A housing correction is well underway which has many potential buyers wondering about upcoming opportunities. But is now the time to test the will of sellers or should you wait for a market bottom? Kyle Green, owner of the Green Mortgage Team, sits down with Matt & Adam to discuss interest rates, market predictions, and how to put together a winning strategy for a falling market? Should you take a variable or fixed rate? Where is the best place to buy and where should you avoid? And what mistakes will some investors inevitably make? Get your notebook!
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Who is Kyle Green?
I’ve been a mortgage broker for just over 15 years, starting out when I was 19 years old. In 2009, I broke out on my own and started my own business. My niche has been working with real estate investors. When I was 21 years old, I did my first presentation in front of 600 people and now I’m one of the leading brokers in my niche in Western Canada.
I recently bought a mortgage brokerage in Vancouver that funded over $1 billion. I also started a real estate investing consulting company a few years ago.
How’s the Vancouver real estate market in 2022?
It’s interesting! We haven’t seen interest rates rise this quickly since the 1980’s. We do a lot of explaining to our customers about what’s happening and why. Vancouver is still a fairly resilient market. We’re still very under-supplied but we’re also seeing demand fall too. We’re not seeing huge price drops in Vancouver because there’s not enough supply.
What are real estate investors doing in 2022?
Leads coming into our business have been slow since March 2022. We’ve been expecting a slow down. But even up until July 2022, we’ve outpaced our funding – we’re 10-15% higher year to date than last year. That’s dipping in August, but it’s the first time we’ve seen a decrease in 2022.
Investors provide us with a counter-lever. When things slow down in the market, investors start to sniff around again. In a low demand market, investors can take advantage of deals where sellers have to sell. Even in a high interest rate environment, you may be able to negotiate a better deal.
Is now the right time to buy real estate or should you wait?
Overall, I think the market will slowly decrease a bit. I think we’re at or close to the floor in Vancouver. I don’t think it will get much softer, but it’s not wrong to wait a few months. However, timing the market will never outperform being ready to jump when an opportunity arises.
Late August is one of the slowest times in real estate. Everyone is off on their final summer vacation. But if you’re an investor who’s ready and you find a seller who has to sell before school starts, you might be able to grab a deal. As an investor, you always want to be ready to jump and throw out an offer, even if it’s on the low end.
Where are real estate investors going right now?
A lot of investment is moving into the short term rental market. A lot of investors are trying to find deals in that market. I expect that trend will continue for 6-12 months. However, I’m not sure how that market will perform after 12 months. If we do go into a recession next year, we usually find a decrease in value for recreational real estate.
I really like downtown core condos. That market has been relatively flat and reasonably soft because of covid. But with immigration opening up, entertainment starting up and employers wanting more people back in the office, I think we’ll see more people coming into the downtown core. It’s hard to cash flow at current interest rates but I think there’s long term potential.
I’m seeing a lot of people buying on Vancouver Island and Interior areas like Kamloops and other blue collar towns. We’re also seeing people buying in Edmonton and Calgary where cash flow is easier to achieve.
What real estate markets would you avoid in 2022?
Detached homes in the east suburbs will be a bit softer this year, in my opinion. A lot of people moved out there during covid and I think that large demand may start to reverse. If people have to come back to the office, all of a sudden that 1.5 hour commute becomes very arduous. Prices went up so much and so quickly in that market during covid, so I expect we’ll see a correction.
We’re seeing a similar thing happening in the suburbs in Ontario. Many of those markets are decreasing and I would avoid them for now.
What’s happening with interest rates, why is it happening and how long will it last?
Interest rates are rising aggressively. The Bank of Canada controls the overnight lending rate which determines the prime rate. During covid, that was at 0.25% but it’s been increasing aggressively this year. So that influences anyone in a variable rate mortgage.
Fixed rates, on the other hand, correlate with bond yields. If bond yields go up, so will fixed rates. Fixed rates have risen quite substantially since January due to increasing bond yields and the spread over bonds increasing too. This happened because the government has begun selling off bonds.
We had clients who had fixed rates under 3% in February or March, with rate holds good until July 2022. The current fixed rate available at the major banks is 5.2%. Rates accelerated very quickly over a short period of time.
The reason why interest rates are rising is inflation. The government wants to slow down inflation, as it’s a big concern. They could have raised the rates slowly, which would take longer to combat inflation but decrease the likelihood of a recession. Or they could raise the rates quickly, battling inflation faster but increasing the likelihood of a recession. It seems the latter is the path they’ve taken.
