TorontoRealtyBlog
Wow, y’all went all out on last Friday’s blog!
Thank you for all the comments, suggestions, and excellent insights posted in the comments section that I read with glee over the weekend as I typed out my list of the “Top Ten” discussion points for the fall market.
It seems like many of us are on the same page, not only in terms of what the bigger stories will be this fall, but also with respect to our thoughts and opinions on those topics.
I’ve said it before and I’ll say it again: I don’t know where else you’re going to find ‘anonymous commenters’ with such thoughtful and intelligent insights. I read the comments section on many articles in the major Toronto newspapers and they’re just awful most of the time. Don’t even get me started on the plight of mankind if comments posted on Facebook and Instagram are indicative of the average level of intelligence of today’s society.
But time and time again, I read the comments on TRB and I’m enthused. It makes me want to write, but it also restores my faith in people in general. That might sound exaggerated, but just look at what’s out there. Just look at what people think and say. And then, come to TRB and read a comments section like Friday’s where readers are providing their own insights on all things real estate, while respectfully adding their opposing views, or supplementing one another’s comments with additional insights.
I’m truly blessed to have such a great readership, so thank you all once again for coming to TRB each and every day to read and comment.
Now, having said the preceding, there were a lot of awesome suggestions and even better comments to pick-and-choose from, so let me continue with my “Top Ten” discussion points for the fall market, picking up with our fourth point…
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4) Mortgage Matters
There is so, so, so much that we can talk about here!
But let’s leave interest rates off the list, even though the Bank of Canada increased the overnight lending rate by 0.75% on Wednesday, because we knew that was going to happen.
I want to talk about three things: trigger rates, variable vs. fixed spread, and alternative lenders.
Many people who have only ever been on a fixed-rate mortgage don’t even know what a “trigger rate is.” So here’s my mortgage broker, Tony Della Sciucca, to explain it:
“Every variable rate mortgage comes with a built-in trigger rate; it’s simply a ‘must’ component of the way the mortgage is designed, but it has rarely come into play in recent market cycles.
Consider that with every mortgage, there’s a portion of the payment that is applied to principal repayment and a portion that is applied to interest.
If a consumer is on a variable rate mortgage and the prime rate increases twenty-five basis points, no big deal, right? The bank just changes the proportion of principal and interest within the payment. Maybe you go from paying $1,650 per month, of which $950 is principal and $700 is interest, to $900 in principal and $750 in interest.
But when the variable rate rises so quickly and so often that the fixed payment no longer covers both principal and interest, within the same amortization period, that’s when we see the so-called ‘trigger rate.’
Now, the bank notifies you and says that your overall payment is going up. So that $1,650 per month payment needs to increase to $1,800 to cover principal and interest at the higher rate.”
The reason why trigger rates are so prevalent in today’s mortgage circles is because we’ve now seen five rate hikes between March 2nd and September 7th, totaling 3.00%.
The math simply won’t allow for the consumer to maintain the same fixed monthly payment, with the same amortization, if rates increase that much, that quickly.
So a lot of borrowers who opted for fixed rate mortgages have got that call, or that email, or that notification from their bank saying, “Your payment is increasing!”
Now, as for the “variable versus fixed” game that borrowers have been playing since the dawn of time, it’s getting more interesting by the day.
“You typically look for a one-hundred basis point spread between variable and fixed. That spread is going to fluctuate constantly, depending on the Bank of Canada’s policy affecting the variable rate and the bond market affecting the fixed rate.
At the moment, we’re seeing a variable rate of about Prime minus fifty points, so that’s 4.95%. And we’re seeing most five-year, fixed-rate mortgages coming in around 5.29% – 5.39%. So that one-hundred point spread that we look for is nowhere to be found.
But there are a couple of lenders that are offering stripped-down mortgages of as low as 4.89% on a five-year term, so that’s less than the variable rate!
Why would anybody take a variable rate?
Well, a lot of people are anticipating rate cuts in 2023 or 2024, so they don’t want to get stuck in a five-year term over five-percent, only to see variable rates drop below four-percent next year. I’m not saying that’s happening, but if people think it is, then they’re going to take a variable rate now even though, based on historical criteria, it doesn’t make sense.
We’re also seeing people taking a one-year or two-year fixed rate, paying more now, but to have the flexiblity to take a variable when their mortgage is up for renewal.”
I mentioned in the past few posts that we’ve seen a lot of media, or had many discussions, about alternative or private lenders.
