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Canadians: Don’t Rush To Buy a House

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Since its peak in May 2022, the Teranet-National Bank House Price Index dropped a total of 10% up to mid-January 2023, the “largest contraction in the index ever recorded” since it began in 1999.

“In mid-2022, we saw a dramatic pull back in transactions, close to 23%, and in many markets, it was 40%,” recalls John Lusink, President of Right at Home Realty. In some higher-demand neighbourhoods, price drops have been more subdued and activity is still brisk. “On buyers’ side in Toronto, he continues, we still get two or three simultaneous offers, but it’s not 20 or 30 as we saw a year ago. People will no longer pay excessive amounts over the asking price.”

As we argued in a previous article, the present slump is not a catastrophe, but a welcome adjustment of prices.

Bank of Canada’s Rate Hikes Play a Role

The Bank of Canada’s rate hikes that started in March 2022 are the main impetus for the turn in the housing market, but the hikes didn’t really bite until the BoC pushed them by one full percentage point in July, then again by 75 basis points in September. All through 2022 and in January 2023, the BoC pumped up its overnight rate by a total of 4.25 percentage points from .25% up to 4.5%.

Of course, it’s not the Bank’s rates per se that did the damage but how mortgage rates responded. Five-year fixed rates went up to 6.05% in 2022, going back up to the level they reached in 2005, according to Super Brokers. For the time being, house listings are somewhat normal, “just a bit higher than a year ago in our network, and still higher than what we would normally see,” notes Lusink.

Also, credit quality has not yet deteriorated significantly, observes Carl De Souza, Senior Vice-President, Canadian Banking, North American Financial Institutions at DBRS Morningstar. “In time, borrowers and mortgage owners will continue to face increased pressure, he says. The impact from higher interest rates and inflation on consumer disposable income should negatively affect credit quality. But credit quality is still quite strong, residential mortgage credit quality remains extremely strong. Also, jobs are still very healthy.”

Stay Patient for Better Deals

Prices in the greater Toronto area fell by 19% between February and July 2022, recalls John Pasalis, President of Realosophy Realty, much more than the Teranet-National-Bank index average. But since July, prices have remained flat. Pasalis believes that many buyers moved to the sidelines, expecting prices to fall further, but now, “some buyers are starting to think: I won’t wait anymore. The market is busier than what most people expected, and it doesn’t seem to panic as they expected.”

The Canadian housing market is still quite resilient, which means that buyers hoping to purchase a house at bargain prices still need to be patient. “I would wait, especially if I were a first-time buyer, to see what effects the rate increases will have, advises Ian Provost, Senior Consultant in Wealth Management and Portfolio Manager at National Bank Financial – Wealth Management. It’s still too early. Usually, these effects need 12 to 18 months to pan out. Since the hikes have been steep only in the second half of 2022, it means holding out to 2024.”

Four other specialists interviewed for this story agree. “The right moment should present itself only in 2024,” confirms Fabien Major, Financial Planner and Wealth Management Advisor at Assante Capital Management, Major Team.

Pasalis also agrees. “There are still risks pressing on prices, he warns. We haven’t yet felt the full weight of rate hikes on the market and on the economy in general.” However, he notes that many buyers don’t really care to wait any longer because they are buying for the long term, and any bargains in prices won’t really make that much of a difference in the long run.

However, buyers who wait shouldn’t expect a rout. “Prices could still fall by another 15%,” ventures to predict Lusink. Yes, on the one hand, conditions are pressing down on prices: interest and mortgage rates, deteriorating household credit conditions, inflation, all factors that could be exacerbated by an eventual recession and its negative impact on the job market, De Souza points out. But, on the other hand, he recalls, “strong immigration and strong demand for housing and low inventories” contribute to hold the market up “and make predictions more difficult”.

For Pasalis, immigration is definitely a major driver of the rise in house prices. “Over the previous decade, he points out, Canada admitted roughly 275,000 new immigrants each year. In 2022, Canada saw a record 431,645 new permanent residents and this number is expected to reach 500,000 annually by 2025.” Trying to increase the number of housing starts is a route fraught with countless obstacles: municipal, regulatory, worker shortages, etc., “but changing our population numbers is the easiest path to follow,” he argues. However, until Canada’s immigration policies are changed, the rise in immigration will definitely supply a support platform for higher house prices.

