By David Larock
Last week federal finance minister Jim Flaherty surprised real estate market stakeholders by announcing a fourth round of changes to the rules that are used to qualify borrowers who have less than 20 per cent equity in their property (commonly referred to as high-ratio borrowers).
You would have thought that Mr. Flaherty was announcing the arrival of the Four Horsemen of the Apocalypse when reading the reactions of most mortgage industry insiders, which I find surprising given that the first three rounds of rule changes did not broadside our real estate markets, as had been predicted each time, and have in fact proven quite prescient in hindsight.
Let’s quickly review how we got to this point:
Ultra-low mortgage rates have been the primary drivers of house-price appreciation across most Canadian real estate markets over the last several years. At first this cause-and-effect helped our economy when it was otherwise vulnerable, by stimulating demand in a wide range of housing-related industries. But while emergency-level borrowing rates can provide an effective short-term economic boost, if rates are left too low for too long they can also fuel asset bubbles (history provides many precedents on this point – and those who do not learn from history are doomed to repeat it).
Our political leaders and regulators have been grappling with a very difficult question for some time now: How do we keep our interest rates at the stimulative levels that our broader economy still desperately needs while guarding against credit and housing bubbles? Each time the answer has been the same: Tighten mortgage lending rules, give the market time to adjust and then tighten again if needed.
Over the past few months our leaders have (at long last) come around to the view that our interest rates are going to stay low for the foreseeable future and that if rising rates aren’t going to slow the market naturally (as was previously hoped), more tightening is needed.
Here are the changes that were just announced and that will take effect on July 9 (with my comments following each bullet point):
* The maximum amortization on a high-ratio mortgage will be reduced from 30 years to 25 years.
Mathematically, this change has the same impact on mortgage affordability as a .95 per cent rise in interest rates. That said, while 40 per cent of high-ratio borrowers opted for a 30-year amortization over the last year, the vast majority of these borrowers could have qualified using a 25-year amortization anyway, so this change should only affect marginal borrowers who would have been the most vulnerable to rate rises in future. (If Mr. Flaherty had asked me, I would have suggested lowering the maximum amortization on the rate used to qualify borrowers instead. This tweak would have allowed high-ratio borrowers to set their minimum mortgage payment using a 30-year amortization as long as they could qualify using a 25-year amortization…but I digress.)
There is also an inherent benefit in making this change at this time, which industry observers have not acknowledged. Looking ahead, when mortgage rates eventually do rise, the maximum amortization threshold can be increased back to 30 years to help cushion the impact of higher borrowing costs. This gives the federal government the option of using an incremental payment shock absorber at some critical future point.
* Mortgage refinancings will now be limited to a maximum of 80 per cent of the value of a property (down from 85 per cent).
Rapidly rising house prices create a wealth effect that allows homeowners to live beyond their means. While only a minority succumb to this temptation, at the margin these home owners form a large enough group to threaten the stability of our real estate markets and, left unchecked, even our overall financial system.
These borrowers typically rack up high-interest unsecured debt and when it becomes unmanageable, they roll it into their mortgage at today’s record-low rates. They wash, rinse and repeat until house prices stop rising and then when they can no longer access new money this way…boom goes the dynamite.
The decision to stop offering high-ratio mortgage insurance on refinance transactions is an attempt to reign in the conversion of credit-card debt into mortgage debt. This practice was commonplace during the U.S. housing bubble run-up and exponentially increased the long-term damage done to the U.S. economy when real estate prices corrected. Home equity extraction has been steadily rising in Canada over the last decade and the federal government is wise to take steps to limit the potential damage it can cause.
The overwhelming majority of my mortgage industry colleagues feel that credit-card debt, not mortgage debt, is the real problem that the federal government must address. This view is either naïve, blindly self-interested or both. Our industry has been abetting the growth of credit-card debt by converting it to mortgage debt.
