Even though the federal government has focused on affordable housing in their new budget, the price of real estate remains unattainable in some parts of the country.
Even though the federal government has focused on affordable housing in their new budget, the price of real estate remains unattainable in some parts of the country.
Many young people are completely priced out unless they’re willing to move to another province, while others are taking on record debt levels. Unfortunately, real estate has become a status symbol for success and many Canadians are going all-in.
The funny thing is, if any government really wanted to make housing more affordable, they would just have to implement a few hard rules.
Doing so would be difficult and stir up controversy. The change would mean falling house prices at a time when owners have come to expect prices always to rise. Hence, the politician to drop housing prices would risk being voted out in the next election.
Plus, anyone who works in real estate would claim it’s the end of the world (or the end of their profits) and use every avenue possible to fight the changes.
For purely entertainment value, let’s look at some real estate rules that would actually make housing more affordable.
Different governments at the federal and provincial levels have introduced multiple policies to address housing affordability, but every new rule seems to only make things more expensive. Let’s quickly highlight some of the rules that have come into play over the last 20 years:
Technically speaking, many of these rules made housing “more affordable” since more buyers were able to enter the market. However, with more buyers, there’s more competition, so that just increased prices further.
Currently, CMHC insured mortgages have a maximum amortization period of 25 years. This means that homeowners have 25 years to pay off their mortgage.
If you have a down payment of at least 20 per cent, you can get an amortization period of 30 years.
Let’s say you’re trying to buy a home that costs $800,000, and you have a 10 per cent down payment. If you were to secure a mortgage at four per cent with a 25-year amortization period, your monthly payment would be $3,787.35.
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What happens if that mortgage term is reduced? With a shorter amortization period, your monthly carrying costs go up.
For a 20-year amortization period, the payment increases to $4,350.57. A $563 monthly difference would greatly affect how much you can borrow.
This drastic change would immediately price people out of the market and force others to take on smaller mortgages. However, it could be a benefit in the long run as there would be less demand, which would hopefully reduce prices.
Let’s be honest. There’s a lot of mortgage fraud out there. Some mortgage brokers will push through your application with false documents as long as you pay them a fee. They might even loan you the funds to meet the mortgage requirements, which you would then immediately pay back to them once you secure your lending. While this may or may not happen often, it’s clearly a problem. It allows people to qualify for a mortgage when they wouldn’t under traditional methods.
What if there was a rule where every mortgage application had to be verified through a non-biased, third-party company? The cost of this service would be charged back to the financial institution providing the mortgage. Doing this would mean less fraud, and lenders would only be approving clients that can actually afford their payments.
I’m not suggesting that there are a lot of corrupt mortgage brokers out there. But despite what financial institutions say, there’s clearly a problem with mortgage fraud. Lenders would hate this idea as it would increase their costs and real estate boards would strongly be opposed too since it could potentially lower how many people can afford to buy a home.
Currently, the minimum down payment for a CMHC-insured mortgage is five per cent, while uninsured mortgages require 20 per cent. What if we raised that to 15 per cent for insured mortgages, and 30 per cent for uninsured?
As soon as you increase the down payment requirement, many potential buyers will be priced out. While that may seem unfair, it’ll reduce the demand for housing. With fewer buyers available, prices would naturally drop. Of course, this assumes supply stays the same.
Anyone who’s just starting to save their down payment would likely be strongly opposed to this, but this is another example of short-term pain leading to long-term gain.
Currently, capital gains on investment properties are taxed at 50 per cent. This is no different than other investments you hold. However, to reduce housing costs, how about increasing the capital gains tax on investment properties to 75 per cent or even 100 per cent. With this increased tax rate, people would likely be less interested in owning an investment property.
What if an investment property you sold increased in value by $100,000? Under the current system, 50 per cent of your gain ($50,000) would be added to your income and taxed at your marginal tax rate. Under my suggestion, $75,000, or the entire $100,000 profit, would be taxed.
Or what about increasing property taxes on a sliding scale for each additional property you own? For example, if you own two properties, your property taxes double. When you own three, your taxes triple. These rules would lower the demand for investment properties and leave more inventory available for end users.
It would be great for people who just want to own a home for themselves, but investors and realtors would be up in arms as their profit margins would drop.
The current system where you bid blindly on real estate is broken. None of the bidders know what numbers they are competing against, forcing them to bid higher in the hopes of securing a home. This system needs to be changed immediately.
If every potential buyer knew what the current bids were, they could just offer their maximum. If someone else decides to bid more, then it wasn’t meant to be. No potential buyer would be disappointed knowing they went in with their maximum offer, but someone bid higher. The seller still gets the top dollar for their home. It’s a win-win, right?
