Dustan Woodhouse makes bold predictions.
In the face of the Foreign Buyer’s Tax, he called for home prices to increase dramatically.
Now, he’s back to offer predictions for 2018 as well as his thoughts on variable versus fixed in today’s economic climate, new pitfalls in qualifying, and the best 22 minutes you can have with your clothes on.
Vancouver Real Estate News, Market Updates, Insider Tips, Stats, & Analysis
VREP #102- Will Vancouver Home Prices Fall in 2018 as Interest Rates Rise? with Dustan Woodhouse
Dustan has been a mortgage broker in the Lower Mainland for 10 years. He is 46 years old and bought his first property 25 years ago. He has bought and sold many properties and learned never to sell anything ever again (real estate has been good to him)!
On his criteria when considering a purchase:
Dustan’s advice to people is to get a detached house with a basement suite as far west in the city as you can. This is because their value is the fastest to go up and the slowest to drop. You could have two tenants and consistently get the biggest gains (notwithstanding last year, where condos and townhouses went up so much). But, in today’s market, the townhouse is the new semi-detached house.
Personally, Dustan wants very low maintenance so has bought a couple of condos and a townhouse (rather than following his own advice). He seeks positive cash flow where rents are strong. Stratas with big levies (though “big” is subjective) can be a buying opportunity for an investor. His properties are in Coquitlam, Port Moody, and Burnaby.
Rental properties require 20% down. For presale properties, by the time a sale completes, it’s possible the value may have risen to the point that you can close at the current market value. (Say you finance 80% of the current value, which may be, for instance, 150% of the original contracted value—you walk away making money, rather than putting money down.)
On this morning’s news—the Bank of Canada raised interest rates:
The quarter-point bump is about a $13 payment difference per $100,000 of mortgage balance (for instance, on a $400,000 balance, the payment goes up about $50 per month). The sky is not falling. For awhile now, anyone getting into a variable-rate mortgage had to be approved based on an interest rate of 4.64% or higher, yet the average variable-rate mortgage holder is paying about 2.8%. So, this increase is not the end of the world.
On if the stress test and higher interest rates will impact his client base in terms of pre-qualifying (considering about two-thirds of his transactions are purchases):
The overnight lending rate increase of 0.25% impacts variable-rate mortgage holders; however, some lenders offer a fixed payment variable-rate mortgage, regardless if prime changes. So, only existing variable-rate mortgage holders with a variable payment are affected (which is only 10-15% of all mortgage holders in Canada, as the majority take a fixed rate). Fixed rates did not move.
The qualifying rate (which recently increased to 5.14%) is a separate topic—this has been hovering around 5% for the past three to four years. The amount of mortgage money someone qualifies for did not change today (the prime rate does not control this). The stress test is what determines how much one can borrow, and this is based on the qualifying rate. This test was effective as of January 1 of this year and is only for people putting 20% or more down. It’s the wildcard—their borrowing amount just decreased by about 20-25%. This is a huge dollar difference, and we don’t know how much it will impact the market. However, Canadians are quite conservative, so the difference in reality may not change much.
- 89% of Canadians are comfortable with the amount of equity they hold in their own home (i.e. the size of their mortgage), and
- 78% of Canadians believe today’s low interest rates have allowed their neighbour to get in over their heads (but somehow, they’re OK?!)
The media fuels these sentiments with the debt-to-income calculations. One’s personal income does not necessarily accurately reflect their capacity to pay their mortgage(s). For instance, if you are self employed, you have the capacity to pay yourself more or less money. Investment properties still count toward the debt-to-income ratio which, in some cases, can be 8,000%. People are not losing sleep over this, as they have tenants in a market with a <1% vacancy rate. Very few households will feel strain from a quarter-point increase. In big cities like Greater Vancouver and Toronto, a finite number of households will actually be limited by the new mortgage regulations because there are a large number of dual-income, stable-job households. Many regular (dual-income) households in Greater Vancouver still qualify for hundreds of thousands of dollars more than they will ever borrow. This impacts single-income households (which are mostly in smaller cities and towns) to a much greater degree, and it means a huge reduction for them.
On his predictions for 2018:
2018 will be boring; Dustan has nothing bold to predict. There is more negative chatter than ever, some of which isn’t done yet. All the increases in fixed rates have been driven by government policy, not economic fundamentals—it’s not due to a natural rise in rates. The rule changes and other things happening give the bubble-talkers more fuel for their fire.
For 20 years, Dustan was saying the same thing: real estate in Vancouver is cheap, people can pay, and there is more room to run. Now, even Dustan has had trouble adapting to the new reality. A $1 million-dollar price tag for land that was $600,000 three years ago is astounding. Now there is no more room to run, but prices will not drop back down either—they will stay put. This is partly because of all the people coming into the Lower Mainland. Detached homes will not spike or drop significantly—they will be steady across the Lower Mainland (with maybe 2-3% gains). The condo and townhouse market is reaching peaks, but we won’t go into the valley. Rents are rising and offsetting the price-increase justification. The market will remain tight, with multiple and subject-free offers (making these is not a smart move!) being here to stay.
On his predictions for rate increases this year, and choosing variable or fixed:
Over the past few years, Dustan has waffled back and forth, depending on timing, between two-year fixed (which has a lower interest rate than the net-variable rate) and variable (which should be called a convertible-rate mortgage, as you can change and lock-in anytime, plus your term options to lock-in change each year). If you go into a five-year fixed mortgage with a major chartered bank or credit union, and later become one of the 65% of Canadians who break their mortgage early, the penalty can be as much as 4.5% of the balance (and rising rates will not necessarily protect you). This penalty is about 900% higher than a two-year fixed, a one-year fixed, or a variable-rate mortgage (which is only about 0.5% of the balance).
Rates could go up another 0.5% this year, but anything higher is unlikely. Two more quarter-point rate increases will be surprising to most of us, including economists. Rate increases are not about house prices or consumer debt levels; they are largely about exchange rates and the national economy, as a whole (i.e. who knows what will happen with NAFTA). Rates are too big a tool to try to control housing with. Dustan figures there will be no significant change: we’ll end the year no higher or lower than a quarter-point from where we are today.
The most important thing for anyone thinking about selling and buying a new property:
Your mortgage is portable, but you must re-qualify under today’s guidelines for that mortgage in order to port it (regardless if your personal circumstances do not change).
On how napping has changed his life:
Dustan works long hours and naps every day around 2:00 or 3:00pm for 22 minutes. Statistics say a cup of coffee makes you alert for 40 minutes, whereas a nap does so for four hours. Naps make all the difference!
To find out more about Dustan: