The fall (and rise) of the Real Estate Market

In these ever interesting times, I find it fascinating to watch the goings on in the real estate market. Over the past several months (if not years) there have been lots of pundits and moon lighting real estate “experts” predicting the collapse of the Canadian real estate market. In particularly in the two hottest Canadian markets Toronto and Vancouver.
In July the finance minister Jim Flaherty yet again changed the laws around government backed mortgages (think CMHC) yet again. These changes were designed to cool the market a little bit and help slow the decent many Canadians are taking down the debt highway. They will work in my opinion but not necessarily quite the way people expect.
As I wrote about previously the Canadian real estate market in many ways is quite predictable. (yes I know stuff happens which can temporarily through it for a loop) Despite the high profile of some real estate investors, most purchases (96%) are home owners looking for a place to live. These buys generally do not really care what the sticker price of a property is, they simply pay attention to the monthly payment, aka “what can I afford”.
One of the most high profile changes made by Flaherty was to move the maximum amortization period (only on government backed mortgages) down to 25 years from 30 where it was before. This little move has the same effect as a 10% price reduction to the market. Let me explain:
In June, Joe and Sally home buyers go to their bank looking for a mortgage approval to go house shopping with and Mr. Banker says ok you can spend up to $1800 per month. Based on average prevailing rates of 3.5% at the time and an amortization of 30 years Joe and Sally could go out and spend $400,000 (monthly payment comes in at $1790). Come July the changes are announced, Joe and Sally still make the same amount of money so Mr. Banker says they can still spend the same each month ($1790) but since the amortization period is now 25 years they can only spend $358,600. This equates to a price reduction of a little more than 10%.
This makes the government happier as now Joe and Sally are building in more of an equity buffer each month and not going quite so fast down the debt highway. Though now Joe and Sally look at what is available to them to purchase and they do not quite like what they see so they sit on the sidelines and watch. As more customers begin to sit out for a while the market quietly adjusts down to what people are able and willing to spend.
The simple fact is that since 96% of the real estate market is home owners, they will dictate what the prices are. Over time the market has to adjust accordingly. Nothing happens over night and there are events which can temporarily through the market off course but the fundamentals always return.
So yes, the market is going down probably in the ballpark of 10% but no it is not the end of the world. It really means very little at the end of the day. As interest rates slowly begin to climb (it is not an if but a when, though possibly not till 2014) the rising rates will have a similar effect on the market but it will make very little difference if you buy today or wait a year. If you of the belief you should wait to buy because you think the prices are going to fall, all you are really doing is losing a year of building equity. Sure maybe you can wait two more years and save 10% on the purchase price. Over time the money you saved on the price will be eaten up by the added interest you will be paying. Find something you love and can afford and just get on with it already.

Opportunity knocks with new transit projects

In the never ending cycle of the real estate market, there always seems to be patterns emerging. When you are able to study these patterns and learn from them you will see opportunity where others see only bad things. I believe in many Canadian cities right now opportunity is knocking quite loudly for real estate investors and all one really needs to do is open up the door.
One such opportunity is the infrastructure spending that governments of all levels are partaking in. The most notable area of this in my opinion right now is through the transit expansion. In the Vancouver area construction is about to begin on the sky-train extension known as the Evergreen Line. In Edmonton they are building out the light rail (LRT) and Toronto continues to talk of subway expansion.
So how exactly does one go about taking advantage of this opportunity? Well, for starters, you should begin by looking at the rule of 800 meters. Simply put if you were to put a dot on a city map of the location of an upcoming transit station you would then draw a circle around that dot with the radius being 800 meters. This will give you a focus area that will provide an increase in property value and market rent of about 10-15% higher than comparable properties outside this circle. It is important to note this increase in value will take place a few months after the project has been completed.
Now, let’s get back to the true opportunity that is presenting itself right now. I am going to use the Evergreen Line as the running example in this article. Construction for this project has begun now, early in 2012 and is scheduled for completion in 2016. Right around the time construction is announced and starts people get excited and a temporary bump in value (or asking price) will take place. Then as construction gets under way, noise will pick up, roads will be closed or congested and people begin to get irritated, thus values will reduce. AKA, opportunity is knocking. The beauty of this is not only will prices recover they will jump due to the value increases of the 800 meter rule.
Another interesting phenomenon is that often times city planning departments will run new transit projects through rougher neighbourhoods they want to rejuvenate. This is done for several reasons:

