The Stress Test

Real estate markets are driven by credit, so when the government starts seriously constricting credit, it can have a large impact.  As expected, the OSFI has announced the changes to the B-20 rules I covered earlier this month.   Stress test for all mortgages (from federally regulated lenders) at 2% higher than existing rates and cracking down on creative financing intended to circumvent these rules.

The rules come into effect January 1, 2018.

Last time we looked at at how minimum incomes to qualify for a typical single family house or condo will have to increase under a stress test.   This time let’s see how that maps to Victoria incomes.   In 2015, our income distribution was like this:

Another way to visualize this is by looking at what percentage of households are above a certain income level.

Now if we assume 20% down (the optimal down payment in many cases) on the median property, what does that do to the number of people that could qualify for the mortgage?  Note that this is assuming good credit and no significant other debts, so the actual qualifying incomes could be higher.

For SFH and condos then, the stress test could sideline around 7% of all Victoria households at current prices.   Of course, the buyers on the edge with additional capital can put more down to pass the stress test, and shadow lenders will take up some of the slack, but it could be a significant chunk out of the buying pool.  Definitely the biggest change we’ve seen to credit availability in years.

Oct 16 Market Update

Weekly sales numbers courtesy of the VREB.

Oct 2017
Wk 1 Wk 2 Wk 3 Wk 4
Unconditional Sales 146  289  735
New Listings 265  479  904
Active Listings 1990 1989  1938
Sales to New Listings  55%  60%  81%
Sales Projection  565
Months of Inventory  2.6

143 sales for the week which is about the same as the 146 in the first week.   However the year over year drop has moderated significantly, now down 23% compared to this time last year.   That sales rate puts us on track for about 565 sales for the month which would be exactly the 10 year average of 567 for October.

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Optimizing your down payment

When putting a down payment on a house, often people strive for 20% if they can, and anything less is just a fallback if you don’t have the cash.   As most people know, if you have less than 20% down your mortgage needs to be insured by the CMHC.   The nice thing about CMHC insurance is that you get to pay the premiums but if you default the bank gets the payout.

Premiums increase the less money you have down, and rates have been cranked up recently.  Now if you have between 15% and 20% down you’ll pay an extra 2.8% of the mortgage in premiums.  10-15% costs 3.1%, and 5-10% costs 4%.   So does that mean it’s always a good idea to put 20% down?   Not necessarily.  It depends on your mortgage rate, and the return you would get on the money if invested elsewhere (your opportunity cost).

It get’s a bit complicated, so I’ve created a calculator to help out.  Check it out. Continue reading

Big sales decline to start off October

Weekly numbers courtesy of the VREB.

Oct 2017
Wk 1 Wk 2 Wk 3 Wk 4
Unconditional Sales 146  735
New Listings 265  904
Active Listings 1990  1938
Sales to New Listings  55%  81%
Sales Projection
Months of Inventory  2.6

Big decline in sales rate from last year.  We are now at identical inventory levels, but sales are down by a third (16 sales/day compared to 24/day this week last year).

Looking at just residential sales for the same week (Sunday to Saturday before thanksgiving) we can see the decline is even more dramatic.

SFH sales off 50%, condos down 38%*.

* Note this is as of 9PM Oct 10, some sales not yet reported may still be added to last week’s numbers.

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Stressed out

Used to play pretend, give each other different names
We would leverage to the hilt, drop it all on real estate
Used to dream of condo flipping, now they’re laughing at our face
Singing “wake up, you need to make money”, yeah

Wish we could turn back time
To the good old days
When they gave crediiit… like candy but
Now we’re stressed out

Twenty one pilots feat. OSFI

You’ve probably heard of the new rules that are coming down the pipe from the Office of the Superintendent of Financial Institutions (OSFI, our friendly bank regulator).  It’s OSFI’s job to make sure our banking system doesn’t get carried away in some irrational exuberance of the day and take after that of our southerly neighbours.

Well it turns out these days they are mighty concerned about the froth in the real estate market and they are determined to stamp it out by any means necessary.   Last year, they introduced the stress test for anyone that wanted a mortgage with less than 20% down.  That meant that buyers had to prove they could afford not only the rate they would be paying (two point something percent) but the Bank of Canada’s average posted 5 year rate (four point something percent).

