Any long-term predictions will be inherently unreliable – CMHC

Ephraim Vecina
Mortgage Broker News

As the COVID-19 pandemic continues to wreak havoc on global markets, Canada Mortgage and Housing Corporation (CMHC) said that the housing sector will see pre-recession prices only after three years, at the earliest.

CMHC Chief Economist Bob Dugan said that any long-term predictions will be inherently unreliable as the coronavirus is turning previously known quantities like income and immigration levels into “unknown variables.”

“But for Canada and for Ontario, I think, the best case we’re looking at … house prices getting back to their pre-recession levels, at the earliest, by the end of 2022,” Dugan said.

CMHC will thus be revising its earlier, far more optimistic estimates, according to chief executive Evan Siddall.

“We did, back in January, look at a pandemic scenario that was not as severe as this,” Siddall said. “And I’m sure that you’d understand that the realm of plausibility has expanded significantly as a result of all the experience we’ve had. … Tens of thousands of Canadians are having trouble meeting their mortgage commitments.”

However, the Crown corporation said that it has solid enough foundations in the interim to continue supporting affordability nationwide.

“In 2019 we have demonstrated commitment to the sound management of resources. This enables us to pay dividends to the government while helping to create new and affordable housing for Canadians as well as promote market functioning through our mortgage insurance and mortgage funding activities,” said Lisa Williams, chief financial officer with CMHC.

Siddall said that CMHC will be focusing on financial stability and risk management as the situation continues to shift.

“[2019] has put us on solid ground so that today, amid the evolving COVID-19 crisis, we are not losing sight of our ultimate goal: that by 2030 everyone in Canada has a home they can afford and that meets their needs,” Siddall said.

Copyright © 2020 Key Media

Alternative lenders sought by landlords in distress

Ephraim Vecina
Mortgage Broker News

The alternative lending sector is seeing a growing contingent of landlords seeking help as banks are turning them away amid the COVID-19 pandemic, according to analysts.

With the economic situation unlikely to normalize over the next few quarters, the market should brace itself for an increase in the volume of “distressed sales” of properties throughout much of the year, said Roelof van Dijk, CoStar Group’s director of market analytics.

“If you’re a landlord, and looking to refinance, you can’t get that,” van Dijk said in an interview with Reuters. “So you’re probably going to have to sell. But they’re also limiting new owners who might want to buy that space.”

Financing will prove especially difficult in the commercial sphere as higher rates in the alternative space would add more pressure to small- and medium-scale ventures, van Dijk said.

“To be eligible for the [rent relief] program, you have to prove that your tenant has had a dramatic loss of business, and is really suffering,” van Dijk said. “[But] then to go to the banks, and say, ‘Don’t worry, the tenant is going to continue doing business when we get out of this,’ is a hard sell.”

And this new status quo is not likely to shift any time soon; Dream Office REIT CEO Michael Cooper said that commercial landlords might need to hold on for at least three years before the financial system adapts to the impact of the coronavirus and yields more agreeable market conditions.

“People talk about what percent of rent they got in April. That was only two weeks of the economic shutdown,” Cooper said in an interview with BNN Bloomberg. “Really, 2022 is going to be a time frame where you can look at what the value of a building is and deal with it with confidence. … Hopefully it will work out over time, but it won’t be working out smoothly.”

Copyright © 2020 Key Media

Cash strapped owners seeking reverse mortgages in the land of COVID-19

Clayton Jarvis
Mortgage Broker News

As ready as Canadians are to move on from the past two months of COVID-19 coverage, disruption and distress, there are few signs that a return to normal is imminent. The Canadian Federation of Independent Business is predicting “tens of thousands” of job losses and the Conference Board of Canada recently surveyed the level of confidence among the country’s business leaders and found it to be the lowest ever recorded.

In such an unpredictable economic climate, where housing prices could just as easily spike as crash, Canadian homeowners in need of cash flow are finding it increasingly risky to leverage strategies that would have worked only weeks ago.

