Bearish Report for the Canadian Housing Market

Thanks to one of our preferred mortgage specialists - Al Nenshi from Quantis Mortgage Solutions - for sending along this article. We are certainly in the position to see some interesting changes in the market over the next few months and years - Dan

 

Brady Yauch, BNN.ca

Another day and another bearish report on the Canadian housing market – this time from analysts at Morningstar, the Chicago-based research group.

The analysts warn that if housing prices fall by just 10 percent, the country's largest banks and the government-backed Canada Mortgage and Housing Corporation (CMHC) face a "significant risk of losses or impairment to capital levels." The analysts add that the loan-to-value ratio of mortgages at Canadian banks is at the same level it was in the U.S. prior to that country's collapse in real estate values. Loan-to-value ratio is a measure of the amount of borrowed money used to purchase home.

"Canadian banks, as a group, state that the major difference between them and U.S. banks just before the housing bubble is the higher level of equity, on average, that most Canadian banks possess in their residential loan portfolios," Morningstar analyst Dan Werner says in a note to clients. But when comparing the data, he found that the average loan-to-value ratio for Canadian banks is about 45 to 60 percent, while that figure was 54 to 55 percent for U.S. banks prior to the financial crisis.

"More important, the distribution of Canadian mortgage loan/value ratios in 2013 and currently insured by the CMHC indicates a higher proportion of loans in the higher-loan/value categories compared with 2006 levels," he adds. "We think this demonstrates higher risk to the CMHC and banks' capital levels."

He warns that the proportion of mortgages with a loan-to-value ratio greater than 80 percent is higher for Canadian banks than it was in the U.S. prior to 2007. A higher figure for a loan-to-value ratio indicates that more money was borrowed to purchase a home.

Worse still, Werner adds that because a large percentage of the mortgages held by Canadian banks have loan-to-value ratios of 70 to 80 percent, it would take only a 10-percent decline to cause these mortgages to exceed the threshold allowed by the CMHC on new loans. The CMHC provides insurance on mortgages where the borrower has put down less than 20 percent of the value of a home.

"If housing values were to fall precipitously, many of those loans would fall into the higher-loan/value categories," he says.

The CMHC may not be able to handle a major pullback in housing prices, Werner says. With 28 percent of insured Canadian mortgages posting loan-to-value ratios greater that 80 percent, he says the CMHC's liabilities could exceed its equity should home prices across the country decline.

In a worst case scenario, if 100 percent of borrowers defaulted when the value of their mortgage exceeded their home, then a 10-percent decline in home prices "would more than exhaust CMHC's capital."

As for the banks, Werner says National Bank of Canada (NA-T 74.5 -0.21 -0.28%) and CIBC (CM-T 78.54 -0.78 -0.98%) will be hit hardest by a significant decline in prices, while Toronto Dominion (TD-T 82.64 -0.32 -0.39%) and the Bank of Montreal (BMO-T 61.62 -0.42 -0.68%) will be the least effected.

The recent catalyst for the more than decade-long run-up in home prices has been cheap funding, a result of the Bank of Canada maintaining low interest rates since the financial crisis. The Bank of Canada has held interest rates at one percent for more than two years, but has in the past year warned consumers that its next move will be to hike rates – a move that would make it more expensive to service debt.

 he debt-to-income level for Canadians is currently at a record 165 percent.

"We think sustained low interest rates will continue to feed cheap funding into the residential real estate sector and drive consumer debt," he says. "However, we continue to think that the growth of household debt to disposable income for Canadians is unsustainable in the long-term."

Like the weather, the real estate market is keeping us on our toes!

I thought I would drop you a line with my thoughts on what is going on in our neck of the woods.

I just listed a condo in the Willows in Hidden Valley and thought I would share this situation with you as it is typical for what is going on in the market throughout the city. This is a lovely four level split townhouse with quite a few upgrades. As with all of our listings, the home has been staged nicely and has a great presentation. Here is a look at this listing, along with the past two sales of similar type properties in the Willows, dating all the way back to February of last year.

