Opinion: Mortgage mathematics not adding up for older generations in B.C.

General Simon Wong 27 Nov

Is the older generation as comfortable in homeownership as generally perceived?

The main critique of BC NDP housing taxes has been that they breed attacks on the difficult-to-defend wealth of the longtime homeowner – that they are, in effect, thinly veiled class warfare.

But I think the data suggests there’s an even deeper issue that should concern us: generational warfare.

I’ve been reflecting on some new figures drawn from our most recent census by Andy Yan, the Simon Fraser University (SFU) housing expert, and concluding that many of our conventional wisdoms about comfortable homeownership in the golden years deserve to be rethought.

In the case of Metro Vancouver, the nearly 95,000 homeowners aged 65 to 74 were far from out of the woods economically. Nearly one in three was still holding a mortgage.

For the nearly 51,000 homeowners aged 75 to 84, when for all intents and purposes our working lives are done, one in five remained mortgaged. And for the nearly 20,000 homeowners 85 and older, one in eight was carrying a mortgage.

Now, there are complexities galore in that data, but before we explore them, let’s agree: the simplistic picture of later-in-life comfy owners who can withstand additional taxes on their appreciating properties is a caricature.

“There is more nuance to it,” said Yan, director of the SFU City Program and an adjunct professor in urban studies. “Any policy needs to take that into account.”

We cannot know from the data the size of the mortgages, how long they have been held, their terms, what individual incomes and liabilities are, their family structures – all sorts of variables that might reframe the picture for better or worse.

Then again, neither does the provincial government, but that didn’t stop it from imposing a surtax on $3-million-plus homes that it disingenuously called a “school tax” and a secondary-home tax that it disingenuously called a “speculation tax.”

Moreover, it has failed to dampen public discourse that has vilified the older homeowner – a.k.a. the west-side Vancouverite – who benefited in the last three decades from a gradual but consistent appreciation in equity. In failing to do so, it provides an easy and politically popular target to tax.

Polls back this antagonism to the homeowner perched on the pricey property, even if the data suggests that person might be contending with debt.

As Yan said: “It is not a simple matter of retirees defending their pot of gold.”

If we work with this data, though, what we might conclude is that there are new dynamics at play that further challenge the traditional notion of retirement and repose at age 65. We are living longer, working longer and looking after our children longer. Locally, we also seem to be carrying our debts longer, and those debts are increasingly in the form of reverse mortgages that consume equity or alternative lending practices that consume more expense.

True, some seniors might be carrying a smaller mortgage in a downsized dwelling and helping their children pay theirs down. True, some seniors might be tolerably handling the costs on their late-work or retirement incomes. But that can’t entirely be the case.

The data for seniors is as surprising as the data for millennials, many more of whom are mortgage-free than one might think. The nearly one-third of the more than 6,000 owners between the ages of 15 and 24 who are without a mortgage, I would suspect, have the Bank of Mom and Dad to thank.

Only one in eight between the ages of 25 and 34 is free and clear of home debt – although nearly one in five in the city of Vancouver is so – and even that is an interesting and positive figure given the expense incurred and the long career runway ahead.

What it suggests is that policies might need to look not only at income but also at age in this era of longevity. By the way, the province’s permission for older people to defer taxes is of little solace, even if it’s the equivalent of a low-interest loan; it is still debt.

I saw a television show the other night that asserted the first person who will live to the age of 150 has already been born. I’d add: unless the debt kills you.

Who’s paying the soaring costs of real estate levies? Experts weigh whether landowners or home buyers are bearing the brunt of fee burden.

General Simon Wong 22 Nov

Who’s paying the soaring costs of real estate levies?

Experts weigh whether landowners or homebuyers are bearing the brunt of fee burden.

Municipal budgets have become increasingly reliant on property taxes and development charges since the federal government began downloading costs onto provinces and municipalities in the 1990s.

But government taxes are not the only factor contributing to the rising cost of real estate ownership. Higher interest rates, permit wait times and stricter financial requirements for mortgages have also played a part.

