Real eState

Real estate market storm clouds are gathering

Published

2 years ago

July 27, 2022

A home for sale in Toronto’s Annex neighbourhood on July 18.Fred Lum/The Globe and Mail

Real estate industry professionals who help homeowners grapple with rising interest rates and crushing debt are trying to keep up with the volume of new business these days.

“We’re aware that the storm is brewing and likely to get worse,” warns Toronto-based real estate lawyer Mark Morris.

Today credit has tightened, extensions are rife and defaults are rising, says the principal with LegalClosing.ca. The process of buying and selling was “very clean” when there was an abundance of money flowing through the system, Mr. Morris explains, but now that stream has slowed to a trickle.

Some buyers appeal to sellers for more time to come up with the financing they need to close a deal, and defaults are also rising, says the lawyer, who has 15 to 20 problem files on his desk on a given day. Purchasers planning to rely on a home equity line of credit, or HELOC, to buy an additional property are finding that avenue closed.

Mr. Morris is carefully watching the new build segment, where he sees peril ahead. He points to the many people who signed a contract with a builder before construction on a new project began. A number of those buyers count on being able to sell the contract to another party without ever taking possession of the property.

When prices were rising rapidly, speculators often made hefty profits on so-called assignment sales.

He sees complications on the horizon because many of those original buyers cannot afford to finalize the purchase when the unit is finished – especially in today’s economy.

In order to rein in inflation, the Bank of Canada has raised its benchmark rate four times since March to its current level of 2.5 per cent.

Few people will be surprised to learn, Mr. Morris says, that lenders were often lax in extending financing to builders without requiring strong proof that their buyers in the pre-construction market were property qualified.

Investors on shaky financial ground are facing the completion of their units without the ability to trade in the unregulated assignment market.

“That market is now illiquid,” Mr. Morris says. “Buyers will find they cannot assign the product away if they can’t afford it.”

In the current environment, Samantha Brookes, chief executive of Mortgages of Canada, is advising prospective buyers they cannot skip any steps in applying for a mortgage pre-approval. Lenders have become much more stringent about making sure a borrower is creditworthy.

“They want documents up front,” she says. “Consumers have to know they have to have their information ready.”

While interest rates have been far higher in previous decades, the debt levels consumers carry today swamp those of the past, Mr. Morris says.Fred Lum/The Globe and Mail

In some cases, Ms. Brookes is seeing three or four people from one family applying for one mortgage in order to buy a property.

“The parents and the kids are all on title just to buy one home,” she says. “They’re trying to make it work.”

Ms. Brookes urges buyers in the current market to make sure that their offer is conditional on financing.

“Do not waive any type of conditions on financing, no matter what anyone tells you,” she says.

Ms. Brookes also recommends that buyers have a short closing period of four or five weeks in order to avoid the problem of the property declining in value before the appraisal is complete.

As rates have shot up, Ms. Brookes says, her firm has had to cut back on its marketing because they are overwhelmed with clients who need to refinance an existing mortgage or they run into problems when the loan is up for renewal.

“A lot of people are looking for solutions.”

In the most dire cases, a homeowner may have had a fixed-term mortgage with an interest rate of 1.89 per cent, for example, only to have the lender present them with a rate of 5.89 per cent at renewal.

“A lot of them already have sticker shock,” she says of the consumers renewing today.

Ms. Brookes can often find a resolution for borrowers by extending the amortization period, which can stretch to as long as 40 years, she says.

“We stop bankruptcies quite frequently.”

Some homeowners have let things slide to the extent that they have defaulted on mortgage payments, received letters from the lender, and eventually had the bank foreclose.

“We have people come to us who have already been locked out of their house by the sheriff,” she says. “They leave it until the last minute.”

Ms. Brookes says mortgage brokers can help some borrowers in such a predicament refinance, pay the arrears and pay the fees and penalties that pile up on a daily basis.

She figures that more homeowners are going to be facing financial challenges as rates continue to climb and more mortgages come up for renewal.

“I do believe by September or October we’re going to see a lot of people jump ship.”

Mr. Morris sees significant risk in the heavy debt loads that many Canadians have accumulated in recent years. People have borrowed against their home equity to pay for major expenditures in the past, but the practice of drawing HELOCs for everyday expenses has accelerated in recent years, he says.