Should one wait for the BoC’s pivot, when it starts to lower rates if it perceives it has tamed inflation? Beware such a moment, warns De Souza. “It could be a signal, provided that inflation comes down toward the 2% target. But the timing will depend on the economy, if there’s a recession, if unemployment grows. Lowering rates could mean a downturn in the economy.” He proposes rather to wait for the moment rates are peaking, which “could get buyers to come back into the market if prices are good and credit conditions are lightening up.”

A House is More an Expense Than an Investment

House owners often consider their purchase as an investment. Such a proposition needs many qualifiers. If you intend to “flip” your purchase and make a quick profit from a fast resale, it could work. But some buyers who expected to execute such a plan over the last year came in for an unhappy surprise. Some people Major knows were quite disappointed with their plan: “They can’t even meet their payments, even with revenues from rents,” he says.

“A main residence can be an investment if held over the long term, asserts Provost. But then, one needs to calculate how much this ‘investment’ has cost.” Indeed, many would find that when they add up all the mortgage costs, repairs, renovations and taxes, their house has cost them more than what they got out of it.

“A house is first and foremost a consumer item, agrees Major, it can become an investment only after many years.” Major warns that, once the share of residential real estate starts to exceed 50% of one’s assets, it ceases to be an asset and tends rather to become a liability because the expense of keeping up the real estate part of the portfolio becomes a drag on revenues from the other part.

A house becomes an investment essentially when you change its mission to produce rents, Major claims. And then, you find yourself with real estate which, for most investors, should represent between 5% and 15% of one’s portfolio.

Is a REIT a Better Real Estate Option?

Investors may consider a real estate investment trust, or a REIT, as a way to invest in real estate without the costs of owning a physical space. Is that a better idea? Jeremy Pagan is a NEXT research analyst at Morningstar, and he leveraged different personas to guide investors toward the right choice.

A Successful and Busy Professional: Property ownership could be costly or infeasible if you don’t have time to deal with tenants or maintenance, so passively investing is likely the right choice, as REITs minimize time and effort while improving risk-adjusted returns in a mixed-asset portfolio.

  • Sophisticated or wealthy investors could consider becoming a silent partner to an active investor, which could generate higher returns but comes with substantial risk.

A Flexible Professional: Early careerists or those with flexible jobs may consider making real estate into a part-time job or hobby. Risk appetite, liquidity needs, and your willingness to earn sweat equity will inform the appropriate choice.

  • Purchasing a rental property could make sense if you’ve already built a traditional investment nest egg and have excess savings. Your spare time and capital can be invested into a specific asset in the right market, and you can leverage real estate’s tax treatment to boost your after tax returns. Choosing tenants and working with maintenance providers is the time cost of actively investing in real estate.
  • Active investors have a wide range of opportunities to pursue. For example, if an investor has an appetite for remodeling, a fixer-upper could be an option. Between the tax benefits and leveraged nature of housing, this approach can compound returns quickly.
  • However, purchasing an illiquid asset could be a costly mistake if you don’t have an adequate financial cushion or suddenly need cash. On the other hand, buying shares of a diversified REIT at the right price could provide the diversification benefits you’re looking for without limiting portfolio liquidity.

Retired or Self-Employed: Professionals planning for retirement or without guaranteed income may lean toward real estate for steady income. Depending on the investor’s willingness to get hands-on, either a traditional investment or a REIT may be appropriate.

  • Empty nesters who plan to downsize or those who want to relocate may benefit from turning their current home into a rental property, especially if property prices are soft. If you purchase a home with a low interest rate and transition it into a rental, your investment property retains this perk and increases your positive cash flow. In addition, since a rental property is not treated as earned income, it is exempt from self-employment tax, or FICA tax. If time is a factor, then hiring a property manager for day-to-day decision-making could be right for you but will offset returns and may still take some of your time.
  • Shifting your investment strategy to REITs might be appropriate if free time is important to you but you desire a steady income. Perhaps you already have a passive income stream or a sizable investment portfolio. Taking advantage of diversified REITs is a strong choice for keeping your real estate assets liquid and easily investing in properties in various markets.
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Former B.C. Realtor has licence cancelled, $130K in penalties for role in mortgage fraud

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The provincial regulator responsible for policing B.C.’s real estate industry has ordered a former Realtor to pay $130,000 and cancelled her licence after determining that she committed a variety of professional misconduct.

