As unaffordability spills out of large urban centres and into their surrounding areas, land leasing homes could become a viable alternative.
The land lease model, wherein a resident owns the home but not the land upon which it’s built, is about 30% cheaper than freehold and is being touted as a panacea to the unaffordability crisis that’s gripping major cities.
Lachlan MacLean, vice president of property operations for Parkbridge, says that land leased homes are excellent options for first-time buyers, retirees, and even real estate investors.
“The fundamentals are the same,” he said, “because they own an asset that typically grows in value over time, with the difference being that it’s at a lower entry point. It’s different than someone looking to buy a home, so the entry point is lower and that might create opportunities for people who wouldn’t otherwise have considered buying a home as a user or investor. It’s a rental product that may be more affordable and, therefore, appeal to a broad audience because the buy-in for the investor was low in the first place.”
A land leased home still builds substantial equity, which could then be used to ascend the property ladder. Parkbridge has land leased communities throughout the country, including in Surrey, B.C., where a three-bedroom, two-bathroom single-family detached house is being sold for $199,000.
“The average benchmark price in the Lower Mainland is well over $1.5mln, so immediately there’s a place where people can go where they own their home, have a yard instead of condo living, and they can start building some equity that would allow them to stay in that community or take other steps on the property ladder.”
Although it’s a model of homeownership that isn’t well publicized, CMHC does offer mortgages for land leased homes.
However, for residents hell-bent on living in an urban centre like Toronto, MacLean says land leased homes wouldn’t be feasible.
“We’re typically in smaller urban centres,” he said. “In places like the GTA, the land value doesn’t support any kind of single-family development, let alone land lease, so we’re in smaller centres like Goderich, Wasaga Beach, the Barrie market and the Kawarthas, around Peterborough.”
Source: Canadian Real Estate Magazine – Neil Sharma30 Apr 2018
Affordability. It’s a word that gets tossed around a lot when people talk about homeownership, but what does it really mean? Affordability is a term that’s both quantifiable (lending institutions use a formula) and a little bit subjective (lifestyle considerations factor in, too). Here’s what you need to know about affordability, and what it means for you.
AFFORDABILITY, AS DETERMINED BY LENDERS
For lending institutions and mortgage insurers, affordability can be summed up by the debt service ratios, as indicated by your gross debt service ratio and total debt service ratio.
Gross debt service (GDS) ratio
Homeownership costs (mortgage payments, property taxes, heating and, if applicable, 50% of condo fees), relative to household income
Total debt service (TDS) ratio
Homeownership costs (as outlined above) plus debt payments (credit cards, lines of credit, student loans, car loans, etc.), relative to household income
To qualify for mortgage insurance (mandatory for any home purchase with a down payment of less than 20% of the cost of the home), the highest allowable GDS ratio is 39% and the highest allowable TDS ratio is 44%.
Expenses like groceries, child care, transportation, and mobile phone and Internet services, for instance, are not covered by TDS, but they’re more or less fixed costs for many households. While they don’t affect debt service ratios, they should be included in your own budget calculations, as they eat up a large chunk of income.
Discretionary expenses like clothing, entertainment, memberships and kids’ extracurricular activities should also be factored into affordability considerations. Are there any areas where you could cut back? Or will some expenses disappear, such as when a car is paid off or when a child leaves daycare for full-time school?
SET A BUDGET YOU CAN AFFORD
Between the numbers-driven debt service ratios used by banks, trust companies and mortgage insurers and the discretionary lifestyle expenses that also affect your bottom line, you will find what affordability means for you.
It’s never too early in your homeownership journey to speak with a mortgage professional or financial planner to determine how much mortgage you can comfortably carry. This will help you assess your financial fitness and also help you set realistic goals on an achievable timeline.
Mortgage broker Samantha Brookes is trying to figure out how to get one of her clients out of a housing-fueled debt hole.
The couple, a 59-year-old Toronto city worker and her husband, 58, have so much debt that they stopped making payments on the C$410,000 ($318,000) mortgage for their suburban home. They wanted to refinance but regulations imposed last year will disqualify them. In a few weeks, they won’t even qualify for an uninsured loan at an alternative lender as more rules come into effect.
They opted for a third route: adding a second mortgage with an interest rate of 10.5 percent to pay off their debt. Their salvation came from a private unregulated lender, a move many other Canadians are making as the government tries to rein in a home-price surge that’s driven household debt to a record. But like a giant game of Whac-A-Mole, the risk to the financial system from tapped out borrowers is merely shifting — this time to a market where there’s no oversight from the country’s national bank regulator and new stress-test rules don’t apply.
