Real Estate Bubble?

I believe it is everyone’s right to have a safe and affordable home to raise a family.  The reality in today’s economy is quite the opposite.  I see people making desperate decisions to buy a home out of their price range for fear that they won’t be able to afford anything similar if they wait.  They are maximizing their credit cards, borrowing more from parents and cutting back on certain activities for their children just to make ends meet.

I had recently quoted Benjamin Tal, Chief Economist with CIBC World Markets, who spoke of a generation that is going to “inherit inequality”.  I won’t even attempt to explore the depth of the subject, but suffice it to say that there is a growing demand for rental units.  Just yesterday, I had a client that is selling her home because she can’t afford to live in it.  Yes, she intends to bank the little amount of equity she will get out of selling her home and rent.  I see this trend more and more.

The implication of what Tal was saying is that if you are not a homeowner now that you may not likely be a homeowner in the near future given the trend of skyrocketing home prices.  And, today’s Globe and Mail article about Ontario pushing Ottawa for some form of tax on speculative buyers or increasing the capital gains tax is a sign that governments recognize the seriousness of the problem.

Just think, you have people buying properties based on speculation of profiting, low inventory of homes on the market and first-time home buyers trying to get into the market.  How does a first-time home buyer compete with an investor with very few homes for sale?

Don’t get me wrong.  I don’t criticize investors.  After all, they have children for whom they want to provide a home and ensure a financial nest egg for themselves.  I get it.  But, if average people can’t afford to buy their own home and must turn to renting, that will put a corresponding strain on all levels of government, primarily provincial and municipal, to provide affordable housing.  It is a storm brewing like no other.

Ironically, I know that builders are in tune with this growing demand for rental housing units and have already started building a mix of condominiums and rental apartments.  The only issue is that market pricing remains an issue because demand is growing for good rental units.

My question is whether all levels of government can create a unified strategy in concert with builders whereby builders have the right incentives to build affordable rental units for growing families?  A grand idea perhaps, but if it works, would this not be a more cost-effective alternative to managing government deficits and pressure to keep increasing tax revenues?  Just saying……

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Burlington, Hamilton, Milton, Mississauga, Guelph

Home Buyers stress Test –  Real Estate

The federal government, bless their heart, have implemented a financial stress test for homebuyers effective October 17, 2016.

Qualifying for a mortgage has always been a “stress test” for borrowers but we never called it that.  The federal government tweaked their lending rules in four substantive ways:

1. Banks now have to assess mortgage applicants against the Bank of Canada’s five-year fixed rate (currently 4.64%);
2. No more than 39% of your total household income can go towards your housing costs such as utilities, property taxes, mortgage and home insurance;
3. You must have a minimum credit rating of 600; and,
4. Amortization must not exceed 25 years.

In the past, homebuyers could qualify under the bank’s five-year variable rate (currently under 3% for most financial lenders).  Now, of course, the new lending rules mean that many new homebuyers or high ratio borrowers will have to wait until they have a larger down payment or consider buying a cheaper home.

Quite frankly, the new lending rules are most unfair to first-time homebuyers.  Others before them got away with much more lenient lending rules and, as a result, were able to buy their new home.  That doorway has now been closed.

Why the new lending rules by the federal government?  Many know that the federal government, through the Canada Mortgage and Housing Corporation (“CMHC”), insures high ratio lenders.  Those are individuals that put less than 20% and more than 5% down on the purchase of a home.

The federal government has legislated a $600 billion limit on the total dollar amount of its mortgage insured loans and, the current balance of CMHC insured outstanding loans sits at $523 billion as of 2016 Q2.  The upper cap of $600 billion is almost maxed out.

In looking at the CMHC Mortgage Loan Insurance Highlights 2002 – 2016 Q2 it appears to me that the federal government wants to stabilize the risk to itself and to homeowners from the volatility of the market.

Although there are several CMHC indicators which remain consistent (such as the average loan to value ratio of CMHC insured homes remaining between 53% to 55%), the soft and unpredictable economy coupled with other CMHC indicators suggest borrowers are being more aggressive in their borrowing habits.  In my view, this trend is concerning to the federal government.

Looking at some CMHC statistics and specifically, CMHC insured households:

• the average loan amount per household prior to 2015 sat around $140,000 and increased in 2015 to $175,000; that’s an average increase of $35,000 insured per household;
• the number of insured households per quarter:
  • 2013 Q1 – 52,000;
  • 2013 Q3 – 114,000 (highest prior to 2016 Q2);
  • 2014 to 2015 Q4 range of 50,000 to a high of 91,000;
  • 2016 Q1 dropped to 63,700 households; then,
  • 2016 Q2 dramatic spike to 117,500 newly insured homes (highest ever).

When you consider the recent spike of $35,000 in the average dollar amount insured per household and the highest jump ever in 2016 Q2 to 117,500 of insured households, these raise huge concerns for the federal government.  Clearly, first-time homebuyers are caught up in the buying frenzy and bidding wars.  With the stagnant low interest rates, people are making more and more aggressive bids, including high ratio borrowers which is likely contributing to the overall increase in the average insured amount per household.

When you also consider the borrowing trend of high ratio borrowers insured by CMHC/federal government alongside a recent report (at huffingtonpost) that downgraded Canada’s economic growth forecast to 1.4% for 2016, plus the fact that the Bank of Canada is hard pressed to increase its lending rate, the federal government stepped in to tighten its lending rules for high ratio (and low ratio) borrowers.

In the event the “bubble bursts” in the housing market, the symptom will be the decline or attrition in housing prices while the substantive socio-economic impact will be families losing their home.  This is what, I suspect, the federal government wants to avoid.

