“Don’t panic” on housing market: principal broker

Fergal McAlinden
other

Prominent executive sees cause for optimism despite recent cooldown

Amid the furore over rising interest rates and a protracted slowdown in sales, there’s considerable room for optimism on the long-term future of Canada’s housing market, according to a well-known Ontario-based mortgage broker.

The country experienced a housing boom after the outbreak of the COVID-19 pandemic as Canadians rushed to take advantage of slashed interest rates and higher savings – but its frenetic pace has slowed in recent months as those borrowing rates shot upwards.

Still, Christine Xu (pictured), principal broker at Moneybroker Canada, told Canadian Mortgage Professional that she believed the outlook remained strong on the mortgage and housing front, with a cooling summer market not uncommon in pre-pandemic times.

“One factor is probably a seasonal adjustment. Every year during this time, in summertime and even spring, it’s a slower time,” she said. “People are taking holidays and things like that. So the seasonal [factor] is one thing that we have to take into consideration.”

Bank of Canada rate hikes have poured cold water on the country’s once-sizzling housing market in recent months, with its latest increase – a one-percentage-point jump – representing an even bigger move than most market observers had expected.

That oversized hike probably had a significant impact on the mindset of buyers and homeowners alike, Xu said, particularly as a more modest increase of 0.75% had been seen as a done deal by many analysts prior to the announcement.

Read next: Toronto home sales continue to plummet

Nonetheless, its effect on the psyche of buyers could fade, she added, as Canadians gradually adjust to the new reality of those higher rates.

“I think that 1% [increase] really had a huge impact, psychologically. The psychological impacts are always shorter-term – people have to get used to it,” she said. “That’s why my prediction is, after the summer and the next winter season, next spring everything will be going [back] to normal, because everybody takes it for granted the interest rate is higher.”

Lending rates remain low by historical standards, Xu said, with the rock-bottom rates that prevailed during the first two years of the COVID-19 pandemic an “abnormal” exception that would not have arrived in ordinary times. She also emphasized the real estate market as a long-term investment, with the return of higher immigration levels likely to herald a busier market in the future.

“For long-term investment, demand and supply always have to balance,” she said. “In a larger city like Toronto, there are so many new immigrants coming, and the younger generation are looking for housing. We still have huge natural demand.

“I don’t see the price really decreasing and never coming back [up] again. It’s just right now, we’re in a calmer market. I don’t even think we’ve reached demand-supply balance yet.”

For Xu, the current market represents plenty of opportunities – particularly for buyers who no longer have to contend with a frenetic bidding process and the high possibility of missing out if they don’t move quickly enough.

Read next: Vancouver market decelerates amid outsized rate hikes

Canada saw over 405,000 new immigrants become permanent residents in 2021 – and the federal government has recently announced ambitious plans to welcome a record number of new Canadians to the country in the next three years.

Its target for this year is more than 432,000 new arrivals, followed by 447,000 next year and 451,000 in 2024. Those rising numbers will play a key role in the continuing growth of Canada’s housing market – and that’s not to mention the fact that high levels of immigration from China, which is still enforcing strong public health restrictions and lockdown in certain areas, is likely to resume, Xu said.

“Right now, [China] still hasn’t opened the door for people to really live here,” she said. “Lots of students are still doing the online course – they’re not fully over here yet.

“I think when COVID really eases down, then we’ll see normal [immigrant] populations will come in, and in the major cities, that’s a huge demand contributor to the market.”

Each of those factors indicates that the current slowdown is unlikely to be a long-lasting one, according to Xu, who believes that much of the doom and gloom about the state of play is misplaced.

“Don’t panic,” she advised. “The real estate market is a long-term investment. So instead of panicking, we should say, ‘Enjoy this calmer market.’”

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B.C. Housing overdue for new leadership, says former premier

Susan Lazaruk
The Vancouver Sun

The next step for the new board is to hire a new CEO for the provincial housing agency that has a $2-billion annual budget and is responsible for solving homelessness and building affordable rental housing.