“We’re transferring risk from the regulated segment to the unregulated segment of the market,” Benjamin Tal, deputy chief economist at Canadian Imperial Bank of Commerce, said by phone from Toronto. “If we have a significant correction, clearly the unregulated markets will suffer even more because that’s where the first casualties would be. And then you will see it elsewhere.”
Brookes says more than 90 percent of her business in the last two months has been lining up funding from non-bank and private sources, or shadow banks — versus a 50-50 mix previously. “People aren’t going to stop buying, they’ll just find different ways of doing it.”
For the government, it may be a case of careful what you wish for. Anxious to prevent a repeat of the kind of taxpayer-funded bank bailouts that occurred in the U.S. after its housing crash a decade ago, the federal government has been moving to reduce its exposure to the mortgage-insurance market.
Rules last year added a stress test for insured loans backed by the government. That sent more buyers to the uninsured space, where a 20 percent down payment is required. As of Jan. 1, these borrowers will also need to qualify at a rate two percentage points higher than their offered rate, a move which could lower mortgage creation by as much as 15 percent, Canada’s bank regulator has said.
Earlier changes have already had a dramatic effect. Uninsured mortgages made up about three-quarters of new loans at federally regulated banks this year, up from two-thirds in 2014, according to the Bank of Canada. Roughly 90 percent of new mortgages in Toronto and Vancouver this year are now uninsured, in part because government insurance is forbidden on homes priced over C$1 million ($780,000) and prices have risen, the bank said.
On the one hand, taxpayer risk has dropped as insured mortgage origination fell 17 percent in the second quarter compared with a year earlier, the bank said in its semi-annual financial system review. About 49 percent of all outstanding mortgages are now uninsured, up from 36 percent five years ago. The credit quality of some of the loans at the big banks have also improved as borrowers buy less expensive homes, the Bank of Canada said.
The rules, along with other measures such as a foreign-purchase tax, have had an initial bite — with Toronto house prices falling 8.8 percent from May to November and the average price of a home posting the first annual drop since 2009. Vancouver prices have reclaimed new heights after cooling earlier this year.
But the risks to the financial system haven’t gone away. In the uninsured space, mortgages are increasingly going to highly indebted households and for amortizations for longer than 25 years, the central bank said. And like Brookes’s clients drowning in house debt, more borrowers are turning to lenders whose activities fall outside federal regulatory scope.
These include credit unions and mortgage-investment corporations, pools of money from individual shareholders, which aren’t subject to the new rules, Tal said. Credit unions hold about 17 percent of uninsured mortgages, according to the Bank of Canada.
Canada’s patchwork regulatory system also doesn’t encourage comfort, Tal said. Banks are regulated by the Office of the Superintendent of Financial Institutions, but credit unions and brokerages are overseen provincially. Mortgage-finance companies are semi-regulated, and MICs and other private lenders are unregulated.
MICs currently make up about 10 percent of mortgage transaction volume, or 6 percent of dollar volume, according to research from Tal at CIBC said. Transaction volume will likely grow to about 14 percent under the new rules, and in the event of defaults in a housing correction, those MIC investors would be open to losses, he said.
“Anything over 10 percent is sub-optimal,” he said. “You don’t want this market to be too big because you don’t want to increase the blind spots.”
Sound underwriting is an important element in maintaining a strong and stable Canadian financial system and OSFI will continue to monitor the country’s housing and mortgage markets under the new rules, Annik Faucher, spokeswoman for Ottawa-based organization said in an email.
Like her clients, Brookes said borrowers will get creative to get around the new rules. Options include companies like Alta West Capital, Fisgard Asset Management Corp. and Brookstreet Mortgage Investment Corp. or just a wealthy individual willing to lend at interest rates starting around 12 percent.
Fisgard didn’t respond to request for comment, Brookstreet declined to comment while Chuck McKitrick, chief executive officer at Calgary-based Alta West said MICs are regulated by the country’s securities commissions and various real estate bodies.
“We’re scrutinized a hundred different ways,” said McKitrick. “There’s very little difference between us and other regulated entities.”
Despite the expectation that MICs will see more business, McKitrick said the big financial institutions will adapt to new regulations to keep lending. Shawn Stillman, a mortgage broker at Mortgage Outlet Inc., said banks could lower their mortgage rates so homebuyers would still qualify under the new stress-test rules.
“The bank doesn’t care because they’re still going to make their fees and get their money,” Stillman said by phone from Toronto.
