Analyzing years of mortgage rule impact

The most recent mortgage rule changes have had a much smaller impact on the market than previous policy changes and there’s a simple explanation for that, according to a new report.

The most recent mortgage rule changes have had a much smaller impact on the market than previous policy changes and there’s a simple explanation for that, according to a new report.

There has been an unprecedented number of housing policy changes over the past year-and-a-half, according to TD Bank, and each has been aimed at tempering housing demand.

And while the industry viewed the last round of changes as particularly invasive, they have proven less impactful than previous iterations.

“Each successive regulation change at the federal level has left a smaller mark on home buying activity. Our estimates suggest that the most recent federal rule changes may have only shaved 2% off demand nationwide,” TD Economists Beata Caranci and Diana Petramala, wrote in their latest report, Canadian Regional Housing Outlook Navigating a Soft Landing. “In contrast, the first regulatory changes implemented in 2008 dampened home sales by roughly 10%. That policy increased the required down payment from 0% to 5% for insured borrowers and lowered the allowable amortization period from 40 years to 35 years.”

The reason for dwindling influence, according to the economists, is that each round of mortgage rule changes has specifically targeted borrowers who require mortgage insurance.

“This incented a shift away from high loan-to-value mortgages into conventional mortgages,” the economists wrote. “New loans that require homebuyer’s insurance now account for less than 20% of all new chartered bank mortgage originations, compared to 40% prior to 2008. So, each round of policy changes has targeted a shrinking share of the overall market.”

The Bank of Canada claims insured mortgage originations fell 43% in 2016 and early 2017 from the peak in late 2015.

However, that shrinking share was up by a growing number of Canadians relying on conventional mortgages.

Looking forward, it seems federal policymakers aren’t quite finished with their market tinkering.

The Office of the Superintendent of Financial Services (OSFI) has proposed additional rules in the form of income tests for all borrowers at a rate of 2% higher than the contracted rate.

And that policy is expected to temper housing demand even further.

“ … if the new measures are put into place, which will cause buyers in the former group to adjust their behaviour by coming up with a bigger down payment, opting for a lower priced purchase, scaling back other debt, or delaying a home purchase altogether,” the economists wrote. “In the year of implementation, we estimate that this new rule could depress demand by 5% to 10%, and shave 2% to 4% off of our current forecast for the average price level in 2018. This will be yet another force limiting price growth in the future.”

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Retiring early with real estate

Let your portfolio work for you: One investor gives his tips to become completely financially independent at any age.

By Sve Pavic, fulltime investor

Millennials have it tough financially- we’ve been told if we go to a respected University, study hard and get good grades we will land a great paying job. The reality? You graduate with loads of debt with no assistance or prospects of getting a great job and you return for more schooling thinking it will solve the problem. To add salt to the wound, house prices and rent keep increasing beyond reasonable affordability. As a millennial, I’m here to tell you that you can create your own financial freedom and you don’t need to settle and live in your parent’s basement into your 30s. In fact, I’m here to show you how we purchased our first house at 24, live for free by “house-hacking” and create passive cash flow for life.

What is house-hacking? The concept is simple yet powerful: purchase a house, create an income suite (e.g. basement apartment) and rent it out for passive income. The rental income from the apartment can either pay for the majority of your mortgage and living expenses, or you could even get paid to live for free. If you live in the main/ upstairs unit and rent out the basement, you can have the majority of your mortgage covered. If you go one step further and live in the basement/lower unit, you could not only live mortgage free but you could also have profit leftover in your pocket.

The first hurdle millennials and most people have to overcome is coming up with the downpayment. In our case, we lived below our means in order to save for a 5% downpayment. Another strategy is to borrow money from family, friends or private lenders. If required for financing, you could also ask them to act as a guarantor / co-signer.

Once we had the downpayment and financing confirmed, we purchased a detached fixer upper bungalow in the GTA which met all of the requirements for a potential basement apartment (e.g. ceiling height, separate entrance, zoning, parking, etc.). The house walkouts to a large backyard and backs on to ravine which is a major selling point for tenants. We built an open-concept legal 2 bedroom basement apartment with high-end looking finishes. We ensured we made the space look modern, bright and open so that it didn’t feel like a typical, dungy basement apartment. We started off by charging $1,250/mo (non-inclusive) with many applicants. Now we rent the unit for $1,450/mo (non-inclusive) and live mortgage-free.

Since then, we have refinanced the house based on the built-in equity and purchased another property which will be converted into a duplex. We are using this same strategy, except creating a 3-bedroom basement apartment and renting both units individually by room. The property is expected to cash flow more than $1,000/mo after all expenses. Once this duplex is complete, we will be refinancing and finding another property to expand our portfolio.