Rashin Rohani surrendered her licence in December 2023, but the BC Financial Services Authority’s chief hearing officer Andrew Pendray determined that it should nevertheless be cancelled as a signal to other licensees that “repetitive participation in deceptive schemes” will result in “significant” punishment.

He also ordered her to pay a $40,000 administrative penalty and $90,000 in enforcement expenses. Pendray explained his rationale for the penalties in a sanctions decision issued on May 17. The decision was published on the BCFSA website Wednesday.

Rohani’s misconduct occurred over a period of several years, and came in two distinct flavours, according to the decision.

Pendray found she had submitted mortgage applications for five different properties that she either owned or was purchasing, providing falsified income information on each one.

Each of these applications was submitted using a person referred to in the decision as “Individual 1” as a mortgage broker. Individual 1 was not a registered mortgage broker and – by the later applications – Rohani either knew or ought to have known this was the case, according to the decision.

All of that constituted “conduct unbecoming” under B.C.’s Real Estate Services Act, Pendray concluded.

Separately, Rohani also referred six clients to Individual 1 when she knew or ought to have known he wasn’t a registered mortgage broker, and she received or anticipated receiving a referral fee from Individual 1 for doing so, according to the decision. Rohani did not disclose this financial interest in the referrals to her clients.

Pendray found all of that to constitute professional misconduct under the act.

‘Deceptive’ scheme

The penalties the chief hearing officer chose to impose for this behaviour were less severe than those sought by the BCFSA in the case, but more significant than those Rohani argued she should face.

Rohani submitted that the appropriate penalty for her conduct would be a six-month licence suspension or a $15,000 discipline penalty, plus $20,000 in enforcement expenses.

For its part, the BCFSA asked Pendray to cancel Rohani’s licence and impose a $100,000 discipline penalty plus more than $116,000 in enforcement expenses.

Pendray’s ultimate decision to cancel the licence and impose penalties and expenses totalling $130,000 reflected his assessment of the severity of Rohani’s misconduct.

Unlike other cases referenced by the parties in their submissions, Rohani’s misconduct was not limited to a single transaction involving falsified documents or a series of such transactions during a brief period of time, according to the decision.

“Rather, in this case Ms. Rohani repetitively, over the course of a number of years, elected to personally participate in a deceptive mortgage application scheme for her own benefit, and subsequently, arranged for her clients to participate in the same deceptive mortgage application scheme,” the decision reads.

Pendray further noted that, although Rohani had been licensed for “a significant period of time,” she had only completed a small handful of transactions, according to records from her brokerage.

There were just six transactions on which her brokerage recorded earnings for her between December 2015 and February 2020, according to the decision. Of those six, four were transactions that were found to have involved misconduct or conduct unbecoming.

“In sum, Ms. Rohani’s minimal participation in the real estate industry as a licensee has, for the majority of that minimal participation, involved her engaging in conduct unbecoming involving deceptive practices and professional misconduct,” the decision reads.

According to the decision, Rohani must pay the $40,000 discipline penalty within 90 days of the date it was issued.

 

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Should you wait to buy or sell your home?

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The Bank of Canada is expected to announce its key interest rate decision in less than two weeks. Last month, the bank lowered its key interest rate to 4.7 per cent, marking its first rate cut since March 2020.

CTV Morning Live asked Jason Pilon, broker of Record Pilon Group, whether now is the right time to buy or sell your home.

When it comes to the next interest rate announcement, Pilon says the bank might either lower it further, or just keep it as is.

“The best case scenario we’re seeing is obviously a quarter point. I think more just because of the job numbers that just came out, I think more people are just leading on the fact that they probably just gonna do it in September,” he said. “Either way, what we saw in June, didn’t make a big difference.”

Here are the pros of buying/ selling now:

Pilon suggests locking in the rate right now, if you don’t want to take a risk with interest rates going up in the future.

