'

RBC has given regulators a worst-case scenario of prices plunging 30 per cent. How likely is that?

Royal Bank of Canada’s regulatory filings for the second quarter of 2021 contain most of what you’d expect, including several best-case/worst-case scenarios that help the banking giant illustrate how much risk the company is exposed to.

It can make for pretty bland reading, but there’s usually a hint of spice when it comes to projecting the worst possible outcome for real estate. And RBC hasn’t disappointed in that area — by saying home prices in Canada could fall by a massive 30%, under certain conditions.

But what are the chances of that happening? Put another way, it’s a question on the minds of most housing market watchers: Can real estate prices in Canada fall as fast as they’ve been rising?

Banks like RBC base their national housing price projections partly on macroeconomic indicators like employment, consumer spending and economic growth. So for RBC’s worst case to play out, Canada would have to return to the economic turbulence seen in the first few months of the pandemic, with a colossal rise in unemployment, a prolonged recession and plummeting growth.

In the housing market nuclear winter that RBC laid out, a home in Canada priced at $713,500 in March 2021 would be valued at $502,304 by June of next year.

A sudden drop to that extent — 29.6% — would be catastrophic for any recent homebuyers who were able to cobble together only a minimum down payment of 5%. Even new owners who put 20% down would find themselves short on equity, and if they felt pressure to sell after a price collapse, they’d have to do it at a loss.

But RBC’s worst-that-could-happen situation involves the wheels coming off the economy in April 2021. We’re already into June, and things are looking up. At least one COVID-19 vaccination has been shot into the arms of more than 23 million Canadians, and lockdown procedures are finally being lifted — though very slowly — in Ontario, the country’s largest economy. Even RBC analysts are upbeat.

RBC Global Asset Management chief economist Eric Lascelles recently predicted that Canada will “enjoy a profound economic recovery.” Lascelles had little negative to say about the housing market.

Looking at the market’s potential for 2021, including the continued impact of low mortgage rates , Lascelles said Canada can look forward to “a housing market that’s likely to be a little bit less hot, but probably not one that’s going to be correcting or anything quite like that.”

To be fair, RBC isn’t the only institution that painted a gloomy and unlikely worst-case scenario for housing. One from Bank of Montreal saw real estate prices falling by 28.7% between March 2021 and December 2022. Canada Mortgage and Housing Corporation’s nightmare situation involved home prices dropping 50%, and unemployment reaching a peak of 25%.

RBC’s filing documents also include base-case and best-case scenarios. In the former, the average home price could hit $871,417 by April 2026. In the latter, it could reach more than $1.2 million.

It hurts to say this, first-time homebuyers, but those outcomes are far more likely than RBC’s doomsday outlook. The base case would require annual average price growth of about 4.4% over the next five years. That’s pretty much a given. The best-case scenario relies on average growth of approximately 14.4% per year.

That’s hardly out of the question. The national average selling price in April was 41.9% higher than a year earlier, according to the Canadian Real Estate Association.

Reasons to bet against a Canadian housing crash

Even with home values heading into uncharted territory at a time of global economic misery, there are several reasons the housing market is unlikely to falter:

  • Immigration. The Canadian government will be welcoming 400,000 newcomers to the country in 2021, 2022 and 2023. That’s 1.2 million people who will be putting pressure on the housing market, either as buyers or renters. Sellers will have no shortage of new families to sell to, and investors who saw their rental income crushed by the pandemic will once again be able ro raise rents.

  • Low mortgage rates. As the economy continues recovering, mortgage rates will inevitably start rising. But with many lenders still offering variable rates below 2%, Canadians will find entering the housing market inviting — from a mortgage perspective, at least — for quite some time.

  • Unquenched demand. Even with the new stress test rules in place, there are still more buyers than there are properties for sale. Each time a home sells after receiving bids from 15 optimistic house hunters, that means 14 bidders will still be in need of a house once the dust settles.

  • Rigorous underwriting. Lenders put Canadian homebuyers’ finances under an electron microscope before being approved for their mortgages. Their credit scores are evaluated, their incomes are verified and their debt-to-income ratios are carefully measured. In Canada, legitimate lenders do not give mortgages to people who can’t afford them.

Put those factors together and it becomes very difficult to imagine a situation where homeowners will ever be forced to sell their homes at a significant loss, en masse and simultaneously — the hallmarks of a housing crash.

If some unforeseen economic calamity were to take place, one that slaughters the incomes of both homeowners and renters, you might see sellers desperately racing to get out of their mortgages. Until then, though, the real worst-case scenario Canadian homebuyers have to worry about is actually RBC’s best — one where most properties in the country are worth over $1 million.