“People started using houses as bank accounts five or six years ago,” he says, pointing out that people who borrow to maintain their lifestyle continually need to borrow more. “I’m not certain people appreciate how much homes have become part of salary,” Mr. Morris says.

Household budgets are already becoming stretched, he says, and the Bank of Canada is likely to raise rates again at upcoming meetings.

Many Bay Street economists are expecting the central bank’s key rate to end up at 3.25 per cent or 3.5 per cent this year as policy makers try to tame runaway prices. Inflation in Canada reached an annualized rate of 8.1 per cent in June to mark a four-decade high.

The central bank has identified lofty levels of household debt and rich home prices as the top two vulnerabilities in the country’s economy. Bank of Canada governor Tiff Macklem says his primary focus is getting inflation back to target.

While interest rates have been far higher in previous decades – rising above 20 per cent in the early 1980s – the debt levels consumers carry today swamp those of the past, Mr. Morris adds.

Mr. Morris fears that higher debt-servicing costs could lead to a tipping point that forces a wave of people to sell their homes at the same time real estate prices are in decline. The combination can lead to a downward spiral, he warns.

Meanwhile, the buyer’s remorse that saw real estate deals falling apart before closing has calmed down after the tumult of early spring, he says.

At that time, buyers who purchased in the heady days of February and March were sometimes distressed to find that prices had fallen in the two to three months between the time the agreement was struck and the deal closed.

“Suddenly people were caught in the shift because they had no knowledge of what was coming,” he says.

The transition was painful for people who had purchased a new home before selling their existing property, he says.

“That type of deal has largely worked its way through the system,” he says, because most sales that took place when prices were at their peak have already closed.

Now he is dealing with the upheaval of tighter credit and higher rates.

“Rising interest rates are really, really really, starting to bite.”

A wave of listings is already here, he says, adding that the wave is likely to swell.

At the same time, borrowers who need to go to private lenders for a second mortgage are facing interest rates of 18 per cent or more, Mr. Morris says.

Mr. Morris has harsh criticism for Mr. Macklem and his assurances to Canadian businesses and consumers in July, 2020 that interest rates would remain low for a long time to come.

“People relied on it,” Mr. Morris says. “It was extreme negligence to give the assurance, even with the storm clouds brewing.”

Mr. Macklem recently reiterated his view that a soft landing is possible for the Canadian economy.

Mr. Morris believes that the only scenario that might save the real estate market is a recession. A contraction in the economy may already be underway, he adds, and that in turn could lead the central bank to lower interest rates once again.

Still, he is not hoping for that grim outcome because it would cause severe economic pain.

“It brings hardship on people. It’s going to be very difficult for many Canadians.”

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Real eState

Here are some facts about British Columbia’s housing market

Published

2 days ago

October 17, 2024

Anne Joseph

Housing affordability is a key issue in the provincial election campaign in British Columbia, particularly in major centres.

Here are some statistics about housing in B.C. from the Canada Mortgage and Housing Corporation’s 2024 Rental Market Report, issued in January, and the B.C. Real Estate Association’s August 2024 report.

Average residential home price in B.C.: $938,500

Average price in greater Vancouver (2024 year to date): $1,304,438

Average price in greater Victoria (2024 year to date): $979,103

Average price in the Okanagan (2024 year to date): $748,015

Average two-bedroom purpose-built rental in Vancouver: $2,181

Average two-bedroom purpose-built rental in Victoria: $1,839

Average two-bedroom purpose-built rental in Canada: $1,359

Rental vacancy rate in Vancouver: 0.9 per cent

How much more do new renters in Vancouver pay compared with renters who have occupied their home for at least a year: 27 per cent

This report by The Canadian Press was first published Oct. 17, 2024.

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Real eState

B.C. voters face atmospheric river with heavy rain, high winds on election day

Published

2 days ago

October 17, 2024

Anne Joseph

VANCOUVER – Voters along the south coast of British Columbia who have not cast their ballots yet will have to contend with heavy rain and high winds from an incoming atmospheric river weather system on election day.