High-ratio mortgages are subject to greater regulation because the risk on these instruments is taken by the federal government and ultimately, by Canadian taxpayers. The risk on credit-card debt, on the other hand, is taken by individual credit-granting institutions. That means that if over-consuming borrowers default on their credit-card debt the negative impact is essentially limited to the borrower and the lender, while a material increase in mortgage defaults can send shock waves throughout the economy (see the current U.S. example, where it is mortgage defaults, not credit-card write-offs, that have created Depression-like conditions).
Put another way, if you ask any regulator whether they would rather have credit-card defaults or mortgage defaults, you won’t have to wait long for the answer.
* High-ratio mortgage insurance will no longer be offered on properties valued at over $1 million.
History has shown that high-value properties are subject to greater price fluctuations when real estate markets soften and as such, highly leveraged high-end properties come with an inherently higher level of risk. Requiring a minimum down payment of 20 per cent is a way to help mitigate this increased marginal risk.
From a mortgage-industry perspective, this change gives balance-sheet lenders (large banks) an increased competitive advantage over lenders who need mortgage default insurance to securitize their loans. That means that high-end borrowers (and the mortgage planners who work with them) will now have fewer lenders to choose from. In spite of this, it is still seems to be the right thing to do in an environment where many inter-related risks appear elevated.
* The maximum gross debt service ratio will be limited to 39 per cent and the maximum total debt service ratios will remain at 44 per cent.
Until now, high-ratio borrowers with excellent credit scores could have their gross debt service ratios waived altogether. This has meant that their mortgage and other basic property costs could total 44 per cent of their gross income if they had no other debt. Now their mortgage and other basic property costs will be capped at 39 per cent, regardless of whether they have any other debt, and that slightly reduces the maximum mortgage amount for the relatively small sub-group of borrowers who have no other debt.
The two most common questions being asked regarding the coming changes are:
* How will this affect my existing mortgage at renewal?
Answer: Not at all. As long as you don’t need to borrow more money, your existing mortgage terms will remain in place, even if you switch lenders at renewal.
* How does this affect my existing pre-approval?
Answer: Pre-approvals that do not become live deals before July 9 will be subject to the new rules beyond that date; if, on the other hand, you have an accepted offer to purchase and you convert your pre-approval to a live deal before July 9, your high-ratio mortgage will not be subject to the most recent changes.
If you have other questions, you can check out this question and answer page on the Department of Finance website, or email me for more details.
Five-year Government of Canada bond yields rose 12 basis points last week, closing at 1.31 per cent on Friday. Despite this rise, lenders are still enjoying healthy gross spreads on five-year fixed-rate mortgages in the 3.09 per cent range. We also saw the launch of some new promotions on shorter-term fixed rates and this wider-than-normal variance at the short end of the interest-rate curve means that borrowers who shop around will be well rewarded for their effort.
Five-year variable rates are still being offered at only a shade below fixed rates (2.80 per cent vs. 3.09 per cent) and as such, I don’t think they offer borrowers enough of a margin of safety to justify their inherent risk.
The bottom line: There is an understandable fear that over-tightening mortgage rules will engineer the very house-price correction we seek to avoid but under tightening could eventually prove even more disastrous (and no one has more to lose than people who depend on a healthy real estate market to make their living).
The first three rounds of changes were initially unpopular but all have thus far proven to be prudent with the passage of time. While I am instinctively skeptical of government intervention in the market, Flaherty has so far consistently earned my respect where changing mortgage regulations are concerned. If this short-term pain helps to preserve our long-term gains, then I’m all for it.
After the release of June home inventory stats by Vancouver Real Estate Board, the media has picked up many opinions out there regarding which way the market is going. These have been mostly negative, including one of our own realtors who was quoted as saying “it’s time to cash out”.
