Jurock’s Real Estate News
Nov.13 to Nov.20, 2014
THIS WEEK IN JUROCK’S REAL ESTATE INSIDER:
CMHC’S HOUSING OUTLOOK IS ROSY AND REALISTIC
CONDO LANDLORDS BANK ON INCOME
HOTTEST B.C. MARKETS IN 2015
ASSESSMENT RULING UPROAR: MILLIONS, PERHAPS BILLIONS LESS IN TAX PAYMENTS
INVESTORS AWAKEN TO SUNSHINE COAST
MARIJUANA RULES AFFECT REAL ESTATE
OIL PIPELINES NOT NEEDED? REALITY COULD AFFECT REAL ESTATE INVESTORS
RENTAL INVESTORS: TIPS TO USING CMHC INSURANCE
MORTGAGE DEBT SLOWS AS HOME SALES INCREASE
CMHC’s Housing Outlook Is Rosy And Realistic
The annual Housing Outlook conference held by Canada Mortgage and Housing Corp. November 4 in Vancouver, sketched a rosy – and realistic – forecast for the B.C and Vancouver market going into 2015.
It should be remembered that the CMHC outlook has proven accurate in the past. Its projections last year for 2014 housing sales and starts in the province and in Metro Vancouver were almost dead-on with the actual market performance.
This year, the outlook is reassuring: a stable housing market with moderate price increases, steady demand from an average of 39,000 immigrants flowing into (mostly) the Lower Mainland; and a healthy balance between supply and demand in the new home market.
“The Metro Vancouver housing market is quite balanced,” said CMHC senior market analyst Roybn Adamache, who noted that construction of new homes is keeping pace with demand; price increases are leveling out and 35% of home sales are to first-time buyers.
Only three suburban markets were cited as “buyers’ markets” where MLS supply is higher than demand: West Vancouver, Maple Ridge-Pitt Meadows, and Richmond. The top sellers’ markets are: Vancouver East, the TriCities; and Langley.
In Metro Vancouver, MLS sales will drop 1.7% in 2015 to 32,250 units, while the overall average MLS price will rise 1.2% to $821,000, CMHC says.
The detached house price average is currently $991,000, up 6% from a year ago.
Major Point: CMHC says: While conceding that there is no definitive data on the scale of foreign buyers, CMHC estimates such buyers represent only 3% of Metro Vancouver’s residential investment market and just 7% of all sales through the multiple listing service in the Lower Mainland. JREI strongly disagrees: “Despite CMHC claiming they have insufficient data, it appears obvious that, with about 40,000 immigrants coming into BC every year and most of these settling in Vancouver, the number of immigrant home buyers is much larger than CMHC estimates.”
Condo Landlords Bank On Income
The conference also revealed that many condo investors are banking on income, not appreciation, to make money on their investment.
CMHC estimates that investors own 27% of all the condos (!) in Metro Vancouver.
The average Metro Vancouver condo now sells for $379,000. For an investor, this requires a 20% downpayment, or $80,000.
But well-heeled buyers characterize the condo investment market, CMHC found. According to its data, 42% of condo investors have no mortgage; 21% of current buyers pay all cash and only 18% require a high-ratio mortgage. 75% of condo investors own only one unit.
Downtown is the most popular area for condo investors, who hold 44% of all units, compared with 24% for all of Vancouver; and 22% of Fraser Valley condos.
Most of the new rental stock is being delivered in the condo market: at least 20,000 condo rentals were created in the past year, compared to just 1,200 purpose-built rental apartments, according to CMHC. The typical rent for a condo apartment is $1,521 per month in Metro Vancouver, compared to $1067 for a typical rental apartment. The vacancy rate for condo apartments that are rented is 1.1%, compared to 1.8% for overall apartment market.
CMHC also found that the inventory of new and unsold condos represents an 11-month supply, down from 20 months at the recent peak in 2013. As of Sept, 1,481 completed new condos had not been sold and, by end of 2015, 9,672 new condos will complete, a third of these in Vancouver. 80% of all new condos being marketed (even if they haven’t started yet) are sold, according to CMHC.
