This post may not be relevant to a number of folks, but for those in a position to be shopping for a home in the $1M-$2M bracket there are some truly fantastic opportunities and the following explains a little bit about why this is.
Not so great if you have to sell a home in that same price bracket mind you, perhaps still worth a read in that case too though.
The past few months www.snapstats.com reports (email me to request a copy of the latest reports) show a continued depression in sales of properties over 1M and in particular 1.5M in nearly every market, West Vancouver & Westide Vancouver being standard exceptions (stronger per capita income), for those two specific markets it is the 2.5M and over range that has been softer. The surprise, and notable exception, was Port Moody in June with very strong sales numbers in the 1M plus category.
Overall the balance of the lower mainland continues to demonstrate a struggle for sales above 1.5M
Is there less of an appetite for these higher end homes throughout the rest of the lower mainland?
Not at all, there are simply ever-increasing challenges with regard to financing larger mortgages that such properties often require.
As I’ve touched on in a past post, the OFSI and the release of the B20 guidelines effectively removed equity lending (Great credit and lots of cash…but lower documented income) from the Chartered Banks tool chest. The focus on documented income is now key to any approval for a mortgage amount above $500,000.
The steps taken by Government to limit (if not eliminate) Equity lending were arguably a knee-jerk reaction due to do some very shallow comparisons in media with lending programs in the USA. There are no reasonable comparisons to be drawn between lending in Canada and lending in the US. For a more detailed explanation of the vast differences pick up a copy of Michael Lewis’ ‘The Big Short’. An excellent read, and a pretty clear demonstration of how loose things were in the USA. Canada has never even been close.
The equity programs that were previously available in Canada required extremely clean credit scores, along with a down payment or equity equivalent to 35% of the value of the property. In the case of purchase transactions this 35% had to be from the clients own resources and could not be gifted or borrowed. (insured transactions via the likes of CMHC notwithstanding, however those had/have their set of rigourous guidelines, and rarely is a 1M plus home being financed with less than 20% down)
In other words the majority of individuals were people who had accumulated wealth through ownership of real estate or their own business. Often the tax advantages of owning their own business allowed these individuals to claim a relatively low documented income yet they were still able to debt service a significant mortgage.
The risk with this sort of lending was in fact quite low. After all is it reasonable to expect that somebody with an excellent credit rating (a 720 beacon score was often the standard), who in addition to this has saved up 35% of the purchase price would take on a mortgage that they cannot afford to make the payments on? No this is not a reasonable assumption at all. The foreclosure statistics in Canada bear this out. Our current foreclosure rate is .35% with 75% of those being investment properties not owner occupied.
In other words ~99.9% of Canadian homeowners do not stop making payments on their homes…ever!
Chartered Banks only offered ‘stated income’ programs for owner occupied properties. With these programs now largely eliminated or simply a shadow of their former selves is all boils down to two years history of documented income.
As an anecdotal review of my own files completed from January 2011 to January 2012 it would appear that 80 of the 200 would not be able to be completed under today’s restrictive guidelines. More importantly of these 200 mortgages 20 were for properties purchased over $1 million, and under today’s rules 12 of them would no longer qualify – even though these people have never missed a payment and are living quite comfortably.
Admittedly this is a small sampling but 60% nonetheless. 60% of my clients no longer able to purchase in the 1M-2M bracket.
I realize that this is a very small slice of the overall picture however I believe that it is still representative of the market in general based on the conversations that I have with a variety of other Brokers. Bankers Realtors, and Lawyers.
The bottom line is that there are far fewer applicants who currently income qualify as required for a mortgage in excess of $1 million, and as such the pool of buyers is far smaller today as opposed to 12 months ago.
Further shrinking the pool was the cap on CMHC insured mortgages. If you wish to purchase a property valued at $1M or more then you must have 20% down, no exceptions. More on that can be read here http://business.financialpost.com/2013/07/03/ottawas-new-rules-creating-red-hot-market-for-homes-under-999999/?__lsa=fb81-bdf9&utm_source=buffer&utm_campaign=Buffer&utm_content=buffer14cb3&utm_medium=twitter
There is no sign of the Government easing lending guidelines for self employed individuals.
In fact I suspect a key driver of these policy changes could be as simple as a push for increased income tax revenues.
If I were somebody who worked for the Federal Government, perhaps in the income tax department, it might occur to me to request a few numbers from the major chartered banks.
1) The total dollar volume of mortgages approved on an annual basis under the stated income programs.
2) The reported ‘stated-income’ number used to qualify clients for these stated income mortgages.
3) The actual taxable documented income number reported by the same clients.
I would then look at the spread between what individuals reported as their income to the tax man, as opposed to what they had to claim as a stated income to the Bank in order to qualify for the mortgage and if the difference in those two numbers multiplied by the number of borrowers was significant, which there is little doubt it was, I would be wanting to find a way to collect the tax revenue on all of that unreported income.
So perhaps I would then do the same and collapse stated income programs forcing individuals into reporting significantly higher documented income should they ever want to purchase another property.
In fact with the way current qualifications work many of my clients would be unable to simply move across the street to a new home and maintain their existing mortgage as they would have to have significantly higher documented income for the two years preceding the move.
All of these changes to the lending guidelines have effectively created a situation where several people are unable to make a lateral move and many more are unable to move up the property ladder into the $1 million plus bracket.
Maybe that is a good thing, however there are a great number of folks that are property rich, i.e. retirees who are now finding that their equity is locked in place and accessing it may only be possible through a sale. That is far less reasonable in many instances.
The pendulum has swung a few degrees too far in this Brokers opinion.