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episode # 300

What is Actually Keeping You Out of the Housing Market? With Dustan Woodhouse

There’s a real risk of middle-class Vancouverites becoming life-long renters. And you hear a lot about supply constraints, speculators, foreign buyers and realtors being the cause. But on today’s show, we talk about the definitive factor that will have you up in arms! On our 300th episode, good friend of the show Dustan Woodhouse (President of Mortgage Architects & Author of the ‘Be the Better Broker’ series) joins Matt & Adam to cover market conditions, interest rates, inflation, government policy and real estate truth bombs. Should you get a variable or a fixed rate? Will BC’s new ‘Cooling Off Period” impact home values? And will real estate prices go up in 2022? All this and more with one of Vancouver’s most trusted real estate voices. Listen up!

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Episode Summary


 

Who is Dustan Woodhouse?

I don’t have a bunch of letters behind my name; I couldn’t stick it out. I’m not a man with a degree but I am a man with 50 years of life experience. For 10 years, I was a face and voice for 1695 families and individuals seeking mortgages. I think I have a pretty good grasp on the homebuyer’s psyche. 

The media drives me crazy with the hype on speculation and bubbles. 95% of real estate transactions are happening with highly stressed individuals looking for shelter. 95% of mortgages are owner-occupied. These people aren’t buying on a whim. As these people are hitting peak levels of stress, they come into contact with a mortgage broker and a realtor. 

I’ve done 10 years of brokering and I miss it every single day. I’ve now spent three years as the President of Mortgage Architects, Canada’s fastest growing brokerage. We’ve gone from 1350 brokers to just under 1900 brokers in under three years. It’s been a fantastic three years behind us and I think another three fantastic years ahead. 

What is causing higher home prices in Vancouver? 

I thought about this topic 10 years ago, 20 years ago and 30 years ago when I was trying to figure out how to put a roof over my head. I remember in my early 20’s wondering how I would afford a $220,000 house that was 3500 square feet and had a new minivan in the driveway. But just a few years later, I was closing on a house for $279,900. It wasn’t a crazy price to pay. That home today would be $1.279 million. Is that crazy? Probably not. 

And it’s not foreign buyers. It’s regular folks who are making $12,000/month after taxes. If they can sell their smaller homes and save up for a down payment, they could be paying under $4000/month for their mortgage on a $1.3 million house.

A number of years ago I wrote a series of blog posts called, “How I Learned to Love the Bubble and Stop Worrying.” Those posts would read as if I wrote them today. 

Are low interest rates affecting the housing market?

Low interest rates aren’t really a factor because the stress test has everyone qualifying between 4.79-5.25%. Everyone who is buying is having to qualify at this higher stress test rate, compared to today’s low rates. So today’s low rates aren’t letting anybody borrow anymore money at all. The stress test cut the average Canadian household’s borrowing capacity by 35%. 

Yes, we’ve never had lower interest rates and mortgage money has never been cheaper, but it’s never been harder to get a mortgage. It’s sad when someone making $100,000/year is only allowed to have a $2000/month mortgage payment. So they have to rent. And that’s dangerous because it means real estate investment is only for the wealthy; the middle class need not apply. A generation of renters is a real risk right now. 

Are foreign buyers a problem for Canadian real estate markets?

The government doesn’t actually do anything to limit foreign buyers. They don’t limit them to one property only or ensure they have a permanent residency application pending. They tax them – first 15% and then they raised it to 20%. So the government isn’t stopping foreign buyers; they’re only asking for their cut. But when the market has gone up 50%, that 15 or 20% tax doesn’t mean anything. 

At the same time, the government kneecaps Canadians 35% of their borrowing power, taking you out of the game. But you have always made your payments on time. 75% of foreclosures are investment properties and 90% are driven by death, disability or divorce. And foreclosures represent only 0.28% of all mortgages. So the government wasn’t fixing a problem when they limited Canadians’ ability to borrow. Which is really unfortunate for hardworking people with good credit and a downpayment, who are now paying more in rent than they’d be allowed to have as a mortgage. 