Most of these comments are based on one calculation method only – inventory absorption rate. In reality, it is only one of many factors influencing real estate market trends. First of all, most of people are buying homes based on their individual needs and life plans. The concept of market “right time to sell or buy” really only applies to short term investors and speculators – they only count for a small percentage of the buying/selling public. Therefore their power to drastically influence property price change is limited and also, geographically specific (some areas have higher # of properties bought by speculators and will feel more effect with a market slow down).
Vancouver is a city with diverse industries (unlike a single-industry town), and the employment base is strong. It is known internationally as one of the most attractive cities to live in and there will continue to have strong demand for immigration which converts to demand in housing. All these elements remain the same and they serve to support a sustainable real estate market. Also, the mistake of using solely the listing inventory account to predict prices is that it ignores the fact that many sellers have the ability to take the properties off the market if they can’t achieve the prices they want, which would change the stats again.
Real estate is a cyclical market. We have had a long run of very active market and price increases in the last few years. By its cyclical nature the market is due for some correction in some overheated markets. And depending on each individual’s specific needs and wants, now could both be the right time and wrong time to buy or sell. For a point of reference, looking back at Vancouver’s past 40 years real estate price charts, Vancouver home prices have doubled every 10 years with drops and rises in between.
Lynn Hsu
President and CEO
Macdonald Realty Group
WHISTLER ACTIVITY
In the last 30 days we have seen 87 new listings come to the market in Whistler and a total of 40 sales.
The current inventory in Whistler stands at 765.
Here is a link to view all the properties that have sold in Whistler over the last 30 days:
http://matrix.buywhistler.com/DE.asp?ID=227352828
Here is a link to view all the Whistler properties that are newly listed over the last 30 days:
http://matrix.buywhistler.com/DE.asp?ID=227351826
MARKET STATISTICS
• For the month of June, 2012, we have seen the number of new listings drop by 50% compared to June, 2011.
• The number of new listings for the month of June 2012 has dropped by 34% compared to new listings for the previous month.
• The total number of active listings in Whistler has dropped by 11% since June 2011.
• For the month of June, 2012, we have seen a 18% drop in the number of unit sales compared to June, 2011.
• The number of sales for the month of June, 2012 has also dropped by 18% compared to the number of sales for the previous month.
• However, the number of sales for Q1 and Q2 for 2012 is very slightly up at 280 units compared to the total number of sales for Q1 and Q2 for 2011 which stood at 275 units.
• The sales to active listings ratio for June 2012 is 4.68% keeping us firmly in a Buyer’s Market.
MORTAGE CHANGES
New rules for government-backed insured mortgages are set to come into effect on July 9, 2012 after an announcement by the Canadian Federal Government on June 21.
See the details of these changes by clicking here.
The new rules stipulate that amortization periods for insured mortgages will now only be 25 years, as opposed to the 30 years where it stands now. This takes away the option for many first-time buyers who would usually take out a mortgage with 5 per cent down and a 30 year amortization that they can afford. Changing that to 25 years means much higher monthly payments, which young first-time buyers simply cannot afford.
This rule is going to put those first-time buyers out of the buying market, and into the rental market. And that will force a correction on Toronto and Vancouver homes of about 5 per cent, according to experts. That correction won’t be enough to help those looking to make up 15 per cent of their down payment, but it will help foreign investors, who are mostly interested in Vancouver and Toronto mortgages – the costliest ones in the country.
The new rules won’t affect foreign investors simply because they have cash. They have money to invest in foreign properties and they know that Canada is a relatively sound place to do it. Because they have so much cash they can easily afford the 20 per cent down payment, and take on any amortization period they wish. Although they usually have the money to afford either a 25 or 30-year.
Derek Lai, director of international properties for Colliers International real estate services says that out of all the Canadian cities, Vancouver and Toronto. Vancouver is especially attractive to those from China’s mainland because of Canada’s excellent education system, and because it’s so close to home.