The rationale behind speculation taxes and other levies on homebuyers is that they curb demand and runaway real estate prices.

“I think that the desired effect by the government, the Canada Mortgage and Housing Corp. [CMHC] and the Ministry of Finance is to let the air out of the balloon slowly,” said Chris Catliff, president and CEO of BlueShore Financial. “The art will be how successfully they do that; they certainly don’t want to pop the balloon. The worry is you may see a drop in price that could be quite precipitous, and if that happens too quickly it could really hurt the market and people’s livelihood.”

Government costs, including property tax and development charges, account for 26.2% of the cost of a new residential condo in Metro Vancouver, according to calculations by Paul Sullivan, senior partner at Burgess Cawley Sullivan and Associates Ltd. Community amenity contribution fees make up roughly one-third of the government levy costs and represent an estimated 7.3% of the final purchase price. Federal sales taxes account for the second-largest portion at a little less than 5 per cent of the cost of a new home while the property transfer tax (PTT) paid on the purchase of an assembled site accounts for 2.4 per cent of the purchase price. This is in addition to the PTT paid by the final buyer (1.8 per cent of the final cost).

levies

“The NDP 2018 budget has increased the government’s take by 20 per cent to 30 per cent, depending on the price of the home, which is some $50,000 to $75,000 per unit,” Sullivan said.

The government cost increase equates to approximately $94 per square foot for a $1,200-per-square-foot unit.

However, geographical barriers mean that the real estate market can’t respond to demand and make supply adjustments in the same way that other markets or industries can.

As a result, selling prices may not necessarily react as expected when costs increase.

Sullivan said the taxes will suppress demand for only a limited time.

Ultimately, he said, pent-up demand will make its way back into the market and drive housing prices up.

But not everyone agrees with this hypothesis.

Tom Davidoff, associate professor at the University of British Columbia’s Sauder School of Business, agreed that real estate prices typically return to levels they had reached before additional taxes were instituted.

However, he said, the subsequent price increases are caused by growing demand and not pent-up demand. The additional taxes help to curtail this growth, he said, adding that without the additional levy, housing prices tend to rise even higher.

But prices are set by what the market can bear; therefore, developers will likely push back on landowners to reduce the price of the land being developed rather than increase the selling price.

“Why would we tax people when they … show up to work or when they buy or sell something, instead of taxing the real estate that doesn’t go anywhere?” said Davidoff.

The first lesson of government revenue is, he said, “you tax the stuff that can’t run away.”

Mortgage stress-test effect

Property taxes, government levies and development charges are not the only costs contributing to the cost of housing. Early this year, the federal government made changes to mortgage rules, adding a stress test for all mortgages.

The mortgage stress test is used to ensure that a debtor would still be able to make mortgage if interest rates were to rise as they have been in recent years. The test was implemented to try and avoid the home mortgage crisis of 2007 from reoccurring. Practically, it results in people having roughly 21 per cent less buying power according to Catliff. This means that new homebuyers will have to buy a less expensive house and those renewing a mortgage may be forced to stay with their current provider. This move came a little over a year after the Canada Mortgage and Housing Corporation stopped insuring high ratio loans on homes over $1 million. This means that the required down payment on these houses increased by 15 percentage points and buyers will ultimately have to put 150 per cent more down.

“What that means is you can’t get a high ratio loan with a CMHC guarantee on property over a million dollars, which basically wipes out Vancouver,” said Catliff.

The views on what type of government intervention would be most effective in controlling rising housing prices is quite varied. Sullivan says that government intervention can be a contributor to rising housing prices in the region. While Davidoff is concerned that the uncertainty around charges like CAC fees is what is causing problems in the real estate market. Instead he suggests that there be a transparent auction process in awarding development projects allowing the government to charge the maximum the market can bare while not having the negative effects of uncertainty surrounding cost.