 Shayne Ramsay, CEO of B.C. Housing, has announced his retirement. Photo by B.C. Housing

Days after the resignation of B.C. Housing’s chief executive and weeks after the dismissal of its board of directors, there is little consensus about what the sweeping leadership changes mean for the provincial housing agency and its $2-billion annual budget.

 

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One of the fired directors says she worries that the board has been stripped of housing expertise.

“Nobody (on the new board) has any housing expertise at all,” said dismissed board member Penny Gurstein, the director of the Housing Research Collaborative at UBC, where she is professor emeritus. “It is really worrying me and I’m sure a lot of other people.”

But former premier Mike Harcourt said the new board has the needed “managerial and financial fire power” to tackle the complex housing file. 

Last week, Shayne Ramsay announced his retirement as CEO in a Twitter thread, stating he no longer has “confidence I can solve the complex problems facing us.”

B.C. Housing works with private and non-profit sectors and other government and community groups to provide housing, including subsidized housing, emergency shelter and rent assistance. And it licenses builders and undertakes housing research and education.

 

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Ramsay’s resignation, effective Sept. 6, comes about a month after the provincial government rescinded the appointments of seven board members.

They were fired a week after the NDP government released an 85-page report by accounting firm Ernst and Young, which examined B.C. Housing since its budget more than doubled in the last five years.

The report made 44 recommendations for potential improvements to operations, including the need for clearer governance roles, structures and processes, better policy direction, and improved collaboration with government.

Allan Seckel, a lawyer, was appointed the new chair, and Jill Kot, Sheila Taylor, Mark Sieben, Russ Jones, Doug White and Clifford White were named as new board members. Among them are a former deputy auditor-general of B.C. and four former or current deputy ministers.

 

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None worked in the housing field, but have mostly “accounting experience and government experience,” Gurstein said.

The old board reflected a broad expertise, including in housing, she said. Among the other six ex-members were a chartered accountant, a psychologist, an urban planner/professor, a youth advocate, a construction lawyer, and a developer.

“I see this as a signal that the government wants B.C. Housing to be under more scrutiny of the government,” said Gurstein. B.C. Housing “is supposed to be independent of government.”

The agency has a goal of building 114,000 affordable housing units over 10 years, and a new board makes sense, said Harcourt.

“I think the changes are good. You need the managerial and financial firepower that’s on the board,” he said. “I see it (board makeup) as very positive.”

 

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He said the previous board was “heavy on producing non-profit housing, but it was light on managing a budget of $2 billion.”

Harcourt said he expected the board to search for a CEO who has housing experience in for-profit development, one possibly with social or affordable housing knowledge. Ramsay’s total compensation in 2020-21 was $394,000.

“Sometimes people decide they want to do something for society,” he said.

Former NDP MLA Shane Simpson, who was the minister of social development and poverty reduction when he retired from politics in 2020, said leadership changes may affect the way B.C. Housing deals with non-profit and co-op housing providers.

“Ramsay’s style, generally supported by the previous board, allowed significant innovation and flexibility. Maybe too flexible, not sure,” he said in a text after an interview. “The new board, should they choose a CEO that more closely reflects their style, will change that culture. Swinging too far in a more bureaucratic direction will have its challenges.”

 

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“We wanted to address housing, not just homelessness, from the homeless to the middle-class housing,” said Gurstein. “That’s a pretty big mandate. We wanted to be creative and be inclusive. We were paying real attention to inclusivity. It just shocks me that we were dismissed in such an abrupt way.”

Simpson said he was “big fan” of Ramsay’s, but “bringing a new set of eyes to the executive is not a bad thing.”

He said B.C. Housing has to resolve the homeless crisis, but also provide affordable housing for those earning between $30,000 and $80,000 a year — the family with a $20-an-hour job and two children that needs a three-bedroom unit.

Vancouver Coun. Jean Swanson said B.C. Housing’s priority has to be to develop a “concrete plan to end homelessness,” including buying all the single-room occupancy hotels.

 

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And she said B.C. needs vacancy control, that is, an end to the practice of landlords being able to raise rents when a tenant moves out, and a rent freeze, to improve affordability for those earning $50,000. The recommended 30-per-cent maximum of income for housing would mean those earners would pay $1,250 for rent.