In looking at the two sales, we found some interesting facts. The property that sold in December was on the market for 79 days, and prior to that they were on the market in 2010 for another 110 days to no avail. The property that sold early in 2012 actually sold for 8% less than the seller purchased it for back in April 2009, one of the most intense times in the market in recent history.  On the first day our new listing was on the market, we received an offer from the only viewing of the day that we accepted and are now awaiting the conditions to be met. What is interesting about the offer is how strong it was right off the bat, they pretty well wrote the offer as we presented it online. Why would the buyers do such a thing?

The answer lies in the fact that they have been looking for a new home for quite some time and according to their Realtor, actually lost out on a variety of listings that sold very quickly. They took a pro-active stance on this particular home because they did not want to lose out on another property being sold to someone else from under them. This is a very interesting phenomenon where the Buyers become more savvy and aggressive due to their experiences in losing out on previous listings.  

Single family homes in Hidden Valley are seeing similar action. At the moment there are 15 homes for sale in the community at various price points. So far this year there have been 61 sale in Hidden Valley, just over 15 sales per month.

In Kincora, there are 14 active listings and there have been 39 sales so far this year, just under ten sales per month.

Even in Panorama Hills, one of the largest communities in Calgary, there are only 71 active listings and they have seen about 27 sales per month.

In Hanson Ranch there is currently only one active listing. There have been six sales this year and there are two pending sales in the community.

It would certainly seem that we are in the midst of a “Sellers” market, the last time we were leaning so far toward the Seller was back in 2006, and we certainly recall what happened back then! The next questions would be, will that happen again to us this year?

I would suggest that there are a whole variety of variables that will help cool off the huge demand in the market at the moment. Perhaps the most influential cooling system will be the financial institutions. We are seeing more and more bank appraisals falling short of the price agreed upon between the Buyers and Sellers. As a matter of fact, I am currently dealing with another sale where the appraised value was about 5% lower than the agreed upon price. There are more and more deals falling apart due to financing, and that is a trend we will probably see continuing.  The banks, mortgage companies and insurers such as CMHC took a huge hit in subsequent years to our peak in 2006-2007 where there were many foreclosures due to the huge loss of equity in the market from 2008-2011. Rest assured that they have written and re-written policy to help hedge them from a similar situation happening again.

Although we currently have a lack of inventory, I would suggest that the supply versus demand crisis we are currently experiencing will be short lived. Typically we see more homes added to the inventory as the weather turns better, then as the summer approaches, demand typically slows as many Calgarians take advantage of our short summer. I would expect that the current situation may last until mid to late June where we should see the market settle down a bit. We should see values stay constant, perhaps even creep up a bit in the next six weeks, however, coming July we could see a reverse in that trend.

The economic forecast is uncertain at best for the rest of the year, and the outlook for 2014 is even more questionable. Although Alberta seems to be bucking the National and International economic trends, I would caution that it will be difficult to continue in that direction due to our reliance on the energy sector in Calgary and all of Alberta.

I would be happy to chat with you about the market, and any concerns you have with the current trends and where we may be heading in the next few weeks, months and years. I would also be happy to chat with you about your current and long-term real estate strategy. Please do not hesitate to let me know if you would like to book a real estate consultation.

Real Property Reports (RPR's)

 

Real Property Reports

What is a Real Property Report (RPR)?

It is a document prepared by a registered member of the Alberta Land Surveyors Association. It is a visual representation that illustrates the boundaries, improvements and encroachments, right of ways, and easements on a property.

 

Why is an RPR necessary?

For a seller, it identifies unknown issues with property and gives them an opportunity to remedy problems before selling and ultimately may assist in preventing future litigation. It also provides disclosure/documentation of known issues.

For the buyer, it identifies boundaries, discloses any issues with the property or provides confirmation that the property meets municipal requirements.

For the REALTOR®, it identifies issues related to title that may impact a sale, provides disclosure of boundary issues that might create future litigation, and meets the AREA contract requirements.

Financial institutions often request RPRs before they will provide financing.

Lawyers cannot close on the sale if an RPR is unavailable, is not current, or indicates problems.

When should my client get an RPR?

If the client has an existing RPR with compliance stamps and no improvements or adjustments have been made to the property, they may not need a new RPR. However, if there have been changes to the property they may need to get a new Real Property Report. Even if there have been no changes, financial institutions may request a current RPR.

