Vancouver is doubling down on the success of its vacant home tax…well, tripling down, technically. The Vancouver Empty Homes Tax (EHT) will be tripled from its original rate for the 2021 assessment year. The tax, which places a penalty on underused homes, was put in place to help encourage more efficient use.

Vancouver Empty Homes Tax (EHT)

Vancouver real estate’s notoriously low property tax rate made it ideal for carrying vacant property for a long period of time. In order to discourage this kind of behaviour, the City joined other places like Paris, in taxing vacant homes. The tax reduces the cost effectiveness of vacant speculation, forcing owners to decide if they really want to carry the empty home. There’s some notable exceptions, like if the home is a principal residence or rented for 6 months. However, generally it helps to close the inefficiency created by the low rates that attract yield chasing…CLICK for complete article

The gang over at Green Mortgage Team sent us their latest blog which contains useful advice for anyone looking to do a something other than a conventional mortgage. ~Ed.
A construction mortgage is set up very different than a conventional mortgage. Lenders finance construction on a “Cost to Complete” basis. In this type of financing, the mortgage lender withholds enough funds from the approved mortgage loan amount to complete the construction in the event there is a foreclosure or default on the loan. As the borrower progresses throughout the different stages of construction, the mortgage lender releases more money in “draws” to the borrower. Click for full article.

Mortgage in arrears have increased 22% since Eitel Insights indicated a rise was imminent. That is only a tenth of the anticipated increase to occur over the upcoming years. Rising mortgages in arrears does not make the market go lower in and of itself. Rising numbers or delinquent mortgages is a symptom of the BC real estate market in decline and a weakened economy.

Evidenced by the chart, this is only the third time in four decades that delinquent mortgages were this low. In every instance previous once the data broke above the low resistance level, mortgages in arrears rose dramatically. Simultaneously the home prices across greater Vancouver declined. The most recent example was 2008 – 2009. The recession was short lived, due in large part to the winter Olympics of 2010 coming to town. That made it nearly impossible for the economy to slow down for long. However a 21% recession still managed to occur even during the short time frame.

The 1990’s prices peaked in 1995 and subsequently declined for years. The ultimate bottom occurred once prices dropped over 26%. Prices did not achieve a higher price until 2004, a 9 year market cycle. That cycle was fuelled partially due to the mortgage in arrears produced by a weakened market.

The mortgage in arrears data is accumulated across BC, however in the current market place most of the outlying or tertiary markets are outperforming Greater Vancouver as the exodus from city centers continues. That would imply many of these newly upcoming additions to the delinquent mortgages will be from right here in the highly volatile Greater Vancouver market.

The cold hard facts of the current market decline appear to be at odds with many bullish headlines. That is because the Real Estate Boards continue to paint a rosy picture in order to find a positive sounding headline. Recent example: “Highest October for sales in decades”. While true, a perfect example of a half-truth.

October has never been a high-water mark in any year previous… ever. Comparing strictly historical October data in order to come up with a fantastic headline is simply too big of a pill to swallow. The high data point of 2020 is October, compared to previous years high-water sales data, 2020 was no more than average. Hearing the excitement over average data points, we believe the next phase will lead to sincere weakness, as opposed to tepid strength, reported as herculean. In the sales chart below you can see the “historic high month of October 2020” is smack dab in the middle of the 15 year chart. To get a true historic high data point one would have to discount 177 other months of data leaving just the 14 previous October’s.

The question is, based on the data, what will occur next? The first six months of 2021 will be crucial, as detached home values based on a 5 year term will be underwater. The initial peak of the detached market occurred during the initial two quarters of 2016. Over that time the average price was $1.790M and 11,400 sales occurred in Greater Vancouver. The overwhelming majority will be up for the 5 year mortgage renewal in the first two quarters of 2021.

The 5 year fixed interest rates have decrease substantially from 2019 when interest rates were around 4%, according to Statscan. Current rates are 2.24%, a significant difference. However compared to the 2016 levels the change is less significant, actually barely noticeable. The first 6 months of 2016 interest rate average was 2.62% making the current interest rates decrease an insignificant factor for those about to go through the renewal process.

A true frenzied market would compare similar to that of 2016 with over 11,400 sales occurring in a six month span with an average sales price of $1.790M. The most recent six months of data, which have been touted as the record breaking, has only achieved 6,300 sales, with an average sales price of $1.645M. So, maybe the market wasn’t as strong as the headlines would have suggested.

All that said markets do ebb and flow. The past few several years of ebb and flow has resulted in the lower highs coupled with lower lows, resulting in a downtrend. Another way to say that would be a period of frenzied strength which created a market top during 2016 -2017 then a market that weakens 2018 – 2019, a period of temporary strength 2020 ultimately resulting in another wave of weakness which results in a market finding the bottom 2021.