Rinse and Repeat until you reach your goals of financial freedom.

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Budget options for Canadian millennials in the age of soaring prices

With Canadian housing price growth having set new records this year, more and more millennials are branching out to other viable options aside from home ownership.

Among these alternatives, especially popular in red-hot Toronto, is cooperative purchases of homes between friends or relatives, The Canadian Press reported.

In its recent survey, RBC noted that co-ownership is a top choice among 24 per cent of millennials. HomeLife/Realty One Ltd. (Toronto) sales representative Alan Aronson said that a leading reason is that each of the buyers in a co-purchase can qualify for a larger mortgage, while sharing the remaining costs (such as land transfer taxes and insurance) among themselves.

However, Aronson warned that this route has its own share of risks, especially considering that relationships can and do become strained when it comes to money. For instance, if one party neglects their fiscal responsibilities, all the co-owners might be forced to sell the property early or might even lose it to the lenders.

Another option would be to rent, probably in perpetuity. Jason Heath of Objective Financial Partners said that this might indeed be the better choice in the most expensive markets, if one is willing to “ignore the practical and psychological benefits of home ownership.”

Instead of using one’s funds for down payment, one can instead invest it—and in the process avoid other, not initially obvious, expenses such as taxes and closing fees.

Earlier this month, Statistics Canada warned in its report that young workers nationwide are facing far worse conditions compared to professionals from older generations, with the youth unemployment rate over a period of 4 decades (from 1976 to 2015) being around 2.3 times higher than the rate among workers older than 25 years old.

This trend accompanied a severe decline in the take-home pay and the purchasing power of this demographic by the early 1980s, with young Canadian males (17 to 24 years old) experiencing a 15 per cent reduction in their real hourly wages, and young females suffering a 10 per cent drop.

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Trouble for investors south of the border?

For luxury-home developers and brokers in Miami and Manhattan who are already contending with slumping prices and slowing demand, the U.S. government’s decision to start scrutinizing all-cash buyers was more bad news.

The Treasury Department’s Financial Crimes Enforcement Network said Wednesday that it will seek out the identity of individuals behind limited-liability companies that pay cash for high-end residential real estate in Manhattan and Miami-Dade County. Starting in March, title insurers will be required to name the true “beneficial owner” behind the anonymous entities, FinCen said in a statement.

FinCen is concerned that such opaque deals — used by wealthy investors seeking to avoid the public gawking that comes with buying expensive property — may also be made by people attempting to hide assets and launder money, according to the statement. By casting such a wide net, the new disclosure rules may discourage legitimate purchases and further damp interest in high-end sales in the two markets, which are already bracing for a slowdown.

“Part of the large swath of people who purchase under LLCs do it for privacy — celebrities, the wealthy — and are not doing something illegal,” said Jonathan Miller, president of New York-based appraiser Miller Samuel Inc. “I’m not downplaying that there aren’t people who are using ill-gotten gains to purchase apartments, but it stereotypes the whole segment and it seems to be some kind of overreach by the federal government. In a cooling market, it certainly isn’t helpful.”

Prices Slipping

Demand for Manhattan’s most-expensive homes is slipping while apartments from a high-end construction boom aimed at wealthy investors pile up on the market. Resale prices for the top 20 percent of the market peaked in February and have fallen every month since then, according to an analysis through October by listings website StreetEasy.

In Miami-Dade County, the stronger dollar is turning away Latin American buyers while 36,000 new units are in the construction pipeline, according to an estimate by South Florida development tracker CraneSpotters.com. The U.S. government measure will hurt sales and may drive investors to other locations such as Panama, said Peter Zalewski, owner of CraneSpotters. Their disappearance may lead to price declines in the market because overseas buyers, seeking a haven from the financial turmoil of their home countries, are often willing to pay more, Zalewski said.

“It’s a killer for Miami — not because we’re afraid of drug buyers,” said Related Group of Florida Chief Executive Officer Jorge Perez, the billionaire developer known as the state’s “Condo King.” “You have to remember that a lot of wealthy people, particularly in South America, are very, very shy about disclosing their wealth.”

One57 Penthouse

Many deals at New York’s ultra-luxury towers are made by LLCs, including the first to close at 432 Park Ave., the tallest completed residential building in the Western Hemisphere. The 35th-floor condominium was purchased in December for $18.1 million, according to city property records made public last week. The most expensive closed sale of an apartment in New York City, the $100.5 million purchase of a penthouse atop Extell Development Co.’s One57, was to a buyer known only as P89-90 LLC.