Only a third of Metro Vancouver condo rental investors expect prices to increase much on their property over the next five years, CMHC says. This appears realistic: the average price of a Lower Mainland condo apartment has increased just 4.6% since 2009 and less than 3% in the past year.
Major Point: So, nearly 80% of condo investors have a low or no mortgage and are grossing $1,500 per month: easy to see why condos remain a prime property play.
Hottest British Columbia Markets In 2015
As for B.C., MLS sales are forecast to dip 2.6% in 2015, from this year, to a still-solid 79,200 units; MLS average prices across B.C. will be a modest 0.4% to $566,300 in 2015 (this up from an average of $465,725 five years ago) and will rise to $573,000 in 2016. CMHC is forecasting the following B.C. sub-markets to outperform the province in 2015:
Nanaimo, where MLS sales will rise 6.3% and prices will advance 2.8%;
Prince George, with a 3% increase in both sales and in average prices: and
Abbotsford-Mission, where prices are forecast to increase 1.1% and sales to rise 1.2% next year.
Metro Vancouver, as a comparison, will see sales fall 1.7% and prices will increase 1.2%.
Victoria is forecast to see a 1.5% increase in prices next year to $497,500, but sales will fall 2.4%.
In the rental market, CMHC is forecasting that by this time next year, the B.C. rental vacancy rate will still be in the 2% range, with 1.8% in Vancouver; 2.7% in Victoria and Abbotsford-Mission; a low of 1.7% in Kelowna; and provincial highs seen in Nanaimo, at 4.4% and Prince George at 3.3%.
Major Point: The B.C. recreational market will see recovery in 2015 and 2016, according to CMHC analysts, as mostly older buyers take advantage of lower prices on Vancouver Island, the Sunshine Coast and the Interior. Right now, for instance, there is about a $600,000 gap between Metro Vancouver house prices and those in Kelowna, Nanaimo, Kamloops or the Sunshine Coast.
NOTE! Assessment Ruling Uproar: Perhaps Billions Of Dollars Less In Tax Payments
You will be hearing a lot about a set of Property Assessment Appeal Board rulings this year that have municipalities running scared that they will potentially lose multimillions of dollars in property taxes. Of course, that means that property owners will be paying billions of dollars less.
It started with a September 16 decision ruled in favour of Vancouver big-time developer Amacon and against BC Assessment! Amacon had launched the assessment appeal regarding nine lots the developer owns in the 1000 block of Seymour Street in Vancouver. The lots, valued at from $3 million to $4 million each, now house small retail outlets and parking lots. Amacon plans to develop the land into higher-density residential and retail premises.
In the ruling, PAAB agreed with an argument put forward by Paul Sullivan, a Vancouver appraiser and chairman of the B.C. Chapter of the Canadian Property Tax Association, that the land should be taxed based on the existing commercial property on the site, not on future development potential, and that a residential property tax rate, which is about four times less than the commercial rate, be applied on future development. Under current conditions, such a property is assessed on its “highest and best use” which is normally residential condominiums, but it is taxed at the higher commercial rate, explained Phil Gerstman, executive vice-president, Western Canada, for Altus Group, a leading appraisal company. “Property owners get the worst of both worlds,” he said.
Retail tenants are also expected to pay property taxes for leased space based on the potential floor-to-space ratio, not the actual space they are renting, Sullivan explained. “You can have a tenant renting in a one-storey retail strip but paying taxes on the air rights above it,” he said.
The Appeal Board’s ruling in Amacon’s favour could reduce the company’s property tax bill by more than $200,000 a year. BC Assessment have appealed the decision and have stated they will proceed with original assessments on Amacon properties – and potentially dozens of other property owners in the same situation – in 2015 assessments.
If BC Assessment loses the appeal, the city of Vancouver alone could see a tax loss of millions of dollars.