This article was created by Wise Publishing, Inc., which provides clear, trustworthy information people can use to take control of their finances. Millions of readers throughout North America have come to count on the Toronto-based company to help them save money, find the best bank accounts, get the best mortgage rates and navigate many other financial matters.

Please feel free to comment.......

July 31, 2023

First Home Savings Account (FHSA)

the federal government is intorducing a new type of registered savings plan designed to assist Canadians in saving for their first home. A great idea that is long overdue in our opinion.  Works just like an RRSP but with greater flexibility.  

FHSAs - A Brief Overview

The FHSA (First Home Savings Account) presents a valuable opportunity for aspiring first-time home buyers to save up to $40,000 without incurring any taxes. Much like Registered Retirement Savings Plans (RRSPs), contributions made to an FHSA would be eligible for tax deduction. Additionally, similar to Tax-Free Savings Accounts (TFSAs), any income, profits, and withdrawals within an FHSA would remain entirely tax-free.

Eligibility Criteria:

To be eligible for an FHSA, you must meet the following requirements:

  • Residency: You must be an individual residing in Canada.
  • Age: You must be at least 18 years old.
  • First-Time Home Buyer: This implies that neither you, nor your spouse or common-law partner, has previously owned a qualifying home as a principal place of residence at any time during the year when the FHSA is opened or in the four calendar years preceding the account opening.

Regarding the first-time home buyer's test, if your spouse owned a home during the relevant period in which you lived, it would only affect your eligibility if you are still married to that person when opening the FHSA.

The contribution limits for the FHSA are as follows:

1. Lifetime Limit: You can contribute a maximum of $40,000 over your lifetime to your FHSA.

2. Annual Limit: Within any given calendar year, including 2023 (even before the FHSA rules come into effect on April 1, 2023), you can contribute up to $8,000.

3. No Retroactive Attributions: Unlike RRSPs, contributions made within the first 60 days of a calendar year cannot be attributed to the previous tax year.

4. Carry-Forward Option: You have the option to carry forward up to $8,000 of your unused annual contribution amount to use in a later year, subject to the lifetime contribution limit. For example, if you open an FHSA in 2023 and contribute $5,000, you can contribute up to $11,000 in 2024. However, these carry-forward amounts start accumulating only after you open an FHSA.

5. Multiple FHSAs Allowed: You are permitted to have more than one FHSA, but the total contributions across all your FHSAs cannot exceed your annual and lifetime contribution limits for the FHSA.

6. Tax on Overcontributions: Similar to TFSAs and RRSPs, if you overcontribute to your FHSA, a tax will be applied for each month (or part-month) that the account exceeds the set limits. The tax rate is 1% and is based on the highest amount of the excess in that particular month.

Withdrawals

Qualifying withdrawals to buy a qualifying home purchase are not taxable.

To qualify, the withdrawal must meet these conditions: You must be a first-time home buyer when you make the withdrawal. There is an exception to allow individuals to make qualifying withdrawals within 30 days of moving into a qualifying home.

You must have a written agreement to buy or build a qualifying home before October 1 of the year following the year of withdrawal, and you must intend to occupy the home as a principal place of residence within one year after buying or building it. A qualifying home is a housing unit located in Canada (or a share in a cooperative housing corporation that entitles the taxpayer to possess and have an equity interest in a housing unit located in Canada). Any funds left over after making a qualifying withdrawal can be transferred to an RRSP or registered retirement income fund (RRIF), penalty-free and tax deferred, as long as you transfer the remaining funds by December 31 of the following year, since the plan stops being an FHSA at that time.

Transfers do not reduce or limit your available RRSP room. If you take out FHSA savings as a non-qualifying withdrawal, you must include the amount in income for the year of the withdrawal and tax will be withheld. Finally, withdrawals and transfers do not replenish FHSA contribution limits. ChatGPT Withdrawals from the FHSA: Withdrawals made to purchase a qualifying home are not taxable, provided they meet certain conditions: First-Time Home Buyer: The account holder must be a first-time home buyer at the time of withdrawal. However, there is an exception that allows individuals to make qualifying withdrawals within 30 days of moving into a qualifying home.

Written Agreement for Purchase or Build: To qualify for the withdrawal, the account holder must have a written agreement to buy or build a qualifying home before October 1 of the year following the year of withdrawal. Additionally, the account holder must intend to occupy the home as their principal place of residence within one year after purchasing or building it.

Qualifying Home: A qualifying home is a housing unit located in Canada or a share in a cooperative housing corporation that entitles the taxpayer to possess and have an equity interest in a housing unit located in Canada.