The current prime rate is 4.7%. The general consensus with economists is that the government is likely to go up to a prime rate of 4.7-5.7%. The major banks are predicting another increase of 0.25-0.75% this year and then no increases next year. Anyone taking a variable rate mortgage should factor in this increase.
The banks also think bond yields will stay the same or lower by the end of this year, and decrease again next year. So anyone taking a fixed rate today is likely at the peak.
What is the strategy to ride out this bumpy period with interest rates? Can you refinance at a lower rate?
Most of our clients are going with a variable mortgage rate right now. The nice thing about a variable mortgage rate is you can lock into a fixed rate at any time. The variable rate, as of today, is still lower than the fixed rate. So you could take a variable rate today and lock into a fixed rate next year when banks predict they will be lower.
Another option is to take a one or two year fixed rate today at a lower rate than the five year fixed. When your mortgage comes up for renewal, you could then move into a variable rate or, hopefully, a lower fixed rate.
Is the gap between variable and fixed rates expected to shrink?
Yes, we do expect the gap between variable and fixed rates to shrink over the next year. If you’re getting an insured mortgage (putting less than 20% down) or your mortgage is insurable, rates are actually better. It’s easier for banks to package these up. Variable rates could be as good as prime minus 0.9%. So you could be looking at a variable rate of 3.8% versus a fixed rate of 5.2%.
But if you’re getting into an uninsured mortgage, rates are prime minus 0.2-0.4%, which is a bit closer to the current fixed rate.
What do rising interest rates do to borrowing power?
Rising interest rates have had a major impact on borrowing power. The stress test came out in 2016, which meant borrowers had to qualify at their rate plus 2% or 5.25%, whichever was higher. When rates were low, most people only had to qualify at 5.25%, as that was higher than their rate + 2%. But now with rates at 5.2%, people have to qualify at 7.2%. That’s a major increase that decreases borrowing power by 20%.
So not only are prices up over the years but you now qualify to borrow less money. We were in a situation where some clients had to buy quickly because they wouldn’t be able to qualify once rates went up.
How will the Vancouver real estate market stay balanced?
Every real estate market is independent and has its own submarkets. In Vancouver, we have seen a decrease in demand. But we also have not seen an increase in supply. If you look at the percentage of sales, we’re still seeing a balanced market in Vancouver.
For the last 18 months, demand was 4-5 times higher than supply – it was nuts! So even if demand decreases substantially, it still is slightly above or equal to supply. And that results in a balanced market.
When the market turns, prices will decrease on paper. If we don’t have 20 bidders on each property, there won’t be people overpaying. So any price decrease we’ve seen lately might just be a correction due to people paying over asking when demand was higher.
When covid hit, a lot of condo projects were paused or cancelled. Once developers saw that demand was high, they got back to work. We had a 12-18 month period when developers could get projects off the ground. But now we’re hearing that developers are struggling to sell units because demand is down. So that will cause another pause in construction.
It takes 3-4 years for condos to come to market; it’s not a switch that can just be flipped on or off. So due to this low supply period we’re heading into, we’ll see high demand and, as a result, high prices. I’m very bullish on condos and think they’re a safe bet. I don’t think you’ll see a decrease in value.
What are the biggest risks to the Vancouver real estate market?
Interest rates are probably the biggest risk to the real estate market, especially if they continue to increase aggressively. But I don’t think they’ll increase substantially as we’re nearing the peak.
Inflation is another concern because inflation affects all hard assets. And real estate is a hard asset. Even while demand softens, it’s becoming more expensive for developers to build. So it’s hard for builders to justify continuing their projects.
We’re not seeing a massive uptick in supply with sellers saying they have to sell now. We’re not seeing that in Vancouver. So I don’t see the supply side changing.
Would you buy a presale property right now?
I’m usually not very keen on presales but right now I’m actually very interested in them. Some developers are offering incentives on presales right now. I think developers are going to get more creative in order to sell their product.
I’d love to be closing on a condo in 2-4 years because I’m sure the values will be higher, especially if I can negotiate a good deal on the deposit.
What advice do you have for real estate investors at this point in the market?
A lot of our investors are getting prepared to take action if and when the opportunity arises. There’s no need to rush into a deal if it’s not a deal. But you want to have a plan in place so you can take action. Get your capital readily available, have your documents organized, get prequalified, etc.
If a time sensitive opportunity comes up and you can move faster than your competitors, that’s ideal. There will be opportunities in this market so a smart investor is getting prepared now.