Excellent news from the world of finance

Mortgage insurance requirement lowered to 20%

Parliament passed new financial services legislation (Bill C-37) at the end of March 2007, which included a measure to lower the required down payment for mortgages. The requirement for mortgage default insurance dropped from 25 per cent to 20 per cent, effective April 20th, 2007.

This is interesting news for those that cannot or don't wish to qualify for a so-called high-ratio mortgage. Since 20% down payment of the purchase price is easier to achieve than 25%, more buyers will now qualify more easily for a mortgage.

From now on, an 80% mortgage (Loan to Value ratio) will no longer attract the mandatory mortgage insurance premium.

As an example, homebuyers could save an average of $2,500 in insurance premiums, based on an average home price of $300,000. "When scrambling to meet the 25 per cent down payment (to avoid paying the insurance premium), one now would only have to come up with 20%. This change will allow certain homebuyers to reduce their down payment and get into their new home faster while saving on the mortgage insurance premium.

The new limit may also affect those intending to refinance their mortgages. Since many Canadians borrow against the equity of their home, they could now refinance their mortgage to a larger amount, or take out a larger home equity line of credit. In essence, by making available an extra five per cent equity to home owners, a certain in-flow of capital into the economy in general, is to be expected.

Another, more indirect, result of this change in mortgage rules will be a tightening of the market for homes in the more sensitive price ranges (above starter homes and below executive homes). This tendency would occur because of a slightly increased buyers’ demand in this market sector.

Under the old Bank Act regulations, which had been in place for 40 years, a bank could not provide a mortgage loan for more than 75 per cent of the value of the property, without having the customer purchase mortgage insurance. Bill C-37 has raised the loan-to-value ratio requiring mortgage insurance from 75% to 80%.

CMHC Mortgage Insurance posted premiums currently range from 0.5% of the loan amount (65% mortgage) to 6% (95% mortgage, self-employed person) – February 2009.

View the CMHC website here: CLICK HERE.

To read more about mortgage financing in general, please CLICK HERE.

What goes up must come down, or not?

The future of Real Property values

A frequently heard question, as a Real Estate professional, is: What are “Real Property” market values going to be in the future. Of course, we don’t know the answer but we can look at trends and listen to market experts.

A recent report, prepared by TD Bank, says fears that the current Canadian housing boom will go bust, or that today's homeowners are over-leveraged, are "largely exaggerated". They say, as they have before, that housing is still a solid investment.

"While a modest cooling in the housing market is in the cards for this year, it's still on a solid foundation because there is very little evidence of a speculative bubble," say bank analysts. "So even if demand suddenly cooled, the risk of a supply overhang would not be as great as during previous cycles. Canada's red-hot housing market is on a solid foundation because there is very little evidence of speculative activity," the TD economist added.

Another concern, often heard, is that homebuyers who have been lured into the market by low interest rates, will be deeply hurt when rates rise. The TD analysis says most homeowners still have fixed-rate mortgages and as a result are protected to some extent against the risk of rising rates. We note that when the Bank of Canada does raise interest rates, fixed mortgage rates tend to rise less than short-term rates.

The TD report says most variable rate mortgage holders could also simply lock into a fixed-rate mortgage if rates headed higher. Even if the variable rates were to rise, it would initially only result in an increase in the proportion of money that goes toward interest and principal, not to an increase in monthly payments. TD predicts that future interest rate increases will be at a measured pace.

Another "myth" the TD economist looks at, deals with the collapse of home prices as baby-boomers retire and unload their large family homes on a smaller pool of younger buyers. However, the baby boom generation spans 20 years. While older boomers may be considering retirement, their younger counterparts with growing families will still be looking to trade-up to larger homes.

The bank also addresses the concern that the condo markets in Canada’s larger cities have become overbuilt, which has created a glut that will lead to a plunge in prices (for this type of housing). The bank analysis, however, says that the condo market is supported by a growing trend towards smaller households. The fact remains that they provide affordable downtown housing, despite high land prices, for buyers such as younger people and recent immigrants.

The report conceded, however, that there could be a drop in prices for smaller condos that have recently sprouted up because they were designed for young first-time buyers. This group is believed to make up a smaller percentage of future potential buyers.

