New equity mortgages base loan on property’s value rather than borrower’s credit

Fiona Anderson
Sun

Daren and Elaine Sanders of Steveston are taking their time while investigating buying an investment property in Vancouver for the potential capital gains. Photograph by : Ward Perrin, Vancouver Sun

With real estate prices continuing to climb, and new mortgage options making buying property possible again, the time for investing in a rental home may never be better.

“It certainly is much easier now [to invest in real estate] than it’s been, I think, ever,” said Steve Moffitt, a senior mortgage consultant with Equimac Mortgage Centre.

Moffitt says lenders are getting more “aggressive for the business” and are coming up with new products to attract borrowers.

One new product is the equity mortgage where a lender bases the loan on the value of the property, not the credit of the borrower, Moffitt said. From a borrower’s perspective, with the emphasis on equity rather than income, increasing property values means people who bought a few years ago are now sitting on a significant amount of money that can be taken out and invested in a rental property, Moffitt said.

A purchaser who paid between $150,000 and $250,000 three years ago now probably has a property worth $300,000 or $350,000, Moffitt said. So there’s at least an extra $100,000 in equity “that can translate easily into two other rentals,” he said.

“You’ve typically only got a certain amount of equity to work with, so the less you put down the more properties you can purchase and the more market value you can gain,” Moffitt said. “The best strategy if your service ratios will allow for it is high-ratio [mortgages] using other people’s money … and buying more in an active market.”

With current low rates, increasing the mortgage on a residential property to use for a down payment on a rental won’t translate into significantly larger payments, especially if the amortization period is lengthened, he said.

In March, the Canada Mortgage and Housing Corp. began insuring 30-year mortgages on residential properties and Canada’s other mortgage insurer, Genworth Financial Canada, agreed to insure 30- and 35-year mortgages. The longer periods would come with an increased fee that would likely add only a few dollars to the monthly payments, said CMHC’s director of product development and strategic direction, Steve Mennill.

CMHC will go even further for rental properties, insuring mortgages for up to 40 years with only 15 per cent down, Mennill said.

While CMHC charges an additional premium for every five years added to the term of the mortgage, borrowers find they recoup that money through lower interest rates, Mennill said. And the interest is tax deductible.

“When it’s an investment property … it’s in your interest to keep your mortgage loan higher for longer because you can write off your interest payments against the income, which you can’t do as a homeowner,” Mennill said.

CMHC insures mortgages for rental properties to make rental housing accessible, Mennill said.

Daren Sanders and his wife Elaine are thinking of taking the plunge and investing in a rental property as a way to further diversify their investment portfolio.

“At this point, from the perspective of investing, it’s a question of what do you do after you’ve topped up your RSPs,” Sanders said.

He was unaware of all the financing options.

“Certainly that would be something to factor in,” he said.

The Steveston couple are motivated by the potential for capital gains from a rising market, as well as the rental income, Sanders said.

“The obvious [investment] is residential downtown, because it’s a hot market. But the other side of that is it’s a hot market, so it’s expensive,” Sanders said.

What if there is a correction? Sanders asked.

So he and Elaine are taking their time looking around before jumping in.

Certified financial planner Biljana Manojlovic said the Sanders’ cautious approach is the right one.

There has been such a phenomenal real estate boom in the last few years with double-digit gains that real estate investing looks very attractive right now, Manojlovic said. So a lot of investors are looking for a quick fix rather than a long-term strategy. But people have to keep in mind there is no guarantee that these double-digit returns will continue.

“Real estate as an investment is very attractive because it appreciates in value,” Manojlovic said. “[But] the key to real estate investing is taking risks one can afford and not overstepping your financial means.”

“You need to be prepared if [the market] turns around,” she said. “Will you be able to service that debt?”

Owning a rental property makes sense as part of diversified portfolio if you already own stocks and bonds, she said.

“Does [real estate] have a place? Absolutely — for the right type of investor who understands the risks,” she said.

Diversification is key, said Adrian Mastracci, investment counsel with KCM Wealth Management.

“If you just have a property here in Vancouver you’ve got one property, one locale and you’re at the mercy of whatever happens in the local market,” Mastracci said.

