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

AirBnBGone

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?

Regulation

Just got an email about the new regulations coming down the pipe in BC for the real estate industry.    If you recall, the industry lost the right to self-regulate last year after a lot of reports of consumer hostile behaviours by certain brokerages in the overheated Vancouver market.   The Real Estate Council of BC was revamped with more outside members, and the Office of the Superintendent of Real Estate (OSRE) appointed to keep an eye on the industry moving forward. Since then they’ve tweaked the rules here and there, for example by making it marginally harder to pass the entrance exam for agents and by cranking up the maximum amount of penalties for misconduct by both licensees and brokerages.   I’ve seen a few job postings for the OSRE that stated the goal was to implement the recommendations of the Independent Advisory Group report that was released last year. Well the next changes have been released in draft form and are:

  1. Removing limited dual agency in BC.  This is where one agent represents both the buyer and the seller as clients in a transaction, with some restrictions.  Some remote and underserved communities will be allowed to continue with this practice for now.
  2. Increasing required disclosure about commissions and representation to clients.   Generally some minor tweaks to disclosure requirements to better inform clients about where their money is going, and what their relationship is with an agent they are dealing with. For example:
    1. In a listing agreement, it must be specified how much commission goes to the listing brokerage and how much to the cooperating (buyer’s agent’s) brokerage.  Also it must be specified how much commission goes to he listing brokerage if the buyer is unrepresented.
    2. Before providing real estate services, an agent must disclose whether they are representing the party as a client (and therefore have a fiduciary duty towards them) and inform them how to file a complaint.  This is very similar to the current Working with a Realtor brochure and will almost certainly result in a modified version of that document.
    3. Before dealing with an unrepresented client in a trade (for example if an agent has a listing and a buyer goes to them directly to write an offer on the property), the agent must explain the risks of dealing with someone that represents only the interests of the opposing party, and a recommendation to get their own professional advice.
    4. When a seller’s agent presents an offer to a seller, they must include detailed information about commission and other remuneration that they would receive if that offer were accepted.

My take: These are draft changes open to comment (provide feedback here) until Oct 6th, but I’ll bet they will essentially pass as written.  Getting rid of limited dual agency is a no brainer and something we’ve seen coming for a long time.  Given that an agent must act in the best interests of their client, it is obviously impossible to do that for two people with competing interests. The increased disclosure laws are relatively minor tweaks to existing requirements.  Some additional transparency for consumers which is always good.   I’m not convinced that the requirement to scare an unrepresented seller via warnings about the risks of being unrepresented is in the consumer’s interest, but certainly getting a lawyer to review an offer before making one is a very good idea.

Overall fairly minor changes that probably won’t have much of an impact on the market outside of turning up the general level of wailing and gnashing of teeth in the industry.   I’m disappointed that they haven’t introduced the requirement for all offers to be recorded on a property to finally put an end to unverifiable competing offers that seem to appear at opportune times to goose a buyer.  Maybe that is still to come.  This is a start and it’s just another sign that the wild west era of speculation, lax regulations, and free money in real estate is slowly being unwound.

Rate Reversal

To no one’s surprise, the Bank of Canada bumped the overnight lending rate from 0.5% to 0.75%, the first increase in 7 years.   It’s a small jump, one that won’t make much difference to anyone’s debt obligations, but it’s a sign that the bottom is in for rates.   Despite various alarmist polls out there (no, an increase of $130/month in payments won’t make most Canadians “struggle”), the majority will be just fine with any conceivable increase in interest rates.   Thing is, the majority is also completely irrelevant to the housing market.  The important thing is what happens at the margins.

The banks wasted no time hiking their prime rate by the same 0.25% which means it sits at 2.95% (except the special flower TD that charges 3.1%).  That means all those HELOCs just got more expensive (the typical HELOC of $70,000 costs an extra $15/month now).   Same goes for every variable mortgage out there.   Like I said, not going to break the bank for anyone, but it’s a sign that the seemingly endless period of decreasing rates might be over.

For now though, even with a 0.25% increase in the mortgage rate, the majority of the about 80,000 monthly mortgage renewals will be coming off a 5 year mortgage, and will find that the deal they are offered (red line)  is still lower than what they locked in for 5 years ago (green line).  

