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.
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
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
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.
“Being self-employed, I don’t like to add extra bills or burdens, and with a moratorium, there’s no guarantee that later I won’t be further into debt.”
Lucy, freelance photographer, Colorado – July 2020
Lucy’s concern about accumulating debt echoes across America. Millions of renters and homeowners are anxious about paying both their monthly housing bill and a ballooning debt balance.
Based on present missed payment rates, consumers will accumulate at least $100B in housing debt by January 2021. The following model describes a set of linked health, social and economic events. These events are likely to unfold in next 6 months. An uncontrolled wave of virus infections drives the cascading economic impact:
> personal income falls > consumers miss rent and mortgage payments
> rent and mortgage payment moratoriums fail > consumers use credit cards to make payments
> small business apartment landlords & homeowners default on mortgages (debt bubble bursts)
> consumer spending dives
Our analysis starts by examining the virus 3rd wave and a likely increase in lockdowns.
Virus Growth Uncontrolled
On November 2st the U.S. had a 44% increase in daily COVID-19 to 93,581. The chart below indicates the second wave of infections did not decline to the first wave low. Thus, experts forecast a third winter wave peak of cases will be higher than the second spring wave peak.
Hospitalizations are rising in 42 states. Nineteen states report their highest hospitalization rate since the pandemic began in March. Uncontrolled virus infections will result in more partial or full lockdowns of intense social activity businesses including, hotels, restaurants, bars, theaters, sports stadiums, indoor arenas, offices, transit, airlines, hair salons, and personal services. An indication of what the U.S. may face soon is unfolding now in the United Kingdom, Germany, and France. These EU countries are tightening pandemic restrictions at levels not seen since last June. Meantime, U.S. businesses, such as internet entertainment, technology services, eCommerce and, socially distanced grocery stores, will continue to grow…CLICK for complete article
The value of technical analysis has become a massive benefit to investors who take advantage of the actionable intelligence produced through analytical interpretation. Let’s recall where the market has been before we get into where it is going. During the uncertain and frenzied market conditions technical analysis allowed Eitel Insights to call the top, first to do so of our analytical peers. More importantly than being first the call was correct. After breaking the growth trend in 2017 (green line) prices dropped off from 1.830 average sales price in May 2017, to 1.468Million during Feb 2019. The recent rebound was technically predicable as well.
The rationale as to why prices found a temporary bottom during 2019 is the properly place technical trend lines established during the 2008 -2009 recovery (black uptrends). As prices were down 19% from peaks, Eitel Insights did say buyers are coming off the benches due to the mitigation of the stress tests, along with home values decreasing back to 2015 levels.
Prices had a prolonged test of the uptrend (lower black line) during 2019, with over 5 months of pricing data testing the staunch trend. Prices can only test a trend for so long before moving on to create a new trend, or test another previously established trendline. Current prices of 1.714Million are back up testing the downtrend which was created during the market peak and subsequent lower price points. While some analysts and the real estate boards have touted the recent increase in prices as the forever win, we see it as a typical lower highs coupled with lower lows in order to fulfill the identified market cycle.
Currently, prices are obviously testing the downtrend, coupled with the lower echelon of the upper channel. September finished with an average sales price of $1.710 Million, October ended with $1.714 Million. With just a four thousand dollar increase, we believe the near term top is likely being put in place in order for prices to return lower in order to have another attempt at breaking through that staunch uptrend line.
One of these two lines will have to relent. Given how strong that market has performed and with all the bullish chatter you would think the downtrend has already been broken and new highs are being put in place. That just simply isn’t the truth. As the market weakens, the bulls will say as the market weakens is this is normal after having such a run up, but the run up was technically perfect. Given how a triple top was put in place during 2017 – 2018, we believe the power behind the three year downtrend will be enough to break the decreasing power of the uptrend with each and every impending test. This should come as relief to home buyers but possibly induce some fear sweats for the sellers.
The entry level markets have been rising since the 2nd quarter, as we had written in February for the Michael Campbell’s Money Talks, Insiders Edge. When a large group with a similar mindset descends into a small region, prices will increase. That occurred due to the pulled forward demand to buy a detached property. With Maple Ridge and Port Coquitlam detached markets rising above 1 Million dollars the entry level of the market has been lifted. The high end market has been substantially damaged, with properties selling well below previous expectations.
Pulled forward demand simply means, purchasers who had planned to buy during the upcoming 3 – 12 months became immediate buyers due to the uncertainty of the pandemic, which resulted in most employees working from home and parents becoming teachers. The exodus from the condo market to the detached market was palpable. Inventory has increased over 2,209 since April while detached properties have only increased 484 over the same time period. This imbalance has forced prices in the short term to increase and retest the downtrend. There will come a time when everyone who wanted a house and could afford one purchased. If the period of strength is coming to an end, what is next?
The growing need to sell is percolating. Largely due to the 11,400 properties purchased during the first six months of 2016, with an average sales price of 1.784 Million. Investors should begin to gear up, as deferred mortgage payments eventually will have to pay the piper, since they didn’t pay the bank. The 11,400 2016 purchasers are praying for continued increased sales resulting in higher sales prices. If prices do not increase and actually decline further the 11,400 number will definitely rise which forces more competition amongst sellers, ultimately pushing prices lower. 2021 will see an incredible increase for the inventory market and this will be met with little enthusiasm as the pulled forward demand has been disbursed.
