Despite pandemic, Canadians spending extravagantly on homes

Neil Sharma
Canadian Real Estate Wealth

Purchasers are spending money on more expensive homes in Canada’s biggest cities and it’s trickling down the ladder, making housing more prohibitive for the people most affected by the pandemic.

“Existing home sales have shifted towards more expensive housing types in Vancouver, Toronto, Ottawa and Montreal and away from generally less expensive apartment condominiums and attached dwelling,” said a new report from the Canada Mortgage and Housing Corporation. “These markets have also seen a shift in the distribution of sales towards higher price ranges.

“This shift likely reflects the uneven distribution of the economic impacts of the pandemic, with higher-income households able to maintain their income through adapting to work from home. In contrast, those employed in lower-paid industries were less able to adapt to pandemic conditions so that, in combination with a sharp decline in new migrants to Canada, relative demand for less expensive housing types fell.”

To be clear, demand from immigrants and lower wage earners for less expensive housing has greatly diminished, but relatively well-heeled Canadians priced out of the single-family market are climbing down the housing ladder and buying whatever they can afford. According to Robert Mogensen, a mortgage broker, their ranks are swelling.

“If they had their sights set on a single-family home, with the way pricing has gone on more modest ones, they’re being pushed down into townhouses and condominiums,” said Mogensen of The Mortgage Advantage. “I’ve had a number of clients you’d assume would have no trouble, like dentists, doctors and lawyers, who’d be looking specifically for single-family homes, not qualify. Maybe because they were getting started in their professions, but they’d have to start looking at townhomes, which are typically for middle-of-the-road income earners, and now it’s driving the price of townhomes up.”

Mogensen says the fierce competition at the higher end of the housing market—where he’s seeing multiple offers on almost everything, as well as “crazy offers with no conditions”—is trickling as far down as the condominium market.

“Buying activity for higher-end homes has picked up from where it was a year ago, and now it’s working its way right down the scale. The condo market is starting to heat up as well for exactly the same reason the townhouse market is.”

At the same time, the economic impact of the pandemic is disproportionately affecting younger Canadians and lower-income households, who are watching the cost of housing soar to new heights from the sidelines.

“Despite increased government transfers to these households, their exposure to negative employment effects meant they were less likely to purchase a home during the pandemic than other households,” said the CMHC report.

© 2021 Canadian Estate Wealth. All Rights Reserved.

Low interest rates, favourable exchange turn U.S. into hotspot

Neil Sharma
Canadian Real Estate Wealth

Savvy Canadian real estate investors have, for years now, known about real estate hotspots south of the border, and with the pandemic catalyzing interest rate cuts courtesy of both the Bank of Canada and the Federal Reserve, there’s arguably never been a better time to invest in the United States.

“Over the last two months, we’ve seen record-high requests for mortgage pre approvals from Canadians looking to buy real estate here in the U.S.,” said Alain Forget, RBC Bank’s director of business development. “A lot of Canadians are COVID- and winter-fatigued and they are getting ready to make a move, and of course the U.S. market in a state like Florida has a lot to offer.”

In fact, between March 2019 and March 2020, Canadians invested $9.5 billion in the American real estate, $4.75 billion of which was in Florida. RBC recently hosted a briefing outlook on the economy and determined that the Canadian dollar should remain at about $0.78-0.80 until mid-2021, at which time the U.S. dollar will return closer to $0.76.

“The currency exchange is one of the best at around $0.78-0.80, which is close to a 25% exchange and one of the best rates in the last three years,” said Forget. “When you factor those together, it’s another opportunity for Canadians to contemplate the U.S. market from an investment standpoint.”

The first step, however, is getting pre approved—RBC helps Canadians do it online within two or three days, and the letter is valid for 120 days

RBC helps Canadian investors plan out their investments. From helping them determine their monthly payments to coming up with a financial plan—as well as putting them in touch with experienced realtors and cross-border legal and tax experts—the bank saw a marked increase last month in interest from Canadians.

Unlike in Canada, where the Office of the Superintendent of Financial Institutions introduced a 200 basis point stress test called B-20, no such thing exists in the U.S. According to the National Association of Realtors, Canadians primarily purchase single-family homes, followed by condominiums, in the U.S. Florida, for example, is often chosen for its turnkey properties, Forget says, and it’s replete with popular investor markets, as are Arizona and California.

“The beauty of the Florida market is it offers everything at relatively affordable price points,” said Forget. “If your budget is starting at $200,000, there are a lot of inland options, and for ocean view condos you should expect to pay over $500,000.”