The general tone of the analysis should be read as an indication of market stability, as it has been so characteristically in most of the country. With general long-term up-trending, the conclusion must be that Real Property remains an excellent investment in the building of personal wealth.

Trust your REALTOR®

How trustworthy are they, those REALTORS®?

It's been brought forward that Canadians don't trust their REALTORS® quite sufficiently. This is an interesting fact if we consider that, each year, almost 500,000 properties are transacted by REALTORS®. Is it true that real estate agents are trusted less than lawyers, civil servants and journalists?

1500 Canadians were "randomly" asked in a survey (by Leger Marketing) to rate the professions they trust. Apparently, this year's survey reveals a ranking like this:

97% - fire-fighters;
94% - nurses;
91% - farmers;
89% - medical doctors;
88% - teachers;
83% - police officers;
65% - pollsters;
49% - journalists;
45% - senior public servants:
45% - lawyers;
44% - insurance brokers;
40% - real estate agents;
38% - unionists;
37% - publicists;
18% - car salespeople;
16% - politicians.

"We" don't like that "our" reputation isn't quite up there but we are aware of this image flaw. We are continuously attempting to do something about it. First of all, we are steadily improving our educational standards, both at the entry level (when new agents are joining) but also through continuing education. Some of these courses are mandatory but many aren't. The steady large turn-out at these functions is an indication of the desire, within the industry, to make further improvements.

Secondly, we are a profession that is big on giving back to the community. Many REALTORS® are active in volunteer work and most agencies appear to liaise with a number of charities or other social organisations. The Royal LePage Shelter Foundation is a great example of the commitment to helping those who need emergency housing. Other companies have raised impressive amounts of money for everything from neighbourhood parks to local food banks.

Thirdly, we should put the survey in perspective. A good estimation of the problem could be that those surveyed had probably not actually dealt with a real estate agent recently. It is interesting to note that most people, who have just purchased or sold a property with the help of an agent, tend to render positive feedback. Even better: much of our business is based on the referral from others, usually past clients. Obviously, if we receive a referral, there was a great deal of satisfaction as to the results or else we would have never been approached.

Timing is everything, even in the business of polling people's opinion. Wouldn't anybody state their opinion of policemen differently just before and after the receiving of a speeding ticket?

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Fraudsters in Real Estate

Does the seller really own the land?

The crime of selling something that you don’t own is probably as old as mankind. This can be as simple as pawning off a TV set that one has collected from an acquaintance’s house.

Also in Real Property, this crime has been around for a long time.
Naturally, the procedure can be rather complicated. The risk of being caught, at one point or another, is significant. Arguably, selling off someone else’s house is not exactly easy. There would be many complications that the fraudster would have to resolve, before they can collect on such a bizarre transaction. Think alone of the logistics surrounding the public utilities. These would arguably all be hooked up to a house prior to the transaction. Obviously, these would all be coming from a third-party name.
Solving this is possible and is has been done. Still, the risks of being caught are great, to the fraudster.

Easier this would be when attempting to “steal” vacant land, particularly if this land is located in a rural area. Many parcels of vacant land have been just resting for decades. There are even owners who hardly know exactly where their property is situated. A smart fraudster, with a bit of luck, would be capable to just emulate an owner’s name and pretend to be them.
They would sign off on the dotted line and be presented with a closing cheque on the day of completion. Of course, this closing cheque would be made payable in the name of the old registered landowner. It would require only a little bit of ingenuity to convert such a cheque into cash. The bogus seller then disappears and the old landowner just lost his property. Thus a fraud has been successfully committed.

A new type of such fraud was just discovered, pertaining to a property held by a corporation. Nobody stole the title to the property. Instead, the fraudsters stole the title to the corporation that owned the land.

This is how the crooks operated. They created phony corporate records, including a minute book and seal for the target company. The name of the corporate lawyer got changed and all those in charge of the company were replaced too. Our crook appointed himself as the chief officer and director of the corporation. From this point on, the crook had total control of the company but he would have to act extremely swiftly to commit the completion of his fraud. This is, because the government’s records are public.
Literally anybody can view the names of those in charge of any corporation in the province by viewing the records on-line. It would require only one whistle-blower to set off a criminal investigation.

