Real Estate

Should You Refinance Your Mortgage Now?

Our friends over at Green Mortgage Team sent us this informative comparative to illustrate whether it’s worth considering refinancing your mortgage during these uncertain times. ~Ed

What does COVID-19 have to do with interest rates?

Despite the substantial negative impact of COVID-19 across many industries, the virus has had a positive impact on mortgages, specifically for people getting a new mortgage today and for people that were in an existing variable rate mortgage. In general, when bad things are happening around the world, this tends to push interest rates down. Events such as 9/11, the credit crisis of 2008, Brexit and COVID-19 are all examples of situations in which interest rates subsequently fell 1% or more over a short period of time.

During trying times, money usually will flock to safety. Canada is a safe country to park money, and bonds are a safe asset class. Fixed mortgage rates are tied to bond yields, which means when bonds fall, fixed rates fall (to learn more about why this is, you can read another blog post here). For variable rates, the Bank of Canada dropped a full 1.5% over a short period of time to stem the bleeding and is in a position where they cannot reasonably go any lower without venturing into negative territory.

What is happening with rates?

After dropping in March and then spiking back up as spreads over top of the bond yield increased due to the COVID-19 “risk premium”, rates have been steadily falling since then and opportunity is brewing. With low interest rates, it makes more and more sense to break an existing mortgage and pay the penalty to take advantage of getting a new lower rate today.

Our clients are refinancing not only because they may save money over the remainder of their current term, but because now they will have a new mortgage for, say, five years instead of renewing in a year or two when rates could be higher at the time.

We believe we are very close to the bottom of the market. Typically interest rates are priced at bonds + 1.5%-1.8%. Currently bonds are hovering around 0.4%, which means fixed rates should be closer to 1.9%-2.2%, but currently most banks are closer to 2.49% for a 5-year fixed, or lower for an insured mortgage. The COVID-19 spreads are decreasing and we expect this will get closer to its normal spread band very soon. Following this, we will either see rates flatten out or begin to increase as we recover through the pandemic.

How do you know if it makes sense to break the mortgage?

Let’s say that you have a $500,000 mortgage with two years left on the mortgage, at a rate of 3.5% interest. The first step is to establish what the penalty to break that mortgage is. Don’t worry, we will do the math and estimate this for you. If you would like to learn more about how the banks calculate the penalties, you can read more here.

We will then evaluate the amount of savings over the remainder of the term. In an ideal circumstance, the savings will exceed the penalty over the remainder of the term up until your maturity date.

One important item that is often forgotten is that if you take a new 5-year term, you will not be coming up for a renewal in two years time, you will instead renew in five years. If you kept your current mortgage you would have to renew in two years, and rates are unlikely to be as low as the rate we can get at the present moment during this pandemic. As a reference, we encourage you to view the bond yield chart here (select 1W or 1M to go back further into history). You will find that over the past ten years, bonds have never been this low.

What is the game plan?

Put yourself in the best position possible to take advantage of a refinance.

We recommend that you have your file prepared and ready for the point when rates hit bottom and then start rising. This will allow us to hold a rate for up to 120 days and see where rates go from there. If rates continue to go up, it will make more and more sense to pull the trigger and refinance. Moreover, rates going up will then shrink the spread on the penalty cost for the IRD (Interest Rate Differential) penalties for fixed rate mortgages.

Some of our clients have decided to break their mortgage and pay a $10,000 penalty, but will save over $30,000 over the term of their mortgage.

In order to be able to hold these rates, we will need a fully built file, including supporting documents, to get the approval.

Should you go variable or fixed?

There is a lot that goes into making the decision of going variable or fixed. However, with the discounts off of posted rates being so great, it will cost anyone who breaks their 5-year fixed rate mortgage before the maturity dearly. In my analysis, the penalties to break a 5-year fixed mortgage early are anywhere from 500%-1,000% more than if you break a variable mortgage (where the penalty is capped at three months interest). To learn more about whether you should choose a fixed rate or a variable rate, you can read more here.

Example

Let’s use some figures to illustrate this. We will use the example of a $500,000 mortgage at an interest rate of 3.5% today, with two years left on the mortgage, compared to a new refinance at 2.29%. The mortgage penalty is added to the outstanding balance of the new mortgage, which means there are no out of pocket costs.

First, here is a look at the annual interest costs. This is assuming that interest rates in two years, when the renewal has come up, has normalized at 3.2%.

Another way to visualize this is to look at the total accumulation of interest over five years.

In most cases, the payments can be lower if you prefer a lower payment. If we keep the payments the same as the current mortgage, we can see that although the mortgage balance starts off higher due to adding the penalty to the outstanding balance, the mortgage outstanding balance after five years is $8,500 lower. This means that in this example, the borrower would be ahead by $8,500 over five years by refinancing.

