The weather is slowly getting warmer. That means many things, but for those interested in real estate, spring is all about a sizzling, busy market.

This year, reports are warning us this could be the last hot spring market for awhile. Yeah, right. I bought my first house a decade ago, when the market was hot. It hasn’t cooled since.

Still, warnings about the economy, housing market and interest rates are putting a spotlight on this year’s real estate activity. If you are buying or selling soon, this puts more pressure on you.  As if there weren’t enough already.

Working a real estate deal when the market is hot adds in a whole extra list of factors. Are you ready? Here are some suggestions for staying cool when the housing market is on fire all around you:

If you’re selling

Forget certainly. Your agent will suggest how much to list your house for and how much interest it should generate. But your agent doesn’t know, really, how much you will get for your home and how many offers will come in. That’s because anything can happen. Something in the news, like a big layoff in your area, could impact buyers. Or a fabulous house down the street could go on the market at the same time and outshine your abode. A water main could burst outside your house and city crews could hamper buyers.

Don’t get greedy. Even if prices are soaring in your neighbourhood, be cautious about asking the moon for your place. A too-high price can turn off buyers, even when there are lots of them.

Think like a buyer. It’s difficult to see your home with fresh eyes. But even if the market is on fire, buyers may still shy away from your place if you have no backyard, your kitchen is seriously outdated or your condo faces a highway. Listen to your agent and make the kind of upgrades and repairs that will satisfy today’s buyers, even if you’re not crazy about them.

If you’re buying

Know your budget. It’s a risk for any buyer to get in over their head with a too-high investment. But you’re at higher risk of bidding $20,000 or even $50,000 over your budget price when there’s a bidding war afoot. It’s difficult when you fall in love with a place, but you may need to walk away if the price gets too steep. Just remember to factor in all costs associated with buying a home and owning a home. You’ll need to make the mortgage payments, pay the utilities, do household repairs (which will run you an average of one to three per cent of your home’s purchase price every year), plus shell out for all your other regular expenses.

Know your budget for the future. Interest rates are at historical lows. Inevitably, they will rise. Before you sign a deal, calculate how much you’d be paying a month for your mortgage if rates rose to 5 per cent. (When I bought my first house a decade ago, my mortgage was 7.5 per cent. And honestly, no one made a big deal about it at the time). You’ll probably sign a 25 or 30 year mortgage, and most of those years you’ll be paying a higher interest rate.

Crunch the numbers again. Not to harp on the money issue, but buying outside of your price range is a sure way to put you on the slippery slope of racking up consumer debt. Don’t just turn to your bank for advice on how much you can borrow. Talk to a financial advisor, accountant or run the numbers carefully yourself to be sure you truly can afford the mortgage on the table.

Get out of the pack. Some houses attract a big group of buyers and provoke a bidding war. Where I live in Toronto, nicely renovated homes and those just steps from the subway make people crazy. Get out of the group mentality and look for a house that’s a 15 minute walk to transit, needs some renovation work, has a shared driveway or another feature that other buyers might shy from. A colleague of mine who was buying in a tough time a few years ago purposefully targetted homes that were sitting on the market. He eventually got a house simply by bidding on one at the right time, when the seller was fed up with waiting and accepted a low-ball offer.

Know your needs. Make a list of what you truly need in your new home (ample backyard perhaps; maybe an office space). And make a separate list for wants (fancy kitchen, hot tub!). Don’t sacrifice your needs or buy a house you truly don’t like, simply because you can get it. Remember: you can only make a house bigger if there’s enough land (and money) and while you can renovate, you can’t fundamentally change a home’s layout or its location.

Stay cool. Choose an agent who can help you navigate bidding wars and keep your head when things get intense. Make a pact with your partner (or find a close friend if you’re buying alone) to keep your price and needs list in mind at all times.

For anyone, buying or selling in a busy spring market, probably the best advice is to be patient. Sometimes you don’t have a choice and need to get in or out of a home quickly. But if there’s flexibility time-wise, lay low and wait for the right house or the right offer to come your way and snap it up when it truly makes sense for your heart and your budget.

Diane
Writer for RateSupermarket.ca

A think tank released a report today outlining the possibility that Canada’s housing market bubble could be heading for a big burst. RateSupermarket.ca’s President, Kelvin Mangaroo, was asked to discuss this on CTV News today with anchor Dan Matheson.

According to a report released today by CREA (Canadian Real Estate Association), seasonally adjusted home sales across Canada for February 2010 were 42,700, which was 1.5% lower than January 2010. CREA President Dale Ripplinger said the Ontario and BC markets were likely to remain high until the summary with buyers looking to get in before HST and interest rate hikes.

Other notable stats from the release included:

CREA Chief Economist Gregory Klump, commented that “There are still a number of major markets where sales negotiations favour the seller due to a shortage of inventory, but supply has begun rising. Further expected supply increases will continue to take the steam out of housing markets as the year progresses.”