“Just hearing that it’s going to be scrutinized by the United States government is going to give people pause on certain high-end purchases,” said Keith Pattiz, head of the real estate group at New York law firm McDermott Will & Emery, who has helped overseas buyers acquire property in some of Manhattan’s glitziest new condo developments. “People just don’t want everyone to know that they’re buying a $50 million apartment.”

Wealthy and foreign buyers might choose to keep their names hidden because of concerns about their personal security or a desire for privacy, said Leonard Steinberg, president of New York brokerage Compass.

‘Crazy Paparazzi’

“I challenge them to walk one day in the shoes of a really famous person to know what it feels like to be hounded like an animal,” Steinberg said of the government. “I’ve seen crazy paparazzi driving the wrong way down a one-way street just to get one stupid picture. Famous and rich people have children, too, and there’s a level of protection that should be provided for these people.”

The New York Times last year examined the increasing use of anonymous shell companies by global buyers seeking havens for cash. Among the findings were that 64 percent of condos at Manhattan’s Time Warner Center were owned by shell companies, and that at least 16 foreigners who have owned in the building have been targeted by government investigations. Secret buyers included former Russian senators, a Greek businessman who was arrested as part of a corruption sweep in his home country and a financier linked to the prime minister of Malaysia, according to the paper. Nationwide, almost half of the most-expensive homes are bought through shell companies, the Times reported.

The disclosure rules will take effect on March 1 and expire on Aug. 27, according to the statement from FinCen, the part of the Treasury Department that collects and analyzes data to safeguard the financial system from illicit use and combat money laundering.

Developer Scrutiny

The scrutiny may not be able to go beyond what some developers already apply to their buyers, said Kevin Maloney, principal and founder of Property Markets Group, which builds condos in both New York and Miami. As many as 60 percent of his firm’s sales are to buyers making their deals through LLCs, he said.

“For us, we meet and we talk and we get to know at some level the face of the LLC,” said Maloney, whose projects include a 1,400-foot (427-meter) tower under construction on Manhattan’s West 57th Street and the 190-unit Echo Aventura outside of Miami.

“We have turned away people who we think have unsavory pasts, so we do as much due diligence as possible.” Maloney said. “But if you want to put a guy up front and have him be the financial face of the LLC, there’s not much you can do.”

Perez of the Related Group, which has 10 condo towers under construction in South Florida, said the Treasury Department should find a way to make sure buyers “tell the truth about where their money is coming from” without forcing them to make a public disclosure.

“Remember, in their countries, they are afraid of being kidnapped, they are afraid of being killed, so privacy is a huge thing,” Perez said. “They don’t want the press to say in Colombia, ‘This guy buys $20 million condos.”’

Oshrat Carmiel, Prashant Gopal and Bill Faries
Bloomberg News

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Bank of Canada sees elevated housing-crash risks as debt climbs

Canada’s central bank said a housing crash remains the most serious risk to the financial system and warned some imbalances are worsening.

The risk of a sharp correction in home prices is “elevated,” Bank of Canada policy makers said Tuesday from Ottawa in their semi-annual Financial System Review, leaving the rating unchanged from the June report. The central bank uses five grades of risk ranging from low to very high, with elevated being in the middle.

High debt levels among younger families with fewer assets are increasing the danger of housing imbalances, the report said. The report reiterated Governor Stephen Poloz’s view the risk of a crash is low and should be avoidable short of a severe recession and major job losses.

“Housing activity should stabilize in line with economic growth, as the driver of growth in the economy switches from household spending to non-resource exports,” Poloz said in a press release, which will be followed by a press conference at 11:45 a.m.

“Certain vulnerabilities are still edging higher, but recent changes by Canadian authorities to the rules for mortgage financing will help to mitigate these risks as we move into 2016,” Poloz said. The rule changes refer to Finance Minister Bill Morneau’s move on Friday to raise mortgage down payment requirements on homes worth between $500,000 and $1 million.

The central bank removed a previous estimate of 10 percent to 30 percent overvaluation in housing prices.

The other elevated risk remains disruptions from a slump in China and other emerging markets. Policy makers also said there is a moderate risk of a jump in the yields demanded by global bond investors.

There are signs that Canada’s total household debt burden may also be dangerous. The share of indebted households with obligations exceeding 350 percent of gross income has climbed to 8 percent from 4 percent before the global crisis, the Bank said. Debt at that level raises the risk of a failure to pay the lender back.

Apart from risks, the Financial System Review lays out “vulnerabilities” and said there’s a high and rising level of household indebtedness.