“(Social) housing needs to be more dispersed (among other types of housing) to help people stabilize,” said long-time Downtown Eastside worker Judy McGuire. “There are different models that work well, like the smaller model, which tends to provide better support” to those in need.

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Kamloops multi-family rental sells at $176,923 per door

NAI Commercial
Western Investor

This 13-suite rental apartment building, centrally located near shopping and transit, sold for $2.3 million.

Property type: Multi-family rental

Location: 1221 Tranquille Road, Kamloops, BC

Number of units: 13

Sale price: $2.3 million

Per door price: $176,923.

Brokerage: NAI Commercial, Vancouver

Broker: Michael Marckwort

© 2022 Western Investor

Rate hikes make themselves felt in the Fraser Valley market

Ephraim Vecina
other

The impact was especially apparent in home sales activity and average prices

The Fraser Valley real estate market saw sales activity drop for the fourth straight month in July amid sustained interest rate hikes, according to the region’s housing industry association.

The market’s home sales saw significant declines of 22.5% monthly and 50.5% annually in July, accompanying drops of 28.4% monthly and 1.9% annually in the region’s new home listings (total of 2,385), data from the Fraser Valley Real Estate Board showed.

However, active listings (total of 6,413) remained relatively unchanged from June and were up by 30.9% from last year. This brought the market into balanced conditions for townhomes (sales-to-active ratio of 18%) and detached properties (12%), while slightly favouring sellers in the apartment segment (28%).

Read more: BC’s speculation tax to cover six more regions

Prices also declined for the fourth consecutive month, particularly among detached residential properties, which saw their benchmark price shrink by 3.5% from June to around $1.594 million. This is despite the region’s average residential price posting an 18.1% annual increase.

“It is important to keep in mind that real estate is and always will be an asset with considerable upside over the long-term,” said Sandra Benz, president of the FVREB. “As prices come down from the highs of recent months, there are opportunities for buyers who have been waiting to re-enter the market and shop for the right property.”

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Montreal housing market: Where are house prices headed?

Fergal McAlinden
other

The city has witnessed continued price growth despite the impact of rate increases

While Quebec’s housing market hasn’t proved immune to the national slowdown of recent months, house prices in the province appear to have remained robust throughout that adjustment.

Second-quarter sales across Quebec declined by 14% compared with the same period last year, according to data released in July by the Quebec Professional Association of Real Estate Brokers (QPAREB) – although home prices surged between Q1 and Q2.

The median price of a single-family home in the province sat at $448,694 in 2022’s second quarter, the association said, a spike of more than $30,000 compared with the previous quarter and up by 20% over the same period last year.

Notable price growth was also registered in Quebec’s condo market, with the median condo price jumping by $16,000 compared with the previous quarter and posting a big increase from Q2 2021.

Those gains will likely be short-lived, QPAREB said, as prices begin to level off in line with further interest rate hikes. Still, the residential real estate market in the province has, to date, proven something of an outlier from the “rapid process of market rebalancing” observed in provinces including Ontario and British Columbia, according to the association.

Read next: What’s next for Canada’s housing market?

The Montreal Census Metropolitan Area (CMA) proved especially resilient in the face of that rising-rate environment: prices for single-family homes edged up $20,000 in Q2 over the previous quarter, also posting a 15% increase over the same point in 2021.

That performance arrived even as sales across all categories in the Montreal CMA declined by 13% year over year and active listings moved into positive territory for the first time in about seven years.

Terry Kilakos (pictured top), president at Montreal-based North East Real Estate & Mortgage Agency, told Canadian Mortgage Professional that the continuing strength of home prices in that city surprised many would-be buyers who had decided to wait until property values declined before entering the market.

Some prospective buyers who had been preapproved were ready to make offers in January and February but decided to hold off in the expectation that prices would be much more favourable in the subsequent months, he said.