Alta West predominantly lends to entrepreneurs and new Canadians, groups that typically have a harder time getting a mortgage at one of the big banks. Its rate of mortgages in arrears is about 2 percent, he said. That compares with about 0.2 percent at the big banks and about 0.4 percent for the credit unions, according to data compiled by the Canadian Credit Union Association.
“People need solutions — it could be temporary, but at least they have a home over their head,” Brookes said.
Source: Bloomberg.com – By Allison McNeely and Katia Dmitrieva
You knew it was expensive to live in Mississauga. With detached houses costing buyers anywhere from $800,000 to $1 million and compact condos selling for over $400,000, residents are turning to the rental market and being equally as disappointed to see that prices are no more kind there (in some cases, two-bedroom suites can cost close to $2,000 a month).
But while most people understand the GTA is a costly place to call home, some might be surprised to find out that Mississauga is one of the most expensive cities in all of North America.
“Having recently hit its lowest level in the past decades, housing affordability is definitely a highly discussed topic for Canadians today,” writes Point2Homes in a recent report. “With this in mind, our team of researchers looked at the 50 most populous cities in North America to determine the affordability ratio for each. Based on the numbers, Mississauga is the 14th most unaffordable real estate market on the continent.”
To show the affordability levels across North America, Point2Homes says it examined the home price to income ratio (also called median multiple).
Data shows that with a median multiple of 7.4, Mississauga is a “severely unaffordable market,” coming in fourteenth in the North American ranking and third in Canada—after Vancouver and Toronto.
But while the numbers aren’t great, people can still take comfort in the fact that Mississauga is more affordable than Toronto and significantly more affordable than Vancouver (which is actually number one on the list). It’s also cheaper—which shouldn’t surprise anyone—than such famous cities as San Francisco, Manhattan, NYC, Boston, San Jose and Seattle.
Surprisingly, it’s more expensive to live in than Dallas, Portland, Oregon, Chicago, Las Vegas, Houston, Montreal, Calgary, Edmonton, Ottawa and Philadelphia.
According to Point2Homes, it would take 10 fewer years to pay off a house in Mississauga than it would in Vancouver. That said, the report notes that, when looking at the raw numbers, Mississauga’s median family income stands out – it’s bigger than the income in Los Angeles and even New York.
If a Mississauga resident were to put their entire income towards their home, it would still take close to a decade—7.4 years—to pay it off.
Of course, this report isn’t the first to notice how unaffordable Mississauga has becom.
According to the strategy, there’s a pressing and dire need to create affordable housing for middle income earners who are in danger of being priced out of the city.
Some of the draft’s findings are alarming, even though they’re not at all surprising.
According to the draft, a home is considered affordable when its inhabitants spend 30 per cent or less of their earnings on housing costs. In Mississauga, 1 in 3 households are spending more than 30 per cent of their income on housing and research suggests this number will rise.
Middle income households typically net between $50,000 and $100,000 a year and middle income earners include nurses, teachers and social workers. When people in this income bracket decide to try to purchase a home, they can typically afford to pay between $270,000 and $400,000—meaning their only options are condos and a limited selection of townhouses.
As far as rent goes, the city says the average rental unit costs $1,200 a month and that rental inventory is 1.6 per cent (which is troublingly low).
So, what has the city proposed to do?
Petition senior levels of government for taxation policies and credits that incent affordable housing
Pilot tools such as pre-zoning and a Development Permit System to develop affordable housing in appropriate locations (close to transit systems, for example)
Encourage the Region of Peel to develop an inclusionary zoning incentive program for private and nonprofit developers
Continue to engage with housing development stakeholders
Encourage the Region of Peel to investigate the cost of deferring development charges on the portion of affordable units provided in newly constructed multiple dwellings
The city has also been working to legalize accessory units (better known as basement apartments). At this juncture, basement suites remain a very viable option for people looking for affordable units, as the suites tend to cost $1,000 or less. Right now, most units remain unregistered and the city is responsible for levying fines against landlords operating unregulated units.
The Daniels Corporation, the development firm who has built multiple properties in the City Centre and Erin Mills Town Centre areas in the city, is slated to construct an affordable housing project at 360 City Centre Drive.
As for how the development will work, 40 per cent of the units (70 in total) will be Rent Geared to Income suites. These units will take residents off affordable housing waitlist. The city also says that 60 per cent (or 104 units) will be set aside for renters and owned by the Region. They will be available to middle-class residents.
A second tower on the same podium will boast market-value units, creating a mixed-income property on City Centre grounds.
With the Hurontario LRT coming, there’s a chance property values along the LRT corridor will increase, potentially pushing people out of the area. The city is also tackling other major development projects, including complete redevelopment of some waterfront areas in the Port Credit and Lakeview neighbourhoods.
