New proposed OFSI rules attacking your real estate wealth

[Thomas Beyer]

Real estate AND the broader economy is under attack in Canada !


Access to capital is vital for business, the overall economy and of course real estate. If access to capital is artificially constrained by new government regulations, business, the overall economy and of course real estate will be impacted substantially.

The OSFI (Office of the Superintendent for Financial Institutions) is pretending to listen to ordinary Canadians as it evaluates forcing ALL (!!!) mortgage companies and banks to use a new stress test when customers apply for a non-insured mortgage. (Similar to the first time buyer test, but now to ALL mortgages). This stress test requires qualification at rates about 60%+ higher than current interest rates, ie 4.75% instead of 2.75%.[e.g. a 5% mortgage rate is 66.67% higher than a 3% rate ]

==> The result: about 20% less loan amount - for everyone !

As investors and professionals in the real estate industry, but also as regular home owners, we need to take a stand. If it becomes law, it will eliminate a very large (15-20%) number of transactions with serious consequences to the whole real estate market across the country. Prices will drop and many folks will be unable to qualify, or they need to buy one 20% smaller.

You can make your voice heard. If you have not, there is still time to write a letter to your MP or to use this lazy (wo)man's website https://tellyourmp.ca/

Write something like this, or use the template provided:

‘The new guidelines being proposed would reduce ALL Canadians mortgage qualification limits by 20%, no matter your impeccable credit, no matter your impeccable employment record, no matter your down payment (even an 80% down payment would not get you special treatment). A nationwide blanket lending reduction of 20% will effectively result in the elimination of 10-20% of homebuyers from the market. Although the effects in the Vancouver and Toronto market will in fact be negligible, the impact felt in small town Canada will be nothing short of devastating."

We already feel the results of the Oct 3, 2016 cutbacks on insured mortgages that make this forecast clear. First time buyers have been removed from smaller markets where incomes are much lower, and there is a greater number of single income households.

DO NOT DELAY. DO IT NOW !

 

[Willyboy]

The interest rate is increasing anyways and by 2018 - 2019 it will be very close to the proposed stress test rate so we're gonna be there eventually what's the difference then?

IMO the proposed stress test should have been implemented in 2015 when the interest rate was lowered to an unprecedented level and if they did so we would have avoided the unhealthy balloon that happened in Vancouver and Toronto and surrounded areas and we could have had a healthy correction in Alberta.

The problem now is that if they implement the test now all those who already bought homes in the last two years will be stuck with non appreciating assets and a flat market at best for a long time as they bought them at very rapidly inflated prices and all new home buyers will be stuck with those highly inflated prices as well and would have to buy the less expensive and less desirable homes and this is even if they ever could.

The other bigger problem is if they keep artificially inflating the market by offering very easy credit, the market will eventually collapse and we will have a US style crash and my feeling is they're trying to avoid that potential crash by gradually tightening the rules.

We're at an all time high and massive debt levels now and it's very dangerous.

 

[Thomas Beyer]

The interest rate is increasing anyways and by 2018 - 2019 it will be very close to the proposed stress test rate so we're gonna be there eventually what's the difference then?

IMO the proposed stress test should have been implemented in 2015 when the interest rate was lowered to an unprecedented level and if they did so we would have avoided the unhealthy balloon that happened in Vancouver and Toronto and surrounded areas and we could have had a healthy correction in Alberta.

The problem now is that if they implement the test now all those who already bought homes in the last two years will be stuck with non appreciating assets and a flat market at best for a long time as they bought them at very rapidly inflated prices and all new home buyers will be stuck with those highly inflated prices as well and would have to buy the less expensive and less desirable homes and this is even if they ever could.

The other bigger problem is if they keep artificially inflating the market by offering very easy credit, the market will eventually collapse and we will have a US style crash and my feeling is they're trying to avoid that potential crash by gradually tightening the rules.

We're at an all time high and massive debt levels now and it's very dangerous.

Interest rates will be 1/4 to maybe 1/2% higher by 2019. That would be an orderly correction / deflation / less of an increase.

Yet these new rules will introduce stress tests at 60%+ higher rates, namely 2% higher ( as a 5% test rate is 66.67% higher than a 3% rate). This will dramatically (!!) lower maximum mortgages, about 20%, although the Canadian bank act allows lending up to 80% LTV. If interest rates are 3% in a year and you will be tested as if they are 5% then to me that is wilful, dangerous and economically harmful and possibly even an illegal manipulation contravening the bank act. It will eliminate 10-15% of mainly entry level buyers, mainly young people. It will reduce EVERYONE'S maximum loan amount by about 20%. Everyone's ! It will significantly reduce access to capital which is vital for the wider economy.