“If you look at markets like Toronto [and] maybe even some pockets of BC, a lot of the homes have dropped in value,” he said. “But Montreal hasn’t. The Montreal market is still relatively strong. Houses are still going over, [and] there are still people looking right now.

“It’s just you’re not getting as many offers so whereas the house might stay on the market for a couple of weeks instead of one weekend, generally the houses are selling – and they’re selling over asking.”

Homeowners are, of course, as preoccupied in Montreal about the impact of the Bank of Canada’s rate-hiking cycle as elsewhere, Kilakos said. That’s where he believes mortgage brokers have a duty to provide strong guidance and detailed information to their clients to make sure they understand precisely what those rate increases entail.

Read next: Foot traffic is at a pandemic high across every major city

“There is concern, especially with the clients that ended up taking variable-rate mortgages. It is something that they’re obviously concerned about, seeing interest rates go up,” he said. “These are the fears that a lot of people are having right now.

“So we just have to… run the numbers at the end of the day and have them actually look at things properly, calculate things properly, and then based on that, make a proper, educated decision.”

Part of the reason home prices have remained so stable in Montreal could be that buyers have realized they’re not likely to plummet, Kilakos said, even despite the impact of higher borrowing rates.

Montreal buyers also have the advantage of a much more affordable market than the country’s frothiest housing markets, with homes in the area selling for a fraction of the cost of Toronto or Vancouver properties despite it being Canada’s second-most-populous urban area.

“A couple of years ago, you’re able to buy a house in Montreal for, let’s call it between $400,000 and $500,000,” Kilakos said. “And that same house is [now] $700,000. But relative to Toronto, it’s nothing.”

Despite the continued strength of home prices in Montreal, QPAREB said they looked set to moderate in the coming months, as demonstrated by the rise in active listings.

“Home prices are showing signs of slowing down,” the association said, “clearly affected by the rapid rise in financing costs, putting an end to a frenzied rise in prices and helping to change the mindset of buyers and sellers regarding market developments.”

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A ‘Weird Recession’ and a ‘Rental Society’: The Industry in Transition