A more diversified approach to getting into the real estate market may be to buy shares of a company that owns real estate or investing in a real estate income trust, he said.

Baskets of REITs are also available for even more diversification, he said.

“People that have done well in real estate will tell you they have had a diversified portfolio,” Mastracci said. “Sometimes they can make it on one or two properties, and it’s wonderful when they do.

“But if you’re in that local marketplace and that market turns against you, it’s a tough one.”

© The Vancouver Sun 2006

In B.C., the average cost is up 22% in a year

Eric Beauchesne
Sun

Large price increases for homes in British Columbia, Alberta and Ontario are behind a national surge in real estate sales, with the average selling price of a Canadian home last month rising nearly four per cent to a record $268,215, the Canadian Real Estate Association reported Thursday.

The national price jump, the second steepest increase in 15 years, left the average selling price up 12.3 per cent from a year earlier.

In British Columbia, average residential prices provincewide climbed to $380,420 in February, a 22.1-per-cent jump over the same month last year. Alberta posted a 23.1-per cent jump to $256,125 while prices in the Northwest Territories climbed 24.5 per cent to $307,813.

The overall housing market remains hot, and is hottest in Western Canada, said association chief economist Gregory Klump.

“A shortage of homes available for sale and the continuation of strong resale housing demand in Western Canada are resulting in substantial price increases there,” Klump said.

He added that part of the surge in prices may have been because of a larger proportion of more expensive homes in the mix. Month-to-month changes in the average selling price can be volatile, he noted.

The seasonally adjusted number of homes that changed hands in February edged up 0.2 per cent to 41,555, the fifth highest monthly level on record, as increases in sales in Ontario and Quebec more than offset a 1.1-per-cent drop in British Columbia.

Sales volume for the first two months of the year was running 17 per cent above the same period last year.

The value of sales in February was $11.2 billion, up 1.5 per cent from January and an all-time high, with new records being set in Alberta, Manitoba, Ontario, Prince Edward Island and Newfoundland, and all-time highs for the month of February in all the other provinces.

“Although the national resale housing market has so far shown few signs of slowing, rising interest rates and home prices are expected to gradually slow resale housing market activity this year . . . towards a soft landing,” Klump said. “We do expect that affordability will continue to erode.”

Earlier this week, RBC reported that its index of housing affordability deteriorated at the end of last year to its worst point in a decade. The index, based on the amount of pre-tax income needed to cover the costs of homeownership, rose to an average of 37 per cent from 35.6 per cent in the third quarter, with the index as high as 57 per cent in Vancouver.

The real estate association expects the benchmark five-year mortgage rate of 6.3 per cent will rise this year by no more than half a percentage point from its current level.

“Given that consumers can still negotiate discounts off the posted rate, rates this year will remain at very good levels for housing markets,” Klump said. “It’s just that the increase in administered lending rates, which are tied to the bank rate, will slow down consumer spending.”

Bruce Maitland has a reputation as a tough negotiator

Frances Bula
Sun

VANCOUVER – Bruce Maitland has been the City of Vancouver’s master real estate manager, tough negotiator, co-parent of the city’s Southeast False Creek project, and fierce guardian of the now $1.3-billion property endowment fund for 20 years.

But he’s decided that it’s time for him to move on, making him the third top-tier Vancouver administrator to announce his retirement in the past two months.

The city’s two co-directors of planning, Larry Beasley and Ann McAfee, announced their departure in February.

Maitland, 60, was less well-known outside city hall, but inside he was seen as the person who was responsible for the city’s ability to pull off some unusual accomplishments.

“The city has had some tough situations and Maitland would go to work and, all of a sudden, up would come a deal,” says former mayor Philip Owen, who was on council when Maitland started pushing to assemble land in southeast False Creek, which was then a forgotten zone of old industrial sites. “He was very tough. The industry people used to say that he would squeeze the last nickel out of them. He looked upon [the city’s assets] as if it was his own money.”

Former mayor Larry Campbell also praised him: “I think he’s one of the reasons the city is in such good shape.”