Here’s an article from last week:
“More GTA Homebuyers Turning To Private Lenders. Here’s What You Need To Know.”
CBC News
August 31st
From the article:
Value of private, alternative lender mortgages in Ontario jumped from $13B in 2019 to $22.4B in 2021: FSRA.
What does our friend Tony say?
“Alternative lenders are picking up a higher market share simply because their rules are more relaxed than the Big-Five banks.
The banks don’t have the same risk tolerance as the private lenders, but it’s really the borrowers who are taking on the risk by paying 1% to 1.5% higher interest rates as well as a full 1% lender fee on the entire loan amount. The alternative lenders factor this in. They welcome the business despite the borrowers being less attractive in the eyes of the bank.
Banks are tied to taxable income. Strip that away, and it lowers their risk tolerance.
Take a self-employed borrower who shows only $50,000 on their tax return, but shows $500,000 coming through their business. The bank only sees $50K. The alternative lenders see something different.
Take a teacher that’s not full-time; he or she is on a one-year contract, and has a series of one-year contracts. The bank looks at this differently than the alternative lenders.
Most people with alternative lenders are on a one-year fixed-rate mortgage and the borrower’s goal is always to turn around and tell the Big-Five banks, “See? I’m trustworthy! I’ve made my payments,” then secure a lower rate and more favourable terms with a TD, or an RBC and the like.
The biggest players in the alt space right now are probably Home Trust and Equitable Bank.”
There will undoubtedly be other topics of discussion relating to mortgage matters, this fall, but these are the three I’m keeping an eye on.
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5) Conversations About “Market Bottom”
What did we talk about last month?
No one wants to catch a falling knife.
That’s even more true today than it was when I wrote: “Catching A Falling Knife” on August 15th.
The TRREB stats are out for August and it shows 5,627 sales, which is a 14.5% increase over the mere 4,912 recorded in July.
Does that mean that the market has bottomed?
The average home price actually increased for the first time since February, moving 0.4% from $1,074,754 in July to $1,079,500 in August.
Does that mean that the market has bottomed?
Or is it simply one month? Conclusions can’t be drawn from just one month, can they?
Then again, who among us thinks that prices could be lower in a “busy” month like September, over a slower month like August?
We can talk ourselves in circles here, but the talk remains the same; talk, talk, talk about market bottom.
“Canada’s Housing Market Appears To Be Cooling. Is This The Right Time To Buy?”
That article was published on August 28th.
How about one from further back?
“Home Buyers Waiting For Market To Hit Bottom”
That was published on August 8th.
How about this:
“When Will Canadian Home Prices Bottom?”
That was August 4th.
We can keep going, but you get the point.
Articles about “market bottom” are great click-bait and the keywords are great for SEO, so the newspapers are going to continue with these headlines, even if the market picks back up again.
For a would-be buyer, you have to ask yourself: what’s the risk/reward equation?
If you wait, and the market goes up, will you pull the trigger and stop the bleeding?
If you want, and the market goes down, how much do you stand to gain?
The truth is: nobody knows where and when market bottom is, until the market has already turned back the other way, and then some. I suspect that very few, if any, active buyers in September were active in February, so very few can actually claim, “I’m paying 15% less today than I would have, if I’d pulled the trigger in February.”
They can, however, claim that they’re paying less today than others paid in February, and that’s powerful. Especially in Toronto where prices have essentially done nothing but go up for twenty years.
So why would a buyer wait longer? To see if prices go lower? But how much? And for how long?
Every buyer needs to look at his or her living situation first. If you’re living with your parents then it’s very different story than if you’re paying $2,200/month in rent. That would-be buyer who waits three months is spending another $6,600, and that’s 1.2% of a $550,000 condo. For that buyer, the market needs to drop another 1.2% just to keep level.
A young couple living in a 1-bedroom condo, who is 6-months pregnant, could wait another month, or two, or three, and “time the market,” but what’s the point? And what’s the risk?
None of us know if the average home price is going to sink lower in September or October, over the month of August, and any buyer who is waiting to buy, thinking that “market bottom” is still a few months into the future, is simply gambling.
But people love to gamble!
So get ready for non-stop talk about market bottom this fall…
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6) Buyer Psychology
Here’s a story for you…
Point #5 should give you some insight into how buyer psychology as well as seller psychology should go this fall, but had a listing late in the summer which was on the market for six days. That’s six. It’s not an eternity, no matter what market you’re in, nor was my seller in any position whereby he needed to entertain any lowball offers.
