years to move into the next level of housing, but it may become five to seven years with new rules,” said Dev.
Source: Canada Real Estate Magazine – by Neil Sharma 8 Dec 2017
While many first-time buyers look to condos as a relatively affordable option, one Toronto housing market expert says that it is actually less expensive to buy a low-rise home in the GTA.
According to Realosophy Brokerage co-founder John Pasalis, when you control for the size difference between low-rise and condos in the GTA, condos are more expensive per-square-foot.
In the Maple neighbourhood of Vaughan a 1,385 square-foot rowhouse costs $685,000, while a condo of a similar size in the area would likely cost $684 per-square-foot, or $947,000. It’s just one example of a price difference that can be seen across markets in the GTA.
Pasalis believes that this discrepancy in prices can be chalked up, in part, to investor demand.
“The majority of new condominium construction is driven by investor demand — not demand from families,” he writes in a recent blog post. “Investors are willing to pay much more (on a per-square-foot basis) than end users are.”
Pasalis says that investors prefer smaller units, which typically have a better return on investment, which means that developers are creating units that are too small for families, at prices they cannot afford.
“When developers are pricing a unit, they’re thinking to themselves, why would I charge this much when I can get this much?” Pasalis tells BuzzBuzzNews. “And those prices don’t make sense for a two- to three-bedroom unit, which is likely why we’re not seeing as many of those units being built [in the GTA.]”
In order for a condo to be good-value-for-money for a young GTA family, Pasalis says that low-rise prices would have to increase at a much faster rate than they currently are.
“The rate of appreciation for low-rise homes in the 905 region isn’t going to be very high in 2018,” says Pasalis. “So I don’t see this trend changing in the next year or so.”
While Pasalis admits that for families with a budget of $400,000 or less, a condo may be the only option for homeownership, he says that those with one of $700,000 or more should consider their options.
“They can choose to buy a two-bedroom 1,000 square-foot condo in Maple for that price, or a three bedroom 1,385 square-foot row house with a finished basement and backyard. For most, it’s a pretty simple choice,” he says.
Here’s what buyers need to know before signing on the dotted line in a private home sale
What if, while cruising around the neighbourhood on your bike, you spied a Private Sale sign on the lawn of your perfect home? What if, when you called the number, it turned out the sellers were in their 80s, had wildly overpriced their home and had been struggling to find a buyer for the past six years? Notice any red flags?
Buying a For Sale By Owner house
Stephanie Barker did, but the senior vice president at Arm Energy also recognized a big opportunity to own the house of her dreams—a four-bedroom, custom-built, one-owner with a large backyard and a converted attic office space. An Internet search, a generic sales contract and a lengthy phone call later, Barker and her boyfriend, Rob Maykut, became the proud new owners of a beautiful Canmore, Alta. family home, located just north of 8th Street. Were they mad?
For some, the idea of buying a For Sale By Owner (FSBO) home conjures up the image of a penny-pinching, emotionally charged seller flogging a defect-laden house. But if you’re in the market for a new home, choosing to avoid FSBOs may mean eliminating up to 25% of the homes currently listed for sale. Not a smart strategy. Instead, would-be FSBO buyers can learn a thing or two from Barker—and realize that, just like all real estate transactions, buyers of FSBOs simply need to do their own homework.
First: Know your market
Barker didn’t bat an eye when she heard how much the sellers wanted for their home. She already knew it was too high. “I’d watched the sales activity in the neighbourhood for at least six months. I knew what homes in that area were worth.” So Barker went in with an initial offer that was 50% less than what they were asking. “They didn’t even counter our offer,” recalls Barker. That didn’t stop her. “We had wiggle room, so I called the sellers.” For 45 minutes Barker discussed price, timing and conditions. “That conversation helped me appreciate where they were coming from and helped them appreciate where I was coming from,” she says. Once off the phone, Barker drafted a second and final offer. This time the sellers accepted. “I paid just a little over half of what the seller’s originally wanted and I’m sure we would never have reached a deal had we not been able to talk.”