He says the environment is more predictable right now, noting that the home values are transparent, which is one of the benefits for home sellers.

“Do you want to risk looking at what that looks like down the road? Or do you want to have the comfort in knowing what your house is worth right now?” Pilon said.

And when it comes to buyers, he notes, the competition is not so fierce right now, noting that there are options to choose from.

“You’re in the driver seat right now,” he said while noting the benefits for buyers.

Here are the cons of buying/ selling now:

He says one of the cons would be locking in the rate right now, then seeing a rate cut in the future.

The competition could potentially become fierce, if the bank decides to cut the rate further more, he explained.

He notes that if that happens, the housing crisis will become even worse, as Canada is still dealing with low housing inventory.

An increase in competition would increase the prices of houses, he adds.

Selling or buying too quickly isn’t the best practice, he notes, suggesting that you should take your time and put some thought into it.

Despite all the pros and cons, Pilon says, real estate remains a good investment.

According to the latest Royal LePage House Price Survey for the second quarter of this year, the average home price in Canada is $824,300. That’s up 1.9 per cent from the same time last year, and up 1.5 per cent from the first quarter of 2024.

In the Ottawa Housing Market Report for June 2024, the average price of a home was up 2.4 per cent from this time last year to $686,535, but down 0.6 per cent from May 2024.

Experts believe many potential buyers are still hesitant of jumping into the housing market and waiting for another interest rate cut of 50 to 100 basis points.

“I don’t think it’s going to be the rush that we see in the past, because people are used to more of a conservative approach right now,” said Curtis Fillier, president of the Ottawa Real Estate Board. “I think there’s still a bit of a hold back, but I definitely do think with another rate cut, we’ll probably see a very positive fall market.”

With files from CTV News Ottawa’s Kimberly Fowler

 

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Real estate stocks soar to best day of year on rate cut bets

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(Bloomberg) — The stock market’s worst group notched its best day of the year as a cooler-than-expected inflation report stoked bets that the Federal Reserve will start cutting interest rates in September.

Shares of real estate companies jumped 2.7% Thursday for their biggest gain of 2024, climbing to their highest level since March as investors snapped up homebuilder, digital and commercial real estate stocks alike. Real estate also was the best-performing group in the S&P 500 Index Thursday, with volume that was around 30% higher than the 30-day average, according to data compiled by Bloomberg.

Arguably the most significant news to come from the latest consumer price index reading was a pullback in housing-related inflation. Shelter costs rose just 0.2% for the slowest monthly increase in three years. Homebuilders, which have risen 7.1% this year, were up 7.3% for the session, the most since 2022. Shares of D.R. Horton Inc., which is scheduled to report earnings next Thursday, gained 7.3%.

“Housing has really been the last shoe to drop in terms of winning the battle against high inflation,” Preston Caldwell, chief U.S. economist at Morningstar wrote in a note to clients Thursday. “Leading-edge data has strongly indicated for some time now that a fall in housing inflation was in the works.”

A rally in real estate stocks is bad news for short sellers who have been piling into the group, which is the worst performer in the S&P 500 this year. To start the week, short interest as a percentage of float hovered near 49% in the SPDR Homebuilders ETF, the highest level since February for the exchange-traded fund, according to data from S3 Partners.

Property owners are rallying as well. Real estate investment trusts, which were brutally penalized during the two-year run up in borrowing costs, advanced by as much as 3%. And the outlook for the group appears to have turned a corner, according Rich Hill, senior vice president and head of real estate strategy and research at Cohen & Steers Capital Management.

“We think this is a compelling backdrop for listed REITs especially as fundamental growth remains on solid footing,” he said, referencing the latest inflation data and rate outlook. “The rally that started in October of 2023 pushing returns more than 20% above their trough looks set to continue if inflation cools and interest rates continue to decline.”

Shares of industrial REIT Prologis Inc., which reports second-quarter results on Wednesday, rose 3.3% to hit their highest level since April. U.S. Treasury yields tumbled, with the 10-year bond falling to 4.2% and the policy-sensitive two-year note slipping to 4.5%.

(Updates indexes and stock prices for market close.)

 

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