“Buying sentiment for overseas properties among Chinese mainland investors has been gaining strong momentum over the past few years,” says Lai in a report. “To date, about 20 per cent to 40 per cent of the foreign property investors in these destinations are from the Chinese mainland.”
The fact that the new rules will restrict those of us here at home but will give new opportunity to foreign investors is sure to add fuel to the fire on an already heated debate. Many think that Canada should restrict foreign property investing altogether, in order to open things up for us who live in the country. Others though disagree, saying that we need foreign investors – and their money – to keep our economy churning.
(Article from Canadian Mortgages Inc.)
JULY ACTIVITIES
Whistler Celebrates Canada Day – June 28 to July 2
Whistler celebrates Canada’s 145th birthday with festivities, including Whistler’s Canada Day Parade, all day street entertainment, fireworks, concerts and more!
Canada Day Celebration Highlights
Whistler Street Entertainment – A Canadian Carnival!
Date: June 28 to July 2 | Time: Between 12 and 7 PM
The carnival is rolling into town to celebrate the Canada Day weekend with free frolic with spirited festivities taking place throughout the Village. Fun includes fabulous face painting, quirky balloon hats, zany circus performers, carnival games and holiday crafts!
Canada Day Celebration Concerts
Date: June 29, 30 & July 1 | Time: 8:30 to 10 PM
All concerts are held at the Whistler Olympic Plaza Pavilion. Performers to be announced.
Canada Day Parade
Date: July 1 | Time: Begins at Noon
This annual parade winds its way through the Village, from Whistler Town Plaza to Mountain Square.
Canada Day Fireworks
Date: July 1 | Time: 10:15 PM
Fireworks begin at nightfall and are best viewed from Skiers Plaza at the base of Whistler Mountain in the Village.
Independence Day Fireworks
Date: July 4 | Time: 10:15 PM
Fireworks begin at nightfall and are best viewed from Skiers Plaza at the base of Whistler Mountain in the Village.
BC Bike Race – June 30 to July 7
BC Bike Race is much more than the challenge of a ride … it’s about everything experienced along the way – spectacular scenery, fascinating culture, interesting people, and tantalizing tastes. The stages of BC Bike Race wind through nine beautiful west coast communities, each showcasing unique qualities and elements that make British Columbia a world-class destination for athletes, adventurers and visitors alike. Friends and spectators will have an opportunity to congratulate the riders on their accomplishment on July 7 as they cross the finish line at Whistler Olympic Plaza.
Whistler Long Board Festival – July 12 to 15
UNKLE is proud to present the Whistler Longboard Festival at the Whistler Sliding Centre. Rain or shine, more than 100 international top racers will drop 1,000 feet over 1.6 kilometres at daredevil speeds along the snaking paved course. This family friendly event is free for spectators. For more details click here
Whistler Children’s Art Festival – July 14 to 15
Mark your calendar for the 29th annual Whistler Children’s Art Festival. This fun-filled weekend features a multitude of hands-on art workshops led by professional artists in fine arts, crafts, theatre, multi-media, dance and music from across BC. The festival comes alive even further with free activities and entertainment by popular children’s performers, roving musicians and zany characters.
Highlights:
• Roving street entertainment, face painting and caricature booths, unique balloon designs, funny clowns and side-splitting comedy magic
• Live entertainment including popular children’s bands, plays and demonstrations
• Art workshops for children of all ages, including pre-school activities for children aged three to five years old (with adult supervision), intermediate workshops for kids up to grade eight and workshops for the entire family (additional fee).
• For more information and online workshop registration and schedule Click Here.
Whistler Farmer’s Market – July 1, 8, 15, 22, 29
A feast for your senses, the Whistler Farmer’s Market features local produce, tasty food, local artisans, live entertainment and family activities along the beautiful Upper Village Stroll. Open Sundays between 11 AM and 4 PM. The Wednesday afternoon market operates from July 4 to August 29, 2012 from 3 to 7 PM.