Next: Get the right papers
Since the sellers were in their 80s, Barker took it upon herself to find a home sales contract online. “I didn’t want them to feel the added stress of trying to find a contract,” says Barker. She got lucky, says Jeff Kahane, a Calgary real estate lawyer. “At the end of the day a spit and a handshake is sufficient to close the deal, as long as nothing goes wrong,” Kahane says, But when things do go drastically wrong, it can be devastating. For instance, the bank can refuse to give you a mortgage if the home has a lien against it, if there’s a health advisory, the owners owe back taxes or the house is deemed overvalued by the appraiser. Quite often, even the seller is unaware of these potential pitfalls. “The sad fact is, it costs as little as $400 to get a sales contract from a lawyer, but you can pay $40,000 or more in fees to get out of a signed deal.”
Then: Do some digging
Getting an iron-clad contract is just the start. There are other pitfalls that can occur within a real estate transaction, explains Monika Furtado, a Calgary Re/Max real estate agent. For example, Ontario buyers can take legal possession of a property without a survey, but in Alberta a buyer must have a Real Property Report—a legal document that shows the location of visible improvements relative to property boundaries. “Neglect to ask for one and the buyer will have to pay $1,000 for the report to close the deal.”
Then there’s the measurements of a home. “Most sellers don’t realize that we have standards when recording home measurements,” says Furtado. “Like, the bottom level of a side-split shouldn’t be included in the total square footage because it’s below-grade living space.”
And what about a title search? While anyone can go to the land records office and pay for this document, not everyone understand what to look for and why it’s important. Furtado will often pull this document during the early stages of an offer. “I want to verify ownership, check setbacks and confirm there’s enough equity in the home to sell it,” explains Furtado. She’s known cases where sellers, caught with little or no equity, stay put in a sold house, refusing to vacate the home because they have no money to move.
Finally: Buy some advice
The big reason why a seller chooses FSBO is to save money on realtor commissions. “Nothing wrong with that,” says Furtado, “but because the house listing hasn’t been vetted by another realtor it often means a lot more work for me or the buyer.”
The key, says Kahane, is to get professional, knowledgeable advice. At the best of times sellers tend to inflate the value of their home, because of all they’ve put into it, while buyers struggle between emotion and logic. “You may go into Sears or Ikea 20 times before picking out a bed, but spend only 40 minutes before signing a contract to buy a home.” It’s one reason why Kahane is a strong advocate for representation—a real estate lawyer, a real estate agent and a home inspector. “These professionals have obligations and responsibilities to help and protect you.”
That’s exactly how Barker handled her last purchase: “I took my signed contract to my attorney. He looked it over and, once satisfied, we finalized the deal.” That’s how most transactions go, says Kahane.
But on those occasions when things don’t go so smoothly you have a choice: Pay a little bit of money for some good advice in advance, or pay a lot to fix a problem that could have been avoided in the first place.
Regulators have finally realized that Canada is addicted to debt, and are trying to limit the fallout. This is not a bad thing.
Canada’s real estate market has seen a lot of changes over the past year or so. Interest rates have gone up twice. Governments in B.C. and Ontario implemented foreign buyer taxes and other measures to cool housing markets, and the Greater Toronto Area is experiencing a dramatic slowdown in sales. More stringent mortgage stress-tests were introduced for borrowers last year, too, reducing demand. Now yet another change is on the horizon that the real estate industry warns will hit the housing market hard, with spill-over effects to the broader economy. Industry pushback and fear-mongering is predictable when regulations are proposed, but in this case, the housing industry isn’t exactly wrong. A proposed policy change from the country’s banking regulator threatens to reduce home sales, knock some first-buyers out of the market and push others to buy less expensive homes. That is the whole point, in fact—and it may be just what Canada needs.
In July, the Office of the Superintendent of Financial Institutions (OSFI) proposed stricter lending criteria for uninsured mortgages. In order to get a loan from a federally regulated financial institution, these borrowers would have to pass a more rigorous stress test and qualify at a mortgage rate two full percentage points higher than the posted rate (OSFI implemented a similar change for insured mortgages, where borrowers have a down payment below 20 per cent, last October). A comment period ended in August, and OSFI is expected to issue finalized guidelines this fall.
With a decision approaching, the housing industry has amped up warnings that the changes spell trouble for the housing market, first-time buyers and the economy at large. Tim Hudak, CEO of the Ontario Real Estate Association, said the plans amount to a “war on first-time homebuyers” and that the cumulative impact of tightening measures “risks capsizing the housing market altogether.” The Canadian Home Builders’ Association says housing starts could drop by up to 30,000 units annually, and wipe out anywhere from 42,500 to 91,500 jobs. Mortgage Professionals Canada (MPC), the industry group for lenders, brokers and insurers, warned national home sales could fall between 10 per cent and 15 per cent and reduce property values across the country, when combined with other recent changes and interest rate hikes. MPC supports a much milder stress test that it says will provide a buffer “without disqualifying too many middle class Canadians from their dream of attaining home ownership,” according to its submission to the regulator.
