2018 Year In Review: Local Real Estate Market Observations

Happy holiday season, Gang! Can you believe Santa is coming to town in less than 2 weeks? With the end of 2018 on the horizon, we wanted to take the opportunity to review some of the things we learned this year about our local (Windsor-Essex) real estate market. Here are some items of note that stood out to us.

Listings Are Still Down.

Per WECAR (Windsor-Essex County Association of Realtors), through the first 11 months of the year, listings were down from 2017 by 6% year to date. Everyone thought inventory was super low last year and that was one of the main reasons for the bidding wars.  Well, inventory got even lower this year. The supply and demand balance has stayed with the sellers this year.

Average Sale Price Is Up, Again.

Also through those same 11 months of the year as per WECAR, the average sale price rose 14% versus 2017. I don’t think this strayed much from our forecast. Having listings down again, upward pressure was put on sale prices. This is a healthy stat that should put us up with some of the best performing markets in Canada.

Unit Sales Are Down Quite A Bit

In that same timespan, unit sales were down 11% versus 2017. This isn't a good stat for realtors! Listings being down explains part of it but clearly there is less turnover. A partial explanation could be that sellers have increased their pricing expectations and these over-priced listings are sitting on the market and not resulting in transactions.

Total Volume of Sales Were Up Modestly

Sales volume rose 2% versus 2017 through the first 11 months of 2018 per WECAR. This stat is pretty easy to figure out when you combine sales prices being up 14%, combined with unit sales being down 11%. What also affects this stat is the fact that more and more of the sales seem to be in higher priced categories bringing up the averages.

Increased Interest Rates Haven’t Affected the Market—Yet

With the Bank of Canada's increased interest rates three times this year, higher interest rates are making things less affordable in housing. This hasn’t translated into much decreased demand yet, but should interest rates go up a few more times in 2019, this could start to drive some people out of market.

Investor Demand Has Plateaued

The fever pitch of real estate investment demand seems to have levelled off. We had some listings this year that surprised us a little on the market reaction. The cap rate demanded by sellers and what buyers will accept seem to be at a standstill in 2018. Perhaps cap rates will increase a little next year and part of that may be due to the increasing interest rates mentioned above.

There Is A Serious Housing Shortage in the Rental Market

The vacancy rate in 2017 was down to 2.3% locally. The 2018 report still hasn’t been released but is looking like it will be less than 2%. We believe this stat is somewhat inflated; if you look around for vacancies for any decent buildings, they are essentially 0% with waiting lists. There are also long waiting lists for socially assisted housing. Combining this low rental supply with the booming housing market that is driving more people into the rental market and the situation is really dire for tenants. Something needs to be done about this at the governmental level as it seems to be getting more tight every year and market based solutions don’t look to be feasible.

Those are some of our 2018 real estate market observations. What are yours?  

Real Estate Insider: August 2018 News Report

Readers, can you believe it's the end of August already? And that means that Fall is just around the corner along with big changes in store! This month we've found some valuable reads, including 7 home projects to do before Winter, buying at a discount in a seller's market, the advantages of living in Windsor-Essex, and 5 important things to know about the new Cannabis Act!

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With the rapid increase in automation in today’s society, some people think Realtors will be obsolete in the next few years, but we disagree! Read why a computer cannot replace the value that a Realtor provides! >>

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Capital Gains Tax is something everyone dreads. A lot of people are aware that their principal residence is exempt, but if you have multiple properties you should read this article to make sure you are getting the most money out of your properties when it comes time to sell! >>

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There are many advantages of living in Windsor-Essex, perhaps one of the most significant is NO LAND TRANSFER TAX! Read here how much you would have to pay living in other places in Canada (sorry Vancouver). >>

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Having a hard time deciding whether to buy a property for yourself or invest in a rental income? Why not do both! A duplex might be the perfect way to get your foot in the door. Read the pros and cons of buying a duplex you plan to live in. >>

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While some chores seem to be manly for aesthetic purposes, many can save you thousands in the long run. Learn about the 7 home improvement projects to put on your list before winter! >>

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Discover the “5 C’s of credit in action” and see where you might fall. >>

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For the fourth time this year the Bank of Canada has raised its interest rates due to strong economic growth, but with concerns over Trump and NAFTA negotiations, some people aren’t so sure it’s a good idea. Read here about some of the implications of the recent spike. >>

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Real Estate Lawyers.ca is back at it with 5 things to know about the new Cannabis act! Watch this video to be more prepared for October. >>

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We are no doubt in a seller’s market right now, but that doesn’t mean you always have to pay top dollar for a property! This article gives a few tips and tricks to increase your odds of buying at a discount. >>

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“A rising rate guide to mortgages, HELOCs, GICs, savings and more”. >>

Posted Rates – How Do They Affect My Mortgage?