Starting in 2023, home sellers will have the option to reveal bid prices. However, since it’s not mandatory to disclose the prices, sellers will likely continue to keep bids a secret.
Some people that work in real estate argue that getting rid of blind bidding is not suitable for privacy reasons. However, the end of blind bidding would only reveal the numbers for the bids. Personal details such as the bidders’ names would not be disclosed.
As long as politicians are more concerned about winning elections and individuals working in real estate are focused on profits, housing affordability will always be an issue.
Rising interest rates may slow down demand, but prices are already at all-time highs. Any future rate hikes will be slow, and in any case, mortgage borrowers are required to pass the “stress test” that ensures they can handle rate hikes of up to two percentage points.
None of the currently proposed solutions appear to be effective. Something drastic needs to happen. If we do nothing, potential homebuyers will continue to struggle.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
The owner of an appraisal company that worked with a capsized Saskatoon real estate firm insists claims made in a court-ordered investigation are flawed.
According to an Ernst and Young report into Epic Alliance Inc. released earlier this month, the company bumped up prices on its housing while doing minimal renovations. The company raised more than $200 million from investors, as appraisals typically assigned a value “well in excess of its original purchase price,” the report stated.
David Lazeski of Associated Appraisal — the appraisal company named in the report — disputes the claims.
Epic imploded earlier this year, when company founders Rochelle Laflamme and Alisa Thompson told worried investors that there was nothing left from the seemingly thriving company. That caused around 120 investors to turn to the legal system to find out what happened to millions of dollars.
Saskatchewan’s Court of Queen’s Bench ordered Ernst and Young to delve into the company’s practices and to prepare a report. The probe found spotty record-keeping and “that accurate electronic accounting records of Epic Alliance were not maintained prior to 2019.”
As well, the report stated, “(from) the Inspector’s review of appraisal documents, it appears that, despite their appraised values significantly exceeding their purchase price, many of the homes had not received significant renovations.”
According to the report, appraisals for Epic “were performed almost exclusively by Associated Appraisal Co.”
Lazeski, in an interview with the Saskatoon StarPhoenix, said his company only started doing appraisals for Epic in December of 2019. Epic opened for business in 2013. He said others were doing appraisals for Epic as well.
The investigator never reached him for comment about the claims in the report, Lazeski said.
Lazeski, who said he did not personally work with Epic, said in an interview that the appraisals were typically conducted one year after Epic purchased the homes. The time elapsed between purchase and appraisal may contribute to the price difference, he said. Another factor may be Epic finding deals on the market, he added.
“Buying that number of houses, during the pandemic, I’m assuming (Epic) probably got some good deals,” he said.
“When we’re doing an appraisal and establishing market value, it’s based on current sales. That’s really the biggest factor.”
Epic bought at least 700 properties, mostly through its “fund a flip” program under which homes were acquired in low-income neighbourhoods in Saskatoon and North Battleford and were then supposed to be renovated for sale.
Once renovations were complete, Epic would bring on an appraiser. Those properties were then sold as part of the “hassle-free landlord” program and Epic leased back the properties to be rented or used for short-term accommodation, such as Airbnb.
The Ernst and Young report compared the total mortgage on each property with the appraisal commissioned by Epic. It found that the average property’s appraised value was $11,325 over the total mortgage.
The report cited one case in which Epic hired an appraiser one year after it bought a property. Photos of the interior “showed outdated appliances, countertops, and cupboards which were not indicative of a renovation occurring. Pictures of two bedrooms had carpet that was visibly stained,” according to the report.
The home’s appraised value was $260,000 — which is $62,000 over its original price, according to the report.
Kari Calder, a Saskatoon realtor, says the price bump on Epic homes affected her business by undermining trust with clients.
She warned clients that the company offered low prices to find “desperate sellers,” then added new paint or flooring before listing the home at higher than market value. One seller lost her faith in Calder when her home sold low only for it to sell again at a higher inflated price, Calder said.
Calder won back the client’s trust by explaining the pattern she saw, but it’s a slice of a broader issue.
“I learned through a lot of trial and error that almost every Epic listing that came up as a comparable threw my evaluation off,” she said.
Calder used the example of four recent sales valued at roughly $250,000 to $265,000. If one sold for $315,000, she would include it in talks with clients to explain the overpricing of some homes on the market.
Former Epic homes may be entering the market if their owners see they’ve lost money on their investors. That could create a challenge for second-time buyers looking to sell their home for something bigger, Calder said.