Most homeowners have been savvy enough to avoid selling their properties at a time when buyers, realtors and appraisers can’t even view homes in person. Sales declines in April in Toronto (67% lower than a year before) Edmonton (55% lower), Hamilton (63%) and Victoria (59%) illustrate both a colossal lack of demand on the part of buyers and a lack of seller faith in the market.

Homeowners who have diversified their portfolios with equities are facing a similar situation. With the S&P 500 already having lost approximately 15% in 2020, selling off shares into such an unstable market may be a less than ideal option, especially at a time when so much has already been lost.

According to Paul von Martels, Vice President of Prime and Reverse Mortgage Lending at Equitable Bank, it’s little surprise that a growing number of Canadians are now considering reverse mortgages as an alternative solution, one that removes many of the variables that can result in even further financial discomfort.

“Given the complexities and challenges presented by our current situation, it’s reasonable to expect a short-term shift in how Canadians access their property wealth,” von Martels says. “Homeowners and advisors alike may view reverse mortgages as a means to optimize equity preservation while ensuring funds are accessible for essential needs.”

Reverse mortgages, von Martels explains, address many concerns homeowners may be feeling. The lower rates – Equitable’s range from 3.94% to 4.84% depending on the reset term – appeal to virtually anyone, and the possibility of the process being successfully carried out remotely using e-signatures and virtual appraisals means clients dedicated to social distancing can still complete their transactions while contributing to the health of their communities.

“Clients really can source a reverse mortgage in a confident and convenient manner, entirely remotely,” von Martels says.

Demand for reverse mortgages is also being driven by one of the fastest growing segments of the population, seniors, who have found in reverse mortgages a financing solution that allows them to keep their homes, age where they’re most comfortable and ensure their and their families’ financial well-being.

“Longer-term, we believe the preference to age in place will grow relative to alternatives like retirement care facilities,” says von Martels. “The COVID-19 situation has highlighted key advantages of having your own home. And, more and more, businesses will keep emerging to provide critical home delivery-like services to help people live more efficient, comfortable and independent lives on their own.”

With the market need for real estate liquidity at an all-time high, and traditional methods of creating liquidity facing unprecedented constraints, von Martels encourages brokers, especially those who take a financial planning approach to their business, to seriously consider incorporating reverse mortgages into their planning programs.

“It creates a real opportunity,” he says.

Copyright © 2020 Key Media

The net profit from a rental property is minimal

Chris Seepe
REM

The financial situation of every rental property is as different as a fingerprint. Every operator applies their level of experience, understanding, operating sophistication and personal values of what’s most important to them in owning and operating a rental property.

Therefore, the numbers below can only very roughly approximate the breakdown of costs of owning and operating a rental property. Nevertheless, the overarching conclusion, regardless of what numbers you use, is that the net profit from a rental property is much less than tenants, media and the government believe, and it’s these same entities who collectively think residential landlords are rich and can afford to carry all the consequent losses caused by COVID-19.

Here’s a rough breakdown of where each investment dollar goes in a six- to 20-unit multi-residential investment property using an average of two six-plexes, one nine-plex, one 11-plex, and two 12-plexes in Oshawa, Ont., arguably levying the third-highest property tax of 444 municipalities in Ontario:

• $1.00 rental income (no HST)
• 18.8 cents – property tax
• 2.2 cents – building insurance
• 3.5 cents – electricity (common area only)
• 3.4 cents – gas heating (included in rent)
• 3.4 cents – water/sewer (included in rent)
• 8.8 cents – repairs & maintenance
• 3.1 cents – property management, janitorial, placement fees
• 1.4 cents – professional fees
• 44.6 cents – operating expenses
• 39.8 cents – principal & interest (5-yr closed fixed, 25-year am, 75 per cent LTV, three per cent interest)

84.4 cents total costs

• 15.6 cents – net profit before corporate taxes (cash flow)
• 7.8 cents – corporate tax (50 per cent “passive” income)

7.8 cents – net profit after tax BEFORE capital costs (new roof, furnace, boiler, windows, etc.)

