With interest rates creeping up, Dustan Woodhouse joins Adam and Matt to discuss the state of the Vancouver Real Estate Market and Vancouver housing predictions for the balance of 2018. We also cover great investments in this market and whether you should be considering a variable or fixed rate. Dustan is a fan-favourite for a reason! Not to be missed!
Vancouver Real Estate News, Market Updates, Insider Tips, Stats, & Analysis
Tell us about yourself
I bought my first investment property 26 years ago and have been a fan of Vancouver real estate ever since. I got into mortgage brokering 11 years ago and primarily work in the greater Vancouver area.
The Bank of Canada raised the benchmark interest rate to 1.5% – what does this mean for the Vancouver market?
A quarter, half or one full point doesn’t have any significant impact on the market whatsoever. Housing prices have gone up during times of rising interest rates. Some people are nervous rates will keep rising so they want to get in right away. But all real estate decisions are made on emotion – not deep market analysis of interest rates. It would be hard to find someone who made a real estate decision based on empirical data.
Who is this impacting?
Are interest rates impacting the market? No, not in any material way. The stress test has already impacted the market way more. We’ve gone from $15,000 of gross employment income getting you $100,000 worth of mortgage money to, as of January 1st with the stress test, $20,000 of gross income per $100,000 of mortgage money. This stress test is arguably excessively restrictive, especially in Toronto and Vancouver markets. The stress test is the real impact.
Rising interest rates historically slow the market. But when interest rates were decreasing, other measures went into place to ensure record high mortgage debt wasn’t being taken on relative to income. The January 1st stress test was the equivalent of a 2% interest rate hike overnight. So yesterday’s quarter point increase, which usually would have a cooling effect, won’t have a huge effect. It means your average family is skipping their monthly dinner at The Keg.
A quarter point here or there won’t have an impact on our market because we’re dealing with a 2% artificial hike already.
What is the biggest contributor to our market’s current state (softening)?
The biggest danger to the stability of the real estate market in Canada is government over-regulation. Every level of government has put some poorly designed tax/measure onto the market. For example, the foreign buyers tax. If the government has issues with the origins of the money, why are they asking for 20% more in the form of tax? Why not just restrict foreign buyers to one property? We have a good title search capacity to ensure no one would cheat the system. But instead of restricting property, we asked for 20% more of the money they aren’t supposed to bring in.
Are you buying/would you buy real estate right now?
Absolutely! Everyone has to live somewhere. What we have is a crisis for tenants in the making thanks to the continued restriction on supply. The government isn’t creating an environment for builders to build extra units. They are making the market unstable so we see resistance from developers. Real estate doesn’t always feel like a sure win for developers if they are unsure about who can qualify to own what they’re building.
As well, there are all of the issues with being a residential landlord; it’s hard to be a landlord. It’s difficult to get financing for individual investors. The stress test has taken many people out of the market. And with all of these restrictions taking buyers out of the market, builders are backing away. Yet we still have the same number of people coming into BC who need to live somewhere
If you can find a property in the Lower Mainland that cash flows, and they do exist, buy it. Rents are going up (there isn’t a bubble that will burst). There are fewer properties available and more people trying to rent since they can no longer qualify to buy.
Any areas that you’re excited about?
We most recently purchased a presale condo in the Brentwood area of Burnaby, I don’t usually buy presales. I believe we should break even or will need to subsidize $100-200 per month for the first year. Being close to transit is critical. If you can find a rental property by transit, you can’t go wrong.
What about areas outside of BC?
I spend lots of time flying to Toronto, Ottawa, Regina, Calgary and Winnipeg. I started going to Toronto five years ago and thought it was a bargain at the time. Now, it’s much pricier. A city that is still phenomenal is Ottawa. You have a high volume of potential renters with stable government jobs. Many of those people aren’t living in Ottawa permanently so there are lots of rental opportunities. Plus, properties are affordable – they cash flow. It’s a beautiful city.
Your latest newsletter discussed fixed or variable rate mortgages. What are you in yourself and what do you suggest for clients?
We have been variable on all of our properties since 1997. If a five year fixed rate mortgage is three quarter points higher than variable, or even a half a point, it doesn’t make sense to lock in. When you pick a five year fixed, you think you’ve won if prime goes up the difference. But variable saves money the entire time the rate was lower. Variable mortgages don’t lose money until prime goes up much higher than the difference to account for money saved before prime increased. Will it break even in the five year term?
2 out of 3 Canadians will break their mortgages before they go to full term. The average is 36 months – at the three year mark. With the high divorce rates and business that don’t last, it’s hard to make it through a five year mortgage. With a five year fixed, you’ll pay approximately 4.5% of the balance of the mortgage (interest rate differential) as a penalty for breaking the term. With a variable mortgage, the penalty is apx 0.75%.
Predictions for rest of 2018
If you’re a buyer who is trying to buy for under $1 m, you’ll have no clue what this slow down is the media is talking about. The sub $1m market is still so hot. It cools over $1m and turns ice cold over $1.5/2m. We may see an overall activity drop but not a price drop. People don’t have to sell at the higher price point. So it becomes a question of who is going to blink first.
What does down turn in Vancouver look like?
We’ll take a little breather and then we will move forward again. The government may actually trigger a recession with all of the measures they put in place to protect us from a recession. Hopefully cooler heads will prevail and the government addresses the supply side of the market instead of the demand side. So far they have just made creating supply more difficult.
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