Environment Canada says the weather system will bring prolonged heavy rain to Metro Vancouver, the Sunshine Coast, Fraser Valley, Howe Sound, Whistler and Vancouver Island starting Friday.

The agency says strong winds with gusts up to 80 kilometres an hour will also develop on Saturday — the day thousands are expected to go to the polls across B.C. — in parts of Vancouver Island and Metro Vancouver.

Wednesday was the last day for advance voting, which started on Oct. 10.

More than 180,000 voters cast their votes Wednesday — the most ever on an advance voting day in B.C., beating the record set just days earlier on Oct. 10 of more than 170,000 votes.

Environment Canada says voters in the area of the atmospheric river can expect around 70 millimetres of precipitation generally and up to 100 millimetres along the coastal mountains, while parts of Vancouver Island could see as much as 200 millimetres of rainfall for the weekend.

An atmospheric river system in November 2021 created severe flooding and landslides that at one point severed most rail links between Vancouver’s port and the rest of Canada while inundating communities in the Fraser Valley and B.C. Interior.

This report by The Canadian Press was first published Oct. 17, 2024.

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No shortage when it comes to B.C. housing policies, as Eby, Rustad offer clear choice

Published

2 days ago

October 17, 2024

Anne Joseph

British Columbia voters face no shortage of policies when it comes to tackling the province’s housing woes in the run-up to Saturday’s election, with a clear choice for the next government’s approach.

David Eby’s New Democrats say the housing market on its own will not deliver the homes people need, while B.C. Conservative Leader John Rustad saysgovernment is part of the problem and B.C. needs to “unleash” the potential of the private sector.

But Andy Yan, director of the City Program at Simon Fraser University, said the “punchline” was that neither would have a hand in regulating interest rates, the “giant X-factor” in housing affordability.

“The one policy that controls it all just happens to be a policy that the province, whoever wins, has absolutely no control over,” said Yan, who made a name for himself scrutinizing B.C.’s chronic affordability problems.

Some metrics have shown those problems easing, with Eby pointing to what he said was a seven per cent drop in rent prices in Vancouver.

But Statistics Canada says 2021 census data shows that 25.5 per cent of B.C. households were paying at least 30 per cent of their income on shelter costs, the worst for any province or territory.

Yan said government had “access to a few levers” aimed at boosting housing affordability, and Eby has been pulling several.

Yet a host of other factors are at play, rates in particular, Yan said.

“This is what makes housing so frustrating, right? It takes time. It takes decades through which solutions and policies play out,” Yan said.

Rustad, meanwhile, is running on a “deregulation” platform.

He has pledged to scrap key NDP housing initiatives, including the speculation and vacancy tax, restrictions on short-term rentals,and legislation aimed at boosting small-scale density in single-family neighbourhoods.

Green Leader Sonia Furstenau, meanwhile, says “commodification” of housing by large investors is a major factor driving up costs, and her party would prioritize people most vulnerable in the housing market.

Yan said it was too soon to fully assess the impact of the NDP government’s housing measures, but there was a risk housing challenges could get worse if certain safeguards were removed, such as policies that preserve existing rental homes.

If interest rates were to drop, spurring a surge of redevelopment, Yan said the new homes with higher rents could wipe the older, cheaper units off the map.

“There is this element of change and redevelopment that needs to occur as a city grows, yet the loss of that stock is part of really, the ongoing challenges,” Yan said.

Given the external forces buffeting the housing market, Yan said the question before voters this month was more about “narrative” than numbers.

“Who do you believe will deliver a better tomorrow?”

Yan said the market has limits, and governments play an important role in providing safeguards for those most vulnerable.

The market “won’t by itself deal with their housing needs,” Yan said, especially given what he described as B.C.’s “30-year deficit of non-market housing.”

IS HOUSING THE ‘GOVERNMENT’S JOB’?

Craig Jones, associate director of the Housing Research Collaborative at the University of British Columbia, echoed Yan, saying people are in “housing distress” and in urgent need of help in the form of social or non-market housing.

“The amount of housing that it’s going to take through straight-up supply to arrive at affordability, it’s more than the system can actually produce,” he said.

Among the three leaders, Yan said it was Furstenau who had focused on the role of the “financialization” of housing, or large investors using housing for profit.