Transferring Remaining Funds: If there are funds left in the FHSA after making a qualifying withdrawal, they can be transferred to an RRSP or registered retirement income fund (RRIF) without incurring penalties and with tax deferred. However, the transfer must take place by December 31 of the following year, as the FHSA stops being effective after that time. It's important to note that these transfers do not reduce or limit the individual's available RRSP room.

Non-Qualifying Withdrawals: If FHSA savings are withdrawn for reasons other than a qualifying home purchase, the amount withdrawn must be included in the individual's income for the year of withdrawal, and tax will be withheld. No Replenishment of FHSA Contribution Limits: Withdrawals and transfers from the FHSA do not replenish the contribution limits of the FHSA.

Dealing with Overcontributions:

When faced with an overcontribution, there are several ways to address it:

Wait for Additional Contribution Room: The account holder can wait until the following year, where the excess contribution may be absorbed by the additional annual contribution room.

Request a "Designated Amount" Return: Another option is to request the return of a "designated amount" not exceeding the overcontribution. This amount can be returned to the account holder as a tax-free withdrawal or transferred to an RRSP. If a tax-free withdrawal is chosen, the original contribution that led to the overcontribution would not be eligible for a deduction. Alternatively, a taxable withdrawal would also reduce the overcontribution in the FHSA.

Deferred Deduction, like RRSPs: Similar to RRSPs, it is possible to make a contribution to the FHSA but defer the deduction until a later year.

Types of Permitted Investments: FHSAs can hold a variety of permitted investments, which are the same as those allowed for TFSAs. These investments include mutual funds, publicly traded securities, government and corporate bonds, and guaranteed investment certificates. Prohibited and Non-Qualified Investments: FHSAs are subject to the same prohibited investment and non-qualified investment rules as other registered plans. These rules aim to prevent non-arm's length investments and the inclusion of assets like land, shares of private corporations, and general partnership units in the FHSA portfolio.

Withdrawals

Qualifying withdrawals to buy a qualifying home purchase are not taxable.

To qualify, the withdrawal must meet these conditions: You must be a first-time home buyer when you make the withdrawal. There is an exception to allow individuals to make qualifying withdrawals within 30 days of moving into a qualifying home.

You must have a written agreement to buy or build a qualifying home before October 1 of the year following the year of withdrawal, and you must intend to occupy the home as a principal place of residence within one year after buying or building it. A qualifying home is a housing unit located in Canada (or a share in a cooperative housing corporation that entitles the taxpayer to possess and have an equity interest in a housing unit located in Canada). Any funds left over after making a qualifying withdrawal can be transferred to an RRSP or registered retirement income fund (RRIF), penalty-free and tax deferred, as long as you transfer the remaining funds by December 31 of the following year, since the plan stops being an FHSA at that time.

Transfers do not reduce or limit your available RRSP room. If you take out FHSA savings as a non-qualifying withdrawal, you must include the amount in income for the year of the withdrawal and tax will be withheld. Finally, withdrawals and transfers do not replenish FHSA contribution limits. ChatGPT Withdrawals from the FHSA: Withdrawals made to purchase a qualifying home are not taxable, provided they meet certain conditions: First-Time Home Buyer: The account holder must be a first-time home buyer at the time of withdrawal. However, there is an exception that allows individuals to make qualifying withdrawals within 30 days of moving into a qualifying home.

Written Agreement for Purchase or Build: To qualify for the withdrawal, the account holder must have a written agreement to buy or build a qualifying home before October 1 of the year following the year of withdrawal. Additionally, the account holder must intend to occupy the home as their principal place of residence within one year after purchasing or building it.

Qualifying Home: A qualifying home is a housing unit located in Canada or a share in a cooperative housing corporation that entitles the taxpayer to possess and have an equity interest in a housing unit located in Canada.

Transferring Remaining Funds: If there are funds left in the FHSA after making a qualifying withdrawal, they can be transferred to an RRSP or registered retirement income fund (RRIF) without incurring penalties and with tax deferred. However, the transfer must take place by December 31 of the following year, as the FHSA stops being effective after that time. It's important to note that these transfers do not reduce or limit the individual's available RRSP room.

Non-Qualifying Withdrawals: If FHSA savings are withdrawn for reasons other than a qualifying home purchase, the amount withdrawn must be included in the individual's income for the year of withdrawal, and tax will be withheld. No Replenishment of FHSA Contribution Limits: Withdrawals and transfers from the FHSA do not replenish the contribution limits of the FHSA.

Administration

To open an FHSA, you will first need to confirm your eligibility to an eligible issuer. Financial institutions will have to file annual information returns with the Canada Revenue Agency (CRA) for each FHSA they administer. The CRA will use this information to administer the plans and provide basic FHSA information to taxpayers to help them determine how much they can contribute each year.