Hopefully you are enjoying the spring weather that has finally arrived ☺ .  You may have heard in the news over the past few weeks that some of Canada’s chartered banks have increased posted rates on their mortgages. These were generally accompanied by a call to action to get locked in before rates go up!  But what exactly does this increase in posted rates mean for you as a borrower? Today, we are going to cover what you need to know so you can be an informed shopper!

What Exactly Is a Posted Rate?

A posted rate is essentially the mortgage rate that the banks and other lenders publicly announce.  It got its name literally from how banks post their mortgage rates on the wall within the branch. Back in the pre-technology days, that was one of the only ways for borrowers to figure out how much interest rates were—to walk into the branch to check out the rates posted on the wall!

Are the Posted Rates What I Should Expect to Pay as a Borrower?

No, definitely not. Posted rates are usually inflated by 1-2%. To give you an example, on May 9, 2018, on a 5 year fixed mortgage, BMO has a posted rate of 5.19% and a best rate of 3.29% (as per ratehub.ca). Now, not everyone can qualify at best rates but you see the significant spread.

Why Do Banks Have Posted Rates Then?

For profits! It sounds bad, but essentially it’s a bit of a game where the bank hopes that borrowers aren’t financially savvy. If you don’t shop around you may not know what market interest rates are and are less apt to negotiate. Plus, it gives them room to negotiate a “discount” (Ie they offer you 1% below posted rates and you think that is a deal but 2% below their posted rate is easily attainable in the market).  One other major reason to note is that mortgage penalties on fixed rate mortgages are usually calculated using a complicated interest rate differential formula.  For example: say you were breaking your mortgage and the interest rate is currently 5%, but rates have since gone down and now the interest rate is 4%. Therefore, the bank has an interest rate differential of 1% that they are missing out on so will charge you the difference by way of your mortgage penalty. But these interest rate differentials in your mortgage contract usually compare posted rates with your discounted rates, and usually because of this 1-2% artificial spread, the interest rate differential can be quite large, equating to penalties of thousands of dollars.

What Else Should I Know About Posted Rates?

Now that the government has implemented stress testing for mortgage qualifications in Canada (click here for more info on the topic), posted rates do have an impact on the mortgage amount you can qualify for. So these increases in Bank posted rates have resulted in the Bank of Canada raising their qualifying rate. This is the main effect from the posted rate increases. If you were planning on buying something later this year and were bumping up into the maximum mortgage amount you qualify for, this may negatively affect your ability to buy in the same price range as before.

The next time you hear about banks increasing posted rates, now you know what it means for you. It doesn’t necessarily mean interest rates on your mortgage are increasing. Always read beyond the headline!

Are you Fit for a Mortgage?

What the heck is a Stress Test? Why Should I care?
Starting next year, it will become tougher to qualify for a mortgage.  Earlier this month, Canada’s banking regulator published final guidelines for its mortgage qualification rules.  For some reason it hasn’t gotten as much coverage as other news items, such interest rate hikes or Amazon HQ2.  But it should have because it has serious potential repercussions for the real estate market and the economy.  Today we are going to discuss what you need to know.

Who is making this change?

Canada’s banking regulator, the OSFI (Office of the Superintendent of Financial Institutions).  The OSFI is responsible for supervising and regulating Canada’s financial institutions.

When do the changes come into effect?

January 1, 2018.

What changes are they making to the regulations?

They are tightening standards on uninsured mortgages (mortgages where the borrower is putting down 20% or more of a down payment on the purchase price).  Lenders will soon be required to “stress test” all uninsured mortgages at the greater of: the Bank of Canada’s five year posted interest rate or 200 basis points (2%) higher than the negotiated contract interest rate.

