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July 22, 2016 - No Comments!

10 Reasons The Vancouver Real Estate Bubble Is About To Burst

Alex Khalil is a private lender & Mortgage Broker with Dominion Lending Centres - Mortgage Evolution -  Want to see more articles like this one? Like my Facebook page - Looking for a mortgage or mortgage advice? Request a Call Or Apply Now.  

There has been a lot of buzz around the Vancouver real estate market lately. Some feel the bubble is about to burst, some suggest the market will just keep going up and up, others feel any adjustment will be nominal.

One thing that we all can agree on is that real estate markets, like all markets, have natural cycles. That means that there will be a boom and there will be a bust, so the question we really should be asking ourselves is not IF the market will burst but WHEN. The correction is inevitable.

Of course no one has a crystal ball but we are now seeing multiple strong indicators of a market crash.

Here are 10 reasons why I think the real estate market is about to crash:

1) Extreme spike in property values

Yes, property values have been on the incline for some time and people have been crying ‘crash’ for a while, but there is one significant difference, the latest spike has been extraordinary. Have a look at the following graph released by the Real Estate Board of Greater Vancouver:

REBGV_Stats_Package_March_2016_1

The significant spike in the last few months alone are a strong indicator of a correction looming. A strong and steady increase is healthy, but what we are now seeing are unsustainable gains, which more often than not is a strong indicator of a market on the verge of collapse.

2) Artificially low interest rates

The Bank of Canada is not lowering interest rates for no good reason. Aside from 2010, we have never seen such low  rates. These historically low interest rates are intended prevent a crash. The problem with this approach is, as we know from the 2007/2008 US real estate crash is that sweeping things under the rug does not solve the underlying problem.

In fact, I am a firm believer the 2007/2008 US real estate crash would have had a significantly less adverse impact if the market had been allowed to follow its natural cycle.

Yes some government intervention is certainly necessary and beneficial  to avoid another interest rate hike like the 80’s where we saw rates as high as 18%+, but what constitutes too much intervention?  Banks are now selling bonds at negative interest rates. There is no more room for reduction in interest rates. To me this is a very strong indicator of a market crash.

3) 30 Billion Dollar Deficit in the 2016/2017 Federal Budget

Yes, you read that right. The Department of finance has projected the 2016/2017 Federal Budget deficit at a whopping -29.4 Billion dollars. The 2017/2018  budget is predicted to at a deficit of -29.0 Billion.

Compare that to the 2015/2016 Federal budget at a surplus of 1.4 Billion. Those figures certainly give a pretty strong indication of what is to come. No it doesn’t mean it is the end of the world but this staggering deficit is surely going to have a major impact on all major major Canadian markets, real estate included.

4) Decreased foreign investment

It is no secret that a significant amount of money from China has and continues to make its way into the Canadian real estate market. Many people believe that that the influx of Chinese money and investors will only increase as Vancouver is on the top list of safe places to harbour money. I have a different perspective on this, I believe that Vancouver is  equivalent to the second home or RV which usually tends to be the first prized possession to go at the sign of bad times.

China has experienced one of the largest economic crashes of all time. What that means is a lot of Chinese investors are now feeling the pinch more than ever before. Pair that with significant over evaluation, some have estimated China’s debt as high as 5 trillion dollars. Now combine all of that with the fact that China’s over reaching government has turned up the heat on money leaving the country and ‘underground banks’ by tripling their efforts to stop the flow.

I am confident we are going to see a significant reduction in Chinese money entering the Canadian marketplace and no Canadian market will be more greatly affected by this slow down in Chinese capital more than Vancouver.

Recent trends are showing many Chinese investors selling or attempting to sell their Canadian real estate holdings or significantly leveraging real estate at higher percentages than ever before.

If all that isn’t enough, the Chinese media is warning of a major crash in the Canadian real estate market, advising Chinese nationals to be cautions and to get out of the Canadian real estate market at all costs. Some may suspect a portion of these advertisements could be government influenced intended to slow the flow of money leaving China, but does it really matter? If even 20% of those foreign investors jump on the band wagon that in and of itself is cause for major concern.