The other property tax battle regards taxes on fixed properties that have a single purpose. Last week, NAV Canada, a non-profit that runs civil air traffic control in Canada, won a Supreme Court of BC decision that slashed the value of its air traffic control tower at Victoria International Airport to $20, from the $1.43 million that BC Assessments said it was worth. The ruling also included airports in Penticton, Pitt Meadows and Castlegar. An appeal on the decision by North Saanich, where the Victoria airport is located, failed. Municipalities are shaken by the decision, because other single-use operations might also see such reductions in assessed value, and therefore property taxes.
Major Point: While it is natural to cheer any reduction in property taxes, beware. If the Amacon decision holds, it will certainly help developers, but municipalities will have to raise the lost taxes somewhere else, which could mean higher taxes on homes and commercial property!
Investors Awaken To Sunshine Coast
Metro Vancouver homeowners are apparently awakening to the lower cost of housing on the Sunshine Coast, which is less than 10 km off the mainland coast. The Globe and Mail has certainly picked up on the story.
Last Saturday the national newspaper profiled a semi-waterfront cottage in Sechelt that sold for $249,000: or about $2.2 million less than similar setup in West Vancouver. (We checked with the agent: the property had 3 small cottages and was on freehold land.)
Then, this week, the G&M ran a lengthy piece on an older couple that sold their Richmond house for $1.35 million. With the help of Sechelt agent Bruce Lasuta (twicetheexperience.com) the couple bought a three-bedroom, two-level, 2,100-square-foot house with a sweeping ocean view for $460,000 in Sechelt. The average sale price for a three-bedroom home in Sechelt is $394,498, according to Landcor Data Corp. In Metro Vancouver, the same house would be close to $1 million.
“We were able to invest the balance and spend money on the garden and give money to our children. We have some in our back pocket. We’re not millionaires, but we’re comfortable,” the new owners are quoted as saying. Lasuta said Sunshine Coast housing sales have increased 20% in the past year, but prices have increased only 3.2%. Lasuta, 58, wonders why even more retirees aren’t scooping up the deals. He suggests it is because retirement has been delayed as people try to rebuild portfolios hit during the 2008 financial crisis. “They are long overdue. They could come up here and put a whack of money in the bank and buy a rancher and enjoy life.” He recently sold a newly built, 1,568-square-foot, centrally located three-bedroom home with quartz counters and gourmet kitchen for $350,530. It was listed at $369,900 and took 237 days to sell.
Bigger investors are taking note: Mainland China buyers bought the Sechelt Golf and Country Club and a large island off of Pender Harbour this year and Vancouver developer Onni has built a new waterfront development of townhomes in Porpoise Bay, called Edgewater. Pacific Spirit Properties has just built a 104-unit beachfront Watermark condo development in Sechelt on a 2.6-acre site with 6,500 square feet of commercial space.
Major Point: We scanned the Sunshine Coast market this week: the parameters were detached houses with at least two bedrooms and an ocean view, on freehold property, priced at $350,000 or less. We found 10 such listings including MLS V1066549, an old timer in Davis Bay for $225.000; and MLS V1039623, a newer post-and-beam 2-bedroom in Sechelt with ocean and mountain views, for $315,000.
Marijuana Rules Affect Real Estate
As marijuana inches towards legal status in B.C. (judging from the proliferation of “medical marijuana outlets”) the real estate implications should be taken into consideration. In Denver, Colorado – where marijuana sales are now allowed – officials say marijuana is to blame for J.C. Penney’s decision not to reopen a store on a downtown pedestrian mall. The retailer sought assurances it wouldn’t have to share entrance areas with marijuana dispensaries in a mixed-use development, a guarantee the city couldn’t make. In Washington state – where pot is also legal – concerns have been raised about potential impacts on neighbours, tenants and properties, including smoke and odors and mold from the high humidity levels needed for growing.