Poloz last week outlined rules that could allow him offer more stimulus if the economy faces another shock, saying he doesn’t expect to need them. Those tools include the ability to take his policy interest rate to negative 0.5 percent, major asset purchases known as quantitative easing, or so-called forward guidance on future interest rates. Poloz said his main aim in making that announcement was to update policies that were first laid out during the global financial crisis and never used.

Such changes in the bond market since the global financial crisis add one other vulnerability for Canada the bank said today: the risk of a freezing up of fixed-income markets with more debt being perceived as harder to trade.

The risks in housing and the global economy underscore the tension behind Governor Stephen Poloz’s two interest-rate cuts to 0.5 percent this year, aimed at reviving the world’s 11th largest economy from a drop in oil prices.

Most of the housing-market risk appears to be concentrated in Toronto and Vancouver, where single-family detached dwelling prices have surged beyond $1 million. Home prices have fallen this year in the Alberta cities of Calgary and Edmonton being hit by the drop in crude oil prices, and gains have been more modest in most other parts of Canada.

Canadian household debt ascended to another record in the third quarter, underscoring why policy makers are stepping up efforts to limit the risks of a collapse in the nation’s real estate market. Credit-market debt including mortgages was 163.7 percent of after-tax income, up by 1 percentage point from the second quarter, Statistics Canada said Monday in Ottawa.

The divide between a hot housing market and weakness elsewhere may continue, with crude oil falling to $35 a barrel this week and Canada’s last trade deficit of $2.76 billion in October wider than any economist had forecast. Encana Corp. on Monday cut its dividend by 79 percent and reduced spending and production plans for 2016.

©2015 Bloomberg News

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A reminder to not take shortcuts

Hefty fines to landlords are a sobering reminder to investors that buildings should be up to code, or they could face the same sort of financial repercussions.

Two landlords in two separate cities are facing substantial fines for building code violations, proving shortcuts can be costly.

A property owner in St. Cathering, Ont., was ordered to pay $8,000 for fire code violations and will also face probation.

“When the court issues a probation order it’s a reflection of the seriousness of the violations,” Fire Chief Dave Wood told local publication, Niagara this Week. “Property owners are responsible for making sure their tenants are safe at home and we have zero tolerance for those who continually neglect their responsibilities. Fire alarms and extinguishers have to work when lives are at risk.”

In a separate case, an Alberta landlord – who had previously been warned about building violations – was fined over $20,000.

In that instance, the owner ignored warnings to address improperly-sized basement windows as well as fire alarm installations.

“All of these things are about minimizing safety risk so someone can escape in case of fire,” Judge Mike Dinkel said during sentencing, according to the Calgary Herald. “The interconnected alarm is so people upstairs can get out. These are pretty crucial things. You don’t want to follow them just to fulfill them, but because they save lives.”

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Time to prepare for a correction?

Oil at $35 a barrel for a period of five years would trigger a 26 percent collapse in Canadian home prices, according to stress tests run by Canada’s housing agency.

The results were part of a slide presentation Evan Siddall, chief executive officer at Canada Mortgage & Housing Corp., gave Monday to a private audience in New York. The “Stress tests – Financial impacts” slide included five scenarios, one of which was called “Oil Price Shock,” which also predicts the unemployment rate would peak at 12.5 percent. Spokesman Charles Sauriol said later in an e-mail the scenario assumes oil at $35 a barrel over five years. The “Base Case” scenario calls for housing prices to climb 9.1 percent and joblessness to peak at 6.6 percent.

Crude oil traded at $41.60 a barrel at 3:21 p.m. in New York, and is set to average below$50 for a fourth month, amid record supplies. Siddall wasn’t available for comment after his presentation. He’s due to speak Thursday in Montreal.

Global Deflation

CMHC’s “US-style Housing Correction” scenario produced a 30 percent fall in home prices and 12 percent peak unemployment. The biggest hit to housing occurred under the “Global Deflation” scenario, where prices plunged 44 percent. That would also be the worst case for the labor market, pushing unemployment up to 16 percent.

The price of an average home in the country rose 8.3 percent to C$452,552 ($339,000) in October from a year earlier, according to the Canadian Real Estate Association. In Vancouver, prices jumped 16 percent and in Toronto, the country’s largest city, they increased 7.4 percent.

Other slides showed Canada’s home price growth since the 2008 recession has outpaced that of the U.S., Australia, and the U.K. It also reiterated risks to housing include high debt-to- income and concentration of net worth in housing.

Bloomberg
Katia Dmitrieva

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