Jesse Williams
other

 Another year, another period of unprecedented transition in real estate. Although agents, brokers and everyone involved in the housing market have always been forward-looking as a rule, the last three years or so have required a unique understanding and focus on both the future and the big picture.Recently, the National Association of REALTORS® (NAR) held their annual Forecast Summit, attempting to alleviate at least a little of the anxiety around all the massive changes on the horizon for real estate—from cratering home sales to a recession to institutional investors “gobbling up” the single-family market.“I think it’s really helpful to understand the market, how to understand consumer behavior and how that’s shifted a little during the pandemic,” said Dr. Jessica Lautz, VP of demographics and consumer insights for NAR. “But a lot of that is an acceleration of past trends that we have been seeing.”Much of what Lautz and NAR Chief Economist Lawrence Yun covered in their presentation are indeed issues that anyone paying attention to real estate will be at least somewhat familiar with. But breaking down exactly where the data is pointing—how fast things are moving, where trends are resilient versus transitory—was surprising.One notable trend is that homes are still disappearing quickly. Spending an average of 14 days on the market, according to Lautz, 88% of homes sell in under a month. This is despite a significant drop in the number of offers per home, plummeting from an average of 5.5 at the height of pandemic-bidding warfare to 3.4 in just the space of a couple months.“In some local markets, I know that’s laughable,” she said.But Lautz said that more than three offers is a great overall indicator as far as demand, and these offers are likely good ones.“We’re not talking about the bottom of the barrel here. That’s still pretty good,” she asserted. “Those are probably qualified buyers who are probably able to ratify that contract—finally, for many of them.”Yun added that some people still have a locked-in mortgage rate from before rates rose precipitously early this year, and are jumping to snatch up homes as other buyers—who might not have locked in a low rate—are getting priced out.Another trend that was a little uncertain was vacation home purchases, which spiked at the height of the pandemic, with 22% of all home sales from small investors (used for Airbnb or seasonal rentals) or second-home purchases. That has dropped significantly to about 16%.Something that has also worried many onlookers is foreclosure sales. As a housing market pullback accelerates, there has so far been no real increase in short sales or foreclosure sales, still at 1% (these sales made up 49% of the market at the height of the 2008 crash).“We’re really just not seeing that today,” Lautz said.From the granular level of how people buy and sell homes in 2022, Lautz highlighted the fact that virtual home purchases—buying a home without ever physically visiting the property—has remained steady, with 12% of buyers making a home purchase sight unseen, even as pandemic restrictions have waned.“I think what’s happening here is there’s still low inventory, but we also know migration trends are playing a part of this. If people are moving a long distance away, and they see that perfect home jump onto their MLS, they’re going to say, ‘You know what, you’re my REALTOR®, show me that home virtually,’” she said.On the same note, 85% of buyers are still looking for homes outside of city centers, and 34% want work-from-home amenities in their home, proving that remote work is a persistent trend. Lautz suggested that highlighting any kind of feature related to work from home in a listing would remain a great practice for listing agents.Yun, who focused on the big-picture economy, explained that the labor economy continues to behave in what he called a “bizarre” manner even as other major economic indicators have at least started to normalize post-pandemic.“In an environment with rushing mortgage rates, what will drive home sales is jobs,” he explained.Specifically, he pointed out how the number of workers who have seemingly permanently abdicated the workforce has remained stubbornly high, with 2 million people still on the sidelines even after stimulus payments subsided and industries reopened.“Help wanted signs are pretty much everywhere,” Yun says. “Theoretically, it is still almost a two-to-one ratio in terms of job openings to people who are unemployed.”He qualified this, however, by noting that many people are not finding the right job to match their needs, demanding higher pay or seeking a match for their qualifications. Construction job openings specifically have reached a record high, with advocates pinpointing both long and short term underinvestment in this industry.But Yun affirmed that having so many open jobs was “unusual” in a recessionary environment.“It’s a very weird recessionary condition—I don’t know if I want to play with the word.”An unequal regional distribution of jobs was another notable oddity of the current economy, according to Yun. Comparing what the market looked like right before the pandemic, different areas have experienced wildly different recoveries.“There is some variation. Generally speaking, Rocky Mountain states along with southern states have turned positive, while the rest of the country is struggling or almost getting back to normal but not there yet,” Yun said.In terms of the well-documented dive in home sales, trends seem to be pointing toward a consistent downturn, with five months of lower sales bringing the country just below where it was before Covid, according to Yun. Leading indicators are also negative, he added.“Essentially, some people are very uncomfortable with higher monthly payments, and other people simply don’t have the money,” Yun said.Inventory indicators are on the way up, and in tandem with some buyers being pushed out of the market, Yun said it was likely that buyers could soon “be more relaxed, look at three, four, five homes…just like the olden days.”The incredibly persistent trend of prices, still spiraling up despite these other falling metrics, could partially be explained due to the fact that list prices are high even if contract prices are falling.“That’s why you are getting this conflicting report where home sales are coming down but prices are hitting record highs,” he explained. “Sellers are looking at what their neighbor’s home sold for…and then they are essentially reducing.”Maybe the hottest topic that was not directly related to housing was the question of whether the country has entered, or is soon likely to enter, a recession, with several audience questions on that theme. Yun said it isn’t that simple, even though based purely on GDP, the economy is indeed in recession.“In 10 years, they will say whether we were in a recession or not,” he said.Besides a recession, something that was not covered by either Lautz or Yun, but was asked about by viewers is institutional buyers and investors. Yun waxed philosophical, wondering just how far big Wall Street-backed companies could transform housing in the United States as they “gobble up” single-family homes to rent them out. Investors make up 20% of all buyers, according to Yun, but that includes both big and small, mom-and-pop operations.“The numbers are a little hard to get as to true Wall Street-backed institutional investors, corporate landlords in a sense. But it is rising. It is a concern,” Yun said.At the very highest level, this trend—which has grown dramatically as big hedge funds and private equity firms see opportunities in real estate—could transform housing at a fundamental level, according to Yun.“I think the bigger question for society is, do we want to see an ownership society, or do we want to see a renter society? I think many people will say an ownership society is preferable, a way to build wealth,” he said. “Corporate investors, in a sense, are hindering the country from becoming a more ownership society.”