Eitel Insights believes the 2017 instigated downtrend (orange line) will hold, with a possibility that a minor breakout occurs, followed by a sharp decline. In that instance, the next occurrence will be the inevitable test of the lower line of the long term uptrend (black line). This again, will be immensely important, this time more so for the bulls. Important to the bulls due to what a break of the long term uptrend will likely imply for future data. After the break of the uptrend we would anticipate similar volatile market behaviour, as was the case when the top line of the uptrend broke, which resulted in a loss of 235,000 in just four months.
The immediate and overdone stimulus actually created a temporary windfall for the economy. During the 2nd quarter, Canadian households received 56 Billion from the government while they only lost 23 Billion in lost wages and salaries due to the pandemic (Source Robert Hogue RBC) a net gain of 33 Billion. The additional income when added to the pent up demand during the shutdown and the pulled forward demand resulted in a massive late summer and fall rally for the Greater Vancouver real estate market.
The completed sales came in with another high water mark for 2020, as the oddities for this year continue. Some have exclaimed the 1353 sales as historic highs. Taking a look at the chart you can see that isn’t a true sentiment of where sales are. What is true is the historic high compared to previous October data. This pent up and pulled forward demand has resulted in very unusual activity given seasonal norms.
To recount what has transpired is the easy part. Interpreting what is on the horizon is the hard part. Eitel Insights ability to accurately predict the future based on the technical analysis has been showcased in the past, the current volatile waters will eventually calm. Once the market returns to normal rhythms, the supply demand factors upcoming during 2021 in the detached market look to favour the buyers more than the sellers.
The governmental factor for BC has changed, while remaining the same. The past three and half years were governed by the NDP coalition with the Green party. The initial reaction to the change in leadership was to break the uptrend (green line) which had propelled Greater Vancouver detached prices higher from 1.184 Million in July 2014 to 1.830 in May 2017. After breaking the growth trend, a sharp downtrend developed (red line) which continually decreased prices until the temporary bottom was discovered in 2019.
This time not only do the NDP have a majority, they seemingly have a mandate. Having the benefit of the past three and a half years as evidence which has resulted in lower prices on average. Add in a historical point of view and which continues to indicate prices decline under an NDP government. Take the 1990’s into consideration. During the last extended NDP leadership prices declined 26% from the top to bottom. Taking the Premier of BC at his words, one could assume the upcoming 4 years will be a challenge to hold prices at current levels, let alone increase from here.
The initial period of weakness began during October 2017 and remained for 21 months. The result of that weakness was prices declined a full 19% which meant a drop of $360,000 over a 21 month time frame. The recent period of strength lasted 13 months from September 2019 at 1.5Million to current levels of 1.715Million an increase of 215,000. In this see saw trending market, the next occurrence after strength is weakness.
The future weakness will likely result from the need to sell, which will heavily impact those who purchased during 2016. The first two quarters of 2016 averaged 1.784Million, and had over 11,400 sales. Even if, prices stay at current levels these properties will be underwater during their 5 year mortgage renewal period.
Inventory had a pull back during October, again thanks to the properly placed trend line that data has come back to retest the uptrend. With just 4,454 active listings, it wouldn’t take much of the potential 11,400 high priced sales from 2016 to list 2021 in order to change market sentiment.
As prices hold according to the downtrend, any future price below 1.6Million would produce another test of the lower line prolonged uptrend.
The significance of the two divergent trend lines entering into the apex of a four year trend cannot be overstated. If or when prices break below the lower line of the prolonged uptrend a volatile reaction will ensue.
The previous example of the type of volatility we anticipate, came when the top line of the prolonged uptrend was broken for the last time in July 2018 (upper black line). The following months produced an attempt to regain position above the uptrend which failed, and subsequently sent the average price from $1.705 Million in November 2018 to $1.468 Million by February 2019 a loss of $237,000 in just 4 months.
Rather than being surprised each and every month with a seemingly chaotic data point, allow the technical analysis offered by Eitel Insights to guide you as to why prices move the way they do, and critical trends are being tested by the data. Without accurate trend lines, investors don’t know which time is more critical than inconsequential sideways data periods. The upcoming two quarters of data are of major significance for both the bears and the bulls of the Greater Vancouver real estate market.
Canada is pulling all of the measures to make sure households and businesses don’t go bust, but it’s just time for some. Office of the Superintendent of Bankruptcy (OSB) data shows insolvencies increased in Q3 from the previous quarter. The quarterly increase is somewhat surprising, considering the number of lender support programs.
Canadian Insolvencies Rise 7.9% In Q3
Insolvencies are climbing as lockdowns ease, although they haven’t gone above last year’s levels. There were 35,535 insolvencies filed in Q3 2020, up 7.9% compared to the previous quarter. This also works out to a decline of 40%, when compared to the same quarter last year. Not as high as last year, but they’re rising even amongst a more lender friendly environment….CLICK for complete article