15 Apr

Housing Data In March Provides Hints Of Coming Strength In Spring

Housing Update

Posted by: Yen Chi (Frank) Feng

Recent Signs Show Housing Activity Will Strengthen Meaningfully In April

The Canadian Real Estate Association (CREA) announced today that national home sales for March were roughly flat, while new listings fell and prices stagnated. CREA analysts are confident that recent activity will harken stronger housing markets for the rest of this year. 

There is significant pent-up demand for housing owing to rapid population growth and first-time homebuyers’ fears that prices will rise sharply once the Bank of Canada cuts interest rates. Moreover, Ottawa has been handing out goodies for first-time buyers–leaking what’s to come in the April 16 federal budget. The Finance Minister has already announced the resumption of 30-year amortization on insured mortgages for first-time buyers of new construction. While this is less than meets the eye, in that pre-sales typically require a 20% deposit, the homebuilders’ association is pretty excited.

In addition, Ottawa has eased restrictions on the RRSP Home Buyers’ Plan, allowing F-T buyers to withdraw $60,000–up from $ 35,000 (never mind that the $35K ceiling is hardly ever broached)–with 5 years until repayments must begin, up from two years.

Ottawa is also providing assistance to at-risk homeowners, telling lenders to work with these households to lower payments “to a number they can afford, for as long as they need to” by allowing longer remaining amortizations. The Department of Finance is encouraging lenders to begin working with these at-risk households two years before scheduled renewals. The unintended consequences of this could be significant. For example, what happens to the mortgage-backed securities market and other investors in mortgages? Also, this reduces competition by discouraging refinancing and could raise the cost of borrowing for all participants. 

Ottawa has never been very good at considering the second-order effects of their actions. A case in point is the decision to markedly increase immigration (for lots of good reasons) without considering where all of these new people would live. This has led to a massive housing shortage and the least affordable housing in Canadian history. Now that Trudeau’s approval ratings have suffered, they are scrambling to remediate, but increasing demand for housing is obviously not the answer. 

There will be more news on Tuesday when I dissect the federal budget’s housing initiatives. The more government money spent, the more money borrowed, which will only raise interest rates from what they will otherwise be. 

Back to the March data, national home sales edged up a mere 0.5% month-over-month, although activity rose 1.7%. That was a much smaller gain than those recorded in the previous two months, although a part of that does reflect a mostly inactive market during the Easter long weekend.

New Listings 

The number of newly listed homes declined by 1.6% month-over-month in March. “While the official March monthly numbers were quite flat, anecdotal evidence from late last month and early April suggests activity is ramping up,” said Larry Cerqua, Chair of CREA.

With sales edging up and new listings falling in March, the national sales-to-new listings ratio tightened to 57.4%. The long-term average is 55%. A sales-to-new listings ratio between 45% and 65% is generally consistent with balanced housing market conditions, with readings above and below this range indicating sellers’ and buyers’ markets, respectively.

At the end of March, there were 3.8 months of inventory nationwide, unchanged from the end of February. The long-term average is about five months of inventory. 

New listings rose sharply in late March and early April–good news on all fronts.

The actual national average home price in March was up 2% year-over-year from a markedly depressed level. The MLS Home Price Index was roughly unchanged, down markedly from its early 2022 peak when the central bank’s overnight policy rate was a mere 25 basis points before they started hiking rates in March, two years ago.

Bottom Line

With pent-up demand for housing rising with every rent increase, the spring housing season is likely to be robust, even before the central bank cuts interest rates. We believe the BoC will begin reducing the policy rate in June or July, depending on the next two CPI reports. March inflation data will be released on Tuesday (a big day for economic news), and April data will come out on May 21st. The next Bank of Canada decision date is June 5th. 

 

Source: Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres

18 Mar

Canadian Home Sales Stop Falling In February As Prices Hold Steady

Real Estate

Posted by: Yen Chi (Frank) Feng

The Canadian Real Estate Association announced today that national home sales dipped 3.1% m/m in February while home prices were flat, ending a five-month price decline that began last fall.