This doesn’t seem that unreasonable.  After all it’s quite likely that rates will rise at some point, and given we Canadians don’t get the luxury of 25 year rates, it would be very prudent for all buyers to verify that they will be able to afford the same mortgage at a modest couple percent higher.   What happened next though, was somewhat concerning. Continue reading

September Numbers

As mentioned earlier today, the MLS HPI index is down again for detached homes.   This has made the VREB press release somewhat more somber than we have been used to recently.  The market is confusing, and of course that means there is a need (more than ever apparently), to engage a local REALTOR®.   Which raises the question: what kind of market would allow one to buy without an agent?  I suspect we may not live to see that recommendation in a press release.

No matter, back to the numbers.   With inventory and new listings essentially unchanged from a year ago, sales are down 18%.  Inventory is still desperately low (lowest on record for September), but it’s about 4% higher than it was in June.   An increase in inventory in that period is very unusual, having not happened since 2008.   However just like we saw the HPI index take a similar breather in 2006, we saw the same increase in inventory going into that fall too, so it is certainly not a surefire indicator of impending doom.

While the index languished, median prices for both detached homes and condos hit a new record this month.   The core detached market is languishing still, essentially flat from August and down $50,000 from the record high in January, but it seems the rest of the market is still rising enough to drag everything up.

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September Monthly Preview

Last month we saw the HPI index take a surprising dip after an extended period of increases.   Well early numbers show that this has continued this month, with a small decrease in the detached index while condos continue to increase.

Looking back at the short history of the HPI (only goes back to 2005), we can search for precedent of price declines in a market that is supposedly “hot”.   Back in 2006, we did have a similar period of several months of declines in the index despite market conditions still indicating a sellers market.

At that time it turned out that prices were still 18 months away from the peak which was 20% higher.   We’ll see what happens this time around, but I want to see much more broad based weakness in the market indicators before I would be confident calling a top or correction.   Sales are down 18% from last year with otherwise essentially identical inventory and new listings, so it is clear that demand has dropped significantly but we still need more properties available before price gains can be halted for good.

Full report on the month coming tonight.

Capital Suite

The topic of a rental suite in your house possibly triggering capital gains tax when sold has been covered extensively on this site (here and here and here).  In short, normally you don’t pay capital gains tax when selling a principal residence, but a self-contained suite of significant size may mean that capital gains is due on the suite portion of the home.    So far the writing from CRA and several articles indicate this is the case, but we’ve also heard that several local accountants have dismissed the concerns especially when the suite is small in relation to the whole house.   It certainly seems that the more self-contained the suite is and the larger it is relative to the property, the greater the chance it could trigger capital gains.   As always, ask a professional about your personal situation.

Even if capital gains tax applies due to your suite, what would be the impact?   Would the capital gains tax completely destroy the profit from the suite, making it better to buy a house without a suite?  To follow up on this, reader CuriousCat (who dug up the original information on this change) went through the calculations and produced a spreadsheet comparing two scenarios.   Here is CuriousCat’s analysis (edits for presentation in this blog):

What if you compare two buyers, both purchased a house for $800,000 and sold for $1,200,000, 5 years later? They both put 20% down, the only difference being that one buyer did not rent out a suite, while the other rented it for $1400/mth.

The point of the tax system, as we keep being reminded by the feds, is that they want it to be fair (an incorporated doctor should pay the same amount of taxes as a non-incorporated doctor, etc.)  So is it? Who comes out ahead? The buyer without the suite, or the one with the suite who is forced to pay all his taxes on the rental income and capital gains?

First we have the purchase of the two properties

Then we need to operate them for 5 years and calculate the total cash we have to put into them consisting of the mortgage payment and down payment, minus rent collected.

Then we sell both properties for $1.2M.

After 5 years, the landlord is ahead by $84,000.   But we haven’t paid any taxes yet.   If capital gains applies:

Then the landlord’s profit drops to $44,000.   And if the landlord reported his rental income every year (and writes off the relevant expenses):

In conclusion, even when paying capital gains and all income taxes, with very strong appreciation in a property, the landlord remains ahead by $36,640 for the 5 year period.    Of course we know most people don’t pay all their taxes (especially the capital gains), so then they come out ahead quite a lot.   You can access the spreadsheet here and change the numbers for your own analysis.

My Take:  Thanks to CuriousCat for preparing this.  While the impact of the capital gains is large if it applies, it would appear that it still makes financial sense to rent out a suite rather than leave it empty.  In times of slower price appreciation than the example, the impact would also be significantly less.

The other way to look at it of course is that the capital gains + income tax on the rental in the example combined to create a 56% tax rate.  That might be hard to swallow regardless of final outcome.