So, on $100,000 of gross income from an average nine-plex rental property, the owner takes home about $7,800 before paying for hopefully infrequent capital costs. Factor in capital costs such as replacing the windows every 30 years, say, $50,000. Keeping the numbers super-simple, that’s $1,667/year; boiler at 20 years and $20,000 = $1,000/year, roof 15 years and $10,000 = $667/year totaling $3,334/year capital costs – paid from the $7,800 annual take-home pay.

The above is overly simplistic and subject to many sophisticated cost-reduction management techniques and best practices to streamline those expenses and maximize return. It’s just a baseline value.

A new boiler may reduce gas consumption by 30 per cent, resulting in a notable equity increase: for example, a $2,000 gas savings might add $40,000 (at a five per cent cap rate).

Depreciation (capital cost allowance) will reduce the taxable income too but the money must all be paid back when the property is sold so it’s a tax deferral scheme, not a tax write-off.

A higher amortization period for financing will improve cash flow but you pay more interest over the term. You could pay off your mortgage quickly, which would substantially improve your cash flow (profit) but then all that equity is “dead” money, which is not working to help you create asset wealth.

I have been receiving insurance quotes for multiple buildings these past three months and every company has been quoting 11 to 15 per cent higher premiums than the previous year, despite not making any claims for more than five years, notable investments in improvements and no explanations from the companies explaining this industry-wide cash grab in a time of enormous financial upheaval.

Ontario’s electricity rates went up 55 per cent last November but the increase was hidden by a 31.7 per cent short-term rebate.

My local water/sewer costs went up about 40 per cent in the past five years. But rental income was “allowed” to increase about 17 per cent over the same five years.

I couldn’t find a quotable statistic on the number of investment properties that are financed but I remember hearing that perhaps 85 per cent of rental properties have some amount of a mortgage.

How much money is left over for a landlord to meet all their obligations in the midst of pandemic emergency measures?

Say a “modest” 10 per cent of tenants don’t pay their rent. Which companies and government agencies have offered relief or forgiveness on the above costs? What will deferral of interest payments accomplish if there’s no increase in rent? How long will most or all of the landlord’s income we live on go towards the forced extended loans and accumulated interest payments?

COVID-19 may be the catalyst but it wouldn’t be the culprit of a collapsing rental property industry. The attraction of leveraging real estate to create asset wealth is a powerful lure but the best advice may be to shed the “bonds” of interest-tyranny and reduce your dependency on lenders.

Many of our risks were artificially and unnecessarily created by ill-conceived, short-term, simple-minded legislation enforced by a fundamentally dis-“membered” Landlord and Tenant Board. In the rental housing industry, ignorance of the law may turn out to be the single greatest “excuse” for financial ruin.

© 1989-2020 REM Real Estate Magazine

COVID-19 immigration to weigh upon Vancouver prices – analyst

Ephraim Vecina
Mortgage Broker News

The single most important factor that would affect Vancouver’s sky-high housing prices is the coronavirus pandemic’s impact on immigration, according to veteran markets observer Douglas Todd.

With immigration accounting for roughly 85% of Metro Vancouver’s population increase in recent years, the global travel restrictions currently in force will almost certainly take a significant chunk off this growth metric, Todd said.

“Start with the drastic drop in tourist numbers. With borders virtually closed to international travellers, investors who relied on short-term rentals like Airbnb to hold onto their properties have been left in the lurch. Many Airbnb hosts will likely be forced to sell,” Todd said. “Citizenship ceremonies have been cancelled during COVID-19 confinement and the processing of would-be permanent residents is being held back.”

Government measures to limit the impact of this slowdown might also prove insufficient.

“The BC NDP government has tried to respond … by strengthening the surcharge on foreign property buyers and by introducing the speculation and vacancy tax, which has an impact on ‘satellite families’ in which the breadwinners earn their incomes outside the country and therefore aren’t subject to Canadian income taxes,” Todd said.

And despite the optimistic post-coronavirus scenarios offered by multiple observers, predicting the long-term impact on the relationship between immigration and housing prices will be trickier.