Far from mounting an attack on homebuyers, however, regulators are trying to prevent a disaster from befalling those same homebuyers and threatening the economy. I
n what will come as news to no one, Canadians are heavily indebted. The household debt-to-income ratio hit another record high of 167.8 per cent in the second quarter of the year. The debt service ratio, a measure of disposable income put toward loan payments, is set to increase to 16.3 per cent by 2021, according to the Parliamentary Budget Office, a level Canada has never seen. The number of households with a home equity line of credit and a mortgage against their properties has increased nearly 40 per cent since 2011. Non-mortgage debt is rising, too, including i nstallment loans—high-interest, short-term products. Our profligate spending habits are regularly bemoaned by the likes of the International Monetary Fund, the OECDand the Bank for International Settlements.
The primary driver of the debt surge has been falling interest rates. The benchmark rate set by the Bank of Canada has been dropping for decades, making it cheaper and cheaper for Canadians to borrow money—especially to buy houses. Canada’s housing boom tracks falling rates closely, particularly since the recession. The Teranet and National Bank House Price Index, for example, increased 72 per cent since January 2008. The gains are more pronounced in Toronto, which saw a 123 per cent surge over the same time period. Not long after the central bank’s two rate cuts in 2015, the housing market in Toronto fell into complete insanity.
Now with the recession behind us and the country recovering from the oil crash, the Bank of Canada believes we can withstand higher interest rates. Governor Stephen Poloz has signalled the central bank is on a tightening path, albeit a very cautious and gradual one.
Still, that marks a dramatic shift after years of excessively loose monetary policy. Previously, Canadians could renew their mortgages and obtain more favourable rates. Now the odds are they’ll have to pay more come renewal time. Those who opt for variable-rate mortgages can expect the same. Because this scenario is new to an entire generation of homebuyers, OSFI wants lenders to ensure borrowers have the means to service their mortgages at higher rates. To some degree, that protects the homeowner from the shock of steeper payments. It also discourages lenders from issuing mortgages that could turn sour and put the financial system at risk. When it comes to uninsured mortgages, after all, the lender bears the risk.
“When you’ve been in such a low interest rate cycle that’s out of sync with what we’ve seen historically, and we see housing markets really go to stratospheric levels, the logic of why these changes come in makes sense,” says Beata Caranci, chief economist at TD. She estimates the proposed OSFI measures will impact about 5 per cent to 10 per cent of sales. That’s not insignificant, but not cataclysmic either. “The vast majority of buyers would still qualify,” she says. OSFI isn’t likely to change direction after the Bank of Canada’s rate hike this month. Should stress-testing hit the market hard, contributing to a bigger-than-expected slowdown in consumer spending, the central bank would likely pause before hiking rates again, Caranci says.
Some of the industry’s concerns are valid, according to Adrienne Warren, a senior economist at Scotiabank. “There’s a bit of a risk of cooling off the market a little too abruptly,” she says. “But saying that, it’s still reasonable to build in some interest-rate buffer on new mortgages, just to limit financial vulnerabilities.” Warren adds there are benefits to eliminating the “distorting incentives” between insured and uninsured mortgages.
When OSFI implemented similar stress-testing measures on insured mortgages last year, some buyers may have attempted to skirt the rules. The Bank of Canada flagged such concerns in its financial system review in June. If buyers have a down payment 20 per cent or more, they’re not required to obtain mortgage insurance or undergo the stress-testing OSFI put in place last year. So
me buyers might be borrowing money from friends and family or taking out loans to reach the 20 per cent down payment threshold, thereby taking on more financial risk. The central bank also noted that borrowers are stretching amortization periods past 25 years. While that allows households to pay off debt more slowly, it also limits their ability to extend the amortization period further to deal with an income shock. OSFI’s proposals could help reduce these risks.
MPC has also argued that these stress-tests will push some buyers to use unregulated lenders that do not fall under OSFI’s purview. That, too, is a valid concern. But it’s not a reason for OSFI to backtrack. Rather, it’s a reason to apply more scrutiny to the unregulated space. Further, Hudak has pointed out that mortgage delinquencies in Canada have dropped and that most households make wise financial decisions, a statement that inadvertently makes a case for OSFI’s stress-testing proposals. Delinquencies are low because interest rates are low. Higher rates will result in more delinquencies if today’s borrowers don’t have the resources to deal with that reality.
