Perhaps I got a wee bit carried away with my first two predictions on Monday, but they were the most important points.
Today, I’ll go through five more points, also in not-so-brief form, and give you my two cents on a number of issues I think will be big in 2018.
With no new listings to speak of through the first few days in 2018, our time is better-spent speculating on things we can’t control, am I right?
3) The “stress-test” will have a short-term effect, but no medium-term effect.
God, what you all must think!
I make my living selling real estate, and I’m so damn positive, all the time. I know how it looks, and if I were you, I’d be cynical; probably more than you are right now.
But I write what I think, and I predict what I believe to be evident.
And while I think the new “stress-test” will have an effect, I don’t think it’s going to be nearly the effect that some people are predicting, nor do I think the “effect” will last longer than three months.
Three months? That’s it? Yes. And let me tell you why.
Can we agree that people still need to live somewhere? Yes.
Can we agree that the market speculators, and investors, have deep enough pockets to avoid being affected by the new rules? I don’t see why not.
So people will still transact in real estate.
The way I see it, there are only two questions that need to be asked of the new rules:
i) How many people will not purchase real estate at all this year, as a result of the new rules?
ii) How many people will buy for a lower amount than they would have in 2017?
We’ll address question #1 first.
We’ve seen “estimates” on how many people will be affected by the new mortgage rules, from a slew of pundits. I’ve seen anywhere from 5% to 20% of “all insured mortgage buyers.”
But as I asked above in question #1, how many people will not purchase at all, as a result?
I can’t answer that question for you, and if I were to hazard a guess, I’d say I’d be doing no better, or worse, than every other pundit online and in newspapers.
Consider that the new mortgage rules only apply to those with more than a 20% down payment.
Robert McLister wrote in his blog (dated, but the only stats I could find) that 63% of first-time buyers have less than a 20% down payment. And I would think that number has increased substantially in the past year or two.
So assuming that 70-75% of first-time buyers have less than a 20% down payment, then how many buyers are really affected by the new mortgage rules?
As a result, how many buyers will not purchase as a result?
Not a whole lot, in my opinion.
I currently have twelve buyer-clients on the roster, and not one of them has told me they don’t intend to purchase as a result of the changes.
In fact, not one of them have changed their criteria, which leads me to point #2.
How many people will buy for a lower amount than they would have in 2017?
A good number, I would think.
While I believe that very few buyers at all will shelve their purchase plans, I do believe that buyers will have to settle for less.
Perhaps 5%. Perhaps 10%. Again, these are educated guesses.
So then what happens to the market? Is there a true “trickle-down” effect? Will we see lower prices as a result?
I don’t think enough buyers will be affected to have that trickle-down that market bears are hoping for, and would-be buyers desire.
Consider two points:
i) Most of my buyers do not purchase to the maximum of their pre-approval.
I always ask my clients a series of questions regarding financing when we start the search
“What’s your approximate acquisition cost target?”
“Have you been pre-approved for a mortgage?”
“How much was the pre-approval?”
More often than not, the first and third questions are answered together, with something like, “We’re looking to spend about $1.2 Million. The bank approved us for $1.6 Million, but that’s crazy!”
Then often they add something like, “How do they think we can afford that?”
Well, perhaps you are a bit more conservative with your personal finances than the banks are with lending. But banks are in business to lend money, and lend, they shall!
So with an overwhelming majority of my clients not spending to their max pre-approval, it means many of them who “will be affected” by the new mortgage rules, really won’t, in the end.
My buyer-clients who usually do spend to their max pre-approval are the ones at the low-end of the totem pole. It’s those buyers who I think will be greatly affected, and those who I think might have to drop out of the race.
But in terms of how this affects pricing, there’s still so much demand for low-end, sub-$400,000 condos in the downtown core, that even losing, say, 10% of the buyer pool, won’t cause prices to go down. They just won’t go up some 20% like last year.
ii) Buyers can take out 30-year amortizations
Let’s not forget that the 30-year amortization is still in play!
For these uninsured mortgages that are now stress-tested, buyers can opt to take a 30-year amortization instead of the standard 25-year.