“I suspect that the current owners of many of these flipped homes will be the ones taking the financial hit as they are the ones who unwittingly overpaid for the houses,” she said.
The Financial and Consumer Affairs Authority of Saskatchewan and Saskatoon police are conducting separate investigations into Epic.
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The real estate industry has never been static, but things have changed here more than normal on several fronts. The skyrocketing cost of housing is not the only major difference.
As technology evolves, disruptors are leveraging platforms to help people make more informed purchasing decisions. They’re also removing pain points along the journey, so buying a home doesn’t have to be a murky, slow, and excruciating process.
Let’s check out some of the technology in today’s real estate market.
Innovators like Regan McGee have made open digital marketplaces where homebuyers, especially millennials, can enjoy transparent data working for them. Compare qualified and verified local real estate agents based on their pricing, service, reputation, and experience level. Then, pick the agent who works best for you.
On a platform where agents vie with each other for your business, prospective homebuyers get further incentives like cashback or improved services, which are likely to be very appreciated given housing costs. As McGee explained to Toronto Life, “People think buying and selling real estate is complicated, but that’s a way for agents to justify their fees.”
Prop tech helps people entering the housing market for the first time learn what questions to ask so they don’t find out hard lessons after it’s too late. Homebuying doesn’t have to be a nerve-wracking, drawn-out process if you rely on today’s leading technological support.
While the development of virtual reality tech predates the COVID-19 pandemic, the need for remotely viewing property was only made more acute. Pictures and even videos of the property up for sale don’t give prospective buyers granular control over what they’re viewing.
Exploring a property using virtual reality lets you delve deeper into the home itself. Imagine looking at a picture of a home and wondering what’s around a certain corner you can’t see. Virtual reality lets you step inside the pictures and even the video and roam freely.
Facebook, now known as Meta, has people spending fortunes buying a virtual property you can’t actually live inside.
Airbnb was originally meant to allow homeowners to rent out their space while they were away on vacation or for whatever other reason. In the years since, people have purchased property for the sole purpose of renting it out short-term on Airbnb.
Such practices have driven up the cost of living, and not every community is supportive. Local battles between long-time community members who resent living in ghost towns and short-term landlords who aren’t breaking any laws are increasingly common.
Each jurisdiction responds differently, but technology has created possibilities that didn’t exist even a few years ago, and that is definitely something to watch.
Technology has evolved so much in the past decade or so that it’s hard to think of a sector it hasn’t affected. From prop-tech platforms, developments in augmented and virtual reality, and apps that increase your property’s value, real estate is presently different than ever. In a way, the future of real estate is now.
The red-hot housing market over the last several months pushed many buyers fighting through bidding wars to put in unconditional offers at high prices.
But now that the market is cooling, some are ending up with mortgages that can’t cover the full cost of their home following an appraisal.
Toronto-based mortgage broker Mary Sialtsis says there are “very few options” for these buyers.
“In the last couple of years, but especially in the last couple of months, I’ve had a few different clients that have dealt with this situation,” she told CTV’s Your Morning on Friday. “Unfortunately, there are very few options when you’ve purchased a property with no conditions and no financing conditions.”
Nationally, home prices fell 6.26 per cent between March and April 2022 after peaking in February, according to the Canadian Real Estate Association. That’s meant some buyers are ending up with mortgages that are more than $100,000 shy of what they need.
In some cases, especially when the down payment from the buy is 50 per cent more, Sialtsis says the lender may just move forward with the mortgage based on the original price of the home, even if the appraisal is a lot lower.
“It’s a case-by-case situation,” she said.
Another option may be to get a second mortgage from a private or alternative lender. But if no other option works, buyers can try and negotiate a mutual release, which usually means forfeiting the deposit.
“For most, they end up going to the bank of mum and dad,” said Sialtsis. “I highly recommend if anyone is in this situation, reach out to your mortgage professional immediately.”
Sialtsis warns that putting in offers without any financing conditions puts buyers at a huge risk, as the buyer is legally bound to close the deal regardless of whether they’re able to get a sufficient mortgage.
“I really don’t think buyers fully understand the impact of those unconditional offers when they submit an offer to purchase a property,” she said. “It becomes a legally binding contract and that buyer is expected to close on the closing date. So, that’s one of the reasons why there’s very few options for this.”
But the cooling housing market isn’t all bad news. For those looking to buy a home, Sialtsis says now is a good time to jump in as buyers have a lot more leverage to negotiate.
“For many Toronto-area buyers, where often we’re dealing with multiple offers… it might be a good chance for you to get in and get a decent property with less competition or no competition and the opportunity to actually include a financing condition,” she said.
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