Pauline Aunger, an Ottawa realtor told a recent U.S.-Canada real estate conference on the topic that there are similar concerns about marijuana growing operations here. In C anada, federal law permits the possession and use of medical marijuana; however, a production license is required to grow marijuana for medical purposes. Aunger said illegal marijuana growing operations in apartments, homes and commercial spaces are becoming a common challenge for police and for property owners who lease those spaces to tenants and could face property damage and legal risks from tenants’ growing activities. Aunger recommends that property managers make planned visits to their leased properties on a frequent basis to ensure tenants aren’t violating marijuana laws.
(Good advice!) She also said realtors should disclose to potential buyers if a property was used for growing marijuana. The Canadian Real Estate Association has developed an educational pamphlet for what realtors need to know about marijuana growth operations. The Institute of Real Estate Management recently released additional information about marijuana legalization laws and their impact on commercial spaces. Contact your realtor for more information.
Major Point: We throw this out because we know a number of investors are thinking of getting into the medical marijuana biz or preparing for possible legalization. A warning: pot prices on the street are falling like a stone, which may drive legal users back into the black market. According to our sources, an eighth-ounce of BC bud (a common amount for buyers) has fallen from $40 to $20 in the past two months. Just saying.
Oil Pipelines Not Needed? Reality Could Affect Real Estate Investors
If it ever gets approved, the Enbridge Northern Gateway oil pipeline from the Alberta oil sands to Kitimat on B.C.’s north coast will be the largest single infrastructure project in Canada, cost billions of dollars and deliver 525,000 barrels of oil per day.
But CN Rail argues that the pipeline may never be built because oil-by-rail is the answer. James Cairns, vice-president of petroleum and chemicals for CN, recently told the Daily Oil Bulletin that planned rail facilities will move one million barrels per day of crude oil from Alberta by 2015 – nearly twice the Northern Gateway capacity.
In 2009, 500 carloads of crude oil were shipped by rail in Canada. Last year that had risen to 160,000 carloads. (!!)
The economic advantages of transporting Alberta crude by rail far outweigh any advantages pipelines may possess, argues Randy Meyer, vice-president of business development and logistics with Calgary-based Altex Energy Ltd., which pioneered crude-by-rail shipments.
For one, Alberta’s heavy crude doesn’t have to be diluted with as much pricey condensate. While heavy crude being transported on pipelines needs as much as a 30% diluent content, a 10-15% mix works well for rail. That gives producers an immediate savings of $15 a barrel or more, he noted.
Rail also has the specific advantage of not having to go through a tortured regulatory process, as is the case with new pipelines like TransCanada’s Eastern Route or Northern Gateway.
Major Point: If the Northern Gateway pipeline is nixed due to rail competition, it would have a negative affect on Northern BC communities along the route and at the terminus. Construction jobs would be lost because, after all, the railroads are already built.
Spotlight: Rental Investors: Tips To Using CMHC Insurance
By Adam Powadiuk, First National
An apartment investor has to decide whether to use mortgage loan insurance, predominately provided by Canada Mortgage and Housing Corporation (CMHC).
CMHC mortgage loan insurance allows approved lenders to provide borrowers with competitive interest rates for the life of the mortgage and to reduce the investor’s renewal risk. The key attraction is that the competitive interest rates are significantly lower than similar conventional products.
The insurance premium is paid at the origination of the loan and is valid for the entire amortization period, typically 25-30 years.
Apartments (blocks) are defined as five units or more and are subject to a different set of rules than single-family homes. Most people are familiar with CMHC from purchasing a home leading to several misconceptions as it relates to apartment financing.
You cannot increase your equity portion above 20% to avoid the insurance premium while still accessing the low interest rates. The minimum insurance premium is 1.75% of the loan amount and this is based on the loan being up to a maximum of 65% loan-to-value (LTV).