How scared should people be in Vancouver’s uncertain housing market?

In the same week that Mr. Holt of Scotiabank predicted eight interest rate hikes, based on I’m not sure what exactly, the Bank of Montreal predicted one or two hikes, and definitely not four. But we’re only seeing “eight interest rate hikes” in the headlines. So what is that based on? And what happens if it’s wrong? If a bunch of people read that and go lock in their mortgages, that’s a mistake that they’ll pay for. But who at Scotiabank or in the media will pay for misleading them? 

I’m not trying to sell anybody anything. I don’t have any skin in the game. I’m in the mortgage space but we’re not really selling anything. We help people who need the financing to buy the thing they want to buy. So I don’t have an agenda.

With interest rates possibly going up, should people switch from a fixed rate to a variable rate mortgage? 

Let’s say the bank calls you and says, “Rates are going up! You’re in a variable mortgage so you need to lock in now. Come down to the bank today and lock in a five year fixed term so we can make sure you’re safe.” A bank is a profit-driven corporation. Are they phoning you to do a public service? Probably not. When you lock into a five-year fixed today, you inflict an immediate 1% increase on yourself – the equivalent of four 0.25% increases by the Bank of Canada. 

To inflict that massive rate hike on yourself is one thing but to do it without the knowledge of prepayment penalties or other restrictions is just brutal. No one thinks they will break their mortgage but six out of ten Canadians break their mortgage at an average of 33 months. So to go from a penalty of, say, $2000 with a variable mortgage to now $18,000 with a fixed mortgage is a big increase that people should know about before they switch. Locking in can be a massive mistake. 

If you’re worried about rising interest rates, up your payment to that higher rate now. Inflict that sticker shock on yourself now while every extra penny can go straight to the principal amount. You’ll be paying your mortgage down faster than ever and if those rate hikes happen, you’re already covered. 

How quickly will interest rates in Canada increase?

No one can predict where rates will go but we can all look at the history of rates. You have to go 40 years back to see the last big spike. And even then, it only lasted 11 months. The people who lost their homes then were the ones who locked in and inflicted a 16-21% interest rate on themselves for five years. 

If you look at the history of human behaviour, you can see the real risk. Banks don’t earn as much as they do by accident. By design, the representative of an institution is not giving you the entire picture. And that’s no disrespect to people who work at banks. A lot of them don’t know; they’re not trained with all the information you need. 

What does inflation mean for the real estate market? How does inflation work with interest rates?

The most important thing – before interest rates or inflation – is you. What is the stability of your job, your relationship, your life, etc? 

Remember a year ago when we were all talking about lumber? Supply was low – not due to lack of trees but due to no one working at the mills – so the price of lumber shot up. And now, a year later, prices have somewhat normalized. Will the same thing happen with the cost of shipping containers with the recent issues off the coast of Victoria? Probably.

Interest rates are a big lever. When the Bank of Canada pulls that lever, it is not to address housing prices. When the lever is pulled gently, people panic and try to buy before their rate hold expires. It creates a boost in demand but we have a supply problem. Just like you couldn’t find any lumber a year ago and prices went up, it’s the same thing with housing. That’s the problem. 

Is there a housing supply issue in Canada?

I spoke with an economist who said that we don’t have good household data in Canada. We don’t know how many new households we need. They say we’re 100,000 – 2,000,000 houses short in Canada. In our recent federal election, every party said they would increase housing by so many units. But with what magic wand will they be doing that? Housing supply is controlled by the municipal government and the person who is loudly screaming, “Not in my backyard!”

There are no new detached homes being created in Vancouver. So that means there will never be more detached homes in Vancouver than there are today. If you want to live in a detached home in Vancouver, the price is never going down. There may be little ups and downs but the trend is the same; it’s a yo-yo on an escalator. 

Is inflation transitory?

A lot of inflation is transitory. It’s short spikes that won’t last too long. It would be irresponsible of the federal government to pull the interest rate lever to try and address inflation that is likely going to shift back down on its own in the next 12 months or so. 