So for the buyer with 20% down, looking at a $400,000 purchase at 2.99%, the $1,512.74 per month mortgage payment payable with a 25-year amortization can be reduced to $1,344.23 with a 30-year amortization.
And using the “stress-tested” rate of 4.99%, those numbers are $1,859.31 and $1,705.90 respectively.
Yes, you pay more interest as the ratio of principal to interest goes down.
But the entire point here is: buyers want to buy.
I feel terrible for the buyer who saved up 20% down and can no longer buy, who says, “Screw this, I should have bought with 5% down two years ago!”
So while I think that it’s going to take a month or two for the proverbial dust to settle, I think by March, this will be old news, and the market will have moved well past any impacts of the stress-test.
4) Banks will change their lending criteria.
What did I say above?
“Banks are in business to lend money, and lend, they shall.”
And what’s that old line I’m thinking of from The Simpsons? Something like, “I didn’t get rich by writing a lot of cheques.”
Folks, the banks want to lend, and they’re going to lend.
There’s no way that the Big-5 banks will sit idly by and watch a chunk of their business fall by the wayside.
It’s not a huge chunk, as I suggested above. How many buyers will fall out of the market? Not a lot. But how many buyers will purchase for less than they would have, could have, should have? That’s a larger number! So add those two numbers together, and you can see what the banks see: they’re lending less money.
And while banks clearly make money nickel-and-diming us for monthly paper-statements, withdrawal fees, overdraft protection, Interac transfer fees, and just about anything else they can think of, their big money comes from lending.
Don’t be surprised to see the banks get creative this year!
I’ve heard that the 35-year amortization is “technically still legal,” although I’m sure there are a slew of ifs, ands, & buts.
We’re now in the safest lending space that banks have ever been in, so perhaps they bring back the stated income programs for self-employed individuals, non-permanent residents, et al.
Perhaps a higher loan-to-value is coming for refinancing.
Who knows, get creative!
But there’s just absolutely no way the banks will cave and accept lower revenues in 2018 and moving forward. They’re smarter than the Federal government, and dare I say they have more clout too.
5) The spring market will provide the reverse chronology of 2017.
This is what I call a “slam dunk.”
As I’ve written before many times, the market typically starts a new year slowly, and builds momentum.
January is cold, dark, and miserable, and while many buyers choose this time to start their searches, many need to learn, educate themselves, see a few properties, and don’t end up buying until February, March, or April.
Having just sat down and tried to find five properties for my weekly “Pick5” video segment, and failed due to lack of new listings (I’ll still have a video out on Thursday afternoon, but it’s an odd one!), I can personally attest to the fact that there are very few new listings on the market so far through the first week of January.
A slow January usually leads to a busier February, and then a March that is the first “big” month of the calendar year. The Easter and Passover weekends, along with various Spring Breaks for the public, private, and separate schools, effectively break the spring market into two halves: Jan/Feb/Mar, then Apr/May/June.
By the time Easter, Passover, and Spring Breaks are all over, the weather gets nicer, Daylight Savings Time provides for more light at night in which to view properties, and historically, May and June are the hottest and busiest months of the real estate calendar.
2017, however, did not follow suit.
Take a look at this chart of active listings and sale prices; 2017 pitted against 2016 for each month up to November:
We started the year with a dearth of listings, and that trend continued through to the start of April.
As a result, prices skyrocketed.
I wrote in Tuesday’s blog that the “Fair Housing Plan” absolutely killed the market in April, but also note the number of listings, and the incredible increase we saw!
Now this is typical of a spring market. We usually do see far more listings in April, May, and June than we do in January, February, and March.
But after the FHP was announced, buyers cooled off.
Sales dropped, and as you can see on the right-hand side of the graphic, so too did prices.
This year, I expect the exact opposite to transpire.
I see the market starting slowly, and building up toward April and what is typically a very strong market.
6) The government is finished meddling in the real estate market.
They just can’t possibly do anything else, can they?
There was an awesome article in the National Post on Tuesday entitled, “Politicians act like they’re ‘solving’ Canada’s housing problems while continually making them worse.”
Folks, it makes me so angry.
