RISING INTERESTS RATES: IS THE PARTY OVER FOR REAL ESTATE? BY MAX SINGH

Anyone who’s carrying a variable-rate mortgage will really feel the effects of interest rates big time, and if you are on  five-year term, you will have to deal with interests rates whenever your mortgage comes up for renewal in any case Some people in Surrey have torn down old ranchers and built these huge 10 bedroom mega-mega houses which look like places from the outside. I wonder if they know when they want to sell for $3-$4 million, the buyers just won’t be there

The Canadian Real Estate community says buyers and sellers should make plans as rising interest rates and declining house sales come to mind. The Bank of Canada cut rates dramatically during the last major economic downturn in 2008, and is now in the middle of a slow process of beginning to get rates back to more normal levels.  Meanwhile in terms of house prices, in early 2018, the Canada Mortgage and Housing Corporation warned of a “high degree of vulnerability in Victoria, Vancouver, Hamilton and Toronto because of the detection of price acceleration and strong evidence of overvaluation.

The mortgage stress test rules introduced in early 2018 seem to have dealt a knockout punch to the Metro Vancouver real estate market and dashed the home ownership dreams of many first time buyers. Under the new stress test rules, would-be buyers for the average Vancouver home need an annual income of $175,000 to even qualify for a mortgage. That’s based on the average benchmark home price of nearly $1.1m, in Vancouver, and on top of the 20% down payment of more than $216,000 needed.  The stricter mortgage rules instead drove more buyers to condos resulting in a hot surge of multiple offers in that part of the market. But even the price of condos are now softening.

Canada’s housing affordability has reached its worst level in 28 years and is bound to deteriorate even further, say Royal Bank of Canada economists. The average share of income a household would need to cover ownership costs hit 53.9 per cent in the second quarter of 2018, the economists said in a report released recently. Based on their analysis, the cost of owning a home in the country hasn’t been this bad since 1990, when the share of income a household would need to cover ownership costs was 56 per cent. In Vancouver homeowners are spending an incredible average of 87% of their income on housing.

In a less inflated housing market, it’s an interesting question what would happen to a glut of new large houses and condos that have more sellers than buyers. The Real Estate Board of Greater Vancouver say only nineteen hundred and sixty-six homes were sold in October 2018, down 23% from 34.9% from the same month a year ago. Meanwhile Real Estate prices are down between 5-10% in Vancouver depending on location. Recently, a proposal for a downtown Vancouver luxury condo tower was put on hold as demand for high-end property has weakened. And in November first-time home buyers leaped at the chance to live mortgage-free for one year in a new condo in response to a Langley developer’s offer to make their mortgage payments for one year. The promotion was in place for a new condo development that only a few months ago would have been sold out. In fact, Langley was the region’s strongest condo market just one year ago, with year-over-year price growth peaking at 51 per cent in December 2017. But in the months since, inventory has jumped 387 per cent and sales have declined dramatically. The trend seems to be hitting Abbotsford and communities further east as well. In October, home sales plummeted 50 per cent year-over-year in the Fraser Valley, while prices also dropped. The Fraser Valley Real Estate Board, which includes  Surrey, saw 1,290 sales last month, down 33.4 per cent compared with July, 2017.Last month’s sales were the lowest for July since 2010,while the average price for detached houses sold in the Fraser Valley’s area last month reached $1,095,339, up 6.4 per cent from the same month last year.

“If you are selling a place for $750,000 and you have a mortgage of $500,000 and want to buy another place for $1.1 million, you can no longer assume you can qualify,” says Harv Dhillon, a Surrey mortgage broker. “If you have to re-qualify based on the stress test, you may not qualify to borrow to the level you think. You can’t simply transfer a mortgage over any more.  Banks and lending institutions will now scrutinize applications more thoroughly with new stress test lending rules. It’s pretty heartbreaking for the first time buyers who discover they just can’t qualify.” Dhillon adds.  “Even for current homeowners carrying over gains in real estate equity, it may not be enough to get a mortgage on the higher-priced property, I’ve had deals fall through at the last minute because the stress test rules mean they just can’t get the funds” he says.

“Rate hikes would affect people with variable-rate mortgages first, but fixed-rate mortgages soon enough” Says Dhillon. “Anyone who’s carrying a variable-rate mortgage will really feel the effects of interest rates big time, and if you are on  five-year term, you will have to deal with interests rates whenever your mortgage comes up for renewal in any case.”

However, REBGV Board president Phil Moore says the supply of homes for sale today is beginning to return to levels we haven’t seen in our market for four years. He says for buyers, that means more selection to choose from, and for sellers it means more competition from other listings as seller adopt a “wait it out” policy. Local real estate agent, Dave Sandhu cays, “The real-estate market today market is incredibly different to 2016, when I would have multiple offers, and a bidding war on properties I had listings for. Now it’s a total buyers’ market – if you have the financing.”

Sellers have been largely unwilling to deeply discount their prices, resulting in fewer sales. Something Sandhu agrees on. “Sellers are so used to rising pric­es they just cannot comprehend how the market has changed, and so now many are just holding onto their properties.” He said, “In Vancouver on the other hand, buyers can be much more aggressive in their offers, because prices are 10 per cent cheaper.” He adds, “It’s a tough market now.  Nothing over 2 million dollars is selling to locals who just can’t qualify. The off- shore Asian buyers who would spend $3-4 million are now concentrated in Montreal  Seattle and Portland because of the foreign buyer tax,” With bemusement he adds, ”Buyers are not afraid of competing against multiple offers on other offers on properties, because the multiple offers of last year are just not there – whether its condo or a detached property” He adds, “In 2017 I believe there was only one single family property in Vancouver under a million dollars to buy-  An old  tiny tear- down house on  small lot on the East side of the city – now there are dozens of tear downs for sale,  close or at about the $1 million mark for sale in the city”.  Sandhu frowns, adding. “When I see in Surrey, how some people have torn down old ranchers and built these huge 10 bedroom mega-mega houses which look like places from the outside. I wonder if they know when they want to sell for $3-$4 million, there will be no buyers at all!

However it’s not all bad news. “If somehow with a huge effort you can get the financing from a bank, financial institution or borrow from parents or family, it’s a good time to buy. If you are a first time buyer, consider condos, not Townhomes which are still on the pricy side, as they offer the much coveted three or four bedrooms. My advice is buyers – first timer buyers in particular should lower their expectations, if they have to, and get into the market. Vancouver is still hugely overpriced, unless you really must live there. Mission is coming up, the Fraser Valley is still a good place to buy – Surrey, Langley, Abbotsford and all the way out to Chilliwack have bargains if you negotiate hard.” says Sandhu.

Cameron Muir, B.C. Real Estate Association Chief Economist has positive news. “The downturn in housing demand induced by the mortgage stress test is now largely behind us, The B.C. housing market is evolving along the same path blazed by Ontario and Alberta, where the initial shock of the mortgage stress test is already dissipating, and will eventually lead to increasing home sales.”

Meanwhile, the BC Real Estate Association has released its fourth quarter housing forecast and it’s predicting house sales will rise 12% in 2019, as the continuing strong performance by the provincial economy and favourable demographics are expected to push home sales above the ten-year average in 2019. The combination of fewer home sales and a larger inventory of homes for sale will they say lead to balanced conditions in most markets across the province and price growth will be slowed considerably.