  1. Any land the city needs to acquire can be done so more economically.
  2. Neighbourhoods which have been run down have land developers can pick up
  3. Rezoning in rougher neighbourhoods can be easier as the residents do not always have enough money or lobbying power to cause a fuss.
  4. Long term project completions can allow developers a chance to build large scale projects that can complete around the same time as the transit projects
  5. Increases in population density and property values means more tax dollars for the city. (property tax is one of the few methods of collecting money a city has)

So this means you have an opportunity to pick up property at a discount, in an area where prices are already lower than those around it. Moreover, you know that once the projects are complete the property and the neighbourhood are going to see a significant INCREASE in market value and potential rent. A prime example of this was Yaletown in Vancouver. Once an industrial wasteland where no one wanted to be, now it has some of the highest property values in the world.
So there is one neighbourhood I believe has enormous potential for the next 36 months or so and that is Burquitlam (I agree it is a silly name). This area is the site for one of the new sky train stations, is full of older single family homes, the city has been approving mass rezoning for the area and a number of developers are about to break ground on new buildings. There is an opportunity to find decent properties at a reasonable price, gain positive cash-flow in the short term and have a big boost in the medium term. There are no guarantees in life but some good research and a little action you can dramatically increase your odds of success.

Shopping for deals on a new house

A friend of mine recently added a new addition to his family and he and his wife decided their current condo was not big enough for the growing family. They wanted to upgrade to a house and like many people who have watch one of those infomercials on late night TV he thought perhaps there were deals to be had in foreclosures sales. Looking for advise he game me a call. Given how common this situation is I thought I would share my advise with everyone.

Let me start by saying foreclosure sales in Canada are not usually what people think. The banks making the sales know full well what the real estate market is doing and will not forgo profit to make a quick sale. The process you have to go through in order to make the deal is often very cumbersome and time consuming as well. It is not the bargain bin type shopping a lot of people are looking for.

There is however a relatively simple way to bargain shop for real estate which can accomplished by gathering a small amount of intelligence any good realtor can get for you on places you are interested in.

The first thing to look for is when the current owner purchased the property and for how much. You are looking for owners who have had the property for a number of years and purchased it when the market was priced much lower than it is now. People becoming very emotional when it comes to selling their home and most are really uncomfortable selling for less than they paid. This is easy to avoid by dealing only with longer terms owners.

The second thing to look for is what mortgages have been registered against the property. There is a record kept of every transaction in which the property is used as collateral. You have done your homework in step one and found a house on the market for $600,000 in which the owner purchased it in 1995 for a mere $200,000 you are getting excited. However, if you learn the property was re-financed in 2009 for $550,000 so the owner could invest in a hot stock tip or a lakeside cabin you are not going to be able to negotiate the bargain you are looking for. Most people are completely unable to sell a property for less than they owe the bank (the bank can veto the sales) so do not even bother trying. Knowing all of the transactions will allow to you get a pretty accurate idea of how much equity the current owner has in the property. The more equity that exists the lower you can offer with a chance it will be accepted.

Once you have identified houses with a long term owner, who purchased the house for far less than the current market value and you know he has not used it as an ATM to refinance and take out money you are close to the bargain you are looking for. Now you want to try and uncover what is the motivation for selling. Perhaps the owner has been transferred for work and needs a quick sale, perhaps the couple is going through a divorce. With a little digging you can uncover the motivation and thus offer terms that appeal to the seller. You can often get away with paying far less than market value by simply offering to close quickly. Offer to close on the transaction the same month, the lure of fast cash can often get people to simply want the deal over with and take far less than they would get if they waited. We live in a society of instant gratification so use that to your advantage.