Florida is already a popular destination for east coast Americans who, because of COVID-19, are escaping large metropolises like New York. Forget says Canadians have expressed similar intentions.

For their part, Western Canadians have grown fond of Arizona and California, the former in particular for its affordability and robust market fundamentals. However, even for investors in Central Canada, where the metropolises offer diminishing return on investments, the United States offers densely-populated markets with strong fundamentals and no shortage of rental demand.

“Florida has a lot of different markets that still offer great returns, and even with prices rising slightly, they’re far more affordable than the GTA, Vancouver and Montreal,” said Forget. “Western, Southeast and Central Florida offer different lifestyles and buying opportunities—the latter is a hot market year-round for long- and short-term rentals. Depending on your investment objective, Florida has a lot to offer at a wide range of prices.”

© 2021 Canadian Estate Wealth

‘Massive’ security concerns surround vacant space

Frank O’Brien
Western Investor

— Rod Fram of Transpacific Realty Advisors: empty commercial space must be monitored, | Chung Chow

Metro Vancouver has more than four million square feet of vacant office space. Calgary has 12 million square feet of empty offices downtown alone – including entire towers – part of literally acres of offices, shopping centre and street-front retail space vacant across Western Canada since COVID-19 began.

Yet every commercial space sitting empty must be protected, preserved and ready for the post-pandemic reopening, whenever that arrives.

The first line of defence is making sure there is no water ingress and that the heating and rest of the HVAC systems keep operating, said Jim Mandeville, senior project manager, large loss, at Toronto-based FirstOnSite Restoration, which has offices across western Canada.

“Businesses are faced with a unique challenge this winter: hibernating commercial facilities left vacant and unattended,” Mandevillle said. “This is a problem business and property managers have never faced on this scale before.”

Due to COVID-19, many businesses are shuttered and workers are under stay-at-home orders, which leaves commercial space vulnerable.

“There is a critical need to make sure exterior pipes are drained and winterized to avoid frozen pipes, monitor plumbing issues, check insulation, inspect roof spaces and clear debris,” Mandeville noted. He added that this, ideally, means that someone trained in mechanical systems takes a regular tour of vacant premises to spot a problem before it results in expensive damage.

For instance, a water leak that could impact all space below it. A single broken window in a mixed-use development could affect the building’s entire HVAC system.

Break-ins, vandalism

But Mandeville added there is another danger for owners and tenants who have been forced to leave commercial space empty.

“Security is a huge concern right across the country,” he said, noting that break-ins, squatters, vandalism and graffiti have all increased during the pandemic.

Vancouver Police Department data shows 966 break-ins were reported in the city’s central business district in 2020, up 21 per cent from 2019.  Across the city, business burglaries hit a 10-year high of 2,789 last year. 

Mark Forward, vice-president, property management division, for Paladin Security, Vancouver’s largest security agency, said there was a sharp spike in downtown break-ins at the start of the pandemic, including thefts from shuttered retail outlets.

Forward said many businesses have since been “hardening the premises” with locks, hoarding, improved lighting, alarms, surveillance cameras and stepped-up security patrols. This, along with colder weather, has reduced break-ins, though vandalism and squatters remains a concern.

Forward said many property owners use remote monitoring, such as closed-circuit surveillance cameras, which he said can also be used to detect fires or flooding.

Rod Fram, president of Burnaby, B.C.-based Transpacific Realty Advisors, a property management firm, said he prefers “boots on the ground” security to keep vacant space safe. Fram, whose company primarily manages suburban properties, said security is not just a downtown problem.

“Even if you have a half-full building, you have vagrants showing up, sleeping in the entrance ways, discarding needles, dumping stuff on the property. Security is a massive problem.”

Fram said a recent tour of 30 commercial sites in the Fraser Valley, a mix of office and industrial properties, found most were operating with a skeleton staff. “Pretty well every single building had the front doors locked and you had to be buzzed in.” Other sites were completely devoid of people.

But it is vital to give the impression that a site is being monitored, Fram warned.

“Once people think a building isn’t being watched is when bad things happen,” he said.

He advises property owners to increase the number of visible, random foot patrols. Some retailers with valuable inventory, such as drugs or high-end fashions, have barred windows and use barriers to stop thieves from crashing vehicles through windows. One of his clients, a jeweller, has installed smoke machines that flood the space with an impenetrable fog to deter thieves.