It was noteworthy that prices remained unchanged from January to February, given that they dropped 1.3 from December to January. The MLS Home Price Index tends to be relatively stable, so a shift in pricing behaviour this large is quite unusual. It has happened only three other times in the past two decades. All three times were in the past four years when demand was poised to rise sharply: May 2020, right after the initial COVID slump; January 2022, before interest rates were increased; and April 2023, when people thought the Bank of Canada would continue to pause. The rebound in home sales in 2023 led the central bank to hike interest rates two more times. 

There is significant pent-up demand for housing owing to strong population growth and first-time homebuyers’ fears that prices will rise sharply once the Bank of Canada cuts interest rates.

New Listings

The number of newly listed homes edged up 1.6% m/m in February. Depending on how many owners prepare to list their properties for sale this spring, gains may rise in the months ahead.

“After two years of mostly quiet resale housing activity, there’s a feeling that things are about to pick up,” said Larry Cerqua, Chair of CREA. “At this point, it’s hard to know whether buyers are going to wait for a signal from the Bank of Canada or whether they’re just waiting for the spring listings to hit the market.

With sales edging down and new listings inching up in February, the national sales-to-new listings ratio eased a bit to 55.6%. The long-term average is 55%. A sales-to-new listings ratio between 45% and 65% is generally consistent with balanced housing market conditions, with readings above and below this range indicating sellers’ and buyers’ markets, respectively.

At the end of February 2024, there were 3.8 months of inventory nationwide, up slightly from 3.7 months at the end of January. The long-term average is about five months of inventory.

Bottom Line

With pent-up demand for housing rising with every rent increase, the spring housing season is likely to be robust, even before the central bank cuts interest rates. We believe the BoC will begin reducing the policy rate in June. Tomorrow, we will get the CPI data for February. The US CPI data for February, released last week, were disappointing as gasoline prices increased headline inflation and core measures remained well above 3%. 

 

Source: Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres

15 Sep

Converting Your Basement to an Income Suite

Real Estate

Posted by: Yen Chi (Frank) Feng

With the current interest rates and economic scenarios, many Canadians may be looking for ways to bring in some extra cash. One option is to put your home equity to work by considering renovating your basement into a legal income suite. You can do this by using a secured credit line (home equity line of credit or HELOC) to help fund the upfront cash to make changes to your home.

A few things to consider before you invest in renovating to create an income suite include:

1. Zoning: Before looking into doing anything with an income suite, always double-check if you are zoned accordingly for a smooth renovation. If your zoning does not allow for secondary suites, consider exploring the possibility of rezoning.

2. Local Regulations: Depending on your location, there may be particular regulations that you need to follow or be aware of regarding your suite. A few examples of how the regulations can differ between provinces or cities include:

  • Coquitlam – you cannot have a suite that is more than 40% of the main house floor plan. You are also required to offer a parking spot for tenants.
  • Kelowna – you can only have one secondary suite and the home must have an “S” designation.
  • Calgary – updated zoning legislation has now made it easier to add income suites.
  • Toronto – has also proposed reforms that will make it easier to add suites.
  • Montréal – anyone carrying out a project involving the addition of at least 1 dwelling and a residential area of ​​more than 450 m² (equivalent to approximately 5 dwellings) must enter into an agreement with the City of Montréal in order to contribute to the supply of social, affordable and family housing. It can be a new building, an extension, or the conversion of a building.

Visit the official municipal websites or consult local building departments to obtain accurate and up-to-date information on the rules and requirements in your area BEFORE getting started.

3. Insurance & Legal Considerations: Before adding your secondary suite, ensure that you have proper insurance coverage or the ability to add additional coverage to protect both the primary residence and suite. it’s important to consult a lawyer to create a proper tenant or rental agreement. Ontario has a mandatory standard lease agreement that all landlords must use.