Our crook, however, knew that it would take a while before the government typists would actually get around to entering the new names into the system.
Somehow, he must have known exactly how long this would take so he could strike on the cusp of time. Not too early (his name would not show yet) and not too late (too much risk of exposure).

At just the right moment, our fraudster sells the corporation in question (including its property). He may sell it to an unsuspecting third party or he may sell to a confederate. This could, for instance, be the preamble to a serious mortgage fraud.

If the sold property goes to an unsuspecting third party, then that third party is in for a nasty surprise. All these frauds, eventually, are discovered. In our example, the unsuspecting third party, would of course have resold to another unsuspecting fourth party, and so on. The chain of litigants is just growing and growing!

The sale to a confederate is, perhaps, even more worrisome. The confederate, collecting bogus mortgage funds on the fraudulent transaction, would disappear after the closing of the deal. In that case, the mortgage company would be holding fairly worthless papers.

It is believed that the chain of fraud is discouraged when more professionals are involved in the transaction. This makes sense. The greater the number of professionals in the chain, the more likely premature discovery will be. Thus, be extremely careful of quick too-good-to-be-true deals by sellers operating on their own.

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Purchasers of real property are getting younger

Percentage of under-35 buyers going up

The purchase of a home used to be something one would postpone a bit. Only a decade ago, just 10 per cent of home buyers fell into the under-35 group.
Over the past few years, we have witnessed this change to just about 35%.
This means that today, about one in three purchasers of a home are under 35 years old.

An obvious driver to this surge in under-35 purchasers, is the interest rate. With market rates hitting just-about record lows, the affordability of homes has improved greatly, while rents (the alternative to buying a home) have not come down. Obviously, when buying is no more expensive than renting, the transition to home ownership is made a lot easier.

In a parallel pattern, we have noted that the average age of a Canadian homeowner has fallen from around 48 years old in the 1990s to around 41 years old since 2000.

Another interesting statistic discloses the size of the average mortgage. In ten years’ time, this amount has increased from $95,000 to $120,000.
However, the mortgage interest rates have come down, to more than offset this increase. For example, the old $95,000 mortgage at 8% would have brought monthly payments of about $725. Today’s $120,000 at a nice 4.5% would cost only $664 per month.

If we dig a little deeper, we also see that condominium purchases have nearly doubled since the early 1990s. This is particularly noteworthy, since condominium ownership has had some harsh knocks over the past decade. Many of the Vancouver moisture debacles were broadcast aloud throughout the land.
Even Halifax wasn’t immune to condominium controversies, most notably the Granbury scandal in the late 90s, where many owners were forced out of their units by a majority owner who attempted to de-condominiumize the building.

New condominium legislation has changed things a bit. Arbitrary majority rule no longer reigns and contingency fund studies have made an investment in a condo much more secure. The size and price range of most condominium units, make these, once again, a smart choice for buyers of all ages, most notably the under-35 group.

You see, there are always interesting changes in the Real Estate scene. Stay tuned for more changes – it won’t be long before we’ll be surprised again.

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Real estate and the Internet

Purchasing property on-line?

Most likely, you are reading this on a computer screen. If not that, you are reading a print-out from the computer. Either way, the indicators are that the Internet has become a major part of many purchasers’ home buying experience.

A recent IPSOS Reid study says that the use of real estate web sites has increased in all regions of Canada. Interestingly enough, Atlantic Canada is mentioned as being an extremely fast grower. If only five years ago, just one in four purchasers also checked web sites in their search for Real Property, this has gone up to more than one in two. We are trending to a two-thirds division. The poll states that the three most popular reasons for adults to use the web are banking, real estate and job searches.

There are many reasons why Canadian home buyers choose to use the Internet. Convenience, and the ability of looking for a home without having to leave home, would be a primary reason. Consumers also feel that using the Internet saves them time. They can customize their search, they like the 24 hour access, and they don’t have to deal with a headstrong, high-pressure real estate sales person.