Maitland, whose official title is manager of real estate services, said one of the things he’s proudest of is that Vancouver never once lost an opportunity to get federal or provincial money for social housing because it didn’t have any land available, as other municipalities have.

He shows the greatest glee when he talks about the great deals he got for the city. Among them: the recent purchase of a building on Boundary Road for $24 million that the Vancouver Olympic organizing committee will use (now assessed at $36 million); the new library building where he got the province to build two floors and turn them back over to the library in 20 years, as well as getting the federal government to pitch in with building an attached tower; $24 million for the old library building at Robson and Burrard, plus saving the heritage building by using a new strategy he came up with — imaginary floor space that owners of heritage buildings could get from the city and sell off.

Maitland, Beasley and McAfee are part of a flood of senior city staff who could end up leaving in the near future.

Maitland’s retirement, which will take effect June 9, hasn’t been officially announced yet, nor has his replacement.

© The Vancouver Sun 2006

No slowdown in demand showing across region

Ashley Ford
Province

It is no surprise record-high house prices are forcing buyers further afield, but there is no lessening in first-time buying demand, says Peter Simpson, CEO of the Greater Vancouver Homebuilders Association.

“While I certainly agree with the numbers that show buyers flocking to places like Abbotsford, Chilliwack, Mission and Squamish for more reasonably-priced housing, there is also clear evidence that first-time-buyer interest is as intense as ever,” he said yesterday.

There is an intense and growing level of both condominium and single-family housing activity going on in these areas with more affordable prices being the magnet, Simpson says.

“I see this trend continuing with buyers going farther afield to acquire an affordable home, but despite this I foresee little change in demand across the region in the immediate future.”

Simpson said the fact the association’s annual seminar for first-time buyers is already practically full “simply proves to us there is no slowdown in first-time-buyer demand.”

The seminar, April 4 in the Guildford Sheraton Hotel, attracts some of the top real-estate professionals, who dole out free advice to potential buyers. It has already attracted over 700 registrants and that response is a strong as it was a year ago, Simpson says.

Speakers include Cameron Muir, senior market analyst, Canada Mortgage & Housing Corp.; Ken Cameron, chief executive officer, Homeowner Protection Office; Jason Neziol, regional director, Genworth Financial Canada.

Also participating are Bill Niblett, residential mortgages manager, TD Canada Trust; Gregory van Popta, associate, McQuarrie Hunter Barristers and Solicitors; Rick Valouche, president, Real Estate Board of Greater Vancouver; and Tom Reeves, director of home warranty operations, Lombard General Insurance Co. of Canada.

Another key indicator of market strength will come this weekend when a rare three-acre waterfront building site with 63 metres of Fraser River frontage in Fort Langley is auctioned off to the highest bidder.

It is one of the last undeveloped, premium building sites in Fort Langley.

The land, assessed at $582,000, is expected to sell in a matter of minutes. “Selling homes by auction is a growing real-estate trend. We expect the property to sell very quickly,” said Dan Bouchard, founding partner of Vancouver’s Able Auctions, who is handling the sale.

© The Vancouver Province 2006

Michael Kane
Sun

Soaring prices in the fourth quarter of 2005 pushed the cost of a standard two-storey home in B.C. to $435,000 or an affordability of 62.8 per cent of average household pre-tax income, making the province the most expensive in which to own a home, RBC Economics said Wednesday.

For other housing types, the RBC Affordability Index stood at 29.9 per cent for a standard condo, which remains the most affordable housing type. A standard townhouse is next at 43.2 per cent, followed by a detached bungalow at 54.9 per cent.

In Vancouver, rapid price gains, slower household income growth, higher mortgage rates and increased utility costs all contributed to eroding affordability across all housing types, RBC said.

Housing affordability for a two-storey Vancouver home was pegged at 64 per cent of household income, detached bungalows slipped to 57.5 per cent, while condos hit 29.4 per cent and townhouses reached 43.6 per cent.

The decline in affordability spanned all provinces and all major cities, with the largest deteriorations in B.C. followed by Manitoba and Alberta.

RBC anticipates that affordability will continue to erode as the economy continues to boom and strong in-migration persists. Land shortages coupled with labour and capacity restraints will intensify demand for homes and are expected to continue to drive price appreciation.