Catliff sees both rising taxes and uncertainty around taxes as ultimately contributing to rising housing prices. While it may be hard to sympatize with higher taxes on multimillion-dollar homebuyers, Catliff says that this ultimately affects the market down stream. Where families who own these homes and sell them, tend to buy multiple condos or town houses for them and their children rather than purchasing another large house and paying the additional tax. This reduces the supply and raises the prices of lower value homes.

There has been a major drop in price and activity in the single-family market that is now starting to be seen in some areas of the condo and town house market according to Catliff. However, he says that that the lack of supply should see a levelling out because of dampened demand by things like tougher qualifications standards and taxes.

Not everyone loses in a softer housing market.

General Simon Wong 17 Nov

Not everyone loses in a softer housing market

TORONTO — Real estate markets across the country may be showing signs of softening, but home stager Monique Shaw says her business has been booming.

“People were using staging as a way to sell in a hot market,” said the owner of Homes Beautifully by Monique Shaw in Calgary.

“But we’re still finding the opposite too. The market isn’t as red hot and it’s becoming more of a buyers’ market now than a sellers’ market then, but we’re doing a lot more vacant staging. We’re just as busy.”

Although housing markets may be off the price peaks seen in the spring of 2017, not all related industries stand to lose when property prices head lower. From staging services to renovation companies to drone operators, some industries that support the real estate market expect demand to remain strong.

Shaw says she’s seen a recent uptick in business, as homeowners invest more into selling a home because properties can often sit unsold longer on the market. She charges $2100 for the first month for a fully-staged property, and a discounted rate for each following month the house remains on the market.

The latest data from the Canadian Real Estate Association signals that a weakening in markets like Toronto and Vancouver is starting to attribute to lower national home sales.

In October, national home sales fell for the second time in a row while the average price for a sold home came in just under $496,800, down 1.5 per cent compared with a year ago.

Shaw, who is a trained interior designer, says a downturn in the Canadian oil-patch over the past three years has left many landlords scrambling to offload their rentals when tenants lost their jobs.

“When you have an empty property, that’s all it appears to be — empty and a property,” she said. “When you stage that home, it becomes a home. It looks like a home. You can imagine yourself in it. You can imagine yourself living in it.”

David Foster, who is with the Canadian Home Builders’ Association, says a weaker real estate market can also mean more demand for renovations as homeowners forgo a move up due to lack of supply.

“Renovation is seen as the affordable option when someone can’t get their dream home either because they can’t afford it or it’s not available,” said Foster, whose group represents 8,600 contractor firms across the country.

“They start thinking, ‘What can I do to make this house better? Maybe it’s a bathroom reno.”‘

The CHBA says home renovations was a $77 billion industry in Canada in 2017.

Foster says home improvements are often done within the first two years of purchasing a home, but they also remain a popular option for those who want to wait out a slow market in undersupplied cities like Toronto and Vancouver.

“Affordability is still a huge issue and supply is still a huge issue,” he said. “When people see home prices are softening, they’re inclined not to sell and instead wait and see what happens next. In the meantime, that might mean improving their current home.”

Drone pilot Misha Herschorn doesn’t anticipate a quieter real estate market will ground the videography business he started last year.

The majority of business from First Class Drones comes from commercial clients who often want to showcase the size of a property lot, but he’s also getting more jobs from real estate agents representing luxury properties.

Herschorn says the commissions realtors receive when selling high-end properties make paying for drone photos and videos worth the cost of doing business — even in a slowing real estate market.

What You Need To Earn To Afford A Single-Family Home Across Canada.

General Simon Wong 9 Nov

What You Need To Earn To Afford A Single-Family Home Across Canada

In Vancouver, you need to be in the top one per cent to buy a detached home at current prices.

Home affordability has become so strained in Canada’s priciest markets that if incomes don’t catch up, house prices will fall, says the co-author of National Bank of Canada’s latest home affordability report.

The data for the third quarter of this year show the costs of owning a home rose in nine out of the 10 major cities surveyed, with only Winnipeg showing a minor improvement. Affordability has been deteriorating steadily for more than three years at this point.