I’ll talk more about politics in prediction #7, so I’ll try to curb it here.
But honestly, I don’t understand the Federal Liberals.
They make so many promises, and have so many agendas, and so many of them contradict each other, or can’t co-exist.
Here’s an excerpt from the National Post article:
The Trudeau government’s National Housing Strategy puts the same misplaced faith in bureaucrats to know the “right” type of housing. For example, according to the federal government’s plan, “housing investments should support Canada’s climate change agenda.” That’s why the policy “includes ambitious targets to reduce greenhouse gas emissions” — which is obviously a demand coming from Liberal politicians and not from those Canadians struggling to pay for housing.
So we need to address the “housing crisis,” but we’re gong to ensure that we address yet another difficult objective with respect to climate change in the process?
For the life of me, I just can’t see any more changes coming to the Canadian housing market.
Back in 2008, when the United States experienced their housing crisis, a buyer of Canadian real estate, often with stated income, could obtain 107% financing, and/or via a 40-year amortization.
Since 2008, the Canadian government has taken extraordinary measures to ensure that our market does not suffer the same fate. They’ve tightened lending rules, and forced buyers to put up more equity, take on less debt, and pay it off faster. We now have the safest lending space in modern Canadian history.
But with this last round of changes, I think they’ve gone way too far.
The idea itself? “We’d like buyers to be able to afford to pay their mortgage if the rate were to change,” that’s a nice one. But it’s not what buyers want. It’s not what Canadians want. And I don’t believe the government implemented this policy to reign in debt (when they’ve done nothing about unsecured debt like credit cards, lines of credit, etc), but rather to be seen as “doing something about the housing market.”
We’ve already beat that horse to death, so let’s look forward.
In 2018, I don’t foresee a single policy change in the mortgage market from the federal government.
Knock on wood, but there’s simply nothing left that they can do.
7) Kathleen Wynne will Wynne another Premiership, and that’s scary for home-owners, and home-buyers.
In March of 2017, Kathleen Wynne’s approval rating reached a low of 12%.
Like, out of a hundred, folks!
I’ve been closely following politics since I turned eighteen and gained the right to vote, and I don’t believe I have ever seen a number anywhere close to that!
A 12% approval rating makes Donald Trump look like Jesus/The Beatles at the same time.
When the above article and associated approval rating first came out in March, I remember sending my sister an email saying, “She’ll still win.”
What I received in response, from somebody who reads a hundred newspaper articles a day and knows politics inside and out, was simply, “Yup.”
What more can you say?
Voters just can’t stop themselves. We saw this in 2014.
All the provincial Conservatives needed in order to obtain a landslide victory was continuously shout, “ORNGE scandal! Power plants! McGuinty! Budget!” over and over. But instead, we got this insane promise to cut 100,000 public sector jobs, as though those 100,000 people, and their families, don’t vote.
I don’t expect things to be different this time around.
I’ve never seen a politician who’s implemented more bad policy than Kathleen Wynne, and no, I don’t want to list them here.
But she’s going to win again, because voters are stupid. If Donald Trump can win the Presidency, then Kathleen Wynne can come back from a 12% approval rating.
And what happens when she wins?
It’s more war against the have’s, to provide for the have-not’s.
If you can think of it, she can implement it.
I know I’m letting my political views shape this entire argument, but I just don’t see Kathleen Wynne doing anything to help home-buyers, and she sure as hell isn’t going to do anything to help home-owners.
Higher taxes, more government revenue, more expenditures on more things that nobody really asked for. And as real estate has always been, and remains, the golden goose of the Golden Horseshoe economy, I think it’s the first place the Liberals will look during their next round of making-up-new-taxes to provide them with the revenue they need to keep the engine moving.
Phew, so that’s it, folks!
As you probably might have assumed, I had a couple other points in the queue, but I’m sitting here in the office at 10:15pm and even the cleaners have already gone home, so I’m outtie.
Time will tell how these predictions, and these hot-button issues, will play out.
Next week, I want to talk a little more about debt, and while I know we’ve covered the new mortgage rules all week, simply put – I just have a lot more to say…