Keep some cash handy as it is getting dangerous out there. Proceed with caution. Unused LOCs may be curtailed. Take some cash out, as LOCs may be cut, unlike mortgages, without notice!

 

[Vine Group]

The guidelines proposed require all mortgages to qualify under the stress test interest rate. It will reduce the average buyer purchase power by 30%. But it impacts everyone equally. The bigger question is how will existing investment portfolios be "stress tested". There are a few suggestions from using the qualifier rate to only using 50% of gross rent and 100% of servicing costs. That has yet to be answered and could make it very difficult even impossible for investors to qualify for residential mortgages.

 

[Matt Crowley]

It's a major concern for REIN investors. Most are investing in SFH, duplexes, fourplexes which will have their highest valuation to the mass consumer market. ie. valuation is not income-based, much more comp based. So chopping off 20% of potential buyers has major refinancing and exit implications. @Vine Group In my opinion, it is less of a concern for existing portfolios as interest rates are going to creep up slowly. Final impact on cash flow can be a bit ambiguous, depends on the market and asset you are in.

If this stress testing is implemented, it will be negative if you are an existing investor looking to exit. If you are sitting on cash, it is a buying opportunity.

 

[Thomas Beyer]

It's a major concern for REIN investors. Most are investing in SFH, duplexes, fourplexes which will have their highest valuation to the mass consumer market. ie. valuation is not income-based, much more comp based. So chopping off 20% of potential buyers has major refinancing and exit implications. @Vine Group In my opinion, it is less of a concern for existing portfolios as interest rates are going to creep up slowly. Final impact on cash flow can be a bit ambiguous, depends on the market and asset you are in.

If this stress testing is implemented, it will be negative if you are an existing investor looking to exit. If you are sitting on cash, it is a buying opportunity.

Well said. We will also see rents go HIGHER due to less people being able to afford to buy. That is a hedge against falling or flattish prices when you hold.

We may see a watered down OSFI version .. but honestly unlike the proposed tax changes for the self-employed high income doctors, lawyers, accountants etc I have NOT seen much media coverage on that topic AT ALL. As such it is upon REIN members and real estate owners / RE investors / small landlords to make some noise here [ as the major landlords like Boardwalk, Mainstreet, CAPReit etc probably benefit from it and stay mumm ]

 

[Willyboy]

It's a major concern for REIN investors. Most are investing in SFH, duplexes, fourplexes which will have their highest valuation to the mass consumer market. ie. valuation is not income-based, much more comp based. So chopping off 20% of potential buyers has major refinancing and exit implications. @Vine Group In my opinion, it is less of a concern for existing portfolios as interest rates are going to creep up slowly. Final impact on cash flow can be a bit ambiguous, depends on the market and asset you are in.

If this stress testing is implemented, it will be negative if you are an existing investor looking to exit. If you are sitting on cash, it is a buying opportunity.

What do you mean by if you are sitting on cash , it is a buying opportunity?
Do you mean the prices will fall or stagnate? and if you mean the prices will fall, by how much do you think and how long it will take for the prices to start falling after the stress test takes effect and for how long they will keep falling until bottoming out? And when they bottom out how long they will stagnate before starting to go up again?

 

[Willyboy]

The guidelines proposed require all mortgages to qualify under the stress test interest rate. It will reduce the average buyer purchase power by 30%. But it impacts everyone equally. The bigger question is how will existing investment portfolios be "stress tested". There are a few suggestions from using the qualifier rate to only using 50% of gross rent and 100% of servicing costs. That has yet to be answered and could make it very difficult even impossible for investors to qualify for residential mortgages.

Just a little question here. if under the current rules you are able to purchase 4 to 5 properties for a total of 2 million dollars with a 20% down payment, how will the new proposed stress test affect that formula? I mean how many properties will you still be able to purchase and for how much maximum? I'm just guessing it could be 3 to 4 instead of 4 to 5 and 1.5 million instead of 2 million. Am I wrong or correct here?

 

[Thomas Beyer]

Assume you will qualify for about 20% less loans, thus more cash required, or 20% smaller asset base. Prices will drop in many markets, some more than others depending on demand.

Access to capital is vital to the economy and if it is constrained the economy and real estate suffers.

Gen Y get screwed the most thus need to speak up the most.