Taxpayers will still need to monitor the limits to avoid overcontributions. To make a qualifying withdrawal, you will need to submit a request to your FHSA issuer confirming your eligibility. Issuers will not withhold taxes on qualifying withdrawals. When any withdrawals are made – qualifying or non-qualifying – the FHSA issuer must prepare an information slip stating the amount of the withdrawal and for non-qualifying withdrawals, the amount of income tax withheld.

FREQUENTLY ASKED QUESTIONS ABOUT THE PLAN

What happens if you don't use the FHSA funds to purchase a first home?

If you don't utilize the funds in your First Home Savings Account (FHSA) to buy a qualifying first home by either the end of the 15th year after opening the account or by the time you reach 71 years old, the FHSA will lose its special status as a homebuyer's savings account.

Consequently, you will be required to close the FHSA. At this point, you have two options for the unused balance:

1. Transfer to an RRSP or RRIF: The remaining balance can be transferred into a Registered Retirement Savings Plan (RRSP) or a Registered Retirement Income Fund (RRIF). This transfer can be done without affecting your RRSP contribution limit, allowing you to continue tax-deferred growth on the funds. Withdrawal on a taxable basis:

2. Alternatively, you can choose to withdraw the unused balance from the FHSA. However, be aware that this withdrawal will be considered taxable income in the year it is withdrawn.

If the FHSA is not closed before its "cessation date" (as mentioned earlier) or if it loses its status for other reasons, you will be subject to a deemed income inclusion. This means you will need to report the fair market value of all FHSA assets at the time it loses its FHSA status as taxable income, potentially leading to tax implications.

For those who rent their homes, an FHSA may still be attractive since it allows them to qualify as a first-time homebuyer and accumulate savings on a tax-deferred basis. Moreover, the possibility of transferring the funds to an RRSP or RRIF if they do not eventually buy a qualifying home adds to its appeal. Nevertheless, it's essential to consider individual financial circumstances and seek advice from a financial advisor to make the best decision regarding the FHSA.

What happens to my FHSA at the time of Death of the Account Holder?

Upon the death of the FHSA holder, the fate of the FHSA depends on who is designated as the successor account holder and the eligibility of the successor to hold the FHSA. Here's what happens: Spouse as the Successor Account Holder: Similar to Tax-Free Savings Accounts (TFSAs), an individual may designate their spouse as the successor account holder for the FHSA. If the surviving spouse is named as the successor holder and meets the FHSA eligibility criteria, they will become the new FHSA holder immediately upon the original holder's death.

This transfer will not affect the spouse's own FHSA contribution limits. Treatment of Overcontribution: If the deceased FHSA holder had an overcontribution in their account immediately before death, the successor holder (i.e., the spouse) may be treated as having made a FHSA contribution at the beginning of the month following the death. The deemed contribution amount is the value of the overcontribution, but it will be reduced by the fair market value of FHSA assets that do not remain in the spouse's FHSA.

This deemed contribution may reduce the spouse's FHSA contribution room or potentially result in their own overcontribution situation, depending on the circumstances. Alternative Options for Non-Spouse Beneficiaries: If the FHSA beneficiary is not the deceased account holder's spouse, the funds will need to be withdrawn and paid to the beneficiary. In this case, the payment will be taxable to the beneficiary.

Taxation and Withholding: Unlike RRSPs or RRIFs, where the value of the plan is usually included as income in the account holder's final tax return, the payment of the FHSA balance to beneficiaries will be taxable income to the respective beneficiaries. If the plan proceeds are paid to the deceased's estate and the surviving spouse is an estate beneficiary, the estate can pay the plan proceeds to the spouse, and with a joint designation, the spouse will be treated as if they received the payment directly. This may allow for a transfer to the spouse's FHSA, RRSP, or RRIF, with taxation based on the spouse's income.

Deemed Income Inclusion: If an FHSA is not closed by its cessation date (usually the end of the year following the FHSA holder's death), each beneficiary or estate, if there are no named beneficiaries, will have a deemed income inclusion equal to the fair market value of all FHSA assets immediately before the cessation of FHSA status. This amount will not be included in the deceased holder's terminal tax return. It's important to note that the rules and implications regarding FHSA and beneficiary designations may vary, so it is advisable to seek guidance from a financial advisor or tax professional to understand the specific implications based on individual circumstances.

Regarding emigration from Canada:

Continued Contributions: After emigrating from Canada, you can continue contributing to your existing FHSA. However, as a non-resident, you cannot make a qualifying withdrawal from the FHSA. To be eligible for a withdrawal, an individual must be a resident of Canada at the time of withdrawal and up to the time a qualifying home is bought or built. Withdrawals by non-residents would be subject to withholding tax.