Plus Summer Artist Demonstrations at the Farmers Market
Mountain Galleries will be hosting live painting demonstrations at the Sunday Farmers Market outside the gallery from 10 AM to 4 PM. Featuring a different artist each week, demonstrations will include sculpture, painting, wood carving and jewelry design.
WORCA Monday Night Rides – July 2, 9, 16, 23, 30
Hosted by Whistler Bike Co., Back in Action, Nesters, The Wildwood and WORCA, Monday nights are fun and social rides for all abilities. Riders are divided into groups based on ability and go out with guides who instruct when necessary. The Wildwood restaurant provides a social afterwards with all participants receiving a free frosty beer and great food specials. Sign in at 6 PM at the Bike Co. in Whistler Village. Rides depart at 6:30 PM. Riders need to be WORCA members (forms will also be available Monday evenings at Bike Co.).
Phat DH Wednesdays – July 4, 11, 18
Brought to you by WORCA, Kokanee, the GLC, the Bike Park, and WORCA sponsors, Phat DH Wednesdays will put your skills to the test. The event is complete with après at the Garibaldi Lift Company and prizing. Events are capped at 200 racers so arrive early. All riders must be WORCA members. Memberships are available for purchase onsite by cash only. All riders must also have a bike park pass or ticket. Discounted tickets are available for $15 at Guest Relations. Registration and race plate must be presented in order to receive the discounted rate.
WORCA Thursday Toonie Rides – July 5, 12, 19, 26
Come ride with local and visiting riders at the Thursday night Toonie Rides hosted by Whistler Off Road Cycling Association (WORCA). Cost to participate is only $2 with half of the proceeds benefitting WORCA’s trail maintenance program and the balance awarded to the top riders. The first place male and female riders will win $50 each. The races are open to everyone, young and old, and of all abilities. All participants must wear a helmet and ensure their bikes are in good working order. For details of upcoming rides, visit here.
ArtWalk Opening Reception – July 5
Join the Whistler Arts Council at the ArtWalk opening reception from 6:30 PM to 9 PM. ArtWalkers will enjoy the artwork displayed in a variety of host galleries throughout Whistler paired with delectable treats and special offers from participating venues. Enjoy entertainment performed by live musicians, roving characters and painters, and mingle with local artists who always come out for this special event. Visit here for more details.
Celebration of Arts Weekend – July 6 to 8
The village will come alive in celebration of the arts including daily live entertainment, musicians, 3rd Annual “Paint-Off”, free guided ArtWalk tours, live art demonstrations and a Paint & Shoot Skate Jam on Sunday July 8 at the Whistler Skate Park.
Art and Heritage Tours – July 6 to 8, July 13 to 15, July 20 to 22, July 27 to 29
Presented by the Whistler Arts Council and Whistler Museum, the one hour walking tour showcases a selection of ArtWalk venues, public art displays and Whistler’s history at the Whistler Museum. The guided tours are facilitated by experienced Whistler locals and take place from Friday to Sunday at 11 AM and 1 PM, starting at the Whistler Visitor Information Centre. The morning tours are free and the afternoon tours are by donation.
Whistler Presents Concert Series – July 6 to 7, July 27 to 28
Whistler Olympic Plaza hosts Whistler Presents, a free outdoor Summer Concert Series. Enjoy free entertainment and live shows throughout the summer from 8:30 PM to 10 PM. Stay tuned for the exciting concert line-up.
Paint and Shoot Skate Jam – July 8
Visit the Whistler Skate Park and check out team challenges composed of a graffiti artist, skater and photographer aiming to capture the most unique photo consisting of art and best skate tricks. Graffiti artists will be painting live from 9 AM to 1 PM. The Skate Jam and photo session will follow from 2 PM to 4 PM.