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Vancouver market decelerates amid outsized rate hikes

Ephraim Vecina
other

The region’s July housing activity was significantly slower than the 10-year average

The impact of the central bank’s outsized rate hikes has become starkly apparent in Vancouver, which saw a significant 22.8% monthly home sales decline in July.

“Metro Vancouver’s housing market has entered a new cycle marked by quieter home buyer demand and a gradual rise in the supply of homes for sale,” said the Real Estate Board of Greater Vancouver.

A total of 1,887 home sales were completed across the region last month, a massive 43.3% annual drop, the REBGV reported. This level was also 35.2% lower than the market’s 10-year average for the month.

Read more: Vancouver’s industrial segment remains a Canadian powerhouse

“Home buyers are exercising more caution in today’s market in response to rising interest rates and inflationary concerns,” said Daniel John, chair of the REBGV. “This allowed the selection of homes for sale to increase and prices to edge down in the region over the last three months.”

The overall number of homes listed for sale in Greater Vancouver stood at 10,288 units in July, representing a 4.4% annual increase and a 1.3% monthly decrease. The composite benchmark price across all residential property types is currently $1.2074 million, up by 10.3% annually and down by 2.3% monthly.

“After two years of market conditions that favoured home sellers, home buyers now have more selection to choose from and more time to make their decision,” John said.

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Toronto home sales continue to plummet

Fergal McAlinden
other

One of the country’s hottest markets is experiencing a protracted slowdown

 A marked cooldown in one of Canada’s once-hottest housing markets continues to gather pace, with home sales in the Greater Toronto Area (GTA) falling by 7.3% last month on a seasonally adjusted basis compared with June.

The 4,912 sales recorded in July represented an eyewatering drop of 47% from the same month last year, according to the Toronto Regional Real Estate Board (TRREB), which provided the update on Thursday morning.

The seasonally adjusted MLS average price of a home in the GTA also fell, with a 2.6% drop in July (to just over $1.1 million) marking the fifth consecutive month that figure has slipped. The latest decline means that it has now fallen by over $176,000 since hitting its peak in February.

TRREB said there had been an uptick in yearly price growth of less expensive home types such as condo apartments as buyers continue to react to the shifting landscape and rising-rate environment.

Read next: Vancouver market decelerates amid outsized rate hikes

New listings posted a small yearly decline, by 4% over the same time last year, with the real estate board indicating its expectation that that trend could continue throughout the second half of the year and the beginning of 2023.

The organization’s chief market analyst Jason Mercer highlighted the importance of continuing to focus on housing inventory in the current climate, noting that a tight labour market was likely to result in the GTA population’s continued growth.

“Despite more balanced market conditions resulting from rapidly increased mortgage rates, policymakers must continue to take action to boost housing supply to account for long-term population growth,” Mercer said in remarks accompanying the release of the new figures.

“With savings high and the unemployment rate still low, homebuyers will eventually account for higher borrowing costs. When they do, we want to have an adequate pipeline of supply in place or market conditions will tighten up again.”

The news arrives a day after it was revealed that another of Canada’s most frenzied housing markets, Vancouver, saw its home sales fall by nearly 23% on a month-over-month basis in July.

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TD launches new, streamlined process for brokers

Ephraim Vecina
other

Submitting referrals for the bank’s protection plans is now more efficient

TD has announced a new process for brokers with an enhanced digital referral system for its TD Protection Plans products.
The new system will save brokers valuable time and effort, as well as “strengthen their relationships with their clients,” TD said.
“And how much time will they save? A considerable amount given the new rapid referral process can take only 60 seconds,” the bank said.
“Brokers simply refer their customers to TD and our specialists will take care of the rest to ensure customers are well informed about their TD Protection Plan options, which include TD’s popular Mortgage Protection Plans. These plans provide Canadians with peace of mind in the knowledge their mortgage can be reduced or paid off in the event of an unforeseen covered health event.”
Read more: TD announces Q2 results
Submitting an eligible customer can be done online through TD’s Protection Plan website or via the TD Mortgage Solutions portal.
“Fill out the customer’s information, read the disclosures to the customer, obtain their consent(s) and submit the form,” TD said. “Refer your customers to TD and our specialists will take care of the rest.”