4. Unit Layout and Design: If the zoning and regulations in your area allow you to build an income suite, the next steps are to look at the suite layout and dimensions. While planning the unit’s design, ensure compliance with size restrictions and minimum ceiling height requirements. The unit should have, at minimum the following:

  • A separate parking space for the renter.
  • A separate entrance, kitchen, bathroom, and living/sleeping areas.
  • Ventilation and soundproofing measures to enhance livability.
  • Consideration of natural light is crucial for the comfort and well-being of your tenants.
  • interlinked smoke detectors for primary and secondary residences.
  • A separate, independently-controlled ventilation and heating system.
  • Proper drainage, sewage connections, and utility separations.
  • Outlets, circuits, and lighting that meet electrical code requirements.

Ensure that however your income suite is designed, you are hiring the appropriate building, plumbing, and electrical experts to ensure your suite is up to code and avoid any potential disasters.

5. Building & Trade Permits: Once you have confirmed that you are properly zoned and able to add an income suite and understand all the regulations for your area, you will want to draft your blueprints and submit a permit application, along with the fee, before you get started. For example, in British Columbia, a Building Permit is mandatory for any suite to be legally recognized.

IMPORTANT: Even if you are not required to have a building permit, it is important to get these permits for other aspects including insurance coverage should anything happen. Having a building permit will help protect your investment.

In addition to your building permits, you will need to get permits for any plumbing, electrical, and gas renovations prior to beginning your work.

6. Inspections & License: Once you have your permits and have begun construction, make sure you understand what inspections are required throughout the process and you schedule them accordingly with local authorities to ensure compliance with building codes, fire safety standards, and health regulations.

If the work meets all requirements, your suite will be approved. The last step is determining if you need a business licence. This is not required if your family (parents, children, etc.) will be living in the suite. In Vancouver, for example, if you intend to rent out your suite long-term, you DO need a license. Be sure to check any rules on this in your area.

7. Incentives: Beyond the ability to earn extra income per month, there are a few additional government incentive programs when it comes to suites including:

  • First Nations: If you live on a First Nations reserve, you may be eligible for federal funding that will provide up to $60,000 to help you build an inexpensive secondary suite rental linked to your principal home. If you live in a northern or remote area, this amount is increased 25%. This is a 100% forgivable loan that is not required to be paid back assuming all guidelines are followed.
  • Residential Rehabilitation Assistance Program (RRAP) – Secondary and Garden Suites: This program is open to all First Nations or individual First Nation members, particularly those who own a family home that can be converted to include a self-contained suite for a senior or adult with disability.
  • Multigenerational Home Renovation Tax Credit: A credit for a renovation that creates a secondary unit within the dwelling to be occupied by the qualifying individual or a qualifying relation. The value of the credit is 15% of the lesser of qualifying expenditures and $50,000.
  • British Columbia: Beginning in early 2024, BC homeowners will be able to access a forgivable loan of 50% of the cost of renovations, up to a maximum of $40,000 over five years, for income suites.
  • Ontario: There are multiple secondary suite programs throughout Ontario, depending on your region. These loans provide $25,000 to $50,000 in funding and are forgivable assuming continuous ownership for 15 years.

While conducting online research is important. Your best resource will be visiting local authorities at the “City of” to confirm that you completely understand the considerations before moving forward with implementing an income suite.

4 Aug

Market Beware: Subject Free Offers

Mortgage Tips

Posted by: Yen Chi (Frank) Feng

When it comes to purchasing a home, most offers include conditions or subjects, which are requirements or criteria to be met before the sale can be finalized and the property is transferred. Some of the most common subjects include:

  • Financing approval
  • Home inspection
  • Fire/home insurance protection
  • Strata document review if applicable

The purpose of these subjects is to protect the buyer from making a poor investment and ensure that there are no hidden surprises when it comes to financing, insurance, or the state of the property.