Be aware that obtaining a current RPR can be time consuming. The completion of the RPR can take several weeks. Added to that the time it takes to obtain a compliance stamp from a municipality can take several weeks. Not having a current RPR can hold up a closing.

For that reason, REALTORS® should ask their sellers about current RPRs as soon as possible.

 

Who is obligated to get an RPR?

Under the AREA purchase contract the obligation to provide a current RPR lies with the seller of the property, unless specifically contracted otherwise.

What if I Can't get what I NEED for my property?

Last evening I met with some great homeowners that have built and customized a beautiful home in a new community in NW Calgary (thanks B&D!) What we found after looking at the sales and active listings in the area is that the market is dictating that the value today is considerably less than what it cost them to build this home only four years ago. What we find in this scenario is this... if the Seller needs a specific price to make a sale happen (taking into account the amount owed on the property and such) and a Buyers perceived value is considerably less, we come to a stalemate. If a Buyer and a Seller cannot find a price they are both comfortable with we will not see a sale. The bottom line as a Seller is we want to get the most that we possibly can in the current market, and if that is not a possibility we need to explore other avenues to look after our real estate investment.

Leasing is certainly a good alternative for a long term holding. I would suggest it may be quite some time before we return to where we are right now in the market. With the uncertainty in the world economy, and especially with regards to our neighbours to the south, the possibility of us escaping these issues unscathed is miniscule. We – as Calgarians and Albertans – did quite well last year in a world that is in turmoil. I feel it is only a matter of time before these national and  international issues and challenges catch up with us. If we see a flat market this year, I feel we will be ahead of the game. Realistically, I think we may lose steam this year and see further declines in pricing. If you do decide to rent or lease your property, I would suggest you consider a long term plan, at least five years as that is how long it may very well take before we see any significant changes in the market.

I would also caution you to be diligent in your research if you are considering a lease-to-own strategy. I personally designed a rent-to-own program back in 2006 where we set up a scenario for renters to put them into homes with a five year program to set them up to purchase their home.  My belief was then - as it is now - that all Calgarians should have the opportunity to own their own home. We were actually able to get most of the folks that applied for this program their own mortgage approval right off the bat (that’s why I love mortgage brokers!)  The only two families that we did need to use the program for have walked from their deals and the properties have reverted back to us. These properties are more of a hindrance than an asset for us, they are not properties that I would have personally chosen for their investment potential. Ask yourself this, why would someone get involved as a Tenant in a lease-to-own situation with mortgage rates at historical lows? Our philosophy at the time was to assist renters that could not get approved for a mortgage from the banks by building their credit so that they could get their own mortgage at the end of the term. We even enlisted the help of a financial advisor for them.  I’m afraid that what I have learned from this experience is that there is often good reason these folks were initially turned away by the banks.

 

As I have mentioned many times in Blogs past, it is essential to enlist the expertise of a knowledgeable real estate professional to assist you with your own real estate investment strategy.

 

Let me help you make it happen!

What if you can't get what you need for your property?

Last evening I met with some great homeowners that have built and customized a beautiful home in a new community in NW Calgary (thanks B&D!). What we found after looking at the sales and active listings in the area is that the market is dictating that the value today is considerably less than what it cost them to build this home only four years ago. What we find in this scenario is this... if the Seller needs a specific price to make a sale happen (taking into account the amount owed on the property and such) and a Buyers perceived value is considerably less, we come to a stalemate. If a Buyer and a Seller cannot find a price they are both comfortable with we will not see a sale. The bottom line as a Seller is we want to get the most that we possibly can in the current market, and if that is not a possibility we need to explore other avenues to look after our real estate investment.

Leasing is certainly a good alternative for a long term holding. I would suggest it may be quite some time before we return to where we are right now in the market. With the uncertainty in the world economy, and especially with regards to our neighbours to the south, the possibility of us escaping these issues unscathed is miniscule. We – as Calgarians and Albertans – did quite well last year in a world that is in turmoil. I feel it is only a matter of time before these national and  international issues and challenges catch up with us. If we see a flat market this year, I feel we will be ahead of the game. Realistically, I think we may lose steam this year and see further declines in pricing. If you do decide to rent or lease your property, I would suggest you consider a long term plan, at least five years as that is how long it may very well take before we see any significant changes in the market.

