The 2019 Federal Budget was just released and who better than fan favorite and newly appointed President of Mortgage Architects, Dustan Woodhouse, to unpack exactly what it means for you as a homeowner and a homebuyer. Hint: he does not pull punches! Dustan also gives his thoughts on the current state of the Metro Vancouver real estate market, whether 2019 is the right time to buy, as well as advice for those considering fixed or variable rate mortgages at this somewhat unique moment in our market’s history. In Dustan’s words: level up!
Vancouver Real Estate News, Market Updates, Insider Tips, Stats, & Analysis
Dustan is the President of Mortgage Architects, the 5th largest Mortgage Brokerage in Canada with 1300 active mortgage brokers. Dustan was a successful mortgage broker for 10 years. During his career he moved to training mortgage brokers, writing books and appearing at speaking engagements. He has now taken a new role at Mortgage Architects.
Dustan bought his first property when he was 22 years old. He originally didn’t work in the real estate field, but bought and sold properties throughout his 20’s. He eventually gravitated towards real estate as a career and became a mortgage broker in his mid 30’s. He is now 47 and he considers real estate to be the best investment he has ever made. It is designed this way because there is no fast exit to real estate. If you buy stocks, people may jump out if the stock rises or falls quickly. With real estate, there is no ‘exit button’ or quick way to buy or sell. This slow, clunky process helps protect people from themselves and allow them to rethink before they make a rash decision. This usually allows for a great investment over time.
On the 2019 Federal Budget that was released last week:
Dustan has a mailer and blog that he recently updated regarding his thoughts on the 2019 Federal Budget. Dustan has been involved with the Board of Directors for Mortgage Professionals Canada for over 3 years. He has been to Ottawa to meet with a number of MP’s and members of government. It has been interesting for him to watch the government do what they have done since 2012 to now.
The government is making changes to mortgage rules that are very complicated and don’t add a lot of value. In Oct 2016, $1.1M Canadian households were no longer allowed to pull equity out of their properties or refinance mobile homes. This was a small change that seemed to go unnoticed. Then on Jan 1, 2018, in the face of talk about foreign buyers, the government launched the stress test that reduced the borrowing power for typical Canadian families by 35%. This is not helping regular families get into the real estate market. They brought in taxes to make it more difficult for foreign buyers to own and knee capped regular Canadian’s at the same time. The stress test is structured in such a way that you will be able to borrow less as the borrowing rates increase. Right now, the borrowing power for typical Canadian families is 40% less.
In real numbers, it used to be that $15K of household income got you $100K of mortgage money. Today it takes $20K household income to get $100K of mortgage money. This is not helping middle class families in small towns and it is definitely not helping people in the larger cities. In a large city, an $800K mortgage a couple of years ago would have required a payment of $3,200 / month. The income of this household would be $6,500 net. There was a lot of money left over to pay the mortgage and they may even have had a mortgage helper in the basement which would further reduce their share of the mortgage payment. The mortgage default rate in Canada is very low – typically 0.29%. We don’t have a default issue in Canada. These changes were to put out a fire that didn’t exist.
On people being overleveraged in Canada:
The debt to income ratio is 180% in Canada. In dollars, households who have income of $100K per year have debt of $180K. This is not a bad thing. A $180K mortgage would cost $800-$900 / mth to carry. A $100K salary nets you income of $6,000 / mth after tax. This $800-$900 monthly payment is not a problem if it is a mortgage.
If it is credit card debt, the interest rate could be 20%, this would be a payment of $3,000 / mth, but there has been 0% government intervention on credit card debt in Canada. A 19-year-old kid can get a $10K credit card limit with very little scrutiny. How does this make sense? Even so, if someone had a $180K credit card debt on $100K income, this is still a manageable payment – but this scenario does not exist in Canada. The 180% debt to income ratio should not be elevating anyone’s blood pressure. It is not an issue.
On the 2019 Federal Budget:
Shared ownership – you are capped at $120K household income to have access to the program. If you have a household income of $120K you qualify right now for $580K mortgage, but under the program, the maximum mortgage is going to be $480K. In the Vancouver and Toronto market (and many others), there are very few families that are borrowing less money than they qualify for. Prior to the stress test, there were lots of families that were borrowing less than they qualified for – this is not the case anymore. The cap will further restrict families that would have had access to a lot more money just a couple of years ago. This shared ownership offering will only work for very few families in practice. Some of the details of this plan are not finalized and won’t be so until after the spring market. The math doesn’t work for many households in Canada.
Existing home owners – there is nothing in the new budget for existing homeowners. Your original mortgage that you qualified for before the stress test was introduced will not be grandfathered if you move to a new property. There could be situations where people sell their home to move to a similar home in a new area where they would no longer qualify for the same mortgage. People looking to move need to talk to their mortgage broker before deciding to move to ensure they will not be caught up. It has nothing to do with your credit or payment history. The rules have changed and they don’t seem to make a lot of sense. OFSI (Office of the Superintendent of Financial Institutions) is instrumental in some of these rules and has a mandate that is to protect the stability of the Canadian mortgage system. The rules stem from this mandate – not from the Canadian Government trying to help home owners.