These conditions are written up in the purchase offer with a date of removal. This is agreed to by the seller before the sale is finalized. Assuming the subjects are lifted by the date of removal, the sale can go through. If the subjects are not lifted (perhaps financing falls through or something is revealed during the home inspection), the buyer can waive the offer and the purchase becomes void.

However recently, especially in heightened housing markets, there has been an emergence of subject-free (or condition-free) offers. These are purchase offers that are submitted without any criteria required! Essentially, what you see is what you get.

Below we have outlined the impact of subject-free offers on both buyers and sellers to help you better understand the risks and outcomes:

Pros of Subject-Free Offers

  • Buyers: The main benefit of a subject-free offer for a buyer is the ability to “beat the competition” in a heated market. However, it is not without risks.
  • Sellers: Typically, a subject-free offer will include a competitive price, willingness to work with the dates the seller prefers, and evidence that the buyer has already done as much research as possible. If time is sensitive for the seller because they are trying to purchase another home or want to move as soon as possible, they may also choose your offer over subject offers to expedite the process.

Cons of Subject-Free Offers

  • Buyers: As a buyer submitting a subject-free offer, you are assuming a great deal of risk in several areas including financing, inspection, and insurance:
    • Financing: While buyers may feel that they have a pre-approval and so they don’t require a subject to financing, it is important to recognize that a pre-approval is not a guarantee of financing. If you are submitting a subject-free purchase based on a pre-approval, buyer beware. The financing is subject to the lender approving the property and the sale; from the price and location to type of property or other variables the lender deems important. By submitting a subject-free offer without a financing guarantee (or an inspection, title check, etc.), there is a risk that the deal can fall through. Even when you do not include subjects on the offer, you still are required to finance your purchase. In addition, as deals are submitted typically with a deposit, there is a risk that if the subject-free offer falls through the buyer will lose their deposit. This amount can range vary in the thousands and is typically a percentage of the purchase price or down payment.
    • Inspection & Insurance: If a buyer is also opting to skip the home inspection and home insurance protection subjects to have the offer accepted, then they assume huge risk as they do not know what they are getting and whether or not the property is up to code for insurance.
    • Due Diligence: With subject-free offers, there is no opportunity for due diligence after the offer has been made. This requires the buyer to do all their research before their initial bid. Because it is firm and binding, a buyer who decides to back out will likely be met with serious legal ramifications. Submitting an offer without subjects is not due diligence and it is at the buyer’s behest.
  • For Sellers: When it comes to the individual selling the property, there is less risk with subject-free offers but not zero. While the benefit is essentially there is no wait to accept the offer on the seller’s side, they do not know for sure if financing will come through.

Financing Around Subject-Free Offers

When submitting a subject-free offer, it is essentially up to the buyer to do as much due diligence as possible before submitting. They will need to identify what the lender is looking for to make sure they walk away with a mortgage. Though approval is never certain, prospective buyers placing a subject-free offer should do their very best to secure financing beforehand.

Contractual Obligations

Be mindful when it comes to purchasing offers versus purchase agreements. While your purchase offer is a written proposal to purchase, the purchase agreement is a full contract between the buyer and seller. The purchase offer acts as a letter of intent, setting the terms you propose to buy the home. If financing falls through, for example, then the contract is breached and this is where the buyer may lose the deposit.

It is also important to be aware of a breach of contract in the event that a seller chooses to take action. For example, if you submit a subject-free offer of $500,000 and cannot secure financing for that offer and the seller turns around and is only able to get a $400,000 deal with another buyer, they could potentially sue the initial buyer for the difference due to breach of contract.

