Tag Archive for residential real estate

Laurin Jeffrey | July 2, 2011
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Housing finance rules pass the stress test

Stephen Dupuis – Yourhome.ca

I will admit that I read each and every news report about Bank of Canada Governor Mark Carney’s speech to the Vancouver Board of Trade last week to determine whether he was focusing solely on the Vancouver real estate market, where prices are eye-popping and continuing to rise quickly, or Toronto’s as well, where sales volumes are quite elevated but average prices are much lower and increasing at a more sustainable pace.

At the same time, I was paying close attention to federal Finance Minister Jim Flaherty’s musings because, let’s face it, these two fellows have all the power and tools to make or break housing markets across Canada.

Obviously the Bank of Canada controls interest rates, and anybody who remembers the days of mortgage rates exceeding 20 per cent will appreciate the wonderful work the Bank of Canada did to wrestle inflation to the ground and keep it there.

With today’s mortgage rates, homebuyers have it very good indeed, but the problem the Bank of Canada has to deal with is what happens when rates rise: Will people still be able to afford their mortgage payments?

Reading Carney’s exact words on the Bank of Canada website ( www.bankofcanada.ca), I found the answer to my question in the second line of his speech where he states that in the past three years, the average Vancouver house price is up about 30 per cent, making that city an “extreme example” of general developments in Canadian housing.

Carney notes that “the value of residential real estate holdings in Canada has climbed more than 250 per cent in the past 20 years, vastly outpacing increases in consumer prices and disposable income over that period.” That’s a very good thing if you got in the game 20 years ago, or even 10 or five years ago. But if you’re looking to get into the market today, your starting point is so much higher.

Here’s where it get’s interesting. Carney reveals that the value of housing-related debt in Canada has nearly tripled over the past decade to $1.3 trillion. This debt is also the single largest exposure for Canadian financial institutions, with real estate loans making up more than 40 per cent of the assets of Canadian banks, up from about 30 per cent a decade ago.

On the up side, Carney notes that “this unprecedented exposure exists in the context of a Canadian mortgage market that is subject to more stringent checks and balances than in the United States. For instance, almost all Canadian mortgages are full recourse, mortgage interest is not tax deductible, and high-ratio lending standards are generally prudent. These factors help instill responsibility and discipline on both homeowners and lenders.”

This is where Flaherty enters the picture. He deserves credit for his pre-emptive strike against the types of mortgage financing practices that caused all the problems in the U.S. He acted before the global financial crisis and he has tightened the mortgage financing rules twice since then.

I gave Flaherty full credit for all three moves, but after his most recent restrictions I made the point that any further tightening would go beyond prudence and into outright market manipulation. On that note, I was delighted to read earlier this week that he “has no plans to tighten mortgage rules again.”

Both Carney and Flaherty are walking fine lines every day. They are trying to achieve sustainable housing markets without killing the goose that is laying the golden eggs, which is never an easy task.

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Laurin Jeffrey | September 18, 2010
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BMO cuts mortgage rate to spur home buying

BMO said in a statement that the move was an effort to provide potential home buyers an incentive as the fall season rolls around

John Greenwood, Financial Post

Bank of Montreal has chopped its benchmark five-year mortgage rate, aggressively throwing its weight behind what many are calling an increasingly wobbly housing market.

“It’s a great time to buy a home,” Martin Nel, a senior BMO official, said in news release announcing the change. He added that people who take advantage of the offer will benefit.

“If ever there was a time to buy, it is now,” Mr. Nel said.

The move brings the bank’s key five-year rate to 3.59%, down from 3.79%, making it one of the lowest five-year rates ever offered by a Canadian bank, says industry newsletter Canadian Mortgage Trends.

But some experts are already scratching their heads because of the aggressive tone of the announcement as well as the timing, given the recent spate of warnings about the uncertain state of the market, including one earlier this week from the Canadian Centre for Policy alternatives predicting an imminent collapse.

When the big banks make mortgage rate changes they generally just disclose the new numbers without commenting on housing market conditions. If pressed, bank officials are usually quick to explain that the change in these consumer lending rates are merely a function of fluctuations in their own borrowing costs.

“It’s a bit puzzling to me,” John Andrew, a professor at Queen’s University’s School of Urban and Regional Planning, said of the BMO announcement. “Perhaps they are concerned that the number of new customers will fall off precipitously.”

Residential real estate prices have been in free-fall in the United States as well as many European countries in contrast to the Canadian market, which has been on a tear for a good part of the past decade with prices in many cities at record levels.

But analysts worry that it’s only a matter of time before the Canadian housing market moves in the same direction, and they point to warning signs that have already appeared.

Earlier this year Moody’s reported that debt to income levels of Canadian households is the highest ever and close to where they were in the United States before that market started to fall apart in 2007.

The Bank of Canada has raised concerns that the high debt loads of Canadian consumers has made them vulnerable to changes in interest rates and potential deterioration of the economy.

In a bid to crack down on what some described as reckless real estate speculation, the Federal Government brought in new regulations in the spring to make it harder for first-time buyers to qualify for government-backed mortgage insurance.