Any amount below this will still incur the minimum insurance premium – which leads to the next misconception. The insurance premium is defined by the LTV of the underwritten value of the property, not the purchase or market price. The underwritten value of the property is typically lower than the market value, so an insurance premium based on 85% LTV might only be 75% of the purchase price.
Is the insurance premium worth it? Let’s do some math.
As an example, let’s assume you have an apartment building worth $2,000,000. A CMHC-insured mortgage would typically allow for a maximum loan amount of $1,500,000 and be based on 85% of the underwritten value.
The insurance premium at this leverage is 4.50% of the loan amount or $67,500 . The interest rate is priced from the Canada Mortgage Bond and if set today, the rate on this loan would be approximately 2.58% for a five-year term.
A comparable conventional offering would be in the range of 3.75% – 4.25%. The interest savings of the insured mortgage versus the conventional mortgage is $73,000 – $103,000 over the five-year term. In other words, it would take only 3-4.5 years to recoup the amount paid for an insurance premium that gives a borrower access to lower interest rates for the full amortization period (25 years, in this example).
The effect on the internal rate of return (IRR) is significant. If your $2,000,000 apartment generated a static 5% cap rate for the entire five-year term of the mortgage, an IRR of 7.02% – 8.25% would be achieved with the conventional mortgage. The insured option would yield an IRR of 10.55% if you amortized the premium expense over the life of the mortgage.
There are several other advantages to the insurance premium. It is payable at the time of funding, but it can be added to your mortgage amount and amortized over the life of the loan. When financing via CMHC insurance, an appraisal is not required for buildings with more than seven units and a building condition assessment is not required in the vast majority of cases.
If longer security is your objective, a 10-year term is readily available through mortgage insurance but this can be difficult to locate conventionally. One other cost savings that was not included in the payback period calculations above is lender fees. You could expect to pay 0.50%-1.25% ($7,500 – $18,750) in fees for a conventional mortgage, far higher than the $3,000 associated with an insured loan.
If the investment objective is based around a short holding period, CMHC is a poor choice as the minimum term is five years with either no prepayment rights or large penalties. If the property needs to be re-positioned or stabilized, a conventional option would be best as the maximum loan amount will be restricted.
Insured mortgages are best suited to stable assets for a buy-and-hold strategy as the benefits accrue over time.
Adam Powadiuk is a Business Development Manager with First National Financial, Canada’s largest non-bank lender. He is active in most markets in the country with a focus on investment real estate. He can be reached at firstname.lastname@example.org.
Mortgage Debt Slows As Home Sales Increase
Here is an interesting fact: While housing sales Canada are increasing, household debt growth has fallen to its lowest level since 2001. Since mortgage debt makes up two-thirds of household debt, the indication is what we have been arguing for years: Canadian homeowners represent the most astute borrowers in the country.
A TD Bank study, released in September, shows that low mortgage rates are helping: interest payments as a percent of income (also called the debt service ratio) is at a record low of 6.6%. Put another way, Canadian homeowners are paying about $4 billion a month less in interest than they were heading into the 2008 recession.
The bottom line: Canadians are accumulating mortgage debt at quick pace, but they are paying down that debt faster than they have in the past.
Major Point: TD notes there are several reasons, aside from lower interest rates, for the lower mortgage debt: home buyers are taking out shorter amortization mortgages than previously; fewer buyers require high-ratio mortgages, which means they are putting down at least 20% and therefore have a smaller mortgage; first-time buyers are getting help from parents to buy; and there are more foreign buyers, who often do not need a mortgage.
OSFI finally publishes B-21 Guidelines
“After The Office of the Superintendent of Financial Institutions released their industry changing B-20 guidelines in 2012, they had hinted about and began working on a following set of guidelines to further control the mortgage industry,” says Kyle Green of Mortgage Alliance (778-373-5441, Kyle@GreenMortgageTeam.ca). “Luckily for us, the damage had for the most part been done already in 2012 with B-20 and B-21 really didn’t change anything we didn’t already know.” B-21 primarily focused on reiterating a few points with lenders, but here is a quick summary of the focus areas:
– Borrowed down payment – Surprisingly, OSFI is still ok with individuals borrowing down payment for their own residence from an unsecured Line of Credit or even a credit card as long as this fits with the lender’s guidelines (it often doesn’t). Odd how they don’t seem to see high risk with an individual borrowing their down payment from a credit card at 18%, although they did point out that they would want to see that the borrower is able to qualify to carry these payments and often the borrower cannot service the debt payments requires (usually 3% of the balance is the monthly payment required to service).