While the city is certainly doing its part to address affordability, it remains to be seen how the housing market will react to a bigger and more sophisticated and urbane Mississauga.
The plan will put a heavy focus on housing supply building tens of thousands of affordable housing units over the next decade and repurposing other cash to maintain housing supplements.
There are expectations that the plan will also include a new portable benefit that low-income renters can carry with them through the market.
Those are just two of a number of anticipated measures aimed at making housing in Canada more affordable, particularly for the 1.7 million households that are forced to spend more of their disposable income than they should on housing.
Prime Minister Justin Trudeau will be in Toronto to unveil the details of the plan, while Social Development Minister Jean-Yves Duclos travels to Vancouver to make a simultaneous announcement on the West Coast to mark National Housing Day.
Recently released census data found that 1.7 million households were in “core housing need” in 2016, meaning they spent more than one-third of their before-tax income on housing that may be substandard or doesn’t meet their needs.
Outside of Vancouver, the cities with the highest rates of core housing need were in Ontario. In Toronto, close to one in five households were financially stretched the highest rate of any city in the country.
The government hopes that building 80,000 new affordable rental units, along with billions more in spending over the next decade, will lift 500,000 of those families out of core housing need and help a further 500,000 avoid or get out of homelessness.
The details of how the spending will roll out are of keen interest to housing providers and cities. Municipal leaders have been meeting with federal officials this week to talk about the national housing strategy.
The Liberals laid the financial backbone for the plan in this year’s federal budget, promising $11.2 billion over a decade in new spending. About $5 billion of that money the Canada Mortgage and Housing Corp. is expected to turn into $15 billion by leveraging $10 billion in private investment.
Still, most of the money won’t be spent until after the next election in 2019, which concerns anti-poverty groups.
Those groups are planning demonstrations in multiple cities today, demanding the Liberals spend the full $11.2 billion before the next election.
Source: Canadian Real Estate Wealth – Neil Sharma13 Nov 2017
With the cost of condos in Toronto surging, it’s only a matter of time before investors find the next hot market. And as it turns out, they might not have to go far.
Hamilton is enjoying a renaissance that’s, in part, being catalyzed by the astronomical cost of living in Canada’s largest city. While Hamilton’s amenities are no match for Toronto’s, they’re showing enough promise to lure millennial-aged Torontonians westward.
Brad Lamb, owner of Brad J. Lamb Realty Inc. and Lamb Development Corp., says investing in Toronto’s vertical homes is producing diminishing returns.
“It’s getting harder and harder in places like Toronto and Vancouver to buy a home, like a condo, and rent it and have it make any sense as an investment because you’re paying $1,000 per square foot,” he said. “You’re paying $500,000 for a one-bedroom condo apartment that’s 500 square feet and you’re going to rent it for $2,000 a month, but when you add up your mortgage, your condo fees and taxes, it doesn’t cover it. It certainly doesn’t cover in Vancouver, where that property is $650,000.”
Lamb says Hamilton has benefited from the black hole Toronto’s become. Steeltown has quietly cultivated a strong cultural scene in the city’s downtown, mostly in the James St. radius.
“Toronto’s real estate unaffordability shines a nice light on Hamilton, so investors are looking at alternate places to invest and prospective homeowners are looking for other places to live, where they can have a decent life in a nice home,” said Lamb. “Hamilton is a real city with a real urban vibe. It has a great parks system and an amazing amount of amenities. It’s a real city with a great food scene, and a great art scene, and a great music scene, so to me it makes sense that Hamilton is the next city. It’s a much more vibrant city now than ever. Every year it’s going to get larger, better, richer, and more expensive.”
The Hammer is a medium-sized city with over half a million residents, so it has retained its quaint, small-town charm, but Lamb believes it’s on the cusp of a population boom. Its downtown is lively on Friday and Saturday nights, and Lamb says business always follows in the tracks of younger people.
“Every month I see new things popping up that are very cool,” he said. “What gets me excited about a city is great retail. When you see young people out, it makes you want to visit and it makes businesses want to open there, because businesses want to be where young people are.”
Many millennials are flocking to Hamilton’s tech sector, where they’re paid good wages and promised bright futures, however, the linchpin is the city’s quality of life.
“Hamilton is going to experience a population growth much higher than what they’re projecting,” said Lamb. “More and more young people are frustrated with the cost of living in Toronto, and the inability of Toronto to create housing at a pace that is needed. I believe Hamilton will grow by 10,000 people a year.”
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.