Can you give an example of how this would work?

Let’s say you are looking to purchase a house and are shopping to line up mortgage financing.  Your realtor tells you to go get pre-approved so you understand what price range you can afford.  Your lender offers you a 5 year fixed interest rate of 3.19% (which would be competitive as of the writing of this blog).  Before this change, you were able to qualify at this fixed rate with your lender and based on your ratios you were able to qualify up to a maximum price range.  After the change, you will now have to qualify at the higher of: 4.99% (the bank of Canada’s posted rate as of writing) or 200 basis points higher than the contract rate (3.19% +2.00%) or 5.19%.  In this case you would use 5.19% to qualify.  Naturally with the higher interest rate your ratios would change and your affordability will drop – you won't be able to qualify for as much house!

How will this affect the market?

This will knock some buyers completely out of the market in some higher priced areas and will drop other buyers into lower prices ranges when shopping for a home.  This should increase competition for starter type homes and decrease the pool of buyers in larger and pricier homes.  Other people will be forced to put up a higher down payment (thanks Mom and Dad).  This will also increase rental demand in most markets.

Why are they making this change?

The main reason is to slow down the runaway housing market many cities in Canada have experienced in the last 7-8 years.  The regulator is also concerned about the indebtedness of the population and their ability to handle potential rising interest rates.  This should reign in the mortgage segment at least.

What else should I know?

This applies to you if you are renewing your mortgage as well.  The only time it doesn’t is if you are renewing and staying at the same lender.  But if you decide to switch, you’ll also have to qualify with this new stress test.  It is a bit concerning that some people will be forced to stay with their existing lenders because of this and knowing the borrowers predicament, the lender will not be very generous in their renewal terms.

Of all the changing regulations the government has thrown at the housing market in the last few years, this one has the most potential to really shake things up.  It remains to be seen how the market will respond but it will be interesting to see!  What do you think of these stress tests?  Will they affect your plans in 2018?  We’d love to hear from you.

Has The Local Real Estate Market Cooled Off?

It's hard to tell from the unseasonably warm weather, but we are a couple weeks into the fall season. The autumn real estate market is well under way and even if the weather hasn’t cooled off yet, our local real estate market (Windsor, Ontario) is certainly feeling a drop in temperature. Today we are going to discuss a few of the factors that have led to this cooling.

Sellers Have Adjusted Their Prices Upwards

This makes a lot of sense. We had a pretty crazy first 8 months of the year. Multiple offers were everywhere, properties were selling considerably over list price and it was a great time to be a seller.  As this continued, the market adjusted and realtors and sellers began to adjust their prices to these new comps. As prices increased, demand levelled out to a more balanced market place.

Interest Rates Were Raised A Couple Times

The Bank of Canada (BOC) has now increased the benchmark interest rate two times this year, for a total of 50 bps (0.5%). Although this is a minor increase, it has affected affordability and how much house a buyer can qualify for.  The BOC seems to be indicating that they are also planning further hikes into 2018. This has led to a modest softening in demand.

Trickle Down From The Toronto Market

After a series of measures introduced earlier this year to slow the housing market, the government seems to be finally succeeding. Sales are way down, prices are stalling and deals signed in the spring are running into snags at closing. A large segment of the demand in our market was coming from Toronto buyers who were relocating and/or investing in our market. Suddenly, properties that used to sell in a few days are sitting on the market for a couple months. Because of these developments, this pool of buyers has seemed to slow and put a dent in demand.

General Uncertainty

There seems to be lots of bad headlines out there right now: the Liberals are planning to change the taxation of professional corporations; anything Trump related; the US, Canada & Mexico are renegotiating NAFTA; North Korea’s nuclear program; hurricanes causing havoc; flooding (which we experienced locally); and terrorist attacks. Uncertainty is never good for markets. Markets operate on confidence, which is sometimes a fragile thing. It's difficult to quantify how much confidence is shaken by these types of events, but combined with the above factors, it probably has some impact on demand.

Sometimes it's hard to figure out cause and effect in markets but those are some of the factors we see cooling our local market. What are your thoughts on this subject? We’d love to hear from you.

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?