However, it seems that these changes won’t have a huge impact on the mortgage market. Flaherty and Bank of Canada Governor, Mark Carney, were both concerned about the increasing personal debt levels of Canadians, and with the additional pressure of the big bank’s top brass going to Flaherty and saying they were concerned that the housing market is getting out of hand and that mortgage arrears could increase in the future, the Finance Minister had to be seen as taking action and make changes.

Here are the main reasons that each of the changes won’t have a huge impact when they come into effect on April 19, 2010:

1. All borrowers need to qualify for a 5 year fixed rate even if they choose a lower mortgage rate or term

Many of the banks have been qualifying applicants at higher rates anyways. So if you were applying for a crazy, low variable rate at 1.95%, they would make sure you could handle at least the 3 year fixed rate at 3.29% or a higher 5 year fixed rate. Genworth Financial‘s COO said they had been qualifying applicants for mortgage default insurance at at least 4% for the last little while.

This makes sense as the mortgage lenders don’t want to give people mortgage loans that they can’t pay back and qualifying people at higher fixed rates is a prudent control. So this change shouldn’t have too big of an impact on people qualifying for mortgages.

The big question that comes out of this is – which 5 year rate will you have to qualify for? Depending on which mortgage lender you apply with, if it’s a big bank, do you have to qualify for their 5 year posted rate (currently 5.39%)? Or do you have to qualify for their “special discounted rate”, or the actual rate where it depends on the amount of investments you have with them and how good your negotiating skills are? If the bank has a 4.09% 5 year fixed special (like RBC), but you can get, 3.99%, due to your other investments with them, which rate is the qualifying rate?

Let’s look at the differences on the monthly payments for various 5 year fixed rates versus a variable rate with a mortgage value of $300,000 and an amortization period of 25 years:

5 year variable rate versus 5 year fixed rate payment differences

As a result, the monthly payment difference for qualifying could be from $256.18 – $556.09 per month or 31%, which is obviously a huge discrepancy. So which 5 year fixed rate is the “qualifying rate”? And each mortgage lender could have a different qualifying rate, so this means comparing products from different lenders could become even more important in the future.

As a result, it will be interesting to see how each mortgage lender defines the qualifying rate and how this is implemented.

2. Lower the maximum amount Canadian homeowners can refinance from 95% to 90% of the value of their homes

This could impact people looking to consolidate higher paying debt into their lower mortgage interest payments, but 5% should only impact a small % of Canadians.

3. Minimum 20% down payment for house buyers looking to buy investment properties and to get government insurance through the CMHC

This may slow down market speculators and real estate investors somewhat, but for the average Canadian looking for a home, the impact could possibly be more supply, so properties on the market, and could tame house prices as well, with less investors buying up large amounts of properties.

So these are our thoughts, we’ll see what else comes out over the next few weeks as more of these questions are answered, and we expect there to be a big rush of pre-approvals before April 19. More to come.

More to come….

“Whether there’s a bubble or not you can only see after the fact,” he added. But it wouldn’t take a bubble bursting to cause consumers pain. If your house price goes down 10 per cent and you’ve borrowed 95 per cent of its value, all of a sudden you’d be in hot water, Mr. Dodge noted.

His comments come as the debate on whether the Canadian market is in a housing bubble or not, has become a very hot topic since December 2009, especially after Finance Minister Jim Flaherty‘s comments that the government may consider adding additional restrictions on the mortgage market to slow down the housing sector. It’s a very fine line as this sector has been performing tremendously well while the economy was in trouble over the past year, and trying to rein in this sector alone while not affecting other struggling parts of the economy will be very difficult.

While it’s clear that low interest rates are heating up the market, it would not be wise to raise them just in order to calm housing because such a move would have other consequences, Mr. Dodge said.

He identified lending standards and the framework default mortgage insurance is issued by companies like the government controlled CMHC and private Genworth Financial, and said they are important tools and stands should probably have been tighter over the last little while. For example, he said that people putting down only 5% for a down payment isn’t enough, and that minimum down payments of 7.5% or 10% is probably better. This would make it tougher for first time home buyers to get on the property ladder and to get their first mortgage, as they would need to save more beforehand for a down payment. With an average house value of $300,000, currently prospective home owners, would need at least $15,000 as a down payment, versus $22,500 (7.5% down payment) or $30,000 (with a 10% down payment).

Genworth Financial‘s President has said that the company is already being more prudent by making sure mortgage applicants can handle mortgage rates of about 4%, despite variable rates being under 2% at the moment.

The head of ING DIRECT, Canada’s 6 largest mortgage lender, has said he hopes that the Finance Minister doesn’t change the mortgage rules as there is too large a threat they could not only slow down, but kill the housing market.

In the Globe and Mail today he said, “High level, one-stroke fixes are too simple, and can have a very large impact, I worry about government-based tightening of the mortgage rules creating a much worse reaction – too fast of a cooling, which is not really good for anyone.” This comes after Scotiabank acknowledged that house prices are now in bubble territory.

Everyone is waiting for the March 4 budget where Jim Flaherty could announce if these proposed mortgage rule changes will actually go into effect.

Today the Bank of Canada governor, Mark Carney said, “Following a period of vigorous growth, housing investment is projected to slow through 2010 as pent-up demand subsides and affordability declines”.