Preparing a Subject-Free Offer

If you have decided to go ahead with a subject-free offer, regardless of the risks, there are some things you can do to mitigate potential issues, including:

  • Get Pre-Approved: Again, this is not a guarantee of financing when you do make an offer, but it can help you determine whether you would be approved or not.
  • Financing Review: Identify what the lender is looking for to make sure they walk away with a mortgage. Though approval is never certain, prospective buyers placing a subject-free offer should do their very best to secure financing beforehand.
  • Do Your Due Diligence: Look into the property and determine if there have been major renovations or a history of damage. This could come in the form of a Property Disclosure Statement. While this statement cannot substitute a proper inspection, it can help identify potential issues or areas of concern. If possible, conduct an inspection before submitting your bid/offer.
  • Get Legal Advice: This can help you determine your potential risk and ramifications of the offer should it be accepted, or otherwise.
  • Title Review: Be sure to review the title of the property.
  • Insurance: Confirm that you are able to purchase insurance for the home. Keep in mind, an inspection may be required for this but in some cases, you can substitute for a depreciation report if it is recent.
  • Strata Documents (if applicable): Thoroughly review strata meeting minutes and any related documents to determine areas of concern.

While there are things that can be done to help with subject-free offers, it is still risky. Ultimately submitting an offer with subjects gives you the time and ability to gather information on the above, as well as access to the property or home for inspections.

If you are intent on submitting a subject-free offer, be sure to discuss it with your real estate agent as they can determine if a subject-free offer is necessary, or if perhaps a short closing window would suffice to seal the deal. A good realtor will keep you informed of potential interest and other bids during the process as well. Their goal should be to maximize your opportunity and minimize your risk. In addition, before making any offers, be sure to check with your mortgage expert to discuss your mortgage and financing so you can make the best decision.

9 Jun

10 Questions to Ask Your Home Inspector

General

Posted by: Yen Chi (Frank) Feng

While home inspections might not be the most exciting part of your home buying journey, they are extremely important and can save you money and a major headache in the long run.

In a competitive housing market, there can sometimes be pressure to make an offer right away without conditions. However, no matter how competitive a market may be, you should never skip out on things designed for buyer protection – such as a home inspection.

You may have a good eye for décor and love the layout of your potential new home, but what is under the surface is typically where headaches can lie. We have all heard the expression “don’t judge a book by its cover” so why would you make the most important purchase in your life without checking it out?

Below are a few key questions you can ask your home inspector to ensure that you are getting a complete and thorough inspection:

  1. Can I see your licence/professional credentials and proof of insurance?
  2. How many years of experience do you have as a home inspector?
    • Note: Make sure they’re talking specifically about home inspection and not just how much experience they have in a single trade.
  3. How many inspections have you personally completed?
  4. What qualifications and training do you have? Are you a member of a professional organization? What’s your background – construction, engineering, plumbing, etc?
  5. Can I see some references?
    • Note: Don’t just ask for references, be sure to follow up with them. Ask the clients how they felt about the home inspection, did any issues crop up down the line that they were not made aware of, etc.
  6. What kind of report do you provide? Do you take photos of the house and specific problem areas (if any) and include them in your report?
  7. What kind of tools do you use during your inspection?
  8. Can you give me an idea of what kind of repairs the house may need?
    • Note: Be hesitant if they offer to fix the issue themselves or are willing to recommend someone cheap. Home renovations and repairs are one area you should never skimp on.
  9. When do you typically do the inspections?
    • Note: Ideally you want a home inspector operating full-time and can view the house during the day to inspect all areas, especially the roof.
  10. How long do your inspections usually take?

While hiring a home inspector may seem daunting, it will be the best few hundred dollars you ever spend. There is no price on peace of mind!

17 Apr

Good News On The Canadian Housing Front

Economics Insights

Posted by: Yen Chi (Frank) Feng

The Canadian Real Estate Association says home sales in March edged up 1.4% in March. Homeowners and buyers were comforted by the fall in fixed mortgage rates as the Bank of Canada paused rate hikes. Bond market yields, though very volatile, have trended downward in March, although they have bounced since the release of this data this morning. The five-year government of Canada bond yield, tied closely to fixed mortgage rates, increased to 3.22% this morning compared to a low of roughly 2.8% in the week of March 20th. Rates had been as high as 3.9% over 52 weeks. 