Example: The $500,000 condo or house will not drop 20%, but maybe only flatline or decline 2% but your promised $400,000 mortgage now is perhaps as low as $320,000 and thus, the $100,000 you got from your parents or had saved won't allow a $500,000 but only a $420,000 tinier uglier and almost certainly smaller house or condo.

 

[Matt Crowley]

What do you mean by if you are sitting on cash , it is a buying opportunity?

Sitting on cash = liquid cash available
The best buying opportunities arise in real estate because real estate is such a poor consumption hedge. So when economy is strong, real estate prices are strong, banks are bullish, capital is plentiful. When real estate prices go south it is alongside job losses, unemployment, vacancy in most cases so that is the buying opportunity.

Do you mean the prices will fall or stagnate? and if you mean the prices will fall, by how much do you think and how long it will take for the prices to start falling after the stress test takes effect and for how long they will keep falling until bottoming out? And when they bottom out how long they will stagnate before starting to go up again?

Prices will react immediately because it constrains capital availability considerably. A YOY 7-10% correction would be my estimate base case, keeping in mind the question is so broad that the answer will be broad. This will clip growth in all markets. If this policy were implemented in its severest form, it is most likely be reversed or softened when they see the detrimental effects. Look back to what happened in the 1980s when rates spiked. Here we have a 50% increase in interest cost, which is very significant given current rates. Bottom is relative to market as is length to recovery. JLL does a good high-level on real estate cycle clocks http://www.us.jll.com/united-states/en-us/research/property-clocks/multifamily. Good historical information if you go back and look at office properties across time.

Clipping growth doesn't mean growth won't happen in any market but it will absolutely be clipped.

 

[Rickson9]

If you are sitting on cash, it is a buying opportunity.

Asset price pressured downwards and rents pressured upwards.

I like it.

 

[Colin Forrest]

Real estate AND the broader economy is under attack in Canada !


Access to capital is vital for business, the overall economy and of course real estate. If access to capital is artificially constrained by new government regulations, business, the overall economy and of course real estate will be impacted substantially.

The OSFI (Office of Superintendent for Financial Institution) is pretending to listen to ordinary Canadians as it evaluates forcing ALL (!!!) mortgage companies and banks to use a new stress test when customers apply for a non-insured mortgage. (Similar to the first time buyer test, but now to ALL mortgages). This stress test requires qualification at rates about 60%+ higher than current interest rates, ie 4.75% instead of 2.75%.[e.g. a 5% mortgage rate is 66.67% higher than a 3% rate ]

==> The result: about 20% less loan amount - for everyone !

As investors and professionals in the real estate industry, but also as regular home owners, we need to take a stand. If it becomes law, it will eliminate a very large (15-20%) number of transactions with serious consequences to the whole real estate market across the country. Prices will drop and many folks will be unable to qualify, or they need to buy one 20% smaller.

You can make your voice heard. If you have not, there is still time to write a letter to your MP or to use this lazy (wo)man's website https://tellyourmp.ca/

Write something like this, or use the template provided:

‘The new guidelines being proposed would reduce ALL Canadians mortgage qualification limits by 20%, no matter your impeccable credit, no matter your impeccable employment record, no matter your down payment (even an 80% down payment would not get you special treatment). A nationwide blanket lending reduction of 20% will effectively result in the elimination of 10-20% of homebuyers from the market. Although the effects in the Vancouver and Toronto market will in fact be negligible, the impact felt in small town Canada will be nothing short of devastating."

We already feel the results of the Oct 3, 2016 cutbacks on insured mortgages that make this forecast clear. First time buyers have been removed from smaller markets where incomes are much lower, and there is a greater number of single income households.

DO NOT DELAY. DO IT NOW !

DONE!

 

[Willyboy]

Sitting on cash = liquid cash available
The best buying opportunities arise in real estate because real estate is such a poor consumption hedge. So when economy is strong, real estate prices are strong, banks are bullish, capital is plentiful. When real estate prices go south it is alongside job losses, unemployment, vacancy in most cases so that is the buying opportunity.



Prices will react immediately because it constrains capital availability considerably. A YOY 7-10% correction would be my estimate base case, keeping in mind the question is so broad that the answer will be broad. This will clip growth in all markets. If this policy were implemented in its severest form, it is most likely be reversed or softened when they see the detrimental effects. Look back to what happened in the 1980s when rates spiked. Here we have a 50% increase in interest cost, which is very significant given current rates. Bottom is relative to market as is length to recovery. JLL does a good high-level on real estate cycle clocks http://www.us.jll.com/united-states/en-us/research/property-clocks/multifamily. Good historcal information if you go back and look at office properties across time.