How can you get prepared to take advantage of this opportunity?

Our team will be happy to help get this process started for you. We will need to collect the necessary information and documents to build your file, so that once we hit the low point with rates, we can send your application to the lender. To prepare yourself for this opportunity, contact us at GreenMortgageTeam.ca or 604-229-5515.

The Devil is in the Details, Greater Vancouver Detached Market Update

June sales increased along with the average price, major win for the bulls? Not even close, the headlines can be deceiving. Once you take deeper dive the recent data is very bleak. The accepted offers in June 2020 are the lowest June in the past 15 years. Homes sold for a higher price than the month before but, for the first time in a quarter, and only up 2% from May.

Even during a downtrend the prices will create higher low data points while still trending lower to find the bottom. Some have stated that the Corona Virus shut down will create a pent up demand, I hope this isn’t the demand they were anticipating because it’s a blip on the charts.

The average sales price for June came in at 1.619Million, signalling the first positive data point since February. July will be hugely important in setting the next short term trend for the Greater Vancouver price chart. If the July is lower than 1.619Million there is a strong likelihood that a new aggressive downtrend will be established. The possible downtrend is indicated with the yellow downtrend marker. We have purposely used yellow as we need confirmation before the downtrend is established.

One anticipated trend that we have spoken on before is now coming to fruition, that being, the high end market is selling more readily than the lot value properties. Buyers are wanting the most bang for their buck and as a result they want the 17Million dollar mansion for 12Million and one such sale took place in June. Not too many buyers are purchasing spec land, this has an effect on the average price. Which means once those foreclosures roll in, and investors begin to dip their toes in the water. That will shift the focus from trying to buy the high end on the cheap to buying homes near lot value.

This also indicates that even while mansions are selling for very high numbers, the average price is still in the middle of the market threshold. Once the foreclosures hit and inventory is high, investors will begin buying deeply discounted lots which will force the average price to further decline. Then the market will panic, but in reality, the investors buying lower valued properties will indeed force the prices to drop but simultaneously be creating the market bottom. The pricing bottom will likely occur at 1.40 million if this threshold breaks we look to 1.225Million as the next threshold.

Detached Sales could be interpreted as “six of one and a half dozen of the other”. Simply meaning you will hear likely hear that the June 2020 sales were the highest over the preceding two year. Technically true, but the June 2020 sales was the lowest excluding the previous two year over the previous 15 years.  Don’t let the language fool you when you hear best June in the previous two years. The past three years of June sales data are the lowest in the past 15 years. Not a great trend to be a part of yet Realtors and the Real Estate Boards will likely tout this as a win.

Another truth even though it may hurt some, the pricing peak for the market occurred in 2017, However sales numbers began to tank substantially since the frenzied mentality of 2015 & 2016. Sales numbers have not exceeded 1000 since June 2017, while the average over the previous 15 years is 1050. The reality is the Greater Vancouver detached market has been trending lower for many years already, while most analysts and definitely the GVRD real estate board have been saying we were nearing the end of the tunnel by being able to see light in 2019… Eitel Insights warned that the light was a train, not the end of the tunnel.

Last truth, we know sales are from previous months accepted offers. The accepted offers in June 2020 were only 561 and the absolute lowest June in the past 15 years. For context June 2019 accepted offers were 804, June 2018 were 755, June 2017 were 1,216, June 2016 were 1,446, June 2015 were 1,816. So much for best in the past 3 years, Eh?   (Happy Canada Day)

Sales are not good nor are they average in fact they are paltry, inventory is on the rise and will continue into 2021. None of this bodes well for prices in the short term.

Inventory finally surpassed 4200 active listings which hadn’t occurred since December 2019. The inventory currently sits at 4471. Once the mortgage deferral system comes to an end the inventory will rise rapidly.

Over the upcoming year an odd phenomenon will occur to the buyer’s mindset. Far from the chaos of 2015-2016 when frenzied buyers lined up and fought over who would pay the most in history for a home. Into 2021 a whole new kind of methodology will prevail, the fear of overpaying for a depreciating asset. When inventory is at the highs prices will be at the lows but purchasers will be fearful when they should be strong.

With all that said, purchasing when a market is actually at the lows of the cycle is a great idea .Eitel Insights will be releasing a full market analysis for Greater Vancouver in the upcoming week. We proudly announce that Eitel Insights will be promoted by Michael Campbell’s Money Talks. In this report we analyze all 20 markets inside of Greater Vancouver and update the data monthly so you can know exactly when and where the opportunities reside, which are currently rare but do exist right now.

With our newest product release you will know exactly where each market inside of Greater Vancouver is with respect to the individual market cycles, for prices, inventory, sales, moving averages, strength index, and our unique supply demand chart. Use our analytical interpretation for your actionable intelligence.