Borrowers must now meet standards for a five-year fixed-rate mortgage, even if they want a shorter-term, variable-rate product. As the key measuring stick for many home buyers, a lower five-year mortgage rate will mean more people will qualify to buy more expensive homes than with a higher mortgage rate.

The tougher rules had the desired effect. The recent imposition of the new harmonized sales tax in Ontario and British Columbia also impacted demand, and as a result the market cooled so much that industry insiders became worried it had gone too far.

The housing market is important to the banks because residential mortgages make up the single biggest asset class on their balance sheets.

There are nearly $1-trillion of home loans outstanding, according to the Bank of Canada, about half of which is held by the chartered banks.

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Contact the Jeffrey Team for more information  -  416-388-1960

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Category: Ajax Real Estate, Buying Real Estate, First Time Buyers, Mortgages, Pickering Real Estate | Tags: , , , , , , , , , ,
Laurin Jeffrey | May 24, 2010
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Vendor financing – A creative way to sell a home

Rather than having a bank or mortgage company lend money, the seller of a house, known as the vendor in property-speak, gets money from the buyer with whatever terms have been negotiated.

Andrew Allentuck, Financial Post

Vendor financing, one of the less well-known ways to buy a home, is one of the most flexible means to pay for it.

Rather than having a bank or mortgage company lend money, the seller of the house, known as the vendor in property-speak, gets money from the buyer with whatever terms have been negotiated.

The deal, sometimes called vendor take back finance, may include barter, such as a swap of assets with or without additional cash. For a homeowner willing to defer payment over time or to include a property swap, such as the buyer’s prized antique car or sailboat, as part of the purchase price, it’s a way to get the deal done.

“It all depends on the purchaser’s needs and the vendor’s motivation,” explains Jim Murphy, president of the Canadian Association of Accredited Mortgage Professionals in Toronto. “Frankly, these deals are uncommon these days, but in a tougher real estate market, you would see more of them.”

In residential real estate sales, vendor financing deals are rare, says Kevin Jaques, whose Jaques Law Office in Regina, Sask., does them, though not often. “If I am trying to sell a place, I just want to get my money and get out,” he explains. “I don’t want the difficulties of worrying about getting paid and enforcing an agreement if I am not paid.”

But there are special situations that make vendor financing helpful and even essential to making a sale. If a buyer has not established a credit history and a bank won’t lend at a reasonable rate of interest or perhaps at all, vendor financing may be required. “The vendor will want a big deposit to cover costs of foreclosure if the deal does not work out,” Mr. Jaques cautions.

Vendor financing can also be used when the vendor knows the buyer well, as would be the case of a family member such as a child who buys a property form a parent.

Becoming the lender in a sale of one’s home can increase the risks that the vendor takes in the deal. If the buyer does not pay on time after title has been transferred to him, getting the home back may take years of litigation. One of the best protections the vendor can have is to make the deal an agreement for sale. Unlike a mortgage take back in which title is transferred to the purchaser who then grants a mortgage back to the vendor, the agreement for sale does not transfer title to the property until all payments have been made and no further funds are owed. Until the title is transferred when all payments have been made, the buyer has limited rights over the property, which remains the vendor’s.

Vendor financing may be worth the trouble if the mortgage pays appreciably more than bank deposits or GICs or if tax advantages add to the return. If the vendor has no other investment plan for the money from a sale other than put it into a bank deposit at low interest rates, he can write a loan against property he already knows.

In commercial real estate sales, where mortgages tend to have higher interest rates than residential mortgages, vendor financing is more common. And where there is a taxable capital gain, it makes sense to consider vendor financing.

If a person sells a second home, perhaps a vacation cottage, then the difference between the sale price and cost (which includes improvements) will be a taxable capital gain. If the sale is financed by a conventional mortgage, the vendor is paid immediately at the closing and the gain is taxed in the year it is realized. But if the vendor finances the sale, then the deal can be structured to distribute the capital gain exclusive of interest over a maximum of five years. Interest is taxable as received, which could be a period as long as the amortization of as much as 25 or 30 years. The accounting details are complex, but the result of distributing the capital gain over as much as five years is lower tax each year and the possibility of putting gains through the tax process at a lower overall rate than if the sale occurs in a period during which the taxpayer is at his or her highest income and tax bracket, Mr. Doer notes.

A final word: vendor take back mortgages are instruments in which the rights and responsibilities of each party need to be spelled out. As well, the costs of the deal – the lawyers’ bills, surveys, etc. – can be shifted to the buyer by agreement. “A private vendor should get the purchaser to pick up the legal costs,” Mr. Jaques says.

Vendor financing deals are best left to the wordsmithing of lawyers who know the field. Protecting a deal in which a family’s potentially largest asset will be transferred is worth the legal fees, perhaps a few hundred or a few thousand dollars, depending on the value of the deal and the jurisdiction.

“The vendor has to check out the buyer very closely to ensure that he or she has the ability to handle his obligations,” Mr. Murphy cautions. The vendor has to be satisfied that buyer can carry his responsibilities for as long as the financing agreement is in place. Vendor finance exposes the seller to problems not involved in a sale handled by a bank or other conventional lender. In an economic sense, the higher risk justifies the higher reward a vendor financing deal may generate.

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