Seasons of Inner Change: A Poetry & Walking Retreat – July 13 to 15
Join Inner Landscapes on an all-inclusive, lodge-based hiking retreat at Brew Creek Centre. Explore changes in your life through the powerful lenses offered by poetry and the natural world. Develop a fresh perspective of where you are on the curve of your own transformation. Tickets are $560. For more information, please click here.
Winemaker Dinners on Whistler Mountain – July 14
The popular Winemaker Dinners at Steeps Grill & Wine Bar atop Whistler Mountain feature British Columbia’s best wines paired with locally-sourced culinary delights. Each evening includes a full-course dinner with wine pairings by the winemaker – it’s guaranteed to be a feast for your senses. Tickets are $99 and starts 6 PM (upload via the Whistler Village Gondola at 5:30 PM). For more information please contact Whistler Blackcomb Guest Relations.
Whistler Arts Council and Little Bear Productions present Summer Musical Workshops – July 16 to 20
Enhance your child’s summer with creative and fun Theatrical Workshops that include Kodaly music training, singing, acting, improvisation, dance, stage performance skills, creative costume making, hikes, picnics and more. For more information on times and costs, please click here.
Araxi Longtable Dining Series – July 21
Whistler’s acclaimed Araxi Restaurant presents Araxi Longtable, an annual series of outdoor dining experiences taking place on Saturday, July 21 and Saturday, August 18 at the picturesque Rainbow Park in Whistler Valley. Each event begins with a reception followed by a 4-course menu designed by Chef James Walt and featuring Pemberton Valley’s freshest local produce, beef from its pastures, day-boat catches from our coast fisheries and wines from leading producers. For more details, including prices and ticket purchase, please visit here.
XTERRA Whistler – July 21 to 22
This year’s Whistler Xterra events will start and finish at Lost Lake park beach area, the scene of Canada’s most successful Xterra event ever in the early 2000s. For those athletes who do not swim but love to mountain bike and trail run, you are invited to race the same course as the Professional Triathletes without the swim. Team entries in both the XTERRA Triathlon and Duathlon is also an option. A post race awards buffet will be provided by the Whister Brew Pub. The Whistler Xterra will still remain as the Provincial championship event, however Canadian National Championship event will be moving to the Canmore, Alberta in 2012. For more information and to register, please click here.
Function Junction Block pARTy – July 26
ArtWalk’s biggest party happens each summer in Function Junction. This eclectic neighbourhood comes alive with live and interactive art by local artists including living murals, artisans, family-friendly street hockey; face painting, children’s crafts, acrobatics and more. This party will surely offer a unique insider perspective into and area recently coined by locals as the “Heart of Whistler”. Bring your bike or roller skates to get to all the venues and have some fun along the way. The pARTy takes place between 6:30 PM to 9 PM.
Charlie’s Angels All Women’s Bike Race – July 27 to 28
180 women. 2 fun-filled events. 0 testosterone. An all-day affair that celebrates the Sea to Sky riding scene and the incredible women who are a big part of it. For more information, please click here.
BioBlitz – July 28 to 29
The Whistler Naturalists are proud to present Whistler’s 6th annual BioBlitz. BioBlitz is a 24-hour, round-the-clock race to count as many species as possible: mammals, birds, plants, frogs, fish, bugs – you name it! Join them at Alpha Lake Park to discover what 60 scientists find as they search Whistler’s habitats. Touch a giant water bug or a snake, learn about frogs and lichens, or take in a scavenger hunt. For more details, please click here.
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Macdonald Realty was founded in Vancouver in 1944 and has continued to grow through the years and the changes in the real estate market. We’re solid, established and respected, with 20 offices throughout British Columbia. Today, we’re Western Canada’s largest independent full service real estate company, with Residential, Commercial, Property Management and Project Marketing divisions. And we’re still proudly BC owned and operated.
About Shauna
As an agent with the largest realtor network in Canada, Macdonald Realty, Shauna O’Callaghan, works locally on a national scale. Shauna’s excellent reputation is the result of unparalleled respect for clients and market smarts.
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