Fram added that any property owner leaving space vacant must notify their insurance company and provide evidence that the property is being protected. “You can actually void your property insurance if you don’t take the necessary steps to secure it while it is vacant,” he said.

© Copyright 2020 Western Investor 

Are the days of low interest rates coming to an end for Canadian homebuyers?

Ephraim Vecina
Mortgage Broker News

 If the opinions of various observers are to be believed, five-year fixed mortgage rates will likely be on their way up if inflation pressures south of the border intensify.

Writing for Move Smartly, independent mortgage planner David Larock said that the Canadian five-year bond yield’s increase from around 0.5% to 0.65% last week “has lowered gross lending spreads (and, by association, lender profit margins) to well below their normal levels.”

So far, the only thing that is preventing across-the-board rate increases is the feverish competition among Canadian lenders.

“No-one wants to be the first to move higher,” Larock said. “Regardless, the dam will break very soon.”

The combination of steady vaccinations, a recently announced US$1.9-trillion pandemic relief package, and a resurgent economy has made the possibility of US inflation rising even higher “virtually guaranteed”.

“When that happens, more normal prices will take their place, causing the [consumer price index] to rise higher still (and the same phenomenon will occur in Canada),” Larock warned, adding that while both the US Federal Reserve and the Bank of Canada have repeatedly assured that they will not take these indicators as signals that inflationary pressures will intensify, “good luck convincing investors who are already primed for that outcome.”

James Laird, co-founder of Ratehub.ca and president of CanWise Financial, echoed these observations.

“The 5-year fixed rate in Canada reached its record low this past summer and has remained there since. This is about to change with lenders across the country announcing fixed-rate increases of between 0.1% and 0.2%. Any lender who has not yet announced changes to their fixed rates is expected to do so by the end of this week,” Laird said.

Laird added that should Canadian inflation ride the wave of optimism brought about by the federal government’s vaccine roll-out, “Canadians should expect fixed rates to continue on their upward trend.”

However, Larock isn’t convinced that the upward trend in bond yields will be permanent, citing “the repeated short-term run-ups over the last 10+ years as the yield dropped from 4.11% to 0.65%.”

More pressing dynamics are currently in play.

“Both the US and Canadian economies have seen their employment momentum stall out and that, not inflation, tops the Fed’s and BoC’s worry lists,” Larock said. “The US and Canadian economic output gaps (which measure the gaps between their actual outputs and their maximum potential outputs) are still the widest they have been since the depths of the Great Recession in 2008.”

Larock argued that any rise in inflationary pressures won’t materialize until those gaps narrow.

Copyright © 2021 Key Media

RBC reveals Q1 financial results

Ephraim Vecina
Mortgage Broker News

 Sustained strength is the running theme in Royal Bank of Canada’s (RBC’s) fiscal first quarter results, which show that net income grew by 10% annually to $3.847 billion.

The quarter ending January 31 saw net income increase by $601 million over the previous quarter, boosted by strong performances in the bank’s personal and commercial banking, capital markets, wealth management, and investor and treasury services.

“Results across our businesses benefited from strong volume growth, increased client activity and constructive markets, partially offset by the impact of low interest rates and higher expenses largely due to variable and stock-based compensation commensurate with strong results,” RBC announced.

The bank’s capital position remained “robust”, with a CET1 ratio of 12.5% “supporting strong volume growth and $1.5 billion in common share dividends paid.” RBC also boasted of a strong average Liquidity Coverage Ratio (LCR) of 141%.

RBC’s fiscal Q1 readings also exhibited lower provisions for credit losses, “largely resulting from releases of provisions on performing loans,” the bank said. “Lower provisions on impaired loans also contributed to the decrease.”

Dave McKay, president and CEO of RBC, said that the bank’s enviable momentum persisted amid the uncertain macroeconomic backdrop brought about by the COVID-19 pandemic.

“This is a reflection of the resiliency of our diversified business model, prudent approach to risk management, significant technology investments, and our colleagues’ dedication to our clients and communities,” McKay said.

Copyright © 2021 Key Media

Vancouver office space getting spookily quiet

Hayley woodin &Frank O’Brien
Western Investor

— Vancouver downtown office towers. | Chung Chow

More office space is expected to come available in what has been one of Canada’s tightest and most competitive markets for office space, but is now facing the highest vacancy rate in years.

Metro Vancouver’s office vacancy rate is expected to increase over the next 12 months, after more than doubling from 2019 to 2020.