Clipping growth doesn't mean growth won't happen in any market but it will absolutely be clipped.

I have been getting ready to buy in Calgary and Edmonton but now with that proposal and the interest rate going up I'm getting scared because I might buy and after that the price might go down so I would lose big money!

Honestly what do you recommend? buying now or waiting till after the proposed stress test goes into effect if passed and see if prices go down?

 

[Thomas Beyer]

I'd take a wait and get ready approach. Research the sub-markets as Calgary and Edmonton each sell 10,000 homes a year and you need to find a narrow area. Then pounce when price is right. Get pre-qualified for a mortgage. Prices will adjust slowly.

More here http://myreinspace.com/threads/educational-rein-posts-by-thomas-beyer.10663/ esp " how to get started "

 

[Willyboy]

By sub-markets you mean the small towns around Calgary and Edmonton or somewhere else?

 

[Thomas Beyer]

By sub-markets you mean the small towns around Calgary and Edmonton or somewhere else?

I mean neighbourhoods with bigger cities. You cannot specialize in "Edmonton" with over 10,000 homes trading annually. How do you know if the $280,000 2BR TH in Millwoods without a finished basement and a single car garage is average, a smoking deal or grossly overpriced .. or if $1050, $1200 or $1450 is a realistic rent level for it ?

 

[Thomas Beyer]

Market likely subdued or "normal" going forward, although these OSFI rules, if implemented, will lead to some further price deflation and more cooling than the somewhat lofty average 2-4% price growth mentioned here http://business.financialpost.com/i...ket-bubble-has-ceased-without-a-crash-landing

A number of headwinds are in front of us
A) rising interest rates
B) credit tightening ie lower LTVs
C) subdued worldwide growth
D) excessive public sector debt that takes more and more $s from the real economy
E) flat or falling real wages
F) subdued oil demand and thus, subdued oil price growth
G) ever bigger government with ever increasing regulations and higher taxation
H) a likely stock market correction and recession in the US and China, and thus, here.

Canada will do somewhat better than rest of G7 but not by much. Keep some cash at hand. It won't be as rosy as it used to be.

On the plus side Canada is an immigration country, it is fairly safe, it will have less internal violence and conflict as we will soon see in China or US, and it has taxes and government sizes that are lower than socialist and economically declining Europe. All in all the better place to be, except a few US cities.

 

[Vine Group]

The stress test doesn’t have anything to do with banks door policies. What it does is impacts how lenders evaluate new investor mortgages and existing investors mortgages. So, if your pre-positioned to invest in 4 -5 properties for a total of $2 Million of residential real-estate, you may find your purchase power reduced to approximately $1.5 Million but you can still look at 4 – 5 properties. Keep in mind this is a generalization and you should revaluate your portfolio with your lending advisor. May I suggest, at $2Milion purchase power, you may want to consider multi-unit residential (5 units or more) purpose build commercial asset. Lending is still very favorable and CMHC is very supportive. So, this will impact everyone equally when it comes to new investors. That being said, how lenders evaluate existing portfolios can have a bigger impact. Even an investor with 1 investment property with a DCR of 1.1 and TDS of 35% could find themselves out of the market or having to put a larger down payment over 20% to keep investing. For example, if under the stress test the new DRC is 1.0, the differential is a treated as a negative cashflow and goes against your personal income. If your income isn’t sufficient to absorbed that “negative cash flow” keeping your TDS at 40% - 44% (TDS requirements are different depending on the lender). That same investors now would have to find a property that stress test over 1.1 DCR. The surplus DCR would need to absorbers the “negative cash flow” of the existing portfolio. Then only if the TDS in line you can buy. This can become very difficult for existing investors to continue investing in residential real-estate. I can say that most investors who invested in the last 5 years DCRS tend to be around 1.1 using the contract rates not the proposed stress test.

 

[JDE]

Figured I would bring this back up since it looks like it will actually be happening in the new year

http://business.financialpost.com/r...-watchdog-sets-new-rules-for-mortgage-lending

Anyone changing course or strategy based on this? Any buyers going to hold off to see if this drives down house prices in the new year?

 

[Thomas Beyer]

No rush to buy anywhere right now .. except in some BC hotspots (which are also cooling fast) ..

Buying opportunities from fallen apart deals will appear in droves from motivated SFH, TH or condo sellers in 2018 everywhere !