I would also caution you to be diligent in your research if you are considering a lease-to-own strategy. I personally designed a rent-to-own program back in 2006 where we set up a scenario for renters to put them into homes with a five year program to set them up to purchase their home.  My belief was then - as it is now - that all Calgarians should have the opportunity to own their own home. We were actually able to get most of the folks that applied for this program their own mortgage approval right off the bat (that’s why I love mortgage brokers!)  The only two families that we did need to use the program for have walked from their deals and the properties have reverted back to us. These properties are more of a hindrance than an asset for us, they are not properties that I would have personally chosen for their investment potential. Ask yourself this, why would someone get involved as a Tenant in a lease-to-own situation with mortgage rates at historical lows? Our philosophy at the time was to assist renters that could not get approved for a mortgage from the banks by building their credit so that they could get their own mortgage at the end of the term. We even enlisted the help of a financial advisor for them.  I’m afraid that what I have learned from this experience is that there is often good reason these folks were initially turned away by the banks.

 

As I have mentioned many times in Blogs past, it is essential to enlist the expertise of a knowledgeable real estate professional to assist you with your own real estate investment strategy.

 

Let me help you make it happen!

Micro Market Analysis Case Study

With the good news regarding growth in both pricing and activity in the Calgary area last year I think it is important that we be cautious on how we view these figures and statistics in making educated and informed decisions on how to move forward with our real estate direction, whether deciding to buy, sell or invest.

Without a doubt, real estate is an excellent strategy for long term financial growth. When deciding how to move forward with your real estate needs, it is imperative to have a professional real estate adviser and strategist on your team. I recently put together some information for clients to assist them with their future real estate goals and thought that this information was pertinent for anyone that is trying to get a grip on the media coverage on the significant growth we have seen over the past year. And more importantly, how it pertains to making sound real estate decisions.

Before I analyze these two communities, let’s have a look at how we fared for sales for single family sales in Calgary Metro. In 2011 the average sale price was $466,506 for the 13,120 sales throughout the City. We saw increases year by year in both sales figures, up 1,989 to 15,109 sales, an increase of 15%. And the average price also increased, up $14,730 to $481,236, an increase of 3%. It is also interesting to note that the average price in January 2012 was lower than any of the previous months in 2011 and 3% below the average price in January 2011 and sales volume was also down in comparison to the year prior. If we were to make predictions of how the year would iron out after that first dismal month, we would have probably been way off on our yearly forecast… hindsight is 20/20!

In looking at the activity of both Hidden Valley and Hanson Ranch in the same period, it is quite obvious that - although these figures above are showing significant growth generally speaking in our beautiful city – it is extremely important to understand that within the city there are huge variances in pricing and activity. Hidden Valley and Hanson Ranch are married as communities sharing the same community association and schools – they are definitely each other’s closest neighbours. You would expect that growth would be very similar in these attached communities, however, after careful analysis we can certainly see that is not the case.

Hidden Valley showed significant sales and equity growth from 2011 to 2012, outperforming the general statistics for the rest of Calgary. The average price increased from $360,260 in 2011 to $385,794 last year, a growth rate of 7%! The volume of sales also increased 25% from 120 sales in 2011 to 153 sales last year. One of the major contributors to this huge growth were higher priced homes within the community. In 2011 the highest sale price for a home was $551k, all other sales were below $450k. Last year there were 13 homes that sold over $450k, and five of those sales were above the ceiling reached the year before… and the real kicker… a sale for $710k (and one for $665k, and one for $630k!)

In contrast, Hanson Ranch saw a significant drop in their average price, whereas sales remained steady (22 in 2011 and 24 in 2012). The average price in 2011 was $541,079, significantly higher than the citywide average. Last year we saw a drop in value of the average sales price to $517,954, a decrease of 4%. There certainly are a variety of factors that have contributed to this detraction in value. The first is this single high sale in 2011 for $870k, the highest price last year was considerably lower at $650k. It is interesting to note that that “high” price in 2011 was actually purchased in 2007 for $962k. And the highest sale in 2012 ($650k) was also sold in 2011 ($568k) after some major renovations.