“It really squeezes renters,” he said of the trend. “It captures those units that would ordinarily become affordable and moves (them) into an investment product.”

The Greens’ platform includes a pledge to advocate for federal legislation banning the sale of residential units toreal estate investment trusts, known as REITs.

The party has also proposed a two per cent tax on homes valued at $3 million or higher, while committing $1.5 billion to build 26,000 non-market units each year.

Eby’s NDP government has enacted a suite of policies aimed at speeding up the development and availability of middle-income housing and affordable rentals.

They include the Rental Protection Fund, which Jones described as a “cutting-edge” policy. The $500-million fund enables non-profit organizations to purchase and manage existing rental buildings with the goal of preserving their affordability.

Another flagship NDP housing initiative, dubbed BC Builds, uses $2 billion in government financingto offer low-interest loans for the development of rental buildings on low-cost, underutilized land. Under the program, operators must offer at least 20 per cent of their units at 20 per cent below the market value.

Ravi Kahlon, the NDP candidate for Delta North who serves as Eby’s housing minister,said BC Builds was designed to navigate “huge headwinds” in housing development, including high interest rates, global inflation and the cost of land.

Boosting supply is one piece of the larger housing puzzle, Kahlon said in an interview before the start of the election campaign.

“We also need governments to invest and … come up with innovative programs to be able to get more affordability than the market can deliver,” he said.

The NDP is also pledging to help more middle-class, first-time buyers into the housing market with a plan to finance 40 per cent of the price on certain projects, with the money repayable as a loan and carrying an interest rate of 1.5 per cent. The government’s contribution would have to be repaid upon resale, plus 40 per cent of any increase in value.

The Canadian Press reached out several times requesting a housing-focused interview with Rustad or another Conservative representative, but received no followup.

At a press conference officially launching the Conservatives’ campaign, Rustad said Eby “seems to think that (housing) is government’s job.”

A key element of the Conservatives’ housing plans is a provincial tax exemption dubbed the “Rustad Rebate.” It would start in 2026 with residents able to deduct up to $1,500 per month for rent and mortgage costs, increasing to $3,000 in 2029.

Rustad also wants Ottawa to reintroduce a 1970s federal program that offered tax incentives to spur multi-unit residential building construction.

“It’s critical to bring that back and get the rental stock that we need built,” Rustad said of the so-called MURB program during the recent televised leaders’ debate.

Rustad also wants to axe B.C.’s speculation and vacancy tax, which Eby says has added 20,000 units to the long-term rental market, and repeal rules restricting short-term rentals on platforms such as Airbnb and Vrbo to an operator’s principal residence or one secondary suite.

“(First) of all it was foreigners, and then it was speculators, and then it was vacant properties, and then it was Airbnbs, instead of pointing at the real problem, which is government, and government is getting in the way,” Rustad said during the televised leaders’ debate.

Rustad has also promised to speed up approvals for rezoning and development applications, and to step in if a city fails to meet the six-month target.

Eby’s approach to clearing zoning and regulatory hurdles includes legislation passed last fall that requires municipalities with more than 5,000 residents to allow small-scale, multi-unit housing on lots previously zoned for single family homes.

The New Democrats have also recently announced a series of free, standardized building designs and a plan to fast-track prefabricated homes in the province.

A statement from B.C.’s Housing Ministry said more than 90 per cent of 188 local governments had adopted the New Democrats’ small-scale, multi-unit housing legislation as of last month, while 21 had received extensions allowing more time.

Rustad has pledged to repeal that law too, describing Eby’s approach as “authoritarian.”

The Greens are meanwhile pledging to spend $650 million in annual infrastructure funding for communities, increase subsidies for elderly renters, and bring in vacancy control measures to prevent landlords from drastically raising rents for new tenants.

Yan likened the Oct. 19 election to a “referendum about the course that David Eby has set” for housing, with Rustad “offering a completely different direction.”

Regardless of which party and leader emerges victorious, Yan said B.C.’s next government will be working against the clock, as well as cost pressures.

Yan said failing to deliver affordable homes for everyone, particularly people living on B.C. streets and young, working families, came at a cost to the whole province.

“It diminishes us as a society, but then also as an economy.”

This report by The Canadian Press was first published Oct. 17, 2024.

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