How will an interest rate hike impact people’s ability to buy a house? Can interest rates slow the housing market? 

I don’t see the government taking any significant action on interest rates. But even a 0.25% bump will cause people to react. However, we still have the stress test. Today’s variable rate is 1.20%, so we’re still very far away from restricting people’s ability to borrow, since they have to qualify at 4.79%. The Bank of Canada only increases in quarter points and to see more than four increases in a year would be untenable. So that’s almost four years before the interest rate has an impact on the amount of money someone has to purchase real estate. 

Interest rates aren’t restricting people’s ability to buy – not in the next 8 hikes or even the next 14. It’s not until that 15th hike, and even then it would only be restricting borrowing ability a little bit. So interest rates will not slow the market down in any significant way. 

Remember that economic good news is what drives interest rates up. Economic bad news, like what we’ve had, keeps rates low. 

What is the biggest risk factor to Canadian real estate? 

The single greatest risk to the Canadian real estate market is the federal government. Governments don’t really understand how things work. The risk is regulation. I’m not anti-regulation; I like that I can go to the hospital and get fixed up for free. But the regulator’s path is a risk to the market. 

Is BC’s recently announced ‘cooling off period’ legislation a good thing? What is wrong with BC’s cooling off period legislation?

The number one problem is that it’s called a cooling off period. That was the first mistake, right out of the gate! It gives people the impression that they can go write offers on 10 different properties and then decide which one they like best. 

The language they should be using is “mandatory subjects.” They could say there’s a mandatory subject to appraisal; for example, if a property appraises at the purchase price or higher, the buyer doesn’t have an out. They could say mandatory inspections; for example, as long as repairs required don’t jeopardize health and safety and don’t exceed 0.5% of the purchase price, the buyer doesn’t have an out. 

We’re not in a market where people want to wiggle out of a purchase. People want to get into a purchase. The high competition is forcing people to do crazy things like write high offers without an appraisal or an inspection. But the results of those eventual appraisals and inspections may compromise the person’s financing. The property is the security, not the person. The bank is left holding the property so the property matters. Not being able to discuss the realities of the property with your financing people is a problem. 

So it should be called “mandatory subjects” not a “cooling off period” and there should be mandatory subjects to appraisal and inspection. There should also be a section on financing to prove when you didn’t get the financing. I was pitching this 10 years ago but no one was listening. Now, it’s affecting the entire nation, so everyone is paying attention.

Why is it that we get 7 days to ensure financing on a brand new building, built to the latest and greatest standards, but for a house built 100 years ago with who knows what is going on inside of it, we get no time? A cooling off period is the wrong label but mandatory subjects make a lot of sense. You can’t wiggle out and you can’t bid on 10 properties at the same time. 

Blind bidding is another very interesting aspect to consider. Let’s say Person A bids $999,999 for a house but the house sells for $1.1 million. Well, maybe Person A would’ve been happy to go up to $1.2 million but due to some factors they bid lower and called it wrong. If it was an open bid, they could have gone up and the house may even have sold for more. Studies show open bidding does accelerate things higher and faster. 

Is the BC government consulting people about the cooling off period? Were you consulted?

No, I wasn’t and I’m not sure who is being consulted. Over the years, I’ve seen some offers from different governments putting together committees and I’ve thrown my hat in the ring. I’d like to think I’m pretty unbiased. My only bias is I want the up and coming generation to have a shot at buying a home. I’m concerned about policies that negatively impact families over and over again. 

When I volunteered for these positions in the past, I was seen as too much of a stakeholder. They want to strike a balance between finding someone close enough to the industry to understand it but far enough removed that the optics don’t look bad. 

I have a lot of respect for the people who are tasked with creating legislation. It’s easy to be a critic from my armchair. But to be the person who has to create it and try to mitigate unintended consequences is a big burden. I respect people trying to move these initiatives forward. But the more voices, the better… to a certain extent. 

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