Thursday, July 20, 2017

Review: Bank of Canada Raises Interest Rates



Unless you were on vacation last week, you probably saw the news that the Bank of Canada increased interest rates.  A lot of commentary has followed the move with everyone sharing their opinion on the matter and what it means for the real estate market.  Today we are going to share our take

What should I know about what the Bank of Canada did last week?
The Bank of Canada raised its overnight lending rate from 0.5% to 0.75% last week.  This overnight rate determines the rate at which banks lend money to each other on a regular basis.  This affects the bank’s cost of funds and since the banks lend to consumers based on a spread, this would lead to increased borrowing costs.  This is the first interest rate increase in seven years.

Why did the Bank of Canada raise interest rates?
The bank has 2 mandates:

1. To ensure the economy is operating as close as possible to full employment.
2. To ensure inflation is operating within an acceptable range (generally 1-3% annually).

The bank cited a strengthening economy and expectations for higher inflation as two primary reasons for the increase.  Another reason is that the Bank of Canada acts mindfully based on how the U.S. Federal Reserve acts. The U.S. has increased interest rates three times already this year!  Lastly, the Bank of Canada is concerned about runaway house prices in large markets such as Toronto and Vancouver; they want to reign in speculation and increased borrowing.

What does the interest rate increase mean for me?
The Big Banks in Canada set a prime lending rate based on their cost of funds.  For the last few years, this rate has been set at 2.7%.  Lots of borrowing products, including variable rate mortgages and home equity lines of credit, are based on a discount or premium based on the prime rate (ie. prime -0.50%).  Therefore, rates on variable rate mortgages and other products tied to prime rates will increase as a result.  In fact, the big banks had all increased their prime rate from 2.7% to 2.95% within 24 hours of Bank of Canada decision.  Fixed rate mortgages or loans (being fixed) will not see a change.

How will this interest rate increase affect the real estate market?
When looking at the big picture, this interest rate increase is very small.  Lets use an example to illustrate:

  • The current average home price in Canada is approximately $500,000
  • Suppose your mortgage is based on 80% loan to value or $400,000
  • Let's say your variable mortgage is based on the previous prime rate of 2.7%
  • Now your prime rate is set to increase to 2.95%
  • The amortization period is 25 years
  • Your previous payment was $1831.95/mth.  Your new payment is $1882.73/mth.  An increase of approximately $50/mth.


While $50 extra isn’t fun, we don’t see it breaking the bank in the big picture.  When people think about interest rate increases, they think about rates rising to historical averages of 7-10%.  We are nowhere near this.  It would take a long succession of interest rate increases for interest rates to really affect the market.

Before the rate increase, sales in markets like Toronto were pulling back on the heels of a proposed 15% foreign buyers tax.  Add chatter of increasing rates and all of the sudden people are sitting on the sidelines.  This seems to be more of a perception issue with people reading the headline news.  Prices were already sky high and speculators are pulling back.  It's doubtful that the extra 0.25% on borrowing costs is suddenly making it unaffordable for qualified buyers who were in the market looking already.

In our home market of Windsor, Ontario, with an average price of $267,000, the affordability is very good and therefore this interest rate increase shouldn’t affect demand too much.  Using the same example above, adjusted for our lower prices, we are talking about an increased payment of $27/mth.  Interest rates are still bouncing off a historical bottom and have a long way to go before affecting affordability.


What are your thoughts on this interest rate increase?

Tuesday, July 11, 2017

REVIEW: Ontario Proposing Ban Of Real Estate Agents “Double Ending” Transactions



Over the last few blog posts, we have discussed the Liberal government’s 16-point housing plan they released in the spring.  The centrepiece of it? A 15 percent foreign buyers tax and expanded rent controls.  Another plank was reviewing the rules for real estate agents to ensure consumers are fairly represented.

The government has now published several proposals for changes to real estate agent rules and penalties and is seeking public consultation on them.  One of the proposals is to ban — with some limited exceptions — salespeople from representing both the buyer and seller or more than one potential buyer in a trade.  Today we are going to discuss what you need to know about double ending and how banning it will affect your future real estate transactions.

What is Double Ending?
Double ending is a term used to describe when the Listing Agent for a property represents both the Seller and the Buyer in a transaction.

What should I know about Double Ending?
Double ending usually occurs when a Buyer doesn’t work with an agent and searches for properties on their own.  Once they find a property, they deal directly with the Listing Agent.

In the above situation, the seller is being represented by the listing agent by their listing agreement.  They would call this an agency relationship.  The buyer is only dealing with this agent because it is his listing.  In this instance, the relationship is called Buyer Customer Service.  It would be considered agency if the Buyer had enlisted the same Agent to find them a property, and most likely signed a buyer representation agreement.

Most of the time, these double ending situations arise from the former, where a Buyer without an Agent deals directly the Listing Agent.  The later example would be rare.  

Why is the government concerned about Double Ending?
This is a pretty straightforward one.  They are taking the position that it is pretty hard to work in both the Seller’s and Buyer’s best interests, at the same time, given that their interests are directly opposed.  It’s more difficult to maintain confidentiality as well when representing both parties.  Its easy to see how this could be abused in the wrong hands.

What does this mean for me on my next real estate transaction?
If this proposal is passed, when buying your next listed property, you would be required to hire your own realtor, more than likely under a buyer representation agreement.  This would mean there would be agency relationships on both sides of the transaction and in theory both parties interests should be protected.  Our guess is that there will be some exceptions to the rules but we will have to see how it plays out.


What are your thoughts on double ending?  Have you had a double ending experience in your real estate travels?

Wednesday, July 5, 2017

Real Estate Insider: 2017 Summer Report



Welcome back, real estate readers! We are going to be adding a new monthly series to our blog. In addition to interesting real estate blogs, we'll be including helpful articles and subjects we think you'll benefit from reading. Last month, we found a treasure trove of insider info we just can't help but share.


Worrying about your credit score? Make it a thing of the past! CIBC is set to launch an easy-access platform for all clients to check their credit scores whenever they want, indicating the importance of everyone being comfortable and up to date with their financial situation. >>
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How much do you know about your condominium’s governance? After investigating some questionable practices in downtown Toronto, this article gives tips on what you should be doing to ensure that your condo is well-managed. >>
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Are we digging ourselves into a deeper hole with the Foreign Buyers Tax? The Montreal Economic Institute says that public decision makers are “missing the mark” and that this tax will do the opposite of what it was imposed to do. >>
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Trying to halt the train! Chief economist at the Canadian Real Estate Association says Torontonians should prepare for a possible tax on speculative home purchases to try and stop outrageous house prices, but will it work? >>
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What goes up, must come down. Home sales dropped 6.2% from April to May 2017, signifying the largest drop since August 2012. This could possibly mean the market is beginning to balance itself out once again. >>
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Is your house under seven years old? Make sure you know about the new home warranty program in Ontario and the changes coming! >>
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Could the legalization of cannabis affect the real estate business? Who should be responsible for all the costs and risks associated with growing marijuana plants? This commentary discusses some of the legal implications that could come with the industry. >>
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Risk big, win big. With interest rates set to rise, are variable rate mortgages worth the risk? Locking in your mortgage rate now might be the way to go for the more cautious homeowner. >>
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Canada has a historically moderate financial situation. In the wake of the recent housing boom, learn how the economy is protected with policies like the Foreign Buyers Tax to ensure Canada’s economy is safe now and in the future. >>


We hope you enjoy our findings -- happy summer and happy reading!