“This pandemic is sure to affect the choices of would-be immigrants,” Todd said. “And it will also affect people who might buy urban Canadian properties with money earned offshore, which is the gasoline that has been accelerating Vancouver’s already-unaffordable housing costs.”

Copyright © 2020 Key Media

Defying COVID-19 pressures, average prices might climb

Ephraim Vecina
Mortgage Broker News

Canada’s home prices are still likely to see a 5%-10% annual gain by year-end, according to Altus Group chief economist Peter Norman.

In an interview with The Financial Post, Norman said that despite the COVID-19 travel restrictions that have ground the entry of wealthy foreign homebuyers to a halt, housing will return to an upward trajectory in late 2020.

Norman acknowledged the fluidity of the situation, saying that the coronavirus might still mean worse times ahead for the market.

“Context is important for everything, and there is a lot in motion right now. It’s a difficult time to be forecasting,” Norman said. “Certainly, we see migration [being] really weak this year, and that has been a macro driver for housing in general.”

The pressures upon Canadian demographics and the economy are expected to persist throughout the second quarter and even well into the third quarter, with data in the April-June period likely to be “pretty dismal.”

However, Norman said that the housing sector’s fundamentals will pave the way for its speedy recovery once the crisis has passed.

“Don’t underestimate how fast things may come back,” Norman said. “We are not expecting prices to go down a lot. … It’s not a negative spiral; it’s not a housing crash.”

And even though prices will be “all over the map” for the next few quarters, “by the time we get to the end of the year and momentum is coming back, with pent-up demand from the downtime and supply coming back on stream in the resale market, I expect we’ll see a lot of activity,” Norman said.

Copyright © 2020 Key Media

The moving experience has changed exponentially

Connie Adair
REM

Moving is stressful at the best of times, but for residential and business clients who have the added pressure of worrying about COVID-19 and associated restrictions, it can take a toll.

Being able to relate what the moving experience might look like, and how to go about “normal” recommendations such as getting three quotes, can offer some reassurance.

As with everything else, the moving experience has changed exponentially. For one thing, the DIY move is no more. With social distancing requirements, people no longer have an option, says John Prittie, president and CEO of Two Men and a Truck Canada.

People would normally set up an appointment for a moving company to do a walk through in order to get an estimate and figure out details such as the number of trucks, movers and time required for the job.

Now, Prittie says his company is doing virtual tours and then creating estimates based on those tours. Even though they are an essential service, their office is closed to walk-in traffic. A sign on the door directs customers to call to order packing supplies and arrange a move. Free deliveries are made to a porch or garage and estimates can be done online.

A couple of days before the move, Two Men and a Truck staff will touch base with the home or business owner to ensure no one in the household has travelled or is in quarantine. The company also asks that only one person be home during the move to make it a mostly contactless experience.

Movers and drivers are checked out before they head out for a job, and they are equipped with face masks. They carry hand sanitizers in their pockets and there are disinfectant wipes in their trucks, Prittie says.

Home and business owners are asked to respect the two-meter social distancing practice, and to make a washroom, along with paper towels and soap, available for movers so they can wash their hands frequently.

Prittie says homeowners should clearly label boxes so movers don’t have to interact with anyone at the new location.

Two Men and A Truck is limiting the number of movers per truck to two and is staggering arrival times for movers/trucks so they don’t overlap. The same two men will work in each truck rather than rotating. Employees are being asked to wash their uniforms every day and to go home right after work and stay there.

When recommending or hiring a mover, Prittie says it’s important to remember all moving companies are not created equal. Some movers may offer a price that seems less expensive, but charge extra for everything, from the number of steps movers have to climb, to surcharges for heavy objects. Look for a company that has a per hour price that’s all inclusive, he says. He also suggests looking for a company that hires, trains and pays benefits to its employees and has appropriate insurance.

To narrow the search for three companies to provide quotes for comparison, he suggests contacting the Canadian Association of Movers for a list of reputable movers.