2020 technically was supposed to be better than 2019, however the Covid-19 pandemic really emerged as a catalyst for buying up the available detached properties. Prices in January 2020 were just below $1.6M, importantly there was less than 4000 active detached properties. The demand to move from a condo to a detached property was pushed to extremes as most employees began to work from home along with school shutdowns. Parents decided they could not go through another shutdown in a small box, they would rather have a larger building footprint and a yard during the looming second lockdown. There will inevitably come a time when all who wanted and could afford a detached home have purchased. Which will lead to a period of weakened demand.

Inventory will be a major story in 2021 one way or the other. If the inventory remains in the doldrums below 5000 active listings, even with less demand there won’t be much of an impetus for sellers to decrease prices. If however, inventory can surpass 5000 or even 6000 active listings prices will fall off with gusto. Given the 11,400 upcoming mortgage renewals it wouldn’t be impossible to see 20% of those come to market in an attempt to stem the losses. That would result in an increase of 2,200 additional inventory. Which would push the data above those key indicating levels.

Can owner occupied demand continue to lift prices to the previous peak of $1.830M in the detached market. The answer is no, since it was not solely owner occupied demand that enabled the market to achieve the all-time highs. There was clearly demand from locals along with many foreign buyers purchasing along with investors continuing to bid each other higher. Now the investors have stopped purchasing, and overseas purchasing has all but stopped. Investing will begin to occur once the proverbial blood hits the streets in the form of distressed sales and foreclosures. As the mortgage in arrears and other analytical indicators suggests that time is coming.

Dane Eitel
Founder & Lead Analyst, Eitel Insights
604 813-1418

Watch Eitel Insight’s latest video here:

Our friends over at Green Mortgage Team sent us their latest article to share with you. ~Ed

When purchasing a pre-sale, it is crucial to confirm that you
are able to get a mortgage on the property, even if you plan to
assign the unit before closing. Planning ahead is very important
in order to avoid being in a position where you are unable to
complete on your contract and/or risk losing your deposit.
Here are the 5 biggest mistakes people make when purchasing
a pre-sale property:
1. Changes in the real estate market
When the time comes to close on the unit, the bank will typically
ask for an appraisal. If the appraisal is lower than the price you
are paying, you will need additional down payment to make up
that difference. It is important to be prepared with more down
payment funds than you originally expected.
If the value is lower, it will be harder to find a buyer to assign the
unit to for the same price you paid, making it more likely you will
need to complete the purchase yourself.

2. Changes to lending guidelines
Lending guidelines with banks change all the time. Even if you
think you are a strong borrower, you may experience challenges
fitting inside of a bank’s “box”. Regardless of your situation, it is
very important to confirm your ability to qualify for the mortgage.

3. Changes to your financial profile
Buying a pre-sale can come with a lot of risk. Between the
time that you write the offer and the time that you close, your
personal circumstances can change. Changes that can affect
your ability to qualify for the mortgage include starting a new
job, losing your job, purchasing a car or another property,
retiring, applying for credit, etc.

4. Rising interest rates
In the event interest rates rise during the course of the
construction, you may find that you are unable to afford or
to qualify for the mortgage by the time that the construction
is finished. It is important that you understand the worst case
scenario for interest rates and get a long-term rate hold.

5. Restrictions regarding your ability to assign the contract
to another buyer
Whether you intend on assigning the contract or not, it is
important to review the contract and know your options. Many
developers either do not allow assignments or will charge a fee
for an assignment; however, these terms can be negotiated when
you are writing the offer. Always aim for the most flexible terms
possible to allow for more options when closing approaches.
The solution: Obtain an approval with a long-term rate hold.
There is one simple solution that can solve all of these problems:
choose a long-term rate hold. A long-term rate hold offers the
following features:
1. Get fully approved now, which protects your ability to close
regardless of changes to your financial profile. This also
protects you from changes to lending guidelines, to ensure
that you are “grandfathered”. Lenders will typically offer
this if the completion is within 18 months (occasionally up
to 24 months).

2. Most lenders offer a long-term rate hold for 18-24 months.
For longer-term rate holds, they may need to approve the
building itself. Typically, this rate hold is more expensive than
current rates; however, it provides you with a worst case
scenario rate, protecting you in the event rates increase.
Most lenders will allow you to revert to their standard rates
at closing if they are lower, making a long-term rate hold
your best option.

3. Sometimes lenders will get a “blanket appraisal” on the
building and your unit, which protects you from changes
in valuation between the date you write the offer and the
closing date. That way if the value drops, you will still be
able to use the value from the date that you wrote the offer
(and you will not require more down payment funds to
complete).

Overall, even if you plan on assigning your unit, it is important to
have a contingency plan. If you are a real estate investor, make
sure this property makes sense in the event that you have to
close. Does it cashflow? Does it fit your portfolio and your game
plan? Always visualize ahead of time and consider what your
situation will look like if you have to complete the purchase.
If you have a pre-sale under contract or you are considering a
pre-sale, make sure you have a long-term rate hold and approval
in place. The Green Mortgage Team has access to a number of
options for long-term rate holds to help protect you as a buyer.
To review your options, contact us today at Green Mortgage Team.