For new immigrants to Canada:

Opening an FHSA: Once you become a Canadian resident, you can open an FHSA if you meet the eligibility criteria. To determine if you qualify as a first-time home buyer, you need to consider any foreign home you owned that would be considered a qualifying property if it were located in Canada. You cannot open an FHSA in a year that you owned such a home or in the four previous years.

For U.S. citizens:

Tax Considerations: U.S. citizens are generally subject to tax on their worldwide income under U.S. tax rules. Income earned in Canadian registered accounts is generally taxed as it is earned, except for retirement plans like RRSPs and RRIFs, which qualify for relief under the Canada-U.S. income tax treaty. However, other Canadian registered accounts like TFSAs and RESPs can create double tax problems and additional U.S. reporting requirements. FHSA accounts could potentially create similar issues for U.S. citizens, so seeking specific advice before opening an FHSA is essential. As tax laws and regulations can be complex and subject to change, individuals should consult with a financial advisor or tax professional to understand their specific situation and make informed decisions accordingly.

In the case of a marital breakdown:

Transfer of Funds: On the breakdown of a marriage or common-law partnership, an amount may be transferred directly from the FHSA of one spouse to an FHSA, RRSP, or RRIF of the other spouse. These transfers do not restore any contribution room for the transferor and do not count against the contribution room of the transferee. However, if the transferor's spouse has overcontributed to their FHSA, the amount eligible for transfer will be reduced.

Can I transfer amounts from my RRSP to an FHSA?

You can transfer funds from an RRSP to an FHSA tax-free, up to the $40,000 lifetime and $8,000 annual contribution limits. These transfers would not restore your RRSP contribution room or generate a tax deduction. However, a subsequent qualifying withdrawal from the FHSA would be tax-free, essentially making it a tax-free RRSP withdrawal. To maximize RRSP room, it appears that making contributions to an FHSA is the preferred approach. If money is tight, however, the ability to use transfers from an RRSP will help you maximize your FHSA’s potential tax-free withdrawal.

Deciding between an FHSA, Home Buyers' Plan (HBP), or TFSA?

That depends on various factors, such as timing, potential savings, and individual financial goals.

Here are some considerations for each option:

FHSA: The FHSA allows first-time home buyers to save money for a home on a tax-deferred basis. Withdrawals for a qualifying home purchase are tax-free. It may make sense to contribute to an FHSA first since withdrawals are tax-free, and there's no requirement to repay the withdrawn amount.

Home Buyers' Plan (HBP): The HBP allows first-time home buyers to withdraw up to $35,000 from their RRSP to purchase a home without immediate tax consequences. However, the withdrawn amount must be repaid to the RRSP over 15 years. If there are insufficient funds in the RRSP for a full HBP withdrawal, contributing to an FHSA first may be a preferred option.

TFSA: While TFSAs are not specifically designed for first-time home savings, they offer tax-free growth and withdrawals. Contributions to a TFSA do not need to be repaid, and the withdrawn amount restores contribution room the following year. TFSAs can be used in conjunction with an FHSA to maximize tax-free savings. Prospective first-time home buyers should review the details of each plan to determine the best approach for their individual circumstances. It's also worth considering other housing-related incentives, such as the Multigenerational Home Renovation Tax Credit, First-Time Home Buyers' Tax Credit, and Home Accessibility Tax Credit.

It's important to note that as of the time of writing, the enabling legislation for FHSAs is still pending, and the rules may change. It's advisable to wait for the final rules to be enacted before making significant decisions on how to best save for a home purchase. Consulting with a financial advisor can also provide personalized guidance in choosing the most suitable approach.

Transferring from RRSP to FHSA?

As of my last update in September 2021, there was no provision for transferring funds from an RRSP (Registered Retirement Savings Plan) to an FHSA (First Home Savings Account) in Canada. RRSP and FHSA are distinct types of savings accounts with different purposes and regulations. RRSPs are designed primarily for retirement savings, allowing individuals to contribute a portion of their income on a tax-deferred basis. However, there are conditions and tax implications associated with withdrawing funds from an RRSP before retirement.

On the other hand, FHSAs are intended specifically for saving for a first home purchase and offer tax-deferred growth on contributions, along with the potential for tax-free withdrawals when used for a qualifying home purchase. Given that FHSAs and RRSPs serve different purposes and have different tax treatments, there is no mechanism in place to transfer funds directly from an RRSP to an FHSA. It's essential to consult with a financial advisor or tax professional for the most up-to-date information on financial products and their suitability for individual financial goals. As regulations and policies may change, always rely on the latest information when making financial decisions.

Oct. 15, 2021

Could housing prices come crashing down?

RBC has given regulators a worst-case scenario of prices plunging 30 per cent. How likely is that?