CBRE’s latest real estate outlook forecasts the region’s downtown vacancy rate will reach 8.4 per cent in 2021, up from 5.8 per cent in 2020, and 2.2 per cent the year before.

More than 1.1 million square feet of new supply is also expected to hit the market this year.

Downtown Vancouver currently has nearly 600,000 square feet of sublease office space that has been returned to the market, part of a total of 1.5 million square feet of vacant offices, according to a recent survey by Avison Young.  

Across the entire Metro region, more than four million square feet of office space –  equal to 90 acres of carpets and concrete –  is currently empty.  Avison Young found that nearly 70 per cent of the vacant space is in Vancouver, Burnaby and Richmond towers.

“Canada’s largest cities have been disproportionately impacted [by COVID-19] as high population densities and dependency on mass transit created logistical challenges which reduced office occupancy,” the CBRE report stated.

While higher office vacancy rates is expected to persist throughout the year, CBRE forecasts that leasing activity will resume as vaccination rates climb, and business activity recovers.

The firm also projects that current allocations of square footage per employee could increase, as employers rethink space, health and safety requirements in the post-pandemic world.

In the meantime, the cost of premium downtown office space in Vancouver is expected to tick down by around 3 per cent to $43.10 per square foot this year, after holding fairly steady from 2019 to 2020.

© Copyright 2020 Western Investor

BMO reports strong fiscal Q1

Ephraim Vecina
Mortgage Broker News

Bank of Montreal has reported its financial results for the first quarter of 2021. BMO saw earnings of $3.06 per share, or net income of $2.04 billion significantly outstripping the $2.15 average projection of analysts in a Bloomberg survey. Higher trading revenue also drove a 36% annual growth in profit at BMO’s capital-markets division.

Overall earnings were boosted by the bank’s shrinking loan-loss reserves. BMO set aside less capital than expected to cover bad loans during the fiscal first quarter. The bank’s provisions for credit losses fell by 64% quarterly, ending up at $156 million. This was just one-third of what analysts previously estimated.

Additionally, BMO saw a $59 million recovery of provisions on performing loans, due to positive borrowing trends and “an improving economic outlook,” Bloomberg reported.

This recovery “materialized earlier than we had expected,” said Mike Rizvanovic, analyst at Credit Suisse Group AG. “Results were better pretty much across the board.”

Further forward momentum is extremely likely as the Canadian economy “is expected to rebound strongly in subsequent quarters as vaccines become more widely available and restrictions are relaxed,” BMO said in a shareholder report.

Copyright © 2021 Key Media

More bad news for owners of condos in Ontario

Clayton Jarvis
Mortgage Broker News

If owning a condo property in Ontario wasn’t already hard enough – price per square foot on new builds continues to climb, making one of the last “affordable” property types in the provinces even less so; COVID-19’s throttling of tourism has killed many investors’ income streams, leading many market-watchers to speculate around a looming mass sell-off; a lack of immigrants and students has forced the owners of countless condo units to lower their rents – it’s starting to get a little tougher.

A new report by rate comparison site LowestRates.ca has found that, as in British Columbia and Alberta, where a similar trend is already leaving a hole in condo owners’ wallets, condo insurance rates in Ontario are rising at what many would consider an alarming rate.

The site reported that, on average, condo insurance prices in Ontario were 8% higher at the end of the fourth quarter of 2020 than they were a year prior, and 3% higher compared to Q3.

The worry, according to LowestRates.ca CEO Justin Thouin, is that these significant quarterly increases will soon add up to equal the more painful hikes being paid in B.C., where condo insurance is 18% more expensive than it was at the end of 2019, and in Alberta, where condo insurance prices ballooned by 20% over the same period.

“Those prices have increased gradually quarter over quarter over quarter,” Thouin told Mortgage Broker News. “The concern is that what’s happening in B.C. and Alberta is now happening in Ontario, and that owners of condos could see their insurance continue to rise dramatically over the subsequent quarters and years.”

Such a sudden jump in insurance costs will seem extreme to some Ontarians, but it’s a trend already established in B.C., where Thouin said the price of condo insurance has been increasing consistently by between 4% and 7% per quarter. If the same rate of change takes place in Ontario, he said a 20% year-over-year increase in condo insurance costs isn’t out of the question.

Why are Ontario’s condo insurance prices rising?

Due to a number of factors, the exorbitant cost of extreme weather-related insurance claims chief among them, insurance companies’ loss ratios have taken a severe hit over the past few years. To compensate, the firms still offering insurance for condo buildings have begun increasing the deductibles these clients have to pay. Those costs, for buildings that lack the reserve fees needed to cover them, get passed on to individual condo owners.