As we move into the all-important spring-selling season, green shoots of growth are evident. A standout in March was a significant sales increase in BC’s Fraser Valley.

The actual (not seasonally adjusted) number of transactions in March 2023 was 34.4% below a historically strong March 2022. The March 2023 sales figure was comparable to what was seen for that month in 2018 and 2019. It was also the smallest year-over-year decline since last September.

As we enter the spring season, some buyers are coming off the sidelines, but these are very tight markets. The inventory of unsold homes is exceptionally low in most regions of the country as sellers have been waiting for prices to rise. Home prices are now stabilizing across the country.

New Listings 

The number of newly listed homes dropped a further 5.8% on a month-over-month basis in March. New supply is currently at a 20-year low. The monthly decline from February to March was led by a majority of major Canadian Census Metropolitan Areas (CMAs).

With new listings falling considerably and sales increasing again in March, the sales-to-new listings ratio jumped to 63.5%, the tightest market in a year. The long-term average for this measure is 55.1%. There were 3.9 months of inventory on a national basis at the end of March 2023, down from 4.1 months at the end of February and the lowest level since last October. It’s also now more than a full month below its long-term average.

Home Prices

The Aggregate Composite MLS® Home Price Index (HPI) was up 0.2% on a month-over-month basis in March 2023 – the first increase, albeit a small one–since February 2022. The trend of stabilizing prices from February 2023 to March 2023 was broad-based.

With few exceptions, prices are no longer falling across most of the country, although they’re not rising meaningfully anywhere. The Aggregate Composite MLS® HPI now sits 15.5% below year-ago levels, a smaller decline than in February.

Bottom Line

A gradual turnaround in the Canadian housing market is in train. While inventory remains extremely low, homes are not only selling but also selling fast. Short-term fixed-rate mortgages are popular with buyers. A significant change from before the Bank of Canada started raising rates. 

While the Bank will likely hold rates steady for the remainder of this year, I do not expect Macklem to cut rates before then. All of this depends on inflation. We will get another read on that next week. It should be a good number (less than February’s 5.2% y/y posting) because of base effects. Stay tuned.

 

*Source: “First Back-to-Back Canadian Home Sales Gain in March” from @DLCCanadaInc Chief Economist @DrSherryCooper

24 Mar

Selling Your Home in the Spring

Real Estate

Posted by: Yen Chi (Frank) Feng

Looking to sell your home this Spring? Here are a few tips to help you make the most of the spring season!

1. Hire an Experienced Realtor: To get your home ready for the Spring market, consider hiring an experienced realtor who can guide you through the entire sales process. A good realtor can assist with preparing your home for listing, showing potential buyers, and finalizing the eventual sale. A realtor’s expertise can ease navigating the sales process with new safety protocols and virtual viewings.

2. Prioritize Repairs and Improvements:  Some minor repairs and improvements can make big differences in how a home appears to potential buyers. Before listing a home, it is important to go through room-by-room and address any issues. These can be fixing chipped paint, patching small holes in the wall, and updating old appliances. Correcting these minor issues can help a home truly shine when buyers walk through.

3. Clean and Stage Your Home: You can hire a professional cleaning service to clean and declutter your home to create a spacious and inviting atmosphere. Also, your real estate agent can help to stage your home for maximum impact.

4. Consider a Pre-Listing Inspection: A pre-listing inspection can identify any issues with the property. The inspector will conduct a thorough visual inspection of both the interior and exterior elements of your home.

5. Organize Your Paperwork: There is a lot of paperwork when it comes to selling your home. Keep all necessary documents organized and easily accessible for potential buyers. This includes permits, renovation or repair receipts, warranties, rental agreements, and copies of utility bills.