Softer prices in Toronto and Vancouver didn’t help with home ownership costs, because mortgage rates are on the rise and wages in those cities slid during the quarter, economists Kyle Dahms and Matthieu Arseneau wrote in the report.

In both Toronto and Vancouver, affordability is at its worst levels since around 1990. Back then, the Bank of Canada pushed interest rates to double digits, far higher than they are today, making mortgages supremely unaffordable.

Home affordability is at its worst levels since the early 1990s in Toronto and Vancouver.

But the worst deterioration this quarter took place in Montreal and Ottawa, where it was rising prices, on top of rising mortgage rates, that took a bite out of affordability.

Prices in Ottawa rose at a 10-per-cent annualized rate in the third quarter, while Montreal — which is now eyeing a foreign buyers tax along the lines of those in B.C. and Ontario — saw prices rise at an 8-per-cent clip.

“These markets appear to be unaffected by rising interest rates and tighter credit standards as shown by … market conditions being strongly tilted in favor of sellers,” the National Bank economists wrote.

All the same, Montreal and Ottawa remain among Canada’s more affordable major cities. A mortgage payment on an average home eats up 32.7 per cent of household income in Montreal and 28.7 per cent in Ottawa.

Compare that to 68.2 per cent of income in Toronto, and 80.8 per cent of income in Vancouver.

Vancouver’s detached homes just for the 1% now

The National Bank’s report shows that Vancouver real estate prices have risen to the point that you would need a household income of $238,818 to qualify for a conventional mortgage (20 per cent down) on a detached home. That’s just slightly less than the income you need to be in Vancouver’s one-per-cent club: $246,000 a year, according to data from the 2016 census.

In Toronto, you need a total income of $159,289, while in Quebec City, the most affordable major market, you can get a single-family home on $51,000 a year.

Vancouver’s real estate requires far more income to buy than any other Canadian market.

Housing affordability has worsened in every quarterly National Bank report for the past three years, but co-author Dahms says that can’t go on much longer in the priciest cities.

“In Vancouver and Toronto, our affordability measures are at extreme levels,” he told HuffPost Canada by email.

“Even if interest rates are in an upward trend, we doubt that further deteriorations for affordability will occur. If income growth does not compensate for rate hikes, our view is that home prices will have to adjust downwardly.”

Not so for the less expensive markets, Dahms says.

In those cities, “households probably have more leeway so we think that rising rates could cause further deterioration in affordability (in) the coming quarters.”

Rates are likely to keep going up. The Bank of Canada has raised its key lending rate five times in the past year-and-a-half, to 1.75 per cent from 0.5 per cent.

Analysts generally expect the Bank to keep up the pace for at least the next half a year, with the next rate hike likely to be in January.

B.C. government launches promised condo flipping registry.

General Simon Wong 6 Nov

B.C. government launches promised condo flipping registry

U.S. Vs Canadian Real Estate: Who Won And Who Lost?

General Simon Wong 5 Nov

A decade after the U.S.’s bust and Canada’s boom, things look surprisingly similar in the two housing markets.

Jon Wightman via Getty Images

This fall marks the tenth anniversary of the collapse of investment bank Lehman Brothers, and the start of the global financial crisis that roiled the world for years to come.

That crisis was precipitated in large part by the collapse of the U.S. mortgage lending market, which propelled the country’s housing into the worst slump in modern history.

In Canada, that slump never happened. After a brief dip in 2008, Canadian house prices resumed growing and didn’t look back.

So 10 years later, are Canadians the big winners in the housing market lottery? That depends on how you look at it. A new analysis from real estate portal Point2 Homes compared the two housing markets to see how they’ve fared in the past decade.

Canadian house prices have shot beyond those in the U.S. since the financial crisis a decade ago.

In that time, the average house price in Canada jumped by 56 per cent, a pretty solid windfall for homeowners. But for homebuyers, affordability is becoming strained. Incomes only rose 15 per cent in that time.