The precipitous interest rate drop in 2009 was the reason our real estate market stayed stable.   The same house cost drastically less to carry and prices plateaued while incomes increased over several years.   The result:  improved affordability which stabilized the market.   This is why I believe our next correction will not look anything like our last two.

Now we see the other side of the slope.   Prices racing ahead, and interest rates on the upward slope too.   That will quickly drive affordability back into the danger zone which correlates with price peaks in Victoria.

Tidbits

Few little bits that caught my eye lately.

Firstly, seems like the number of price changes are increasing lately.   Unfortunately the Matrix database search is a little broken when searching for price changes in the past, but looking at the last few weeks the rate of price cuts has been increasing quite a bit.

Either the market’s appreciation rate is slowing, requiring some price flexibility from sellers to get properties sold, or the overpriced properties that didn’t move in the spring are being reduced to try for a summer / fall sale.  Something to watch going forward.

Rents

According to Padmapper, Victoria has the third highest rental rate in Canada at $1180/month for a 1 bedroom (up 7.3% in a year) and $1400 for 2 bedrooms (up 2.9% from last year).    Those numbers are higher than the CMHC stats mostly because CMHC only surveys purpose built rentals, and not privately rented condos that generally go for more money.

Regulations

The NDP are discussing options with respect to curbing speculation, saying that a speculation tax as proposed in their platform may not be the only option they are looking at.   The article is light on details, but David Eby has a good handle on the housing portfolio so I’m hoping for some effective changes, assuming they can actually get into power.   Meanwhile the City of Victoria is mulling more AirBnB restrictions, which has caused a bit of a storm in a teacup about the mayor’s recusal from related discussions.

Delinquency Rates

The CMHC has new data on delinquency rates, and as discussed earlier, it’s pretty clear that they don’t tell us a lot until house prices decline.

In the strong markets of Vancouver and Toronto, delinquency rates decreased to absurdly low levels.  In Victoria we saw the same thing as prices increased.

 

After all, why default on your mortgage if you can sell your house at any time for a large profit?   In the stagnant markets of Calgary and Edmonton we can see the effect of the downturn in increased delinquency rates.  It takes a while, but if house prices stay flat or decline for a couple years, people start running out of the easy options.   If Toronto undergoes a serious correction this will be an interesting stat to watch.

For now though in Victoria, we are still happily financing this runup in house prices with ever increasing mortgages.  All good until those rates rise!

A changing of the guard

Wow, an amazing result in this election if it holds.  I was sure that the Liberals would pull off another majority but it seems the anger against them was greater than anticipated and we seem to be converging on a minority government with the Liberals one seat ahead of the NDP and the Greens tripling their seats.

What is likely to come if this holds?  Well could be a Liberal minority although I don’t see how that would be effective, or could be a coalition.   Despite some grumblings about John Horgan’s temper, it is more likely that that the Greens will want to work with the NDP as the two big priorities for Weaver was to get money out of politics and bring in proportional representation which the NDP has also promised.  Of course at current counts a coalition only gets them to 44 which is hardly enough to be effective.

At the very least it seems like it might be worth looking at what each party says about housing.  Let’s look at the NDP Platform and what it says about housing:

  1. New Supply: Build 114,000 affordable rental, non profit, co-op and owner purchase housing units through partnerships over ten years.  Use public land to build housing.  Get new student housing built by removing unnecessary rules that prevent universities and colleges from building affordable student housing
  2. Renters: Introduce a refundable renter’s rebate of $400 dollars per rental household in BC each year.   Close the BC Liberals’ “fixed term lease” loophole and ensure controls on rent increases are enforced.   Re-invest in co-op housing.
  3. Speculation:  Close the loopholes that let speculators dodge taxes and hide their identities.   Direct the revenue from the absentee speculators’ tax into a Housing Affordability Fund.  Establish a multi-agency task force to fight tax fraud and money laundering in the BC real estate marketplace.
  4. Foreign buyers tax:  There isn’t anything specific in the platform, but other reports have said the NDP want to bring in a 2% foreign speculators tax for foreign owners that don’t pay income tax.