Article written by Karmel Sakran

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Burlington, Hamilton, Milton, Mississauga, Guelph

Oct. 19, 2016

Housing Market Real Estate Sales

The other day, I heard a report on CBC that housing sales are down an overall 3%, primarily due to the B.C. housing market.  Although this is a very busy time for real estate deals, the number of deals our office is handling is leveling off compared to the same time last year.

In my unqualified opinion, housing prices are not declining.  Instead, they are stabilizing which means that the gross competition and bidding wars experienced in the recent past are now tailing off.  As an aside, two months ago, I was successful in having CMHC reverse a refusal to extend coverage by presenting them with a 3^rd party valuation substantiating the fair market value at $80,000 over the list.  This saved the deal and ensured that the client did not lose their $10,000 deposit.

The new reality is that the recent boom and fierce competition has helped many, who held onto their home, to increase their equity intended for retirement.  Good for you and good for the many that got into the housing market before the boom.

Interest rates?  Again, in my unqualified opinion, I don’t see a large shift over the next 24 months.  Interest rates are tied to multiple economic factors but the simplest I see is that our economy is still transitioning to the new reality of high tech – we are not entirely there yet.  In fact, I have a lot to say about this growth area but that is for politicians and economists to solve.  I enjoy leaving this for “nice” dinner conversation.

Happy owning!

Karmel Sakran

Buying a home? Talk to a Real Estate Lawyer »

Burlington, Hamilton, Milton, Mississauga, Guelph

Buying Selling in the Real Estate Market from a lawyers perspective

Homes are selling incredibly fast and often selling above list price. The reason seems clear…low inventory of homes for sale and many more buyers. Bidding wars are now the norm.

I have heard from many realtors that the strategy is to list the home on Friday, schedule a Sunday open house and accept offers on Monday.

People knowingly present an offer they feel will beat other offers. I have one client that is frustrated for being out bid on 4 different homes. Yet, I have a seller client that received 18 offers on her home and accepted an offer $70,000.00 over list price with offers still coming in.

And because of the bidding wars, banks are now insisting on obtaining an appraisal of the property where in the past they relied on the Purchase and Sale Agreement as satisfactory proof of the fair market price. After all, banks want to verify the fair market value of the property as part of their due diligence and determining what they perceive as the true loan to value ratio.

If the lender bank determines that the property requires insurance from the Canada Mortgage and Housing Corporation, the lender bank will submit the lending application to CMHC who, in turn, will review the application for approval.  If CMHC has any concern, CMHC will request their own appraisal to satisfy themselves as to the overall risk.  CMHC performs this on a case by case basis and their underwriter will ultimately decide whether to extend CMHC insurance coverage.

I have two simple questions. Are the current bidding wars a self-correcting mechanism to adjust home prices up to their true fair market value? Or, are home buyers going to regret overpaying for their new homes?

Home ownership is great, but at what cost?

Article written by Karmel Sakran

Readers may contact Karmel Sakran at 905-639-1222 ext. 224

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Burlington, Hamilton, Milton, Mississauga, Guelph

Closing Real Estate Lawyers advises Buyer-Sellers – precautions to avoid issues and ensure a smooth closing.

It is unfortunate, but it does happen on rare occasions when the closing of a real estate …

That a buyer pulls up to their newly purchased home and the seller has not cleared out of the home!  And worst of all, it is obvious that it will be a few hours before the seller completely vacates the home. Even the best closing real estate lawyers can’t anticipate this issue occurring when closing a deal.

Neither the buyer’s lawyer nor the seller’s lawyer goes to visit the property, so there is no way for either lawyer to visually assess the likelihood that delivery of vacant possession will be delayed.  When this happens, the buyer is inconvenienced and frustrated and often out of pocket because the movers are waiting to move furniture into the home.

For our buyer clients, we advise them to arrange a visit the day before closing to assess how much or how little has been packed and/or removed by the sellers.  This visual observation is usually a good indicator of whether vacant possession will be delayed.  We also ask our clients to report any concerns to us and their realtor so that communication can be sent to the seller’s lawyer and realtor to address the issue with their respective clients.

Real estate Lawyer Cautions on the day of closing

And, if a buyer wants to be extra careful, there is no harm in driving by the morning of closing to have an outside visual of the property and determine whether things are being moved or whether it appears the home has already been vacated or whether any debris has been left about the property.  After all, the goal is to avoid any issue BEFORE money is paid over to the seller’s lawyer.

Closing Real Estate Lawyers advise…

At our firm, we always ask our seller clients “when do they expect to be completely out of the property”.  This is particularly important where the parties are selling because of a separation and one has remained in the home.  Regardless of why people are selling, we aim to avoid any misunderstandings on the part of our clients.

Our advice is to be out no later than 1pm but preferably by 11am the day of closing.  This is what we tell our clients to ensure there are no surprises that create animosity and discontent between the sellers and the buyers; and of course, potential litigation.

We also advise our clients to ensure they leave their home in a broom-swept condition free of any debris, such as old furniture, unwanted lawn furniture, and other things a seller may presume buyers would appreciate having.  This approach has always worked well for our clients.

At GGS, we are proactive in trying to avoid problems and ensure a smooth and happy real estate closing.

Article written by Karmel Sakran

Readers may contact Karmel Sakran at 905-639-1222 ext. 224

Home Buyer-Seller real estate closing – Talk to a Real Estate Lawyer »

Burlington, Hamilton, Milton, Mississauga, Guelph

Real estate is a regulated profession in Ontario. Salespersons and brokers must register with the Real Estate Council of Ontario (RECO).