In the same statement the bank said they expect the Canadian economy to grow faster than expected from the 2nd quarter of this year through early 2011, and increased its forecast for the US. So it seems like the recession is behind us, and with Obama’s recent announcement that he wants to increase banking regulations so that the US can’t get into a situation again where taxpayers are held ransom by a bank that is “too big to fail”, let’s hope we don’t get into this type of a situation again.

Time will tell.

“2009 came in like a lamb and went out like a lion,” said Cameron Muir, BCREA Chief Economist. “The year began with home sales trending at a 25-year low and ended at a 20-year high. Low mortgage rates, pent-up demand and improving economic conditions were key drivers of consumer demand.”

BC MLS stats for 2009 were as follows:

“Considerable momentum in the housing market is expected to carry through the first quarter of 2010, before home sales begin to moderate as a result of eroding affordability and less pent-up demand,” added Muir.

The chart below outlines the December 2009 Residential Average Price, Active Listings and Sales-to-Active-Listings Data by Board:

So potentially higher interest rates and additional taxes are on the horizon – sounds like a double whammy right? You see, the additional tax is going to affect everything we currently don’t pay PST on: groceries, haircuts, clothes, etc. This also includes most of the home purchasing closing costs such as lawyer fees, home inspections and real estate commissions. To top it off, the current 5% GST we pay on new homes will now increase by 7 – 8%. Homeownership is going to get a little more expensive come July 2010.

So what exactly is the HST and how will it affect the provinces of Ontario and BC?

The HST is a sales tax that combines both the PST with the GST. In Ontario, this tax will be 8% PST + 5% GST equalling a new 13% HST. In BC, this will mean adding up the existing 7% PST + 5% GST resulting in 12% HST. When the new tax becomes effective, GST/PST will be completely eliminated and everything will instead require HST, minus certain exempt items that can be found on the Revenue Canada website.

While the HST will take effect in BC and Ontario on the same day, key differences exist between how the tax was introduced and the rebates each province will receive.

In Ontario, Dalton McGuinty introduced the HST in January 2009. Despite negative reactions, it was announced in March 2009 that the HST would take effect in July 2010. When this tax was introduced, the public was also promised a family rebate to “offset” some of the tax burden. Rebates introduced to counter balance the effect of the sales tax totals $1,000 for families with an income below $160,000 and $30 for singles with an income below $80,000.

While Ontario has been preparing for the July 2010 transition to HST since March, BC didn’t make this announcement until this past July. The announcement came as a complete shock to businesses and residents. There was no warning or consultation and no family or individual rebate offered.

How will the HST affect real estate

Regardless of when it was announced, both provinces will face increased taxes. Resale homes will be exempt but new home sales will be affected. However, in both cases, the services required to run a home and sell a home such as utilities, real estate commissions, home inspections and legal fees will increase by 8% or 7% (depending on the province you live in).

For new home sales, according to the Ontario Real Estate Association, the HST will add $1,747 to $2,297 to a home costing less than $400,000. Here is a breakdown of the typical increases we’ll see in both Ontario and BC:

To help ease the burden, both the Ontario and the BC governments have promised rebates for all home buyers purchasing new homes regardless of the price of the house (resale homes don’t qualify).

Rebates up to $24,000 are promised on the first $400,000 of the purchase price. This rebate is also extended to new residential rental properties.

Yes, all new homes, regardless of their price, are going to be seeing a maximum rebate of $24,000. However, the price for a new home will increase by 8% in Ontario and 7% in BC. Meaning, a $400,000 house will still increase by approximately $8,000 after the rebate, plus you’ll have to pay the additional taxes on top of the closing costs.

Other areas being affected by HST

Residential landlords will see an increase in the costs to house tenants. Items required to operate a building such as maintenance, electricity, plumbing, etc., will now be subject to the additional tax. Landlords may be forced to increase rent as a result.

The home construction industry is also expected to suffer. All new homes are subject to the combined tax and builders are worried this will cause the market to collapse when it was just getting back up to speed, even with the promised rebate. The past few months have been seeing extremely high rates of housing starts, rising to the highest levels in March. Starts were up to 55,700 in October (up 14.8% from September) in BC and up 13% in Toronto reaching 34,200 in October.

While builders have seen a promising recovery in their industry over the past few months, they’re now worried consumers will once again crawl back into hiding after July. Therefore, many are working overtime to get projects done before the deadline.

The HST is arriving at a time when we’ll still be recovering from the hard-hit recession. Yes consumer confidence in the real estate market has increased but this has been a result of lower prices and record-low interest rates. Now with the new tax coming at a time when interest rates are predicted to go up, new home sales and starts may once again stagnate.

The real estate market experienced a depressing winter last year, with real estate agents and lawyers losing out on a lot of money. While this winter looks more promising, lawyers, agents and builders will have to work to maintain consumer confidence into the summer; whether this is through discounts, packaged deals or attractive home prices. If you’re thinking about purchasing a new home, you may want to look into it now so you’re not caught in the potential crossfire between hiked interest rates and added tax.

Caroline
PR@RateSupermarket.ca