What about the Greens?  Well looking at the Green Platform on housing we can see it is a bit more aggressive:

  1. New Supply:  Build 4000 affordable units per year.  Use public land to build housing.  Rethink zoning.
  2. Owners:  Make the home owner grant income tested.   Make property taxes progressive based on income.
  3. Renters: Introduce incentives for construction of rental properties.  Enhance the Residential Tenancy Act with more protections for renters.
  4. Speculation:  Implement a sliding scale PTT from 0-12% for properties between $200,000 and $3M with additional tax for flippers.   Lifetime capital gains limit of $750,000.
  5. Foreign buyers tax: Expand across province, raise to 30%.

What do you think will happen?  What will be the effect on Victoria’s and BC’s market?

CMHC: Victoria Overvalued

Last year the CMHC started releasing their quarterly housing assessments and I had some fun ridiculing their conclusions.   Once again they’ve swapped out the analyst in charge of Victoria, which makes it the 4th analyst in just over year, and none of them are from here.

The new report for Spring 2017 is out, and by new report for Spring 2017 I mean released spring 2017 and actually only covering data up to Dec 2016.  Again, how a measure is supposed to give an “early indication of potentially problematic housing market conditions” when the measure is at minimum 4 months out of date I have no idea.

They analyze the housing market based on evidence of Overheating, Price Acceleration, Overvaluation, and Overbuilding.  Let’s go through their analysis in detail.

Overheating

Their definition of overheating is a sales to new listings ratio of 80% or higher for the quarter.   This is relatively sensible, although the threshold is quite high.   Looking back at recent history, the hot market recently and the mid 2000s would have been identified as overheating.  Note that the overheating evidence does not go higher than “moderate evidence” because it is only based on one metric (sales/list ratio > 80%).

Continue reading

10 years of HHV: Time for a meetup?

It’s been just over 10 years since the first post appeared on the original House Hunt Victoria blog.   Back then the blog was an expression of the frustration of the original author in trying to understand the insanity of the local housing market in early 2007.    It’s interesting to go back and read some of those early posts and see the similarity to the market today.   Many of the same factors were present, with an ultra-low rental vacancy rate of 0.5% and a condo building boom.  To HHV’s original author John, something about the current prices didn’t quite add up.   And indeed after many years of rapid price appreciation, 2008 marked the end of the bull run.

However the big crash that some predicted did not arrive, and in retrospect it was clear why that was the case.  Interest rates at very low levels combined with price stagnation and income growth combined to return affordability to more reasonable levels.

What’s in store for the next 10 years?   Sounds like something to discuss over a couple beers so I’m proposing the much delayed HHV meetup.   Given everyone is obsessed with Oak Bay, I suggest the patio (enclosed, heated) of the Penny Farthing on either the evening (6ish) of Thursday March 30th or Friday April 7th.

Let me know if interested by putting your name on either or both dates at this doodle.

Continue reading

The Owner Builder Exam

This post is based on the information gathered and tireless work done in this area by Marko Juras.

Each year Rich Coleman – our Minister Responsible for Housing – pens a letter to BC Housing laying out their mandate for the year.   Last year he reminded them that as a public sector organization, they were bound to the Taxpayer Accountability Principles which state that their actions should be consistent with government priorities and be executed efficiently to respect the taxpayer’s dollar.  Unfortunately it seems like that letter fell on deaf ears.

You see, BC Housing has a department called Licensing and Consumer Services (formerly the Homeowner Protection Office) that amongst other things administers residential builder licensing.  For a builder to get licensed they have to show experience in building and continue to receive training (such as on this arduous Caribbean cruise) to maintain their licenses.  An exception to this has always been individuals building for themselves – the owner builder – who merely had to pay BC Housing for an Owner Builder Authorization.  In the last 15 years, some 45,000 people went that route in BC.

Clearly the idea that that many people could build their own home relatively unmolested by the government could not stand, so last July BC Housing introduced the Owner Builder Exam. This 100 question exam requires 70% to pass, and you only get one attempt for your application (you get a partial refund if you fail but then you have to re-apply).  BC Housing justifies this test saying it protects the consumer, helps owner builders expand their knowledge base, and creates a more level playing field.   This sounds great, other than the fact that it is complete and utter nonsense.   Let’s examine these justifications in detail. Continue reading