Royal Bank of Canada’s regulatory filings for the second quarter of 2021 contain most of what you’d expect, including several best-case/worst-case scenarios that help the banking giant illustrate how much risk the company is exposed to.

It can make for pretty bland reading, but there’s usually a hint of spice when it comes to projecting the worst possible outcome for real estate. And RBC hasn’t disappointed in that area — by saying home prices in Canada could fall by a massive 30%, under certain conditions.

But what are the chances of that happening? Put another way, it’s a question on the minds of most housing market watchers: Can real estate prices in Canada fall as fast as they’ve been rising?

Banks like RBC base their national housing price projections partly on macroeconomic indicators like employment, consumer spending and economic growth. So for RBC’s worst case to play out, Canada would have to return to the economic turbulence seen in the first few months of the pandemic, with a colossal rise in unemployment, a prolonged recession and plummeting growth.

In the housing market nuclear winter that RBC laid out, a home in Canada priced at $713,500 in March 2021 would be valued at $502,304 by June of next year.

A sudden drop to that extent — 29.6% — would be catastrophic for any recent homebuyers who were able to cobble together only a minimum down payment of 5%. Even new owners who put 20% down would find themselves short on equity, and if they felt pressure to sell after a price collapse, they’d have to do it at a loss.

But RBC’s worst-that-could-happen situation involves the wheels coming off the economy in April 2021. We’re already into June, and things are looking up. At least one COVID-19 vaccination has been shot into the arms of more than 23 million Canadians, and lockdown procedures are finally being lifted — though very slowly — in Ontario, the country’s largest economy. Even RBC analysts are upbeat.

RBC Global Asset Management chief economist Eric Lascelles recently predicted that Canada will “enjoy a profound economic recovery.” Lascelles had little negative to say about the housing market.

Looking at the market’s potential for 2021, including the continued impact of low mortgage rates , Lascelles said Canada can look forward to “a housing market that’s likely to be a little bit less hot, but probably not one that’s going to be correcting or anything quite like that.”

To be fair, RBC isn’t the only institution that painted a gloomy and unlikely worst-case scenario for housing. One from Bank of Montreal saw real estate prices falling by 28.7% between March 2021 and December 2022. Canada Mortgage and Housing Corporation’s nightmare situation involved home prices dropping 50%, and unemployment reaching a peak of 25%.

RBC’s filing documents also include base-case and best-case scenarios. In the former, the average home price could hit $871,417 by April 2026. In the latter, it could reach more than $1.2 million.

It hurts to say this, first-time homebuyers, but those outcomes are far more likely than RBC’s doomsday outlook. The base case would require annual average price growth of about 4.4% over the next five years. That’s pretty much a given. The best-case scenario relies on average growth of approximately 14.4% per year.

That’s hardly out of the question. The national average selling price in April was 41.9% higher than a year earlier, according to the Canadian Real Estate Association.

Reasons to bet against a Canadian housing crash

Even with home values heading into uncharted territory at a time of global economic misery, there are several reasons the housing market is unlikely to falter:

  • Immigration. The Canadian government will be welcoming 400,000 newcomers to the country in 2021, 2022 and 2023. That’s 1.2 million people who will be putting pressure on the housing market, either as buyers or renters. Sellers will have no shortage of new families to sell to, and investors who saw their rental income crushed by the pandemic will once again be able ro raise rents.

  • Low mortgage rates. As the economy continues recovering, mortgage rates will inevitably start rising. But with many lenders still offering variable rates below 2%, Canadians will find entering the housing market inviting — from a mortgage perspective, at least — for quite some time.

  • Unquenched demand. Even with the new stress test rules in place, there are still more buyers than there are properties for sale. Each time a home sells after receiving bids from 15 optimistic house hunters, that means 14 bidders will still be in need of a house once the dust settles.

  • Rigorous underwriting. Lenders put Canadian homebuyers’ finances under an electron microscope before being approved for their mortgages. Their credit scores are evaluated, their incomes are verified and their debt-to-income ratios are carefully measured. In Canada, legitimate lenders do not give mortgages to people who can’t afford them.

Put those factors together and it becomes very difficult to imagine a situation where homeowners will ever be forced to sell their homes at a significant loss, en masse and simultaneously — the hallmarks of a housing crash.

If some unforeseen economic calamity were to take place, one that slaughters the incomes of both homeowners and renters, you might see sellers desperately racing to get out of their mortgages. Until then, though, the real worst-case scenario Canadian homebuyers have to worry about is actually RBC’s best — one where most properties in the country are worth over $1 million.

This article was created by Wise Publishing, Inc., which provides clear, trustworthy information people can use to take control of their finances. Millions of readers throughout North America have come to count on the Toronto-based company to help them save money, find the best bank accounts, get the best mortgage rates and navigate many other financial matters.