Finally with all this intelligence in hand find a realtor who is aggressive and willing to write multiple offers and do the homework for you. Some sellers will take offence to you making a low offer, accept this and move on. To use a fishing analogy, the more lines you have in the water the more likely you are to catch a fish. It also gives you leverage on the sellers. If they know your offer may go away because you are also bidding on other places they may just take the offer right away to lock your cash down.

Let me close by giving you one simple little piece of perspective. If you have a standard 30 year mortgage for every $10,000 you save off the purchase price you are saving yourself $50 per month for 30 years. I am sure you can think of better things to do with your money than add it to the bottom line of our already profitable banks. There are deals to be had in any market if you know some of the factors to look for.



The secret truth about the Canadian real estate market

One of the things that continues to fascinate me is the talk of a housing bubble in Canada. With both the Bank of Canada and our finance minister Jim Flaherty foretelling of increasing interest rates on the horizon there is much speculation going on in regards to the sale price of houses. I find one of the most over-looked facts is just how the market determines what a house (or condo) will sell for.

It has been my observation that the actual selling price very rarely factors in to the decision making process for most people. Given it is almost unheard of for someone to purchase a home in cash (without taking out a mortgage) the focus on the purchase price gives way to the focus on the actual monthly cost of ownership.

Through the last decade or so housing prices have changed pretty dramatically though the average take home pay of Canadians has not changed all that much. I think if you look at the overall trends the amount of money being shelled out each month for home ownership has not actually changed all that much. What we have seen though have been significant decreases in interest rates combined with (for a time) extended amortization periods and reduced down payments. It was not that long ago where you could get a mortgage for around 2% interest and a 40 year amortization.

So if you take the average family who has say for example $2000 per month to spend on housing (mortgage, taxes, strata fees, maintenance ect…). In the year 2000 maybe that gave them the ability to spend $250,000 on a house or condo (this is an estimate for illustrative purposes only). Fast forward to 2009 when the same $2000 per month would give them the ability to spend say $400,000 on a house or condo. In both cases they were probably shopping for the same house or condo in the same neighbourhood. Yes the purchase price changed pretty dramatically, but it terms of what it costs you every month and what you end up with in the end it is all about the same.

Do I think the purchase price of houses are going to drop in the near future? The answer is almost certainly yes.

Do I think it is the doom and gloom some so called experts are predicting? No, I really think that is unlikely.

If you are worried about the impact of interests rates changing you still have time to lock in. The only people I see really at risk of being severely impacted by this are speculators who are in the flipping game (one very few people should be in) or those who are looking to get out of the home market all together.

In closing however I do find it amusing that the one thing people seem to pay attention to the most (purchase price) is often the item that has the least effect on them long term.

Purchase something for $400,000 at 3% APR and a 30 amortization will cost you about $1900 per month and total cost including interest by the time it is paid off will be about $568,000.

Purchase the same place for $300,000 at 6% APR (our historical average) it will cost you the same $1900 per month and total cost including interest will be about $576,000.

Which scenario is better? I will let you be the judge of that one!



Investment Real Estate- The Numbers

by Barry Lenson
Lets’ face facts. Only a small percentage of real estate ventures generate as much profit as the investors were hoping for. And many investments actually lose money.
When ventures lose money, the problem is usually that the investors failed to work the numbers carefully. And working the numbers is not all that difficult. Let’s take a closer look. 

First, consider this investment that lost money:

  • An investor named Joan bought a pre-foreclosure property for $180,000 from a seller who said, “Houses like this in this neighborhood should sell for $300,000.” So Joan spent another $50,000 on renovations, then discovered she could sell the house for only $225,000 in the current market. Her mistake? She believed an unsubstantiated statement from the seller (“Houses like this in this neighborhood should sell for $300,000”) instead of studying comparable sales in the current market. As a result, she spent too much on renovations – and lost money.