Larger, more successful moving companies should have online estimate generating systems.

“We have built out our website so people can soft book,” he says. The home or business owner fills out an inventory of everything that needs to be moved and the system will generate a cost and time estimate.”

He says to keep in mind the old saying, “garbage in, garbage out. You have to put in the proper information – make full disclosure – to get an accurate price.”

Along with residential moving, it’s a busy time for small businesses that are moving to new locations, putting their businesses into storage or reconfiguring spaces. So it helps if you hire a full-service moving company that offers storage for businesses that need facilities until they can get back to business. This service is also handy for military personnel redeployed to other areas or overseas, or people who have to move temporarily to smaller quarters to weather the COVID-19 storm.

Two Men and A Truck was founded by Mary Ellen Sheets of Michigan. Her two sons, Jon and Brig Sorber (the stick figures on the well-known logo) drove the first beat-up truck to make money for school, Prittie says. When they returned to college, business kept coming and Sheets hired more people. Now 30 years later it’s one of the largest franchises, with 2,800 trucks in 380 locations worldwide.

© 1989-2020 REM Real Estate Magazine

Listings mirror sales by dropping in the near term

Ephraim Vecina
Mortgage Broker News

A vital component of the Canadian housing sector’s post-coronavirus recovery phase is homeowners refraining from selling their assets, according to TD Economics.

“Absolutely key to our forecasts is the assumption that listings mirror sales by dropping substantially in the near term and recovering gradually thereafter,” said TD economist Rishi Sondhi. “This puts a floor on prices and sustains relatively tight supply-demand balances across most markets, allowing for the resumption of positive price growth as provincial economies are re-opened.”

Such estimates have to be tempered by the reality of dwindling budgets forcing some homeowners to sell in a suboptimal market environment, however.

“Indeed, we anticipate the gap between listings and sales to grow in coming months, as financial stresses force some homeowners to list their properties,” Sondhi said.

Sales fell by 14.3% month-over-month, while new listings declined by 12.5% during the same period, according to March data from the Canadian Real Estate Association.

The Teranet–National Bank of Canada House Price Index predicted that this trend would only intensify, especially in traditional hotspots like Toronto and Vancouver, over the next few months.

“At the national level, resale home prices were still gaining momentum in March. But this is based on home sales reported in land registries,” Teranet said. “The most important real estate boards all mentioned a clear break of activity during the second half of March due to measures to contain propagation of COVID-19.”

On the other hand, homeowners might find a measure of relief in “a jobs market that will likely improve starting next month,” Sondhi said. “Next year should see much stronger activity, as markets benefit from significant pent-up demand and historically low interest rates.”

Copyright © 2020 Key Media

The impact of the coronavirus outbreak on the value of Canadian housing will fully manifest by next year

Ephraim Vecina
Mortgage Broker News

The impact of the coronavirus outbreak on the value of Canadian housing will fully manifest by next year, according to economists with the Canadian Imperial Bank of Commerce (CIBC).

“The expected volatility in overall economic activity in the coming quarters will not skip the resale market,” said CIBC economists Benjamin Tal and Katherine Judge in a report last week. “By 2021, as the economics of housing returns to fundamentals, we expect an array of factors to result in a weaker market with some downward pressure on prices.”

Among the most influential of these factors is the already-weakening employment sector, latest Statistics Canada figures indicated.

The national market suffered a 5.3% decline from February to March, representing more than 1 million lost jobs. Meanwhile, the unemployment rate rose by a record high 2.2% monthly, ending up at 7.8%.

Tal and Judge said that this trend will almost certainly lead to much slower demand. Rapidly-depleting budgets might also force some homeowners to sell in a less-than-ideal market environment, The Financial Post reported.

“Overall, as the fog clears, we expect to see average prices 5%-10% lower relative to 2019 levels, with high-cost units in the high-rise segment of the market seeing the most notable price declines,” the economists said. “The cumulative damage suggests that when we recover, potentially at one point in 2021, we will be recovering into recessionary conditions.”

Copyright © 2020 Key Media