Condo investors and the housing market

A recent study titled, “Window Into the World of Condo Investors” by Shaun Hildebrand, senior vice-president of rental research firm Urbanation, and Benjamin Tal, senior economist with CIBC Capital Market, sheds a light into who these investors are in the GTA and how they might impact the condo market in the future.

What’s interesting is that investors who grab the best units at developer pre-sales account for nearly half of the rental housing inventory in the region. And while many are foreign investors, it’s the domestic investors who may hold the key to the future of the real estate market.

According to the report, only about 10% of condo investors are international buyers and are more likely to be local immigrants aged 40 to 60. The reasons are many – a retirement investment or to help their children, for example.

Most investors use a minimum down payment of 20% on a pre-sale unit. Since it may take four to five years to build a condo, the value increases each year until the unit is leased at market rent, which should cover costs and pay down principal. 

However, the future may not look as bright as it once did. While current market conditions have elevated demand, the slow turnover, higher prices for move-up buyers and the mortgage rule changes have reduced turnover, with fewer units available.

A Snapshot of Condo Investors

Some hard data:

•  In 2017, just over 20% of condo investors purchased the units with no mortgage.
•  The Big “5” Banks provided two-thirds of the credit
• Credit unions provided 20$ of the credit
•  Private lending accounted for 5% in dollar amount but 10% in number of transactions
• Approx. 30% have an interest rate of more than 6%
• 16% have interest rates higher than 9%
•  On average, investors provided the 20% down payment; non-investors, of course, can provide lower down payments. 
•  44% of investors with a mortgage are in a negative cash flow position
•  Investors with positive cash flow have an average monthly income of $360
•  The average resale price was 51% higher than the average pre-sale price

The last few years have been challenging for investors and it’s going to be difficult to get that healthy return.  Forty-four per cent of investors who took possession of their units in 2017 are seeing their rental income fall short of mortgage payments and building maintenance fees.

Here’s a scenario: The authors of the study estimate that new units that were pre-sold over the past year and scheduled for completion in 2021, rents would have to rise by 17% over the next four years, if there were no changes in interest rates, by 28% if rates increased by 100 basis points, and by 39% if rates rose by 200 basis points.

The condo market is the last bastion of affordability, but it’s going to be more important than ever for investors, and non-investors, to make sure they do their homework and get the information they need to make the best decisions.

TMG Mortgage Broker Runs 250KM for Breakfast Club of Canada

Can you imagine running a 250km ultra marathon over six days, in the Sahara Desert, while carrying all your supplies?

Mathieu McCaie, a mortgage broker with TMG The Mortgage Group, based in New Brunswick, has done just that. After months of training, this father of two ran 250 km in a six-stage event in the Sahara Desert, under extreme conditions, in part, to raise more than $13,000 for Breakfast Club of Canada.

The Marathon des Sables (MDS) is one of the toughest races in the world. What makes it challenging? “It’s an ultra-marathon where I carried everything I needed over the 6-day race: food, sleeping bag, venom pump, compass, etc., so my backpack weighed about 22 pounds,” McCaie said. “There was also the change in temperature, which varied from 4 degrees at night to around 50 degrees in the daytime.”

 “We at TMG The Mortgage Group, are in awe of Mathieu’s achievement,” said Mark Kerzner, president of TMG. “He is a consummate professional, who leads by example - -this was just his next challenge.”

For McCaie, completing the race felt good, but says he’s ready to move on. “I trained for almost two years and missed precious time with my family,” he said. “I had time to reflect while running and realized I wanted to spend more time with my family.  Before the race, I spent a lot of time working but I have adjusted my work schedule.”

Would he run the race again? Absolutely not, he said.

McCaie trained between 15-20 hours a week since September, determined to accomplish two major objectives: Finish the race, and do so with no permanent injuries. During this rigorous training, he has also been working, and caring for his two young children and… fundraising for Breakfast Club of Canada!

McCaie has raised over $13,000 for Breakfast Club of Canada.