Please feel free to comment.......

Oct. 17, 2018

Buying Foreclosure Properties in Victoria BC

Bank Foreclosure

 

Buying foreclosure properties is not all that it's cracked up to be.  Buyers are often under the mistaken impression financially distressed Real Estate can be purchased at prices significantly below fair market value. While that may be the case in the US where foreclosure laws are substantially different than in Canada, here you can typically expect to pay no less than 5% below market value, due mainly to the additional protections afforded to property owners under foreclosure laws in Canada.  

The process of foreclosure begins with the lender filing a "petition for foreclosure" asking the courts for a hearing to commence the foreclosure process in order to dispose of the property put up as security.  The owner of the property, or borrower in default, has 21 days to respond to the petition after receiving the notice of the hearing required to be provided to them by the petitioner, after which a hearing will scheduled for the issuance of an "order NISI". This court order typically gives the owner about 6 month to either refinance or sell their property - the redemption period. As of recently, it also often simultaneously provides for an order for conduct of sale to be granted, which gives the bank the right to list the property for sale at a certain price, and at a given rate of commission, if the respondent borrower fails to solve the issue within the redemption period. 

In many cases the respondent (property owner) is not in a position to obtain financing elsewhere during the redemption period due to the credit and insolvency issues that have put them into foreclosure in the first place; often leaving the disposition of their property as their only option. The owner may also not have enough equity in their property to sell it either, with all the accumulated arrears, Real Estate commissions, and legal fees incurred by the bank, which are all the responsibility of the owner, in which case the process move to the next stage, the court ordered sale. 

Under a court ordered sale, or conduct order, the bank selects the Realtor and controls the the marketing process, while the owner is typically permitted to remain in the property providing they do not interfere with the marketing process; otherwise the bank may also petition the courts for an order for possession, forcing the owner to also move out. 

It is at this stage that the property enters the market as a foreclosure or distressed sale. Owners tend to be co-operative here in hopes of minimizing any potential shortfall of capital after the discharge of the mortgage liability, principle, accrued interest, and fees at the time of completion, as they will still be responsible for this deficiency.  In some cases the owner knows the shortfall will be excessive and result in bankruptcy and insolvency.  In these cases the chances of an uncooperative owner will be greater.  

Signs of damage to the home, a deliberate mess left behind, or difficulties in scheduling viewing appointments are typical signs of an uncooperative owner that should be well noted by anyone considering acquiring such a property through a court process because the banks will typically insist an amendment be included (Schedule A) in any contract to acquire foreclosure property that provides, among many other things, that the buyer will take responsibility for the condition of the property on completion. This is done since the lender does not have much control over what the current owner does there while still in possession.  This deviation from the standard practice of holding the seller responsible for the condition of the property on completion often contributes to impacting the value of properties sold under foreclosure to the downside.

A contract to purchase a property under foreclosure is typically submitted to the lender in charge of selling the property.  It can contain conditions in favor of the buyer, will typically contain the aforementioned Schedule A, which should be studied carefully, and will also contain a condition in favor of the seller / lender, that the contract is subject to approval by the courts.  Except in rare instances, all buyer conditions must be removed before the lender will schedule a court hearing for approval of the contract. 

Once a hearing is scheduled the interested parties will be notified of of the court date and will appear before a judge to have the contract approved.   The judge may also invite other interested parties to make a competing offer at the time of the hearing, which is probably the most egregious aspect of the foreclosure process, and the primary reason for the price discount that can often be achieved when purchasing foreclosure properties - typically in the 5% range.  Lately, with the lack of inventory, and generally overheated market condition, this discount has begun to narrow and is in some cases eliminated entirely.  Bidding wars in court have become far more common.  

Once the sale has been approved by the judge issue an order transferring title to the buyer called a "vesting order". One important technicality of vesting orders that is often overlooked is that the property can only be transferred directly to the buyer named in this order at completion.  No assignments or secondary transfers are permissible.  It is therefore important to choose the entity that will eventually take possession of the property at the time of writing the offer.  I have seen foreclosure cases for commercial properties where this has become a serious issue.

Not all foreclosure properties are sold under this process, however.  Banks have the option of applying for "an order absolute", giving the banks complete possession of the property.  The banks are then free to sell the property to third parties without court approval.  An order absolute is typically granted when the value of the property is below the value of the recoverable debt, meaning that no equity will remain for the original owner and secondary or subsequent mortgage holders when the property is sold.  