The higher home prices combined with rising mortgage rates are expected to slow British Columbia’s booming real estate market by the end of this year.

By 2007, the erosion of affordability will reduce demand and the market will trend to more balanced conditions, said Cameron Muir, senior market analyst with Canada Mortgage and Housing Corp. in Vancouver.

“We are not expecting any kind of crash but we are expecting prices to level off rather than grow at double digit rates.”

Price growth across B.C. is expected slow to about 10 per cent this year, compared to 15 per cent in 2005, said Helmut Pastrick, chief economist of the Credit Union Central of B.C.

However, Pastrick sees the market holding up in 2007 and prices continuing to rise about seven per cent.

“Affordability will continue to worsen over the next year or two,” he said.

“If you look back at previous housing market upturns, we have always gone through this kind of situation where prices have risen substantially and we wonder how long it can go on. It seems to go on until something quite negative happens in the external environment and, in my view, the external environment isn’t going to be negative for the next couple of years, if not longer.”

CMHC’s Muir said affordability measures are climbing to levels not seen since previous market peaks.

“When we combine the price increases we have seen over the past few years with the expected increase this year and gradually rising mortgage rates, it is going to begin to impact demand in the marketplace by the end of this year,” Muir said.

While the markets in British Columbia and Alberta continue to power forward, RBC expects the pace of demand for new and existing homes in the rest of the country to slow moderately over the next two years because of the decline in affordability.

© The Vancouver Sun 2006

Housing’s share of pretax income highest in decade

Ian Austin and John Colebourn
Province

Vancouverites spend more on housing than anyone else in Canada.

A new RBC Economics study found that the city’s residents spend an average of 57.5 per cent of their pretax household income to purchase a detached bungalow.

That number — the highest in a decade — far outweighs other cities across Canada.

In Toronto, the second-most expensive city, residents spend 42.7 per cent of their gross income on detached housing, followed by 35.6 per cent in Calgary, 34.1 per cent in Montreal and 33.1 per cent in Ottawa.

In her 18 years of selling real estate, Vancouver realtor Brenda Boyle has seen the market through good and bad times.

Right now, she wonders where the red-hot market is going in Vancouver and who really will be able to afford a home, as prices continue to be unrealistic for many average wage-earners and first-time buyers.

“Homes have gone up drastically in the last two years, and it’s driving everybody out of the city,” said Boyle, who works for Coldwell Banker Premier in Vancouver’s West End.

“The prices people are getting continue to astound me,” she said. “Is it going to end?”

Those who can afford a down payment, she noted, often have the help of family.

“I think it is the baby boomer generation encouraging their kids to get into the real-estate market,” she said.

Paul Fenney, a mortgage broker with Home Loans Canada, calls the market “crazy right now.”

Fenney said high real-estate prices have some of his clients “unable to buy where they want to live.”

“The complaint I hear from people is they can’t purchase the home they want,” he said. “It’s outside their qualifying budget.”

And if people are just scraping by now with big mortgages, Fenney warned that there could be a big reality check in the coming years as they go to renew and rates are higher, as economists predict.

“Five years down the road when their mortgages come up for renewal and the rates are significantly higher and their incomes have gone up only modestly, people are going to be very stressed,” said Fenney.

At the Urban Futures Institute, executive director David Baxter said people who buy in the Lower Mainland are getting much more than just a home.

“In buying a home in the Vancouver area, part of what you’re buying into is much better job and income prospects,” he said. “The lifestyle and quality of life are in that [home] value.”

The B.C. picture is no more encouraging, said RBC.

“The two-storey home took up 62.8 per cent of a typical household’s pre-tax income in the final quarter of 2005, costing a whopping $435,000,” RBC reported.

“The closest runner-up was Ontario, where two-storey homes cost $325,000.”

RBC sees no break in B.C. prices: “The significant deterioration in affordability is expected to continue as the economy continues to boom and strong migration to the province persists. Land shortages coupled with labour and capacity constraints will intensify demand for homes and [are] expected to continue to drive rapid price appreciation across the province.”