There are disadvantages as well: respondents said the information on real estate web sites is not always complete and sometimes out-of-date. Lacking details such as neighbourhood information are considered an annoyance. A recurring complaint is a concern with misleading photos.

According to IPSOS Reid, the results also show how the Internet works well alongside a REALTOR ® but cannot replace a REALTOR ®. While the Internet has certainly done a lot to empower those looking to purchase or sell real estate, REALTORS ® continue to have a major role in the process, although the Internet has certainly done much to empower those looking to purchase or sell. A vast majority of Internet users state the advantages of using a REALTOR ® with benefits including experience and personal knowledge.

Other benefits quoted, are that a REALTOR ® can tailor the search, and save the buyer time in the process. Also, a significant number of respondents cited negotiating expertise as a REALTOR ® service.

With Internet access now believed to be available to over 80% of home buyers, we are starting to see the phenomenon of on-line purchasing. Unbelievable as this may sound at first, we have witnessed a number of sales through the Internet. The property had not actually been personally inspected, walked on or touched by the buyer. It’s almost like purchasing a book at an on-line bookstore, is it?

In fact, it’s not. Purchasing real property is so fundamentally distinct from buying a book that listing the differences is quite amusing. The most significant difference, of course, is the individual uniqueness of real property. Every parcel of land, every house, even every condominium is dissimilar by definition. All books however, from one print run, are meant to be identical.

Since every piece of Real Property is unique, they are all identifiable by a description that only fits that property. Accordingly, the government has attached a tax value to it. A property can be shown on a map and once it has been established, it’s basically permanent and immovable.

An on-line purchase would still be a stab in the dark if there isn’t a base of trust with the person and the company behind the on-line store. It works pretty much like that when buying a book on-line. Naturally, when putting forward a substantial sum of money to purchase Real Property, the aspects of trust and reputation are many times more important.

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The trend towards bungalow living

A new generation demands one-floor convenience

At one time, there was virtually nothing but bungalows. Then, for decades, we saw other designs take over, most notably the 2-storey and the contemporary styles. Right now, one may suggest that there is significant trending in favour of a new style bungalow.

Today’s bungalows are based on the principal of the traditional one-storey home, while definitely different in many ways. We are starting to see examples of bungalows that are, actually, a variation of the theme. The single-floor principle, for example, is now to be interpreted loosely.
Although all the major rooms are still on the main floor, it’s now more likely to find the spare rooms on a different level. This can be up, down or sideways … creativity is very much permitted.

Architects are opening up to this newly created market that is, arguably, driven by the so-called baby boomer generation. They wish to stay in their home for years to come. Thus, a new market for a new type of bungalow has been created. Innovations in design have given the “new” bungalow a choice of new looks.

While reaching for a particular lifestyle, the master bedroom is moving from the 2nd floor (as in the 2-storey design) to the main floor. A large en-suite bathroom and a focus on the kitchen of the home, are taking precedence over the second and third bedrooms. After all, those will only be used occasionally.

Rec rooms and family rooms, appear to be trending forward as well. In the new bungalow style, those could be in the basement or creatively tucked away on a half-story. The possibilities are numerous.

Builders, developers, architects and REALTORS ® are the first ones to spot this trend. Only a few years ago, a bungalow design was a rarity. In new subdivisions, only one in 30 homes, was built as a bungalow. Today, a quick drive through any subdivision under construction, shows a different kind of ratio. In might well be more than one in 5, reaching perhaps one in 3 in the top-end subdivisions.

The design variations are so numerous that it sometimes is difficult to spot the bungalow. After all, we now see raised bungalows with walk-out basements, bungalows with upper lofts and even two-storey designs with a main-floor master bedroom.

A bungalow is more expensive per square foot than a 2-storey home. This is, because the total square footage is resting on a much larger foundation and covered by a greater roof area. There is more exterior to the house. Still, the “Baby Boomers” spot a product that meets their needs and do not object to the extra cost. As with all trends, it spreads. This is why we also see that people of other generations are acquiring a taste for today’s style bungalow. Perhaps, these younger generations are predicting that the resale value of bungalows is going to be beneficial.

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