 5) A market correction has already started

Single family home values in the Greater Vancouver Area, according to many real estate professionals I have spoken to recently, including many real estate appraisers, have now started to take a small dip. This is a stark contrast to the bidding wars we were seeing as little as two months ago. In fact, some sellers are not seeing competing offers at all.

According to the Real Estate Board of Greater Vancouver, the number of sales of single family homes has now dropped 19 percent. As much as 36 percent on the Vancouver’s west side.

The number of sales to listings have decreased from 72 sales per 100 listings in the first six months of 2015 to 58 sales per 100 listings in the first six months of 2016.

Some may argue that this is just simply evidence of a ‘small’ correction and that may be true. The problem is that there are a number of savvy real estate investors and homeowners who are sitting and waiting for the peak of the market before ‘getting out’. This minor slow- down may not seem like much on the surface, but it has all the ingredients to cause a wide spread panic. As soon as these speculators get wind of the possibility of a down turn it may just be too late. It could be too soon to tell, but a minor slow-down is usually a clear indicator that things could start to go south.

Alex Khalil is a private lender & Mortgage Broker with Dominion Lending Centres - Mortgage Evolution -  Want to see more articles like this one? Like my Facebook page - Looking for a mortgage or mortgage advice? Request a Call Or Apply Now.  

6) Fraudulent mortgages

One can only speculate, but the probability of fraudulent mortgages in the marketplace is extremely high. Consider for a moment that the median individual income reported by stats Canada for Vancouverites is $76,000 and the average benchmark home price in Vancouver Region (not just the City itself) according the Greater Vancouver Real Estate Board is currently hovering around 1.4-Million.

Based on current mortgage rates and qualification requirements, a 20 percent down payment (minimum for mortgages above 1-Million) and zero debt and perfect credit, a person would need to earn $162,500 per annum to qualify for that size of a mortgage. Even with two median income earners in the home that still would not be enough income.

Of course there are exceptions. Those who owned their properties prior to the surge in prices, those that have above average income, those who have larger than life down payments and those who rely on non-traditional or private financing but those are few and far between.

Either way you slice or dice it, what that means is that Vancouverites, particularly those who have bought recently are highly over leveraged, under qualified or into some really expensive mortgage debt. All of that is fine, as long as the market keeps going up and up, but at the first sign of a decline many of those property owners could find themselves in very hot water.

7) Big players betting against the market

I am sure by now most of you have heard about Marc Cohodes, the multi-billion dollar fund manager and Wall Street legend who came out of retirement to short Canadian Real Estate vis-à-vis Canadian Home Capital Group (HCG), a ‘B’ mortgage lender with an impressive Mortgage portfolio exceeding 20 Billion dollars.

HCG admitted to inadvertently underwriting 1.9 Billion dollars in fraudulent mortgages last year alone, but Cohodes isn’t the only one betting against Canadian real estate.  Rumours have it that a number of other funds are also betting against Canadian real estate.

What we are also now seeing are senior bankers and major players in both the private and government financial sectors selling their own personal real estate and getting out of the Vancouver and Toronto real estate markets. Pair that up with the fact that two of the five major Canadian banks, TD Canada Trust and Scotiabank, have now officially to paraphrase Scotiabank Chief Executive Brian Porter, ‘taken their foot of the gas’ when it comes to mortgage lending in both Vancouver and Toronto.

8) Vancouver is such an amazing city and has the best weather in Canada!

I couldn’t agree more. I love Vancouver!

I am hearing this more and more these days whenever the topic of the real estate bubble comes u. The problem is that as nice and desirable of a city is Vancouver really is, that is not a sound financial indicator and does not make it immune to market cycles. Caracas and Florida are both beautiful places to live, but that doesn’t guarantee the real estate prices or make real estate markets immortal, and yes, I completely agree that in the long term, all of those reasons will play a significant factor in Vancouver’s positive migration and by no means am I saying that Vancouver will never recover, but the reality is we may very well be in for a bust in the short run, at least until the market catches up to other global markets at a steady and natural pace. If anything when people start telling me that the reason the Vancouver’s real estate is going to continue to sky rocket is because of the weather, the alarm bells sound louder then ever before.

