Remember what I told you last week, that all mortgages of more than 25 years would be banned in Canada? It will soon happen, as this information and this industry article attest. It’s a joint initiative of F, the Bank of Canada and OSFI, the bank regulator. Almost half of all outstanding mortgages at the monster banks are believed to be longer than 25 years. This change may further decrease national housing sales by up to 10%. — Garth
For the record, I’ve never met James de Vuyst, but I know he took a junket to Vegas a few weeks ago sponsored by non-bank mortgage lender State Capital. I know he tweets when he drives, (“bike police checking cars on Denman before Lions Gate driving straight instead of turning on Robson”) and who he’s voting for on Tuesday ([email protected] is the only way to go’).
And I know Darcy hates him.
“I am a loyal reader of your blog, but more importantly I am a decent person and not as dumb as my father-in-law thinks I am.
“As a decent person, I request that you eviscerate a mortgage broker preying on the unenlightened pre-approved millennials whose parental filters block your words of wisdom. Further, I would gladly donate to a campaign to drop leaflets on basement-dwelling hipster neighbourhoods in the interests of ensuring the survival of our species.”
As residential real estate scares more people, for good reason, the reaction is about what you’d expect.
- Lenders are racing to the bottom, chopping mortgage rates to the point where a five-year closed loan is at 2.8%. Everybody knows the cost of money will erupt later, which is why banks are pumping so hard. They’re called teaser rates. They helped destroy US housing.
- Brokers and lenders have gone on a charm offensive (with the emphasis on offensive). How else to explain stories like those in the Toronto Star extolling mortgage brokers? What a shame, however, the happy first-time buyer they profiled was related to her lender. Testimonials just ain’t what they used to be.
- Realtors in places like Calgary and Vancouver are offering a Buyer Protection Plan, giving up to 5% of the price back if the market tanks, thereby helping ensure it will.
- And here’s Twittering James the broker, basically guaranteeing the young & the horny that real estate prices will steadily rise, even in the nation’s most delusional market.
“You’ve heard them. The skeptics are everywhere, talking of gloom and doom about the Vancouver real estate market. ‘It’s too expensive,’ they say, or even ‘It’s fundamentally overvalued and will crash soon.’ It isn’t, and it won’t. Here are the top 5 reasons why young people should ignore the talking heads and bet on Vancouver real estate now.”
And what are they?
First, cheap rates (of course). But instead of counseling that buyers use one-in-a-lifetime levels to trash debt faster, James does his people proud by suggesting they buy more, thereby taking on as much debt as possible. “Because of this, first time buyers can qualify in a higher price range, allowing them to enter into the expensive Vancouver market.”
And what happens when rates rise? Yes, real estate values fall and the 5%-down gang with a monster mortgage end up owning more than the property is worth. Great tip, James!
Second, buyer incentives. And here the broker’s right. Governments have been lavishing homebuyer credits, RRSP loans and first-time bonuses. This is like when Loblaws marks down week-old comatose chicken breasts, or Kia lets you drive a car for 60 days without paying, or you get a tax credit to buy a labour-sponsored fund no sane person would touch otherwise. Do you think they just like you?
Third, says James, “there really are decent homes out there for under $300K.” Well, not exactly a house, more like a 650-square-foot box. And not exactly where hipsters hang out, since “these types of deals are out there in Coquitlam, Surrey and Langley.” But think of all the great iTunes you can listen to while you pedal your bike the 2 ½ hours to your cool job downtown!
Fourth, “they’re not making any more land.” Seriously. He said that. Of course, every high-rise building that puts 600 people in a spot where four houses used to be manufactures more real estate. And when James says (categorically), “land values will probably go up,” how does that relate to a virgin’s condo, where no land is actually owned? Does he just mean monthly fees?
And fifth, the broker says the kids should buy real estate so it can be rented out for a fabulous future income. “Once that place is paid off (say 15 years) it’s providing you with $1500 a month in rent. If you buy a few more small places in your life time you could be receiving $6000 a month in rent, which would be 72K/year….does your RRSP provide that kind of return?”
Let’s see, that’s four places at three hundred grand, which are paid off after 15 years for a total investment of $2.1 million, yielding $72,000 in gross revenue, or about $50,000 after fees and taxes (assuming 100% occupancy and no rate increases for 15 year, LOL), or an annual return of 2.3%, fully taxed at your marginal rate.
Gee, James, you’re right. That’s not the kind of return my portfolio provides.
The finale: “In closing, while everybody likes to listen to the skeptics, the fact of the matter is that now is a really good time to buy. Forget all the reports on Vancouver being in a bubble and the market crashing. If they had been true, the market would have crashed a long, long time ago. If you live your life by what these reports say, you might find yourself paying rent to support somebody else’s mortgage forever.”
The average Van condo costs $365,900. Closing costs (including 5% down and land tax) are $24,000. The mortgage and insurance of $358,000 costs $1,657 a month or $2,097 with strata fees and property tax. That’s $500 more than rent. After five years, the mortgage would cost $99,461, and you’d still owe $304,817. Now that $365,900 condo has cost $430,637. You need more than 5% growth in prices a year just to break even – and you’d still have paid $30,000 more than the renter to live in the same place.
But, wait. Van condo prices are 3% lower than last year. Oops.
There ya go, Darcy. Spread the word. I wish your species well.
After this blog post was published, the article referenced above which he had posted on the site Abodable.com was erased, later reinstated. The owner of that site has asked me to submit a column to add ‘more balance’. Mr. de Vuyst’s recent tweeets have also disappeared.