Despite a long slump after 2008, the U.S. housing market has seen prices grow for six straight years, and the average price is now 24 per cent higher than it was a decade ago, the Point2 Homes study found. Incomes grew by 18 per cent in that time, so unlike in Canada, affordability has only worsened slightly, overall.

“The affordability crisis worsened in Canada, where the housing market went from ‘seriously unaffordable’ to ‘severely unaffordable,’ but the American housing market remained in the ‘seriously unaffordable’ category,” the report said.

Home affordability has deteriorated in both the U.S. and Canada, but much more so in Canada.

In Canada, the average house went from costing 4.9 times the average household income, to 6.7 times. According to Royal Bank of Canada, home affordability is at its worst levels in three decades. In the U.S., things have barely changed in a decade, going from a ratio of 4.7 to 4.9.

But the trend has been very uneven in Canada, with affordability eroding particularly in Toronto and Vancouver, while other cities have remained relatively stable.

Watch: This is Canada’s most expensive condo (story continues below)

In Vancouver, the benchmark price for a detached home more than doubled in the past decade, to around $1.5 million this fall from around $725,000 in the fall of 2008. The average home now costs 17.3 times the average income, making it the least affordable housing market on the continent.

In Toronto, the average price of all home types also more than doubled in that time, to $786,000 from $368,000. An average house costs 7.5 times average income.

But other places have had very different experiences. Take Calgary, where house prices peaked and fell in 2007. Today, the price index for Calgary is just 4 per cent higher than it was at that peak in 2007. A house costs just 4.1 times average income, a bargain compared to Toronto and Vancouver.

Calgary house prices have barely grown beyond their peak in 2007.

In both the U.S. and Canada, the share of households that own their own home has declined in the past decade — though more steeply in the U.S.

And likely for different reasons: In Canada, worsening affordability has delayed first-time home buying, while in the U.S., many were forced out of their homes through foreclosures during the crisis, while high unemployment kept many younger Americans from buying homes.

The percentage of households that own their own home has declined in both the U.S. and Canada, but more so in the U.S.

For those renting, things look very similar in Canada and the U.S. Rental rates rose 23 per cent in the U.S. over the past decade, and 25 per cent in Canada — though, again, with very large regional differences.

As pricey as Toronto and Vancouver have become, they don’t hold a candle to the U.S.’s most expensive rental markets. According to Padmapper, an average one-bedroom rented for $2,140 this past August in Toronto, and for $2,000 in Vancouver. Compare that to an average rent — in U.S. dollars — of $4,119 in Manhattan, $3,590 in San Francisco, $3,379 in Boston and $2,801 in Brooklyn. That’s according to data from RentCafe.com, cited by Point2 Homes.

Rental rates are very similar between the U.S. and Canada.

And finally, there is the fact that both the U.S. and Canadian housing markets entered a slump this year.

In Canada, tougher new mortgage rules combined with rising mortgage rates took a bite particularly out of Toronto and Vancouver. In Toronto, sales in the first nine months of this year fell nearly 18 per cent from a year earlier. In Vancouver, October home sales were the lowest for the month in six years. Calgary home sales are at their lowest level since the 1990s.

As in Canada, mortgage rates are rising in the U.S., and it’s tipping many housing markets downwards. Sales are down 18 per cent in California and asking prices are falling in New York City.

So maybe the real surprise here is that, after a decade in which the U.S.’s housing market struggled through an epic slump, and Canada’s soared to new heights, things don’t actually look all that different. And, as residents of Calgary can tell you, whether you won or lost depends very much on the specific housing market you’re in.

Who the winners and losers are doesn’t break down according to Canadians or Americans. Rather, the winners are those who got in early and have seen real equity gains in recent years. The losers are those looking to break into the market now, with prices high and mortgage rates on the rise. To those we can only say, good luck.

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Simon Wong

Mortgage Specialist

Month: November 2018