Not all markets in Greater Vancouver are created equal, some areas are closer to the bottom. While others still have significant percentage losses upcoming. Become an Eitel Insights client to find out which are which.

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

Watch Eitel Insight’s Latest Video:

Prices are Down – Sales are Way Down

and the Horizon Looks Ominous. Money Save is Money Earned.

May 2020 will be remembered as the month CMHC finally turned negative. They stated the two major markets in Canadian Real Estate will be going lower for the remaining portion of 2020 and into 2021. Something Eitel Insights has been stating correctly since 2017. The CMHC forecast sounds very familiar if you think about it.

Eitel insights stated in 2017 prices had peaked and would decline until 2021 dropping from 1.830Million to 1.4Million. In 2018 we stated, if 1.4Million does not hold as a bottom then as low as 1.225Million would be tested.

The CMHC forecast as of May 2020 calls for a 9% – 18% drop. Interesting, since the average sales price in Vancouver was 1.6Million that would put their forecast at 1.45Million for 9% drop or 1.3Million at an 18% drop. Just a bit of a rosier colour than our forecast offered years ago.

The exactness of Eitel Insights forecasts been unmatched, while others have continued to flip flop their positions, we have remained true.

Greater Vancouver detached prices in May dropped to 1.585Million which is the middle threshold of the market cycle. Seemingly breaking the uptrend that has been prevalent since September 2019 and instigated with an average sales price of 1.5Million.

CMHC tightening the purchasing restrictions for mortgages with less than 20% down will only perpetuate the tough market conditions. With the old normal, prices were in decline, and our new normal is not very promising. Prices will continue to search for lower prices as the market goes forward. We do anticipate a test of 1.4Million in 2020 with 2021 confirming the market bottom.

Gone are the days of 10 year outlooks, Eitel insights has advised potential purchasers to steer clear from buying at the market peaks. To date over $245,000 (from 1.830Mil – 1.585Mil) saved if the temptation to purchase has been resisted through our analytical interpretation. The 10 year outlook, if purchased in 2016 after 5 years will be down by $430,000, once 2021 realizes the 1.4Million forecast. Meaning your investment is negative, which forces you to put more time and money into an asset that is underwater.

Once the bottom is confirmed by our analytical process, prices will begin to increase back up to the old market high and beyond. This is how Eitel Insights clients invest, we analyze and observe, and then step to the plate buy at the low echelon of the market cycle. We cannot wait to offer the opportunity to make money in the Real Estate market rather than saving you money like we have been, but remember, money saved is money earned.

Sales are the headline, with only 544 detached sales taking place at land titles in May 2020. The accepted offers in May were only at 525. Which has been quoted as a great number compared to 370 in April and true enough but beating a lame duck doesn’t make you a champ.

Let’s take a look at the past 5 years of May accepted offers. 2015 had 1837, 2016 had 1820, 2017 had 1503, 2018 had 839, 2019 had 839, and of course we just had 525 accepted offers last month. This epitomizes what we have been try to explain would transpire. After peaks comes valley’s. The peak was frenzied, the bottom will look deserted. We advise purchasing during the desertion, while there is copious amounts of inventory and prices at the lower end of the market cycle.

The historically low sales numbers experienced recently, are occurring during the usual peaks, you can imagine what the sales number will look like during the seasonal market lulls.

Inventory has hit an artificial ceiling of 4200 active listings across Greater Vancouver. This number has been tested twice thus far. Once the 4200 level is broken we anticipate the next levels to be broken with relative ease. The upcoming levels are 4500 and then of course 5000, at the 5800 level the market will meet up with the 15 year average.

One interesting point on the chart is the high levels of inventory during the market peak of 2017 was the seller’s choice to trade their property for an all-time high sale price. This upcoming high level of inventory will largely be out of need to sell. These upcoming sellers will have a very different modus operandi.

Once inventory return to normal levels which will inevitably occur, we anticipate the downturn in prices to return with gusto bringing the average price down an additonal $185,000 lower than the current price.

Again, Eitel Insights has saved a potential purchaser $245,000 to date with more savings on the horizon. Stick with the industry leader, since inception Eitel Insights have led all contemporaries.

Not all markets in Greater Vancouver are created equal, some areas are closer to the bottom. While others still have significant percentage losses upcoming. Become an Eitel Insights client to find out which are which.

Dane Eitel, Eitel Insights

Watch Eitel’s latest video:

Condo Prices are expected to drop until 2022

The condo market just gave back the 5% gain in the previous month. After months sitting inside of a 1% range the condo market made its move in March. Only problem, it was the wrong way. Prices had shot up to just $699K, one month later the Condo market has recognized its mistake has come back to the $661K pricing threshold.