This is a great case study to point out the importance of taking into account the micro analysis of an area and a specific property as the trend of the entire area may not be a good indication of current values in a specific area. We are seeing more and more variance from one community to another, and even from one street to the next. Coming up with a value for a particular property takes a great deal of information gathering, analysis and strategic marketing in order to maximize the equity of that home. I do believe that in the coming weeks, months and years it will be essential to understand these various nuances in the market so that we can achieve sustainable growth throughout Calgary.

Hey Dan,

My husband and I have been discussing moving, and we have a few questions -

 

     1. Is it better to look for a house and list our house at the same time?

 

     2. Or is it better to sell our house first and then look... and hopefully we find something.

 

We're having the bank do a pre approval for us which will be good for 120 days, just in case we do find something we love love love in the new year. And I did contact my mortgage lady who said basically what I already knew - that selling first can possibly create a rush situation, and selling and buying at the same time can sometimes create a less desirable offer to the other seller when your condition is based upon the sale of your current home.

 

She suggested I talk to you as well to see what you recommend. Soooo... Any insight you have would be great!

 

Thank you so much for your note and inquiry, I look forward to assisting your family in putting together a strategy in finding a new home and selling your current home. To start, let me say that there really is no solid answer to whether you should sell first or buy first. Please do read through my last two Blogs...

 

Let's start by going over the listing process.

Getting a home ready to list and view is a bit of a hectic matter. The days of sticking a sign in the ground and hoping for the best are long gone. Today there are many aspects to the listing that are of prime importance in getting a potential buyer through the door. There are essentially three things that affect your success in having a successful and less stressfull selling experience.

 

First and foremost is pricing your home effectively and aggressively. A detailed analysis of sales of similar homes in your community and area is of prime importance to understand better what is going on in your micro-market. Within Canada, Alberta, Calgary and specific communities and jurisdictions we can see quite a variety of activity. We can see that the Canadian market is doing well, or not doing so well, and that trend may or may not be the same in Alberta. On the same token, what is happening generally in Alberta may not be the norm in your own town or city. And even more specific, what is happening within the city may be very different from one community to the next. We have seen a huge expansion in communities close to the city core, both in re-development and pricing. More suburban areas may have not fared so well over the past few months. We need to take the "micro-market" very seriously in determining how quickly homes are selling, and whether prices are trending upward or downward. And most importantly, what trends to expect in the short term.

 

The second aspect to take into account is how the house and property presents itself to the potential buyer. Without a doubt, Calgary has seen excellent sales over the past year. Something we need to take into account, though, is how the buyer is looking at their investment. In the past seven years or so, we have seen great volatility in the market. Buyers often looked at potential growth of their real estate investment in the short and mid-term. Will the market show significant growth over the next few months and years so that I make a decent profit on my investment? I do believe we are seeing a shift in paradym and buyers are starting to look at their investment once again in the long term. Can I see myself living in this home for many years, or over a decade? This paradym shift really is moving back to the way we looked at our real estate purchase prior to our unsustainable growth in 2006 and early 2007, but that's a topic for another day!

 

Having said that, it would also be prudent to point out how important it is to present a property in the best light possible. Staging a property is of prime importance to show off all of the attributes of a specific home, and to be sure a potential buyer is not turned off because of something that has been overlooked. Even though there has been significant growth in the market over the past year, there are also many, many homes that have been on the market for a significant amount of time, some for many months, and even years. In a volatile market with the potential of a downturn, it is very important to sell your home quickly to maximize your equity and profit.

 

The third aspect to selling your home quickly and for a maximum profit is to be sure it looks good - no GREAT - online and through the marketing of the property. It irks me to no end when I see questionable photography and inaccurate information in a listing. Without a doubt, the vast majority of potential buyers are going to look at your home online prior to making a decision to visit your home. We are in a very busy and hectic world, a potential buyer will most likely narrow down their search on their computer, losing a potential buyer because of a lackluster presentation is a major consideration today.