9) Regulators tighten the reigns

“Persistently low interest rates, record levels of household indebtedness, and rapid increases in house prices in certain areas of Canada (such as Greater Vancouver and Toronto) could generate significant loan losses if economic conditions deteriorate” -  one of the warnings issued recently by the Office of the Superintendent of Financial Institutions (“OSFI”) to financial institutions across Canada.

The Canadian Mortgage and Housing Corporation (“CMHC”) also warned earlier this year of ‘strong evidence of overevaluation’ in the Vancouver housing market.

This all comes in the wake of a recent announcement by the Provincial government that the Real Estate Industry in British Columbia’s ability to self-regulate has been forthwith revoked.

The Bank of Canada recently released a report that calls the rapid growth of home prices in Vancouver ‘unsustainable’, saying the potential for a downturn in prices is becoming likelier.

10) Natural market cycle

I touched on this briefly at the beginning of this article. One of and if not the most important factors we cannot ignore is that all markets go through a natural cycle. In its simplest terms, a market booms, busts, recovers and repeats. That leaves us in no other spot then at the end of that cycle. There is no real question of what is coming next, only when.

Somehow, history continues to repeat itself, most people seem to get amnesia and forget what happened last go around. Everybody gets caught up in the hype. ‘Get in now before it’s too late’ and turn a blind eye to the risks associated with a market crash.

Those on the sidelines, not in a position to buy due to soaring house prices, might want to turn that frown upside down, because believe me, history is about to repeat itself in a big way.

As a mortgage broker I am really adverse in interest to write this article, the more people that buy, the more mortgages are originated, but regardless the impact on my industry, the bubble is about to burst and the writing is on the wall in neon letters.

Some argue that they could ride out the storm, that they have seen such huge gains that a correction of say 30% wouldn’t affect them that much. That may be true, but if you are ahead of the game, you’ve tripled or quadrupled your money, isn’t now the time to pick up your chips and cash out?

Take quick look back at the last two crashes in our real estate market and you will see that in both cases the bust was nearly as big as the boom. The longer the cycle and the bigger the boom, the bigger the crash. Particularly so in a market that has been artificially manipulated by non-organic interest rates.

Some might argue that the bungee cord has been stretched farther than ever before, so pick wisely which side of the bungee cord you want to be on when it snaps back.

Alex Khalil is a private lender & Mortgage Broker with Dominion Lending Centres - Mortgage Evolution -  Want to see more articles like this one? Like my Facebook page - Looking for a mortgage or mortgage advice? Request a Call Or Apply Now.  

 

June 30, 2016 - No Comments!

Your Equifax credit score may have just increased (or decreased) significantly!

On June 7, 2016 Canada’s largest consumer reporting credit agency, Equifax Canada, migrated from Beacon 4 to Beacon 9 credit scores.  If you checked your score before June 7, 2016, your score could be significantly higher (or lower) than what you might expect.

Here are some important key changes you should know about the changes from beacon 4 to beacon 9;

    1. There is now a greater emphasis on credit utilization and less emphasis on ‘one off’ missed or late payments -Beacon 9 penalizes consumers greater for carrying higher balances and should a consumer miss a payment it will not affect a score as significantly. Beacon 9 looks more at ‘patterns’ of default as opposed to a simple yes or no delinquency. Beacon 9 also distinguishes between high utilization on different credit products. For example, high limit on a line of credit at lower rates is not penalized as heavily as a credit card at a high rate
    2. Mortgage payments are now factored into your credit score - Although for some time we have seen most mortgage payments report on the credit bureau, until the migration of Beacon 9, the actual payments have not had any impact your credit score.
    3. Telephone/Cell phone bills are now factored into your credit score - Although it is nothing new that cell phone companies report on the credit bureau, until the migration of Beacon 9, cell phone payments were not factored into determining your score. This is a significant change, and although the impact may be little (based on the amount and size of the credit) your cell phone payments can now make or break your loan or mortgage approval. Beacon 9 is not new. Some lenders have been using Beacon 9 since 2013, however, as of June 7, 2016. majority if not all lenders, insurers and mortgage brokers have migrated to Beacon 9.

