Vancouver Condo Info

Joycer posted this on the weekend, but it got held up in moderation and is worth a second look.  According to his analysis the new CMHC qualification rules for rental income are going to have a big impact for anyone counting on a ‘mortgage helper’ to qualify for a larger mortgage.  If your eyes don’t glaze over at the math, see if you can see any holes in this reasoning:

Since we’re talking about how the new rules will affect rental income, I thought I’d do some math to see the net result. For those of you who aren’t interested in the math, here’s the punchline:
After April 19th your annual qualifying income is reduced by 30x(monthly rent).

For example, suppose there is a house for sale with a rental suite that generates $1000/month. If the potential buyers need an annual income of 70K to qualify for the loan before April 19th, then they will need to make 100K for the same loan under the new rules.

Here’s the math:
According to CMHC’s website, monthly housing expenses (which include taxes and heating) must not exceed 32% of your gross monthly income.

m = mortgage payment
r = rental income
i = gross monthly income
h = heating expenses
t = taxes

Under the current rules:
(m – 0.8r) + h + t = 0.32i

Under the new rules:
m + h + t = 0.32(i + 0.5r)
m + h + t = 0.32i + 0.16r
(m – 0.16r) + h + t = 0.32i

Comparing the changes, the difference between the old and new rules is (m – 0.8r) vs. (m – 0.16r). To qualify for the equivalent loan under the new rules the rental income would have to increase by 5 times. Since 50% of rental income is added to your gross income, that means your gross monthly income needs to increase by 2.5 times rent. For an annual salary that means 2.5 x 12 = 30 x rent.

You can verify this on the CMHC’s own calculator:
http://www.cmhc-schl.gc.ca/en/co/buho/buho_007.cfm

For example if you are using the $1000/month rent example it will increase your maximum monthly mortgage payment by $800 with the old rules.

If you put in $5000 for the monthly income (does not matter tax/heat you use), then change it to 5000 + 2.5 x 1000 = 7500 you will see the maximum monthly mortgage payment increases by $800 just like under the old rules. The difference though is an income of 60K vs. 90K!

Addendum: Above are the two formulas I came up with, one as change in principle under the new rules, and the other the change in rent. It’s interesting to play around with the numbers, for example a $600,000 mortgage requires $2650/month over 35 years at 4%. Assuming this is a typical detached mortgage for someone with a suite that generates $1250/month, the same people will now qualify for 22% less mortgage or 130K less. In order to make up the gap previously they need to increase their monthly income by $2500.

One change I can see coming from this is how the suites are valued when selling a home. In my example above, the suite adds an extra 130K to the mortgage a potential buyer can qualify for compared to the new rules. The only way around the rules of course is to come up with 20+% down… maybe Flaherty did effectively raise the minimum down payment for homes with suites to 20%.

This fixer-upper is conveniently located near the center of Vancouver BC host city of the 2010 Olympic and Paralympic games.  Just minutes from downtown, it can be yours for only $579,900.  You may be slightly put off by the pictures, but remember, many investors won’t be able to recognize a diamond in the rough, so you might not have to bid too much over asking price to put this baby in your portfolio of investment properties.

First time buyers, Investors, Builders. Corner lot with lane. Nice residential street. Close to everything. Central location. Handy man special. Needs TLC. Mainly Land Value. 21st Avenue and Prince Albert St. 10 mins to Downtown Vancover.

Thanks to crash and tincup for finding this gem!

Bob Rennie is the quintessential salesman and like most marketers he knows how to talk his product up.  Here he is expounding on the wonders of Vancouver condos on the Chinese news site xinhuanet.com.  This follows the template of most of his ‘news’ releases but includes one very interesting quote about the post-games market here in Vancouver:

“I’ll guarantee it won’t hurt our values. I’ll guarantee it will maintain our values. The frightening part is if values go up too much. We don’t have financial sector head office jobs, no manufacturing. If we are basing things on local incomes, how does housing keep up with local incomes if we have a shortage? We have to be very careful on the affordability side.”

This is a very generous offer.  If anyone has the financial resources to ‘guarantee’ that your condo won’t drop in value it’s Bob Rennie.  This could be exactly what anyone who fears the fallout of a housing bubble needs to get them to buy property in Vancouver.  After all, many people are leery of buying in a market where prices are near record highs and there are no ‘financial sector head office jobs’ and ‘no manufacturing’, particularly when that city has a history of volatility in house prices and has seen market crashes of up to 50% in the past.  Watching people in cities around the world go into foreclosure or make mortgage payments that are far beyond the current value of their property doesn’t exactly instill confidence either, even if it IS different here.