“TMG The Mortgage Group has been a longtime supporter of the Club, and to have the support of individuals like Matt, who go out of their way to raise funds and awareness is inspiring. We congratulate Matt on this amazing achievement!” says Benjamin Neumer, Senior Business Development Advisor, Western Canada, Breakfast Club of Canada.

“It was a tough race, but not as hard as what some kids are going through,” McCaie said. “This cause has hit me hard, especially now that I have my own kids.”

To donate to the Club please visit www.breakfastclubcanada.org

The mortgage industry stresses quality over quantity

By Mark Kerzner, President TMG The Mortgage Group

The Canadian mortgage landscape has seen regulatory change after change combined with continued Government legislative changes since the Fall of 2016.  Government changes to mortgage rules have been led by the Department of Finance, superimposed with tightening from the Bank of Canada. We have also seen some provinces introduce their own restrictions that have resulted in increased taxes to foreigners and speculators.

As Canadians it is important that we question the reasons for these rule and guideline changes.  There are slightly different answers depending on where the rule changes are coming from. For the most part, they stem from the fact that there was a belief that the Canadian housing market was overheating, that an interest rate shock would paralyze a great many Canadians in being able to afford their payments when interest rates increase, and that the liability of the Government in backstopping mortgages was just too high.

It would seem the motivation to ‘tighten’ might have come from different vantage points but implemented with unison.  The Office of the Superintendent of Financial Institutions (OSFI), which oversees federally-regulated financial institutions wants to ensure their solvency, whereas the Department of Finance may have been more concerned about outstanding debt, and the Bank of Canada on their inability to raise rates quickly enough to stem borrowing activity.

And after nearly a year and a half of dealing with all these changes we are told by an international credit rating agency (S&P) that the quality of Canadian mortgages is deteriorating, resulting in the lowering of a key metric for Canadian banks.

I just don’t buy it. And to suggest that the broker channel is somehow complicit with the elevated levels of fraud is insulting. 

Robert McLister in Canadian Mortgage Trends, cited from the agency’s report: "…The growing share of residential mortgages originated via brokers, compound the risks of high household debt and house prices…As brokers do not bear credit risk for the residential mortgages they initiate, and are generally compensated primarily on the quantity (not quality) of residential mortgages applications they process, we believe brokers have less incentive than a lender’s own staff to prevent fraud.” 

Here are the facts: Deals originated by mortgage brokers are often underwritten four times. The broker underwrites the deal and reviews the documents for suitability deciding where to place the file. The underwriter underwrites the file according to the specifications of the lender guidelines. When the file is insured or insurable, the mortgage insurer (CMHC, Genworth or Canada Guaranty) underwrite the file, and with many non-bank lenders, the file may be reviewed on a pre-funding audit (may even go through Quality Assurance at one of the banks).

Fraud is an issue, and as an industry we cannot tolerate it. It is an issue in bank branches, with mobile sales forces as well as and among brokers.

The Financial Consumer Agency of Canada (FCAC) in their 9-month long study just outlined the wrongdoings of bank mobile sales forces. Included in their findings were; 

• Performance management programs -- including financial and non-financial incentives, sales targets and scorecards -- may increase the risk of mis-selling and breaching market conduct obligations

We must all be vigilant against fraudsters. Brokers are regulated provincially and must complete educational requirements. In many jurisdictions they have to complete periodic re-licensing requirements.

 In addition, there are supervisory requirements placed upon the brokerages where agents are licensed. The vast majority of brokers view their livelihood as a profession and would not want to jeopardize it in any respect.

All that said, over the past ten years, and accelerated more recently, mortgage rule guideline and qualification changes have dramatically increased the quality of the mortgages underwritten in Canada. Average credit scores have increased significantly, and arrears rates remain at historically low levels.

Brokers have been an accountability check on other channels for some time ensuring that consumers have choice and access to market leading rates. In the same respect, they are also educated and knowledgeable about lending guidelines and suitability. In the same respect they are an accountability check to maintain high standards in mortgage underwriting and fulfillment.

I shudder to think what the Canadian mortgage landscape would look like without a vibrant mortgage broker channel.