Your score could have increased or decreased significantly. For most consumers their score did increase. I am already seeing clients who were scoring much lower, scoring much higher and hence are now eligible for better rates and products then pre-migration.

If you applied for a mortgage or credit prior to June 7, 2016, and were declined due to credit, you may now be eligible for that same or a better product.

If you would like more information on how your credit score has been impacted by these important changes or if you are interested in applying for a pre-approval, approval, mortgage refinance or simply have any mortgage related questions, get in touch or apply now!

Published by: admin in Advice

June 20, 2016 - No Comments!

Ready to Refinance?

“Is now the right time to buy?”

As a mortgage broker, I am often asked this question.

It’s a tough question to answer. I really wish I had a crystal ball when people ask me that. So if you are reading this article and know where I can find a crystal ball, please let me know.

In the meantime, I am of the belief there are some simple deductions you can make to determine when and where to invest your hard earned dollars for the highest possible gain.

The irony is that real estate as an investment is actually really quite simple. Real Estate markets follow a fairly basic pattern and natural cycle. The timing of that cycle may fluctuate, but there are always two constant denominators: 1) The market will go up (Boom) and 2) the market will go down (crash).

Now let’s get even more fundamental. The simplest (albeit not the only) way to profit in real estate is to buy low and sell high.

Pretty simple right? That’s it. Those are the most important four things you ever need to know, that you probably already knew about the real estate market.

What’s even better is with modern technology and communication, you can now get access to any market almost real time! I think we often take that for granted and I think many of us are still stuck in the mindset of ‘buying local’. If that is your mind set, you need to change it ASAP.

Now I am not suggesting if you live in Toronto to invest in Mongolia. There are sub-markets within a reasonable distance. For example, if you lived in Vancouver, accessible markets could include Saskatoon, Edmonton, Calgary, Seattle, San Diego, Phoenix. Pretty much any market within a 3 hour flight is an accessible market.

Unfortunately, there is an old school mentality in play that has most people limiting themselves to their own backyard. Sorry to sound like a broken record, but if you are one of those people, change that mentality now!

For example, at the time of this article, if you live in Vancouver or Toronto, it’s no secret that the markets are booming in those cities! Buyers are lined up, deposits in hand, ready to make ‘cash offers’. Houses are selling well over ask. Hey that’s great for my business (actually my business is great either way) … but this makes very little sense to me.

Let’s just take a step back. As you read above, the simple rule of investing is buy low, sell high. And I don’t think that’s any secret but if you are buying in an already booming market, is that in line with the principle of buying low?

Now I don’t purport to know if those markets will continue go up for a month, a year, or a decade before the inevitable decline. But making an impulsive leap into the market out of fear you will miss the buck, simply is not a sustainable approach. Personally, I believe, at this point, the only people making money in those markets, at this very moment, are sellers.

The beauty is, you now have access to many more markets than ever before! Markets that were, until recent, primarily only accessible to the already super wealthy.

On the contrast, some of the Alberta markets, such as Calgary and Edmonton, at the time of this article, have been or are on a decline. The funny thing is, majority of people in those markets are selling! The panic lies with the property owners. In my view, I believe that the only people making money in those markets are the buyers.

Of course it is ideal to own the home you live in, but that doesn’t always make sense. For example if you lived in a hot market, maybe renting the home you live in and buying another property for investment in a declining or cool market might make more sense.

You are still in the market, so any potential gains you may have had in the hot market should at least flow with or exceed the potential hot market gains. If you are already invested in a cool or declining market, hold tight, the storm is likely to pass and will soon be forgotten!

The same cycle can be said for the USD/CAD exchange. For as long as I can remember (without revealing my young age) the US and Canadian dollar have played a cat and mouse game. The US dollar just about makes it to par with the Canadian dollar, then surely but steadily it climbs back up to just under $1.4. That’s a solid 30% cycle that seems to be fairly consistent.