Instead of a “war on homebuyers,” governments and regulators are finally waking up to the fact that Canada has become addicted to debt and real estate, and are trying to limit the potential fallout. There will be turmoil as interest rate hikes and regulations work through the market, but the alternative could be far worse.
While it’s fairly common for those in tight rental markets to have a roommate to help split the rent, an emerging trend is buying real estate with a family member or friend.
Faced with high home prices in big cities and tougher mortgage rules, including a new stress test on uninsured mortgages, it’s becoming increasingly difficult for first-time homebuyers to get their foot in the door of the real estate market. As such, prospective buyers are finding more creative ways to be able to enter the real estate market, and buying with a family member or friend is one of them.
When considering co-ownership, it doesn’t have to be with a spouse or romantic partner. It can be your brother, sister, aunt, uncle, cousin, friend or even co-worker. When you’re buying with a partner, make sure it’s someone you can trust. You’ll both be on the title and responsible for paying the mortgage on time and in full. If either you or your partner run into financial difficulties and are unable to pay your respective share of the mortgage, it could adversely affect your credit score if the other party is unable to come up with the extra money.
For that reason, I recommend treating co-ownership like a business arrangement by having a lawyer draft up an agreement. Also, this living arrangement likely isn’t permanent. You’ll want this agreement in place when you or your partner wants to sell. The last thing you’d want is for the sale of your property to hurt your relationship.
Qualifying for a Mortgage is Easier with a Partner
Buying with a partner helps you in several ways. The first is mortgage qualification. Two of the factors that lenders consider when qualifying you for a mortgage is your down payment and income.
Saving a sizable down payment is tough, especially for those living in cities like Toronto or Vancouver with sky-high rents and home prices.
Not to mention it’s also more challenging to qualify for a mortgage on a single income. Even being able to afford to a starter home, such as a condo in Vancouver, on a single income can be tough. That’s where buying with a partner comes in handy.
When buying with a partner, both of your down payments and incomes are taken into account. This makes qualifying for a mortgage a lot easier. In many cases it means qualifying for a home you otherwise wouldn’t be able to afford on your own.
For example, instead of only being able to afford a cramped condo, you might be able to afford a more spacious townhouse or semi-detached house. In essence, buying with a partner helps you move up the property ladder faster.
If you don’t know anyone who’s in the financial position to purchase a property with you, you’re not necessarily out of luck. The sharing economy is throwing homebuyers a lifeline. There are real estate matchmaking services like C-Harmony that will pair you with fellow homebuyers.
Some lenders like Meridian Credit Union are making buying with family and friends easier than ever by offering mortgages specifically for this living arrangement. With the Family and Friends Mortgage, up to four people can obtain a mortgage at a low rate.
Ready to Buy with a Partner?
The first step is to find a reliable partner who would be willing to purchase a property with you. After that, you’ll want to get pre-approved for a mortgage. With your housing budget in mind, you can buy a property together that will be a good long-term investment for both of you.
Once you purchase a property, don’t forget to have an agreement drafted up by a lawyer so there aren’t any surprises when one partner eventually wants out of the deal.
This will make for a happy, and hopefully long-term, real estate partnership.
It’s tough to feel financially prudent when buying a house these days.
That’s why an increasing number of first-time buyers are saving a down payment of 20 per cent or more. In doing so, they avoid having to buy mortgage default insurance which, in the case of a house price of $487,095 (the national average) bought with a 10 per cent down payment, would be 3.1 per cent or $13,590. This premium is generally added to the mortgage, which means more interest to pay.
It certainly sounds financially prudent to make a 20-per-cent down payment where possible, but this isn’t always the case. In fact, you may save money both now and in the future by making a slightly smaller down payment and taking on the cost of mortgage default insurance.
Listen up if you’re concerned about the new mortgage lending rules that were announced last week and will take effect on Jan. 1. When making a down payment of 20 per cent or more, the new rules require that you be able to qualify for a mortgage at the greater of the five-year benchmark rate published by the Bank of Canada, or the original contractual rate plus two percentage points. An easier path to a mortgage may be to make a smaller down payment.