Second, consider this investment that made money:

  •  Before starting serious negotiations to buy a condominium that was for sale, Jim did a thorough investigation of comparable sales in the complex and the wider area. He learned that the unit he was considering would sell for about $250,000 in the current market. He then toured the unit and estimated that he would have to spend $85,000 to fix the place up before he could sell it. Then he added in a buffer of another $15,000 for taxes and other unexpected costs. Next, he offered the seller $150,000 (the projected selling $250,000 cost minus his $100,000 estimated expenses and buffer). When the seller protested and asked for $225,000, Jim replied, “I am offering you $150,000 because that is what the property is worth to me.” In a month, the seller called and accepted Jim’s offer of $150,000. The deal was done and when the renovations were completed, Jim sold the property for $275,000. After all was said and done, he had netted more than $40,000 on his investment. Success!

Those examples prove that a successful investor only needs to add and subtract! But here is more advice to keep in mind:

  •  Always start out with a realistic dollar figure of a property’s value on the current market. How much will it really sell for, or command as a rental? This your baseline figure. All your other figures must be weighed against it, so keep it firmly in mind. Don’t daydream here, and don’t believe what a seller or real estate agent tells you. Look at comparable properties in the area – and remember to consider only recent data, not sales figures from two years ago.
  • Set a firm budget for your improvements, and stick to it. Even if you want to put in ceramic tile floors, put in linoleum tile instead if the numbers don’t work. Or put sealant on the driveway instead of repaving it. You don’t have to do everything on the cheap, but you do have to refuse to spend more money than you can recoup from your final sale or rental. Don’t get carried away. Your budget must be your final yardstick in every decision you make.
  • Do a realistic estimate of taxes and other recurring expenses, like utilities, association fees for condos, etc. Estimate how much they will run while you fix up the property – and how much they will cost if it takes you six months or a year to sell the property after you have fixed it up. Don’t fudge these expenses, work them into your budget. They are not going to go away.

Sticking to this advice requires discipline and self-control. Yet consider our Chairman, Donald J. Trump. He didn’t get where he is today by overspending on his development projects. He bargained hard to pay the right price, then bargained hard to keep renovation expenses within budget. If you follow his example, one day you too can follow in his success.

Market conditions drive strong June housing sales

VANCOUVER, B.C. – July 3, 2009 –

The combination of low interest rates and more affordable pricing helped propel Greater Vancouver home sale numbers to the second all-time highest total for the month of June. The Real Estate Board of Greater Vancouver (REBGV) reports that sales of detached, attached and apartment properties increased 75.6 per cent in June 2009 to 4,259, from the 2,425 sales recorded in June 2008. The figure is just short of the record-breaking 4,333 sales which occurred in June 2005.

New listings for detached, attached and apartment properties declined 17.9 per cent to 5,372 in June 2009 compared to June 2008, when 6,546 new units were listed. However, new listings increased 13.5 per cent from May to June of this year. Total active listings in Greater Vancouver currently sit at 13,252, down 27 per cent from June 2008 and 2.9 per cent below the active listings count at the end of May 2009.

“Price reductions and low interest rates have created an improvement in affordability, which is causing the number of sales to rise to levels comparable to 2003 to 2007,” Scott Russell, REBGV president said.

“Many people who were reluctant to purchase a home last fall and earlier this year are returning to the market because they see conditions that appeal to their personal and financial needs,” Russell said. “However, the current marketplace is such that buyers are more inclined to walk if they don’t like the terms of an offer.”

Residential benchmark prices, as calculated by the MLSLink® Housing Price Index, declined 8.2 percent to $518,855 in June 2009 compared to June 2008.

The number of sales of detached properties increased 81.6 per cent to 1,667 from the 918 detached sales recorded during the same period in 2008. The benchmark price for detached properties declined 8.4 per cent to $701,384 in June 2009 compared to June 2008.
The number of sales of apartment properties in June 2009 increased 69.3 per cent to 1,790, compared to 1,057 sales in June 2008. The benchmark price of an apartment property declined 8.2 per cent from June 2008 to $356,880.

The number of attached property sales in June 2009 increased 78.2 per cent to 802, compared with the 450 sales in June 2008. The benchmark price of an attached unit declined 7.3 per cent between June 2009 and 2008 to $441,620. For more information on real estate, statistics, and buying or selling a home, visit

Copyright © 2020 Chuck Brady.