Perhaps waiting for the USD to hit close to par would be the time to divest into some US real estate. Phoenix, Palm Springs, Washington state and Oregon could be great options for those on the West Coast. Miami, New York State & Vermont could be good options for those further east.

If history repeats itself (and I am not making any promises). Even without any gain in the market, you should see a 30% gain on your investment within a matter of a few years. Better yet, invest in a cool market with the dollar at par, you may even see much greater gains.

The beauty about real estate is you can leverage your dollar & more often than not you can achieve rental income to offset any cost of financing and provide a steady ROI.

It’s no secret that going against the grain can often make you the most gain.

For more information about how you can implement this strategy, request a call with me here and we can set up a discussion right away!

Published by: admin in Advice

May 31, 2016 - No Comments!

HOUSE VS. CONDO – THE DIFFERENCE MIGHT BE BIGGER THAN YOU THINK

If you live in metro Vancouver, odds are you have been faced with this dilemma. I hear this question quite often, should I buy a house in the suburbs or a condo downtown?

With a booming real estate market and surging housing prices, “house” living near the core is near impossible for most. It is true, a condo is convenient, more affordable and if you are single or do not have children, buying a condo could just be the perfect solution! Right? .. well maybe not..

Firstly if you are looking for a return on your investment, condos traditionally do not appreciate nearly as much as houses do, if they appreciate at all. If the condo market is doing good, odds are the housing marking is doing amazing!

Secondly, condo living is often short term. Not to say that some people do not live in a condo long term, but majority do not.

Thirdly condominiums are a ‘complicated’ investment. A number of factors, often ignored, when investing in a condo can significantly impact your bottom line, the list is exhaustive, but some of these factors include the size of the reserve fund, whether the owners are getting along, whether management is doing a good job, sufficiency of bylaws, restrictions on use, etc.

When you are buying into a condo/strata, just remember, more often than not, you will have a very little say in how the building is run and managed. You can only hope and pray that all the owners are on the same page. Maybe the majority want to replace all the windows, this could cost you a significant special assessment that you might not otherwise wish to incur or maybe the owners vote to restrict the age of the owners/renters in the building, this would substantially affect (drop) the value of your condo, those are just a couple of scenarios you could face as a condo owner.

Bottom line is a lot could go wrong. Not to mention that although a building may be ‘new and modern’ when you buy it, it won’t take long for those amenities and the building to become dated. Upgrading your house is relatively easy, upgrading an entire apartment building or high rise and common areas, not so straight forward.

Don’t get me wrong, Condos can be a great investment, but I absolutely do not recommend it as a first investment and if you do make money on condo you can almost always be certain that you would have done a lot better on a house. So what is the solution? How can you have your cake and eat it too?..

Well, if you are sure you want to live in a condo, yet still want to take advantage of any potential increase in the housing market, consider buying a house and renting a Condo. With record low interest rates, you are likely to find a property that will produce enough rental income to cover your monthly obligations, maybe even earn you some surplus income. When the time comes, you could move into the rental property, or sell it, using the profits to purchase your dream home or another rental property.

Be prepared to stay in the market long term (up to 15 years), it may not take that long to see a decent profit, but in the meantime you shouldn’t have to worry too much provided you have sufficient rental income.

If you already own a condo or you are dead set on owning a condo, don’t panic, it does not mean you are going to lose your shorts or you need to sell now, but DO take some immediate steps to make sure your Condo investment has the best chance of profitability. At a minimum make sure you have a comprehensive condo insurance policy that protects you against special assessments, get involved with the strata and educate yourself as much as possible.

Stay tuned for my upcoming article on the do’s and dont’s of condo ownership.

Alex Khalil
Mortgage Specialist
Mortgage Evolution Yaletown
C. 604-367-7880 – F. 888-377-7510
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Published by: admin in Advice

May 31, 2016 - No Comments!

THE DANGERS OF CASH OFFERS

“But I have perfect credit and I make great money, why wouldn’t you be able to get me a mortgage?”