I’m not sure exactly what the contract on this deal would look like but I imagine that you’d ‘lock in’ your purchase price and it would be held on record for any future point you decide to sell.  If the market goes up, you’ve made free money.  If the market goes down, I’m guessing Bob Rennie would write you a cheque to cover the difference between your purchase price and the price you were able to sell for.

Nah, that’s just silly… he’d probably have an employee write you the cheque.

I’m not sure if there are any catches, but with a deal like that how could you possibly go wrong?

Yep, property tax assessments are out and the Vancouver Sun asks how did you do?

This year — unlike in January of 2009 when the system was turned on its ear by political interference — it’s fairly easy to figure out if you’ll win or lose when your tax bill comes out in July.

Let me illustrate with an example that, on the surface, looks scary: Say your assessment notice shows a 15-per-cent increase in the value of your home or business. What to do?

First, don’t panic. Take a moment to read this column, check our website and figure out what this really means.

You’ll find a 15-per-cent increase is no big deal if your home is in New Denver, Kitimat or Clearwater, or your business is in Peachland, Sparwood or Smithers. Because in these places the average assessment — not just yours — is up about 15 per cent. So the impact will be nil. Any hit on your tax bill in July will be due solely to increased municipal spending.

Phew!  But it’s a different story if you own property in a major urban center.

However, if this hypothetical 15-per-cent increase is for property in most urban centres — almost all of the Lower Mainland, the Capital Region or the Okanagan — then now might be a good time to panic. Because the average in these places hovers just a few points above or below zero. And if you have a significantly higher-than-average change in value, you get a bigger tax bill.

It’s how the change in your assessed value compares to the average for other properties in your community — not the absolute value of your assessment — that matters to your tax bill.

Well, I guess we’ll just have to hope that Vancouver City Council doesn’t want to raise any more tax money in the near future.  You can check the assessment online here if you haven’t received any mail yet.

UPDATE: Don and Larry point out that the REBGV stats package PDF for December is now available online.

Canadian Mortgage Trends has an interesting interview with Pierre Serre, the Vice President of Insurance Products and Business Development at CMHC.  The upshot of the interview is that the CMHC has plenty of dough in reserve and poses no threat to the Canadian taxpayer in the event of a housing market crash.  There are some other interesting figures in that interview: currently 9% of Canadian mortgage holders have less than 10% equity in their home.  They also remark on default rates during previous rate increase periods, which seems topical since Carney is planning on raising the benchmark rate by 500% in 2010 (from a rock bottom .25% to a still low 1.5%)

CMT: Can you tell us, what were default rates in past periods of large rate increases (like 1980-81 or 88-89)?

Pierre: According to the Canadian Bankers Association, the highest rate of mortgage arrears—which is, greater than 90 days–occurred in 1982 and in 1983. The rates were 0.96% and 1.02% respectively, compared to today’s rate of 0.43%.

CMT: Mortgage arrears are currently around 0.4% in Canada—exceptionally low, especially for a recession. I assume CMHC’s risk analysts have calculated what would happen in a worst-case scenario of mass defaults?

Pierre: CMHC internal analysis supports CMHC being able to cope with a variety of economic scenarios, including some rather severe ones.

By ‘rather severe ones’ I assume he means a US-style cliff diving real estate market.  Speaking of cliff-diving and on a whole different topic, check out this graph of US commercial real estate.

Thanks to Don for the links!

This post is all about contacting your representatives in government – getting clarification on where they stand regarding housing economics, and letting them know where you stand as a voter.  Many readers on this site have mentioned the importance of writing to your MP, so I figure it’s high time we do a story thread where we can share ideas and contact information.

First off a list of Vancouver area members of Parliament including email links and mailing addresses. (thanks Drachen for the link)

Now a few questions / opinions I have for my MP.  I should clarify these are just points for discussion and not intended to be copy and pasted into an email.  Writing a letter in your own words will likely be more effective than a form letter.

The Canadian Mortgage and Housing Corporation
I believe that the CMHC is flooding too much cheap credit into the housing market temporarily driving up prices.  Where do you stand on the CMHC and how effective do you feel they are addressing their mandate of making housing affordable to Canadians?  Is ‘affordability’ measured best as temporarily low monthly payments or as total debt load?

OSFI Conversion to International Financial Reporting Standards
The Office of the Superintendent of Financial Institutions Canada (OSFI) has a draft advisory (pdf) that is set to be put into effect at the end of this year.  There has been some opposition to implementing these changes at this time.  Where do you stand on the OSFI advisory, specifically on taxpayer funded securitization of mortgage debt?
* You may wish to contact the Honorable James M. Flaherty on this topic

Bailouts for speculators and negative equity homeowners
As housing prices fell in the US, there were a number of government bailouts and stimulus measures that tried to prop up the market.  These measures have so far failed to keep house prices from falling more than %50 in cities like Las Vegas and Miami.  Where do you stand on bailouts or other measures that attempt to prop up housing markets?  If foreclosure rates rise further in Vancouver, what sort of action would you take if any?  Would you support or oppose bailouts?

