Landlords Rejoice! Impact of CMHC changes

Posted by Thomas Beyer

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Thomas4 2011web

Thomas4 2011web

I trust you heard about the recent announcement to further tighten rules for CMHC insured mortgages. Our Finance Minister Jim Flaherty primarily announced a reduction of the Total-Debt-Coverage ratio and a reduction of the maximum mortgage amortization from 30 to 25 years, basically back to similar rules that existed 10 years ago.

These changes are essentially an effective increase in interest rates – without increasing the interest rates. It means you need a higher income to qualify for the same mortgage as monthly payments are higher due to the shorter amortization – or it means a smaller insured CMHC mortgage for that income.

While these changes are not dramatic and affect less than 15% of all mortgages, namely CMHC insured mortgages only, it nevertheless will decrease the pool of buyers slightly and what was not mentioned in the media: it will INCREASE THE NUMBER OF RENTERS slightly.

This is good news for existing real estate investors or those that are considering a safe, income producing investment class: rental properties. We have seen considerable tightening of vacancies and steady rent increases across our entire 1000+ unit portfolio over the last 18 months and we expect further tightening with associated continued rent increases (and thus property value increases). See some of the latest labour market stories in the media feature on the bottom right of our home page (which is a copy of the corporate facebook page). Rents in our Calgary asset for two bedroom units are now over $1150/month .. up over 15% from a year ago .. wow !

You will also see a reduction in construction volume, starting later 2012 into 2013 – again reducing supply which is by and large good news for (existing or aspiring) landlords.

Thirdly, builders will build smaller, or cheaper, starter homes and condos as this is the primary use of CMHC insured mortgages. This will reduce the average price, but will have almost no effect on existing prices of older resale homes or more expensive homes. Of course, the media will tout “the average price is falling” while in effect there is little to no impact on apartment buildings or smaller, older single-family rental properties favoured by real estate investors

Canadian land-, small single family home- or apartment building-investments continue to make a lot of sense as we have strong GDP growth, large natural resources reserves, high immigration, job growth, high quality of living standards, clean air, low corruption, low debt and low deficits, especially in Alberta or Saskatchewan, but also job producing pockets of BC, ON, NS or TX. We also have fairly conservative governments that balance social needs with fiscal responsibility, as shown by this latest CMHC rule tightening. Next on the list in a year or two might be the gradual ratcheting up from a minimum of 5% down to 7.5% or 10% or a rule to allow 5% down only once, for first time homebuyers.

As always please call or e-mail with questions or comments!

Sincerely and successful investing,

Thomas Beyer, President
Prestigious Properties Group
T: 403-678-3330

P.S.  I love Facebook .. but not the stock, now trading below its IPO price. Insiders and banks made out like bandits here at the expense of retail investors. Therefore, we prefer real assets in the “exempt market” space – also referred to as private equity.

Our Kings Castle LP is currently open for new investment (in cash or now, your TFSA or RRSP) with optional 5% cash-flow and equity growth, with a verified target ROI of around 10%/year. We intend to buy another small asset with the roughly $1M cash at hand, in Alberta, where we are actively seeking apartment buildings right now. We have placed an offer on a Red Deer building for a likely late summer 2012 possession date. This investment class is where I have made most of my money over the last decade and where I continue to place most of my money. It is far safer, higher yielding and less risky than the volatile stock market.

This is an opinion only – not advice. And as always, past results are not a guarantee for future success, and no results are guaranteed ! Securities are sold via Exempt Market Dealers.