There is a dangerous trend emerging in our real estate markets, particularly in Vancouver & Toronto. Buyers are thrown into a bidding frenzy and told the only way to have the slightest chance of an accepted offer is to go ‘all cash’, otherwise known as ‘subject free’.

Firstly, any real estate professional (mortgage or real estate broker) who advises a client who doesn’t have ALL of the cash to close in the bank to make an offer ‘all cash’ or ‘subject free’ is not giving sound advice.

Of course, no matter the advice, cash offers will still be made, and it can be a costly mistake.

I am not saying there is not a place and time to make a ‘cash’ offer but there is a lot you can do to both educate yourself and mitigate any potential risk before doing so.

What a lot of my clients quite often do not realize is that there are a lot of behind the scene factors that go into a mortgage approval. You can have the best credit and income in the world, but that doesn’t necessarily ‘automatically’ approve you or guarantee you a mortgage.

Even if you are fully qualified, the property itself can be the issue in proceeding with financing. For example, post tension cables, freehold vs. leasehold, owner occupied vs. rentals, size of parcel, size of unit, the list goes on and on. Your mortgage professional should be able to catch most, if not all of these prior to giving you a pre-approval.

I have seen it time and time again where a client makes an offer ‘subject free’ and then gets stuck in a situation where they may not be able to close. Not only does this put your deposit on the line but you can potentially be subjected to ‘liquidated damages’, meaning if the seller doesn’t achieve the same or more in terms of profits, you could legally be on the hook for any shortfall.

So what steps should you take before making a ‘cash’ or ‘subject free’ offer?

Again, I am not advising you to make a ‘cash’ or ‘subject free’ offer… but if you do, here are a few considerations you should make before even thinking about putting that pen to paper:

1.Get pre-qualified with an experienced broker.

No not your bank. A mortgage broker you know and trust will do a good job. A good broker has access to multiple lenders and specializes only in mortgage financing, not GIC’s, not term deposits or overdraft. If something does go wrong with one lender (and it definitely can) a broker can approach one of many other lenders. Banks are very limited to what they can offer, if you have to switch gears last minute, last thing you want to do is have another bureau pulled and have your deal re-packaged and presented a different way, get a good broker from the start and stick with him or her. Remember even a ‘pre-approval’ is not a guarantee, it is just a preliminary approval based on the information you have provided.

2.Provide all of your financial documents upfront.

A good broker should be asking to see ALL of your documents upfront. This includes your Notice of Assessments, T1 Generals if you are self-employed, leases, tax notices, and mortgage statements if you own any other property. No it won’t eliminate all risks, but it can help your mortgage broker identify and address any potential issues right up front.

 

3.‘Cash’ and ‘subject free’ does not mean waiving all due diligence

Even if you do not put any financing or inspection conditions in your offer to purchase, some basic wording is essential. For example; “subject to lender’s acceptance of property” is a very simple, basic and reasonable provision that you could insert into an offer to purchase to protect you in case something unpredictable pops up.

 

4.Always have a a plan B

A plan B could include private or ‘B’ type financing, a co-signer, additional money as down perhaps as a gift or leveraged against other real estate. Always have a plan B! Your mortgage broker should be able to assist you with this.

 

5.Your realtor is not your mortgage broker, your mortgage broker is not an appraiser

A lot of people call me up and say ‘but my realtor said it was worth XX ‘. Your realtor is not an appraiser, neither is the city assessor or your mortgage broker. Realize that each is a professional in his or her own respective field. If you want to know if you are qualified for financing and the best rates, call a mortgage broker, if you want advice on writing an offer or want to find a property, consult your Realtor. Each professional has a specific function. Relying on unqualified advice has the potential of landing you (and the professional) in hot water.

 

6.Don’t panic and don’t be pushed into making an offer

Making spur of the moment decisions are sometimes necessary but that does not mean the decision has to be rash or uneducated. Being prepared will ensure you make an informed decision with the comfort of knowing that you have taken all reasonable steps to ensure you are pre-qualified and that your mortgage broker has your back, so you won’t lose any sleep.

Published by: admin in Advice