Borrow up to $35K from RRSP – generally, it is not advisable to borrow against your RRSP for home ownership. If you do the math: you borrow $10K from your RRSP, you have to pay it back in 15 years ($55/mth payment). For 15 years you are paying this back, but if you borrowed the same amount from the bank, the payment would only be $45 / mth (3.5% interest rate). Most people will be earning more than 3.5% in their RRSP, some will be earning 8%-9% just by buying an S&P 500 fund. Why would you take money out of your RRSP to be left with less money overall? This part of the budget doesn’t help anybody.
The best thing for the government to do would have been to ease the stress test or increase the amortization from 25 to 30 years. They didn’t throw anything to the voter. It is like they are unaware an election is coming.
On why the Government is focused on housing loans and not consumer debt:
The Canadian Government doesn’t have anything on the line with regards to your credit card balance. They do have something on the line with regards to your home ownership in form of CMHC (Canadian Mortgage and Housing Corporation), one of the most profitable government corporations in existence. It generates massive profits and the government has a stake in the real estate industry and not in consumer debt.
We have had record low interest rates in Canada for 10 years +, but credit card interest rates are still 19%, the same rate they have been since the 90’s. Even though the cost of borrowing for the banks has dropped significantly, none of these savings are passed on to consumers. Government regulators are not focused on this.
On his thoughts on the metro Vancouver real estate market:
When it comes to an owner/occupied residence, the time to buy is the day you find a place you like that fits your budget. This is not always easy to find something that works for you, so when you find it, you buy it. Don’t pay attention to the market and live there for at least 7 years (Greater Vancouver area, but this also holds true in most of Canada).
In this market, we are not seeing as many instances of subject free offers and multiple bids. There is a lot of pressure due to government intervention on the sub $1M market. As soon as you breach $1M, it is much quieter. This is related to the CMHC limit of $1M that creates and artificial barrier for people.
The market itself in Vancouver will not going on any wild tear in the next year or two unless there is a major change by the government. People want to buy and they can afford to buy, but they can’t qualify to buy right now. In the long run, people will always want to live in Vancouver and by 2026, if you bought today, you will be really glad that you did so.
Prices in Vancouver and the surrounding area will continue to increase over time due to inflation. People always think prices are as high as they will get and people are crazy to buy, but 20 years later you look like a genius for buying at that time because prices continue to increase over the long run.
The market right now is frustrating for buyers. There is a steady stream of applicants that don’t qualify to buy even though they have great credit. Developers are having a hard time building for any cheaper, partly due to 25% of their costs going to tax. If the government really wanted to make housing cheaper, they could ease up on the tax. There is also the situation where the local government is forcing developers to build a certain number of 3-bedroom units for families in Vancouver, but the federal government is making it so that the people that can afford to buy them, do not qualify for the mortgage to buy them.
On interest rates – variable vs fixed:
Variable is the best bet for buyers. 5-year fixed rates are the most popular by far, which is troublesome because they are the most risky. If you do a little bit of research, you find out that 65% of mortgages in Canada are broken early – at an average of 33 months. People always think they will not break their mortgage, but life is unpredictable – divorce, death, relocation, sickness. To break a 5-year fixed mortgage, you trigger a prepayment penalty that is significant. This penalty is in the range of 4.5% of the balance, $4,500 for $100K mortgage. The average mortgage in BC is roughly $400K, which translates to a $18,000 penalty. A variable rate mortgage carries a penalty of 0.75% or $3,000. This is a $15K bet you are making by taking a fixed rate mortgage that you are not going to break your mortgage – even if the odds are stacked against you.
People normally are weary of variable rate mortgages because there could be a possibility of interest rate increases. This fear is generally unfounded and you have to have a considerable amount of interest rate increases to make up $15K. This is pretty much not going to happen. Interest rates are driven up by economic good news to prevent the economy from going into hyper inflation. Our economy right now is not booming and that is why you see interest rates at a flat rate. Variable is absolutely the way to go.
- Favorite neighbourhood in Vancouver: Anmore & downtown Vancouver are the two communities he spends the most time in
- Favourite restaurant or bar: MeeT on Main
- Downtown penthouse or west-side mansion: Downtown penthouse
- First place he brings someone from out of town: Grouse Mountain or Cypress
- Something he’s bought for under $500 in the past year that impacted his life: Dustan is working on making his sleeping habits better and recommends 3 things – Book: Why We Sleep by Matthew Walker; Sleep masters Sleep Mask; Mack’s Ear Plugs (silicon). These are great on airplanes or just sleeping in your home – game changers for better sleep.