But that didn’t stop them from coming in.
Listed at $629,900, our first offer was $560,000, and we dismissed it without signing back, which is something I rarely do, but this situation warranted it.
The next offer was $570,000, which is still a lowball, any way you look at it, but this buyer agent was at least a little more keen to give me his pitch.
“Interest rates are going up by seventy-five basis points in September,” he told me. “We’re offering you tomorrow’s price, today.”
It was an interesting take and while I had no intention of working with this agent or this offer, I asked him to explain.
“With a seventy-five basis point increase in a five-year, fixed-rate mortgage, or even on a variable rate mortgage – on any mortgage,” he began to explain, “A first-time buyer’s purchasing power will go down by about fifteen percent. My buyer works in the financial markets, he’s very sharp and he knows where this real estate market is headed. He’s offering you about fifteen percent less than the asking price, which is what this condo’s value will fall to in September.”
Nice try.
We sold that condo for $625,000, by the way, and it was to an investor who’s going to AirBnB the condo, so perhaps those folks are coming back into the market.
But the fact that a buyer is looking at “purchasing power” as it relates to real estate prices is quite interesting. Maybe this was just a gimmick. I mean, did they think that this would actually work? But if there are really buyers out there that are biding their time until this atomic bomb is apparently set to detonate on September 7th, then maybe sellers will adjust their strategies and expectations accordingly.
Of course, a first-time buyer who works in the financial markets and is attempting to purchase a completely unspectacular condo in a building that I would, personally, never put a buyer, is probably just looking for a deal.
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7) Seller Psychology
Here’s a story for you…
Tara had clients that were looking at a townhouse in Durham Region, listed at $675,000, and on the market for 36 days.
The same unit in the complex was sold conditionally, listed at $674,900, and Tara’s clients decided to make an offer on the other property despite the fact that this competing listing had sold – but the price wasn’t known yet.
The listing agent for the $675,000 property was saying, “Bring an offer, my clients are motivated!” The dialogue was going very well leading up to the offer.
But when an offer of $625,000 was presented, the seller and the listing agent did nothing.
Nothing?
Yeah, like literally nothing. They let the offer expire without signing it back, and then the listing agent sent Tara a text message – because that’s professionalism in 2022, that read, “My sellers want the 675K. Can your buyer make up the distance?”
Excuse the butchering of the analogy, but that was just something else the listing agent was bad at, because I don’t know if this was his idea, or if he was being told what to do by his clients, but they seriously misplayed their response to Tara’s offer.
Not signing the offer back is one thing, but their expectation on price was silly.
Tara’s clients walked, and two days later, the conditional sale firmed up – at $632,000.
So what happened next, you ask? Did the listing agent come to his senses and beg Tara for that $625,000 offer back?
No.
Tara reached out to him, he said he wasn’t aware of the other unit for sale in the complex, and reiterated that his clients wanted $675,000.
These could be uneducated sellers, this could be an uneducated listing agent, or, they could just be willfully ignorant about the market.
Some sellers need to sell; other sellers merely want to sell. The problem in this market is that while the latter are able to act however they want, even if its to their detriment, the former have to eventually come to their senses. If those that need to sell don’t ever come to their senses, then we get into trouble.
The number one question to ask about any seller this fall: “Have they bought yet?” Look on MLS to see if there’s a target possesion date, and find out if they “need” to sell or simply “want” to.
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8) Taxes
A reader last week asked me to comment on this:
“Home Owners Are The New Oil Barons And It’s Time To Start Taxing Their Housing Wealth”
Globe & Mail
August 16th, 2022
Articles like this, which don’t appear under the heading “Toronto Star Editorial Board,” are usually written by career academics with no real-world experience, so I’ll let ya’ll dig into that one.
Rather than provide a lengthy comment on the idea for the tax, which I think once again goes to punish anybody who has achieved a modicum of success in Canada, I’d rather point out that this simply provides more evidence to my constant predictions that the federal government will continue to invent taxes, for everybody, on anything and everything, in attempts to pay for their pandemic spending spree, election vote-buying, and “spend-and-spend” agenda.
How about the new luxury tax?
That’s a beauty!
So far, the response seems to be one-sided…
CBC: “Critics Warn Ottawa’s New Luxury Tax On Pricey Cars, Planes, And Boats Could Backfire”
Toronto Sun: “Trudeau And Freeland Bring In Luxury Tax Saying The Rich Don’t Pay Their Fair Share”
Toronto Star: “Federal Government’s New Luxury Tax Is Unfair And Ill-Advised”
This tax is expected to “raise” $168 Million.