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Reverse mortgage boom could be on the way, report suggests

Fergal McAlinden
other

Strong growth potential also comes with heightened risk
The reverse mortgage market in Canada still lags behind those of other countries including Australia and the United Kingdom – but it has potential for “strong growth” in the coming years, according to a recent report.
Global credit rating agency DBRS Morningstar said in its latest commentary that Canada had a total reverse mortgage volume of under $6 billion as of 2022’s first quarter, with originations highly concentrated in metropolitan areas including the Greater Toronto Area (GTA) and Greater Vancouver Area (GVA).
Factors including Canada’s aging population and rapid home price appreciation in recent years mean the reverse mortgage market has ample room for growth, the report said, although it also highlighted the higher risk associated with those products because of “unique features” such as no defined term and no monthly repayment of principal and interest.
That means lending institutions that cater to reverse mortgages are likely to maintain “strict underwriting standards and conservative lending policies,” to ensure mitigation of those risks, according to DBRS Morningstar.
Property valuation and appraisals are especially crucial in determining the initial mortgage amount for a reverse mortgage, the report said, as well as for maintaining asset quality and capital buffers to absorb unanticipated losses, for instance during a downturn.
That’s because repayment risk heightens when the housing market slips, part of the reason that Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI) has indicated that it expects reverse mortgages to be limited to a maximum loan-to-value (LTV) ratio of 65% or under.
Read next: New HELOC regulation – what do brokers need to know?
Ken Lindsay (pictured top), broker of record at the Hamilton-based Mortgage Financial Corp. and a reverse mortgage specialist, told Canadian Mortgage Professional that perceptions around the product appeared to be shifting in Canada, with many homeowners viewing it as a means of accessing equity while remaining in their long-term property.
“People are starting to understand what it is now,” he said. “I can say for the last 10 years, people have been saying, ‘But I have all this equity.’ Equity, at one time, was an extremely good word when I first got in the business. Now, it tends to be a bad word unless you’re talking about a reverse mortgage.
“Like I say, it’s an equity mortgage. If you don’t want to make payments, you don’t have to. If you want to make payments so that it doesn’t go into reverse, that’s an option as well.”
As with any mortgage product, Lindsay emphasized the importance of suitability and making sure that a customer is fully aware of the features of the option, what it entails and their obligations under the agreement.
Those so-called “lifetime loans,” the DBRS Morningstar report highlighted, have a bullet repayment that becomes due upon a trigger event, consisting of principal and accrued interest. That could be upon sale or transfer of the property, a period of time after the final remaining borrower moves into a long-term care facility or retirement residence, or some time after the last borrower passes away.
Read next: Analysis: Reverse mortgage borrowing trends persist
Interest rates are typically about 150-300 basis points higher than a home equity line of credit (HELOC) or conventional mortgage, with the borrower’s age “an important factor for underwriting and imposes longevity risk,” the report said.
The product is seeing increasing uptake among older Canadians, Lindsay said, because it can often represent a better option than a private mortgage. “It’s cheaper than private,” he said.
“It’s geared for someone that has irregular income, needs better cash flow, and maybe could be for term or long-term payment relief – and allows them to avoid moving in with kids or moving out to a nursing home. For those reasons, it’s very popular.”
DBRS Morningstar said that the fact that reverse mortgages usually had a relatively low LTV meant that lenders in that sphere had a buffer against collateral value risk.
The majority of Canada’s reverse mortgages being located in parts of Ontario and British Columbia that have seen spectacular price appreciation also has its benefits and pitfalls, the report suggested.
“This rapid spike in prices [over 50% in some areas since the COVID-19 pandemic began] makes recently originated reverse mortgages riskier in a severe real estate market downturn,” it said, “but provides increased protection for older vintages.”