So what do you think? What do you want your MP to know and what issues do you want them to clarify their stand on?  Are there other Government entities that you think would be worth contacting?  Post your thoughts, letter excerpts and ideas in the comment section below.

If you’re waiting out the current real estate market in the hope for a return to sane prices, chances are you’re saving up at least some of the difference between rent and sales prices.  The question then is: what are you doing with your money?  Do you have it stuffed in a mattress or buried in a jar in the backyard?  What are your expectations of return on capital and do you expect to beat inflation?

Stock markets are way up again, the local real estate market is close to it prior peak again and rock bottom interest rates mean any guaranteed returns are pretty low, so the challenge is to find sectors with room to grow.  Are you content with the 2% you can get on a saving account or are you playing the markets and buying up bonds and GICs?

Here’s a handy tip when building your laneway house: consider ‘going green’ and building a laneway home without any electricity.. That one simple move could save you the $20,000 that BC Hydro might charge for new electric hookups on these homes.

Bryn Davidson, who runs Lanefab Custom Homes, said he was originally told by city staff it would cost just a few hundred dollars to hook up power to the new backyard rental units.

“We were told from the city and other people that we would be able to just run off of an upgrade to the main house for about $500,” said Davidson.

But now that his clients are going ahead with their projects, BC Hydro has revealed the price for hook-ups will be up to $20,000 for some homeowners.

“Through the process of dealing with these first ones, we were originally told [by BC Hydro] it would be between $20,000 and $30,000, and now they’re saying between $8,000 and $20,000,” said Davidson.

BC Hydro was not available for comment early Monday morning, but Davidson said the power company said the overhead power lines are at capacity, so the new lines will have to be run underground.

One of Davidson’s clients, Agnus Mendoza, said she can’t believe staff at BC Hydro appeared to be so unprepared for the new homes and were not more upfront about the potential costs.  Mendoza says she’s already spent more than $4,000 on development fees and was hoping to break ground on her unit this week before learning of expensive hook-up fee.

Or take part in the latest Vancouver eco-density fad: extension cables hanging from tree branches going from the main house to the garage.

Just a few years ago it seemed like the easy way to get rich was to buy a pre-sales condo in the Lower Mainland and wait for appreciation to kick in.  Well, a funny thing happened on the way to the bank: property values deflated.  That means that many people who bought condo units under construction in the last couple of years now owe more for their condo that it’s current market value.  We’ve posted before about buyers trying to get out of their contracts and developers suing buyers.

Bat posted this link to a craigslist comment, it appears some buyers at D’Corize in Surrey are frustrated with the drop in property values and would like to ask the developer to return some of their profits:

First of all my apologies as I did not know where else to post this info. :

The project is pretty much complete and you are probably being asked to make arrangments for financing. Financing is based on the appraised value of your suite…guess what? Appraisals are coming in well below the price you signed up for back in 2007, this means you’ve got to come up with a bigger down payment. I hear that there are alot of people that are not qualifying due to the poor real estate market, job losses and these individuals may walk away, this won’t be easy as you’ll lose your deposit and then the developer can come after you for further losses….well you’re not alone. Some individuals are approaching the developer to re-negotiate the price and in my opinion there is strength in numbers, if you know of others that have purchased these units in a presale…your friends, your family….talk to them and approach the developer as a group or have someone represent you as a group (lawyer). Where are all the realtors who said that this would be a “Great Investment”. Well they’ve all disappeared and I guess they were looking after their own best interest….. Well good luck…and if anyone else has anything to say,,,,,just post your comments.

Regards,

In the same boat as you…..

Here’s a nightmare scenario: You bought a presales contract for a condo in Vancouver but delays in construction made you change your mind.  No problem! Just sell your contract for a profit, and then the buyer resells the contract for yet another profit! But wait – the third buyer defaults, the second buyer defaults, and the developer is suddenly coming after you for a contract you thought you got out of a long time ago.

Apparently it can happen.

Attention Presales Buyers: If you are unable to complete your transaction of sale, or have assigned your agreement to another party who has not completed the transaction, gather your contracts and documents and make an appointment to meet your lawyer.

Presales agreements are contractual obligations with a developer, where you, the buyer, are compelled to purchase the unit when it is complete, at the fixed conditions in the agreement.

This is not a sales agreement. It binds the rights and obligations of the potential buyer and the developer to the conditions of the contract.

If you have transferred your presales agreement to another party, you may very likely have an obligation to the developer if the assigned buyer defaults.

Full story at househunting, and a tip of the hat to Bubble Lad for the link.