To even propose this seems bizarre. “The story has been that you’re just throwing money away with mortgage insurance,” said Mike Bricknell, a mortgage agent with CanWise Financial. What this thinking ignores is the way today’s mortgage market discriminates against people who make down payments of 20 per cent or more. They may pay a fair bit more for a mortgage than someone with a high-ratio mortgage (down payment of less than 20 per cent) both now and on renewal.
A lender dealing with a client who has a sub-20 per cent down payment can take comfort from the fact that the loan is covered by government-backed insurance that is paid for by the borrower. A conventional mortgage (20 per cent or more) can be insured as well, but by the lender. All in all, a high-ratio mortgage is preferable from the lender’s point of view and often results in a lower mortgage rate.
Mr. Bricknell has lately found that rates on five-year fixed rate mortgages are about 0.45 of a percentage point less for high ratio as opposed to conventional mortgages. Maybe your lender can do better than that. If not, consider this example of how a down payment less than 20 per cent can pay off.
We start with a $450,000 house and a buyer with a 20-per-cent down payment already saved. With a conventional mortgage amortized over 25 years, Mr. Bricknell figures this person could get a five-year fixed rate mortgage at 3.29 per cent. That means a monthly payment of $1,758.
Now, let’s see what happens when this borrower makes a 19-per-cent down payment. A smaller down payment means borrowing a bit more, and thus more interest over the life of the mortgage. Also, mortgage insurance will be required at a cost of $10,206. All of this nets out to a monthly payment of $1,743, with the mortgage insurance premium included. How is this possible? Mr. Bricknell said it’s because the high-ratio borrower gets a mortgage rate of 2.84 per cent.
There’s a stress test for high-ratio mortgages as well, but it’s marginally less onerous than it is for conventional mortgages because you only have to be able to handle the Bank of Canada benchmark rate, currently 4.89 per cent. Thus the high-ratio mortgage in Mr. Bricknell’s example would have a qualifying rate of 4.89 per cent and the conventional mortgage would be at 5.29 per cent (the client’s actual rate plus two percentage points).
The two mortgages outlined by Mr. Bricknell are pretty much a wash right now when compared on cost. Looking ahead, the high-ratio mortgage offers the potential for lower interest rates when it’s time to renew your mortgage. This assumes that lenders will continue to look more favourably at high-ratio mortgages.
Mortgage industry data show that even as house prices increased from the early 2000s through the past few years, the percentage of people making down payments of less than 20 per cent has declined to 39 per cent from 54 per cent. If the rationale for this is to save money and be financially prudent, a rethink is required. Depending on the rates offered by your lender, a slightly smaller down payment could save you money in the long run.
Get to know one of the largest cohorts of future home buyers – and what these clients want in a home.
“When looking for a home, 53% of peak millennial purchasers across Canada are willing to spend up to $350,000, which would typically buy them a 2.5 bedroom, 1.5 bathroom property nationwide, with 1,272 square feet of living space,” Royal LePage said in its latest report. “Yet, with 58% of respondents having a annual household income of less than $69,000, and only 34% currently tracking to have a sufficient down payment of over 20% to qualify for a mortgage in this price range, the actual logistics of homeownership can be quite difficult.”
The report, entitled Largest Cohort of Millennials Changing Canadian Real Estate, Despite Constraints of Affordability and Mortgage Regulation, was based on a cross-Canada survey about Millennials’ sentiments around real estate.
It found only 35% of millennials currently own a home, 50% rent, and 14% live with parents.
The desire to own a home is strong among these Canadians, with Royal LePage’s survey finding 87% of Canadians aged 25-30 believe home ownerships is a good investment.
However, slightly fewer –69% — hope to own a home in the next five years and only 57% of those surveyed believe they will be able to afford one.
Of those interested in buying a home, 75% would use savings for a down payment; 37% would seek alternative funding as well and 25% plan to rely on family support.
When it comes to housing preference, 61% of respondents prefer to buy a detached home, while a mere 36% believe that is realistic, financially.
The majority (52%) would look to the suburbs when purchasing due to affordability constraints.
“When asked, 64% of peak millennials currently believe that homes in their area are unaffordable, with a significant proportion of respondents in both British Columbia (83%) and Ontario (72%) asserting that prices are simply too high,” Royal LePage said. “Of those that do not believe they will be able to own a home in the next five years, 69% stated that they cannot afford a home in their region or the type of home they want, while roughly a quarter (24%) are unable to qualify for a mortgage.”