First of all, it’s not really “raising” that money, but rather “confiscating” it.
Secondly, what’s $168 Million? Trudeau will give that to another country when a cat falls out of a tree!
But the point remains: $168 Million isn’t a lot on its own, but if the government can conceive of another tax like this, then another, then ten more, suddenly they’re starting to rake in more money.
This government will never be fiscally conservative. To be fair, I don’t know that any government will ever be fiscally conservative again, since the elected party is usually the one who promises the most free stuff. But regardless, it’s become clear that the federal government has no interest in running anything close to a balanced budget and that they will continue to spend money freely as long as they remain in office.
So what does this have to do with the Toronto real estate market in the fall of 2022?
Look out for more taxes. Look out for more fees, levies, charges, tolls, payments, and remittances.
Not just from the federal government but from the municipal government too.
We talked a little bit last summer about the massive increase in development charges that the brain-trust at the City of Toronto passed during one of their lunches, er, meetings. With a 46% increase for new residential buildings to be “phased in” over the next two years, I don’t know how this is going to help ease condominium prices.
More to the point, combine that with the increase in inflation and declining prices, and many developers are simply putting projects on pause.
Developers might be the ones tasked with building houses and condos into the future, even though the city should, theoretically, be at the helm of a “housing plan,” but that doesn’t mean they have to.
If the government continues to make it too too expensive for consumers to buy real estate and too expensive for developers to build real estate, then what should we expect to happen in the coming years?
Just wait, folks. New taxes are being conceived as we speak and they’ll be discussed this fall.
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9) Government Intervention
This has always been a topic, even though it’s never really called “government intervention,” we see the government fanning the flames, stoking the fire, pulling the goalie, closing the floodgates, or any other metaphor that you want to use to describe their impact on not just the real estate market, but housing in general.
Housing is different from other markets. We live in our houses, so they’re not just investments and thus the government needs to treat the housing market different than the stock market, the gold market, or the futures market for bushels of corn.
While I’m a “free market” proponent, I also recognize that any democratic government needs to have a national housing strategy, and it’s this strategy (or often lack thereof) along with the big moves and the small moves that continue to be a discussion topic each and every year.
So what will be the big topics this fall?
The Bank of Canada will address inflation and interest rates but we’ve already talked about that.
How about rent-to-own?
That’s a hot topic of late, and something that was suggested by the readers last week.
Perfect timing too, since this article just ran on Monday:
“Canada Is Buying Into The Rent-To-Own Concept. Here’s How It Works”
CBC News
Septmeber 5th, 2022
From the article:
When Christian Fracchia first heard about a rent-to-own opportunity in Port Moody, B.C., four years ago, he saw a way to realize his dream of first-time home ownership, so he put his name in a lottery for 30 units.
About 10 per cent of the 358 units in the development still under construction at 50 Electronic Avenue were sold as rent-to-own, meaning the buyers pay a fixed rent for two years, which is then converted into equity.
Fracchia, a 28-year-old software developer, has an appointment a week from now to tour his new one-bedroom apartment near the SkyTrain and a seaside park. All this for $10,000 down and $1,000 per month rent, which goes toward a down payment on the $470,000 place in two years’ time.
“Essentially, it’s like free rent for two years. That money [I pay now] I get to keep as long as I go through with the sale,” said Fracchia, who will move in with his wife in a few months
Did you see what I saw?
I struggled to get past the first sentence.
The word “lottery” made me pause, facepalm, and then consider the plight of our housing market.
If a lottery is part of anything that we do with respect to housing, then we’re not really doing anything. If we’re truly looking to use words like “fair” and “equal” and “opportunity,” then the word “lottery” can’t be anywhere near this.
The article continues:
Rent-to-own is a unique path to home ownership that delays one of the biggest hurdles for new homebuyers — the hefty down payment.
Advocates say this model of home financing allows people with limited or damaged credit who can’t qualify for a traditional mortgage to work toward ownership.
But critics caution that rent-to-own is untested and has some pitfalls and risks — such as maintenance costs or the potential to lose the down payment, in some instances, if a renter fails to meet the terms of the deal.
Alright.
So now we’re focusing on providing housing to people with “limited or damaged credit.”
Since when is this a good thing?
The entire reason that we brought the mortgage stress test into effect, and why others are suggesting we need to increase the requirements (more on this later), is so that we could protect our..