 

Having Realtors make appointments at all times of the day, having the house in top shape for every showing and having to move out the troops for those showings is a bit of a pain! Our strategy and goal is always to sell the listing in as short a period of time as possible. In my opinion, that achieves both the best price for the home and the least amount of hassle and stress for you. Having said that, the question remains should one sell first or buy first…

 

The first question is whether or not you can be approved for financing to carry two properties simultaneously, even if it is for a short while. The probability of holding two properties is daunting to most, and that scenario got a lot of homeowners in trouble in the latter part of 2007 and well into 2008 and 2009. Although we have seen that many homes have sold quickly in Southern Alberta this past year, there is always a possibility that a sale will take longer than anticipated.

I have recently been in contact with a homeowner that has purchased a new home and take possession in the next month or so. They have explained to me what their "bottom line" is in selling their existing home in making both transactions work smoothly for them. The issue with having a “bottom line” is that we are trying to predict what a buyer in the current market is willing to pay for a specific property at this point in time. If that price is less than the sellers “bottom line” there is only one outcome… they will not sell their home... so they may be in for a huge reality check with two homes and two mortgages. This is a scenario that I try to avoid for any of my own clients, it can certainly get messy.

 

Alternatively, one can make an offer on a property with a condition to sell their home within a specific period of time. The issue with this scenario at this particular point in time is that there are quite a few buyers looking for premium properties and the inventory is quite low. So the question is, would a Seller be willing to entertain an offer with a condition to sell another home when they could possibly secure a deal in a short period of time with no such conditions? The other consideration is this... even if you are able to secure a potential sale, there is a very good chance that another buyer will come along and make a second offer on the property, forcing you to make a decision on whether to move forward with the purchase of the new home with no condition to sell your home, or walk away from the purchase. Although it may not sound like a problematic issue, the fact is that you will have made a decision to purchase the new home, and if you are unwilling or unable to hold two properties at the same time, it is a heartbreaking experience to "lose your new home". In my experience, after a deal falls apart for this reason, the Buyer is now always comparing their new search to the home they lost.

 

The third choice is to sell your current home and search for a new home once an offer is secured. The advantage to this scenario is that you are totally aware of your budget and what your home sells for. The disadvantage is the fact there may not be a property that you like, or are able to secure, for some time. That would mean you may have to rent or stay with friends or relatives until a property comes up that works for you. Alternatively, you may settle for a home that does not meet all of your criteria. This is exactly what happened in 2006 where there was such high demand and very little supply. Many Buyers ended up purchasing less than they anticipated just to secure a place to stay. When this happens, many, many buyers will want to find a new home that they anticipate living in for a short time. If values fluctuate so that the value of the home they “settled” on decreases, they may not be in a position to relocate for quite some time.

 

The current market in Calgary does seem to be leaning towards a “Seller’s” market, however, is that just a short term phenomenon or something we can anticipate throughout the next year? Many in the industry are anticipating an ease in the market in 2013, and I would lean toward that prediction. There are many, many variables that I feel will certainly affect our economy over the next year including the world economy, the price of oil and gas, the “fiscal cliff” south of the border, the European debt crisis, unrest in the Middle East and the list goes on and on. We have fared well over the past year, and have essentially bucked against both national and international trends. How long can we be an island in the turmoil the rest of the world is going through? If we reach the predictions in this article I believe we will be doing well, however, I would suggest that if we see no changes in market values over the coming year, we will be doing well.

 

Eventually we will work through all of the chaos and will return to a “normal” market. One should put a strategy together to anticipate at least three to five years before we see things hit a predictable pace again. In your own scenario, it may be prudent to work through the pros and cons of relocating, and if you feel that is your best strategy for family and peace of mind, I would consider the move sooner than later. If values do trend downward, your own affordability will also start to diminish as you will be pulling out less equity from your current home. If you are comfortable with your current location, putting together a strategy to stay put for that three to five years will be paramount.

 

Lauren, there is nothing holding us back from looking at properties in anticipation of finding a new home, just be aware that when we do find a property that ticks all your boxes there may be a good chance of losing that home if we do not put a strategy together. I would be happy to sit with you and Brad to discuss the market further and to put together a plan and strategy together.