Another significant problem, Thouin feels, is that the number of companies willing to insure condo buildings is dwindling.

“When you have fewer insurance companies willing to insure something, prices are inevitably going to go up. And that’s what you’re seeing in the condo insurance market,” he said, adding that today’s historically low interest rates are preventing insurance companies from generating income through the interest paid on their cash reserves, a historically reliable source of funds.

A building’s age also plays a factor in insurance costs, and there is no shortage of older condo developments in Ontario.

“Some of the infrastructure is getting older, so it’s breaking down. And with the values of basically all real estate in Ontario having increased over the past five or 10 years, it costs more when things break, so those repair costs are higher and the insurance companies have to pay out more in claims,” Thouin said.

Homeowners have so far escaped the pain being felt by their condo-owning brethren. In Q4 2020, the average cost of home insurance had fallen by 1% year-over-year in Ontario and by 4% in Alberta. It was 3% higher in B.C.

Implications for condo owners

Under normal circumstances, an 8% increase in condo insurance costs would not likely break the back of the average condo owner. But owners attracted to the condo market because of its affordability, who have had their income disrupted by the pandemic, may not have a lot of financial wiggle room to work with.

“This insurance increase certainly doesn’t come at a good time,” Thouin said. “Condo prices are down. Many condos are owned by people for investment purposes, and a lot of these people are highly leveraged, so anything that’s going to increase costs at a time when revenue is down could be problematic and could force these individuals to have to sell these condos.”

How can mortgage brokers help? Thouin said it’s important that condo owners are reminded that they have the option to compare rates and find an insurance plan that better fits their budget. Condo insurance may not even be on their radar when it comes time to trim a little fat from their monthly obligations.

“If, overall, rates are going up 8%, that’s just an average,” he said. “With some companies, you might be able to get a better rate than last year, whereas with others, your rate might go up 20-30%. You absolutely need to compare your options, because it could give you more money to put toward your mortgage.”

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Major projects salvaged B.C. construction in 2020

WI Staff
Western Investor

— Metro Vancouver home building has rallied after falling nearly 19 per cent in 2020. – Adera

Major resource projects, such as the LNG Canada export terminal at Kitimat, salvaged British Columbia’s construction pace in 2020, as home building plunged 18.9 per cent and commercial construction fell nearly 8 per cent from a year earlier.

B.C.’s inventory of major projects, those valued at more than $15,000,000, increased to $369.8 billion as of Q3 2020, up 4.8 per cent compared to the same period last year.

Nearly a third of the major projects are under construction, including LNG Canada ($36 billion) the Coastal GasLink Pipeline Project ($6.2 billion) and the Trans Mountain Pipeline (12.6 billion).
“B.C.’s major projects, driven by natural resource and infrastructure projects, provide thousands of both direct and indirect jobs and are spread across every region in the province. With employment and GDP expected to remain below pre-crisis levels in 2021, these projects will meaningfully increase economic growth and help pay down the large provincial debt incurred to support businesses and citizens through the pandemic,” said Lori Mathison, president and CEO of the Chartered Professional Accountants BC (CPABC).

The data is contained in the CPABC’s annual BC Check-Up for 2020.

Investment into both residential and private non-residential projects also cooled, and despite recent price gains, housing starts steeply declined. The overall number of housing units started was down by nearly a fifth (-18.3 per cent) through 2020 compared to the number started in 2019. Attached units, such as condos and townhomes, accounted for the majority of the decline, according to the CPABC.

Private non-residential investment, such as commercial and industrial construction, declined to $5 billion in 2020, representing a 7.9 per cent drop compared to the level of investment in 2019. 

“Economic uncertainty saw investors delay or cancel both residential and non-residential investment projects in 2020,” noted Mathison. “Over 7,800 fewer residential housing units were started compared to 2019, and over $430 million less was invested in private non-residential developments. This is worrying as construction has been a large factor in the province’s robust economic growth. “

She noted that both attached and detached starts rebounded from earlier in 2020, and the pace has continued into 2021.

According to Canada Mortgage and Housing Corp. total Metro Vancouver housing starts in January 2021, at 1,394 units, were up 36 per cent from same month a year earlier. A total of 44,213 units are currently under construction in Metro Vancouver, including 37,135 apartments – 15 per cent of which are rentals – , 2,994 townhouses and 3,464 detached houses.

© Copyright 2020 Western Investor