No so coincidentally, at the price point where the market spent 6 months deciding whether to rise or fall. The resulting short lived retest to the upper echelon got optimists excited. The challenge, the move was a head fake.

The technical feature of the divergent trend is over, next we forecast a prolonged downtrend of lower highs for the reaming months in 2020 and a further decline in 2021. Ultimately the Condo Market will test the $525,000 threshold, which hasn’t been seen since 2016. Signalling that 5 years of investment will have netted an investor zero increase of equity.

The 2015 investor with a zero equity increase will be the envy of all those who invested during the market frenzy of 2017-2018. The average purchaser in January 2017 paid $584K (upper orange line) and by January 2018 prices had increased to $751,000(upper green line). Every Condo purchased during these times will technically be under water in the upcoming years as prices test the 2015 threshold of $525,000. Meaning the 2017 investor who purchased at an average price of $584K will be down $59,000 and the $751K Investors purchases during the peak, will be down $225,000 in 2021 on average.

Investing in real estate is not for the feint of heart. I vividly recall in 2017 the line ups for presales and the amount of complaining that occurred from those who didn’t get a chance to purchase because some investor bought multiple units. Thank your lucky stars for those investors. Now it is them on the hook instead of you. In the upcoming months as those pre sold buildings are completed you can purchase that same unit at a discount. Crazy how life works out.

That being said we do not advise any investment purchases or even owner occupied purchases in the current market. We would prefer buyers wait until prices are much lower than $661K. Prices will continue lower as the inventory increases. Supply demand factors cannot be ignored.

As for the investor owners who are about to be caught in this chaotic market, our advice, sell in May and go away… for years. Wait until prices reach the lower echelon of the market cycle before re-entering the Greater Vancouver condo market.

The inventory remained similar from the previous month. April finished with just under 4000 active condos for sale across the lower mainland. Over the next quarter we anticipate an additional 1000 active listings to join and remain on the market.

Age isn’t just a number, by that we mean elder buildings will have a tremendously hard time in the upcoming years. As the presale properties work their way onto market which will cause added competition, add the insurance concerns, and common sentiment to like a new shiny object. The resale market will be living the hard knock life.

The April totals for condo sales across Greater Vancouver was 508. Marking the lowest April data on the record. April’s sales historically fall around 1100. The forecasts gets even worse, as we have stated in the past, sales numbers come from land titles meaning the recorded sales for April actually came from the previous months accepted offers.

The 508 April completions could have possibly come out of the accepted offers earlier in the year. January had over 900 accepted offers, February had over 1100 while March saw just under 1000. The gloom and doom of April 2020 only realized 257 accepted offers across all of Greater Vancouver. Buckle up condo owners it’s about to become a bumpy ride.

Not all markets in Greater Vancouver are created equal, some areas are closer to the bottom. While others still have significant percentage losses upcoming. Become an Eitel Insights client to find out which are which.

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

Watch Eitel Insight’s Latest Video

Student Housing, One of the Most Hyped Asset Classes, Runs Out of Students

Here’s the story of two student housing REITs in the UK that crashed.

Wolf here: In recent years, student housing, a subcategory of Commercial Real Estate, became one of the hottest asset classes in the US, in the UK, and elsewhere. Big money piled in. Wall Street raked in the fees by securitizing the mortgages into commercial mortgage-backed securities (CMBS). Large firms spun off their portfolios of student housing buildings into publicly traded REITs. The article below is about two of those REITs in the UK, but the issues are the same in the US. This asset class is risky even in good times because students are not stable renters. Last fall, long before Covid-19 showed up, delinquencies and special servicing rates on US student housing CMBS already spiked. The pandemic has now been heaped on top of it….CLICK for complete article

Evolving Today, Strategizing for Tomorrow – A Webinar Invitation

Looking to gain clarity on the current environment and its implications for the real estate market? Join Justin Smith of Hawkeye Wealth on Wednesday May 27th @ 11am. They have spent many hours analyzing data, perspectives, and strategies from some of the best minds in real estate to help us all make better investment decisions.

Registration is limited. Reserve your access today – CLICK HERE

Specifically, this webinar covers:

1. The State of the Nation
What’s the damage to the economy? How are various assets in commercial real estate performing? We will focus on Multifamily and Industrial. What’s the data for rent-collection rates?

2. How is industry adapting?
What are some best practices we’ve seen out there? How much of a difference is superior management making in terms of property performance?

3. What might the future look like?
What trends might emerge or accelerate due to Covid-19? How might they uniquely impact various property types?

4. Based on that future, what are Hawkeye’s plans for their investors?
Where do they potentially see the greatest opportunity for investors? What do they need to see before recommending a deal in today’s environment?