– Cashback – OSFI’s stance on cashback mortgages is that they are ok with cashback mortgages as long as the cashback is not used towards down payment. Again, interesting that OSFI allows borrowed down payment for down payment but not cashback when cashback often has a fairly low impact on the borrower’s interest rate when compared to credit cards.
– Self employed income – OSFI instills that they want to see that self employed borrowers have a clear and legitimate 3rd party source of income to be used for qualifications. This is obviously a challenge for many self employed borrowers. Long gone are the “glory” days of equity lending – 35% down, no questions asked, best rates type of lending.
– Debt Servicing – Nothing big here. OSFI agrees with CMHC and their preference for a 39% / 44% maximum on GDS/TDS ratios. GDS is the total percentage of borrower’s income being used for all housing related expenses, and TDS is all housing plus non-housing related expenses (car loans, etc).
– Monitoring of lenders – This may not be a change from the B-20 guidelines but was perhaps understated originally. OSFI has definitely taken a prominent role when a lender is determining whether to approve a file or not. OSFI advised they will be keeping a close eye on lenders that are producing exceptionally high default rates or are frequently failing OSFI’s audits to confirm proper documentation is on hand.
Kyle adds: “We have definitely seen OSFI’s influence in the industry. Many times we are dealing with a “make sense” deal and the lenders are much more concerned with feeling the wrath of OSFI than the wrath of an upset broker or client. We are likely to see a continuation of what has happened in the last few years with regards to more and more lenders moving to very similar lending guidelines. It is unfortunate as it means there is a lower competitive advantage for lenders that would like to go out of their way to pick up market share by offering a product that may be fairly low risk, but run into OSFI’s guidelines and audit in the process and nobody wants to be in their crosshairs right now.”
NAR the US National Association of Realtors (much like Canada’s MLS system) features over a million US listings, allows for personalization (will email listings) and has at two websites with a multitude of information on properties for sale. It also features news, statistics, suburb by suburb info on schools (rated on 1-10 basis), property turnover rates, numbers of people per household etc. No, it does not feature vacancy rates yet. The websites are realtor.com and realtor.org.
In Canada our MLS system is found at www.realtor.ca . You can search by listing number, Residential/Commercial, for sale/rent, number of bedrooms, number of bathrooms, open houses, by price, date listed, and location. Property details such as property type, title, build date, maintenance fees, building amenities, floor space and more can also be found. Both the US or Canada websites feature mobile versions for easy free download. I love standing outside a building and in seconds can see all the units that are for sale with photos.
1. As we said above, we scanned the Sunshine Coast market this week: the parameters were detached houses with at least two bedrooms and an ocean view, on freehold property, priced at $350,000 or less. We found 10 such listings including MLS V1066549, an old timer in Davis Bay for $225.000; and MLS V1039623, a newer post-and-beam 2-bedroom in Sechelt with ocean and mountain views, for $315,000. There are also dozens of waterfront properties available for under $1,000,000;
2. Victoria 2006 built great condo, last purchased in March 2008 for $255,000, listed 185 days ago for $211,900 … now $173,900(!);
3. Victoria purchased in August 2007 for $157,500 … 1st listed Sept 2013 for $159,500. Now currently listed at $125,000!!
Anyone could be here. If you think you have a deal you own or have a personal agency agreement send it in. No warranties … you must do your own due diligence. Contact info on your website. There is no charge to be here or on your website. Read your disclosure statement on your website.
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