As has been widely reported, Victoria city council approved their internal staff report to enact sweeping new regulations on short term vacation rentals (i.e. AirBnB and VRBO).  The goal of the change is to bring properties that could have been used by regular occupiers back to the market (or if you are more cynical, to boost the hotel industry).   As we’ve seen some confusing information in the news coverage, I read through the staff report to check first hand what the changes actually are*.
*I believe the information below is accurate however it should not be used for investment decisions without verification.

What will no longer be allowed?

  1. Short term vacation rentals (STVRs) would no longer be a permitted use in transient zoned buildings (like the Janion or 595 Pandora).  Note however that STVRs would then become a legal non-conforming use and would continue to be allowed in those buildings (as per Division 14 of the Local Government Act).
  2. Operating a STVR without a business license and displaying the information on the ad for the unit.
  3. Short term renting out properties that are not your primary residence (except as in 1 above).
  4. Short term renting out a self-contained suite in your primary residence.
  5. Short term renting out your entire primary residence (except if on vacation).

What can you rent on AirBnB/VRBO going forward?

  1. Up to 2 bedrooms in your principal residence (same as currently).
  2. Your primary residence while on vacation.
  3. A unit in a transient zoned property as a legal non-conforming use.

All of those uses will require a business license as below.

Note that it appears their plan is to eradicate STVRs in transient zoned properties by charging them the commercial business license fee.  In fact they say one goal of the fees is to “discourage casual operators who are unwilling to pay to operate”.  So while STVRs will continue to be allowed in transient zoned properties, the license cost will likely discourage all but the most profitable ones.

When is this coming into effect?

City staff will prepare the bylaws for this change by end of year, and complete the full implementation plan by Q1 2018.

How will it be enforced? 

The city has estimated it will cost $512,000 for new staff and a third party monitoring service.  Given that the nature of STVRs requires public advertising, it shouldn’t be too difficult to enforce these changes.  In fact the proposal specifically mentions ease of enforcement as a priority.

So what? 

I know I’m late to the game here and this change has already been extensively discussed in the previous article but before reading the report it wasn’t clear to me what would happen to units in transient zoned properties so I thought it might be useful to have a summary up.

It’s hard to tell how many of the some 1500 STVR units in Victoria might be “liberated” as either long term rentals or sold in response to this change.   Some are just shared spaces and will be either taken off the market entirely to avoid the hassle of a business license, or fall into line and keep operating.   Some are entire units but only rented out seasonally.   They could end up being rented for longer periods, left empty, or sold if the owners can’t afford them without AirBnB income.   The dedicated investment properties are the most likely to return to the rental or resale markets with their use either being banned entirely or subject to costly license fees that will erode most of the profit.

What else could happen?

  1. Even if only a few hundred units return to use as primary residences, we should see a small increase in rental selection and condo inventory on the resale market.
  2. AirBnB units in municipalities around Victoria will probably be able to command a somewhat higher price (quick! snap up condos in Esquimalt!).
  3. BC Assessment could reclassify some STVR operations as commercial on the city’s request which would mean the city could charge commercial taxes.  I doubt this will happen as the number of truly commercial operations will be probably close to zero after these changes.
  4. The resale value of condos used and marketed as AirBnB businesses in non-transient buildings will likely drop.   I suspect enforcement will shut those down first and there is no grandfathering for those.
  5. Some units in transient zoned properties will continue to operate as AirBnB but I suspect many will close down as the $2500 annual fee will destroy the majority of profit above simply renting them out longer term.   Resale values of these units will likely drop.
  6. Victoria residents will be paying some more taxes to cover the cost of enforcement.
  7. STVR management companies might have a lean year.
  8. We won’t see any more of these kinds of articles.

These regulations aren’t a done deal yet. The city is asking for feedback from stakeholders, but the signs are clear, this or something close to it will be brought into effect.    What do you think it will mean for affordability and rental availability in Victoria?  Will it move the needle?

September 18 Market Update

Weekly numbers courtesy of the VREB.

Sep 2017
Wk 1 Wk 2 Wk 3 Wk 4
Unconditional Sales 183  314  781
New Listings 321  598  1050
Active Listings 1949 2011  2061
Sales to New Listings  57%  53%  74%
Sales Projection  616
Months of Inventory  2.6

Sales continuing to weaken relative to last year as we are now 21% below the rate of this time last year (first week we were down 16%).   As fall rapidly approaches, we are seeing an increasing number of sellers either give up their unrealistic price expectations by cancelling listings or not renewing them (78 last week) or drop prices (95 of those) to dry to entice the late house hunters.

Inventory is also up and has cracked 2000.   That is very low historically speaking, but this is a time it should be dropping, not rising.   That means the market slowdown is overcoming the normal seasonal trend.

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