A secondary mortgage holder may opt to pay out the primary mortgagee at this point to take an order absolute possession of the property themselves, if they believe the property value can be improved. Banks also typically avoid this option if they believe they can sue the borrower for the shortfall as their right to sue the owner for the difference between what is owed and what is achieved at sale, also known as deficiency, is lost under this process.  If the owner is also undergoing bankruptcy proceedings, and the chances of any recovery of the deficiency is small, the bank is more likely to proceed by way of an order absolute. 

Properties acquired by banks in this manner are typically sold at fair market value.  No discount applies because the court process and other associated risk burdens to the buyer are eliminated.  

A further category of foreclosure sale that fall into a category similar to an order absolute sale are sales by government mortgage insurance agencies like CMHC and Genworth and AIG.  These will take possession of the property under foreclosure from the petitioning financial institution when it becomes apparent that a deficiency will be incurred and the originally borrower has a mortgage insurance policy in place.  The government agency will pay the borrowers debt to the financial institution, take possession of the property, and market the property conventionally.  No discount applies in these instances to the buyer.  In fact, Realtors in charge of marketing these properties on behalf of mortgage insurance agencies are prohibited from making any reference to a foreclosure process, or distress sale, or to even mention the name of the mortgage insurer anywhere in the listing data, in order to avoid the impression that the property can be had below market value.  The only exception to this will be a reference in the title document.  

Buying foreclosure properties can be a stressful proposition that may not resolve in a discounted price.  Up front costs for property inspections, financing applications, appraisal fees, and other costs can be lost if a competing buyer steps forward, and the property may not be in the original condition on the possession date.  The pressure, risk, and time involved discourages many from going through this process, especially fist time buyers.   

  

 

Dec. 27, 2017

All About Bidding Wars and Competitions


Bidding War

 

Bidding wars for Real Estate have become an almost unavoidable reality in Victoria over the past few years, much to the chagrin of buyers and the delight sellers in what has become known as the strongest Real Estate market in the history of Victoria. 

It all started when Vancouver buyers brought their Asian currency export dollars into Victoria along with market dynamics that have been the norm in Vancouver for well over a decade.  Until 2014 a spread between the asking price of a home and a final sale price of more than $25,000 above was almost unheard of while spreads exceeding $200,000 were already the norm in Vancouver. 

Since 2015 bidding wars have almost become the norm in Victoria with the number of bidding wars with sale prices exceeding the asking price by more than $100,000 rising astronomically.  Even spreads of $200,000, $300,000 or even $400,000 have since been registered in Victoria. 

Your first line of offense when entering this stressful arena is your buyer’s agent.  You want to select someone not too timid who is well versed in the complex dynamics of bidding war politics, and with plenty of industry experience and a track record of winning multiple offer competitions.  Ask for a bidding war transaction resume and a description of the tactics employed to win them.

Your buyer’s agent will research and analyze recent sales of comparable properties to determine what your property of interest is likely to sell for.  He will take current and most recent market activity into account.  In a rising market your home may sell for 5% more than an identical property sold for a month ago.  An experience and competent buyer’s agent will have a cutting-edge awareness of current market condition and provide you with accurate valuation advise.

The next step will be to gauge the level of interest by the market in the competition property.  Your agent will find out how many times a day the property has been shown by other Realtors or independent clients, if anyone has ordered a building inspection report, or in the case of strata properties, if anyone has requested to receive copies of the strata documentation package that will including things like things like strata bylaws, rules, financial statement, depreciation reports, minutes of meetings, etc. 

Building inspection orders and strata information requests are an indication of very serious interest by other competing parties, and a sign that competing parties are planning on presenting an unconditional offer.  In today’s market the wining bid will, in most cases, be an unconditional offer, so any research respecting the suitability of the property will be done in advance by serious prospects.

For this reason, the agent representing the seller should have a complete set of strata documents available for all prospective bidders before commencing the marketing process.  I typically also advise my sellers to order and make available to prospective buyers, a building inspection report from a reputable inspector in conjunction to insure a maximum number of bids. 

Many buyers are reluctant to incur the expense associated with ordering such a report in a competitive situation for obvious reasons.   When the seller order this report the related costs are only incurred once.   

Sellers typically achieve optimal results by ordering such a report; the concern by some that this could lead to the seller being liable for defects not discovered in the report are, in my opinion, completely unfounded.

As Realtors we are obligated to recommend a building inspection report for every purchase, or risk being liable for any defects found after the fact, unless we have our clients sign a waiver that they are prepared to take the risk notwithstanding our advice.  The truth of the matter is that these reports are really a bit overrated due to the costs to rectify the defects uncovered by them rarely exceeding the price of the report.  

This holds especially true for strata property where any costs associated with maintenance and repair of the exterior and building envelope is the responsibility of the strata and where minutes of meetings, the Depreciation Report and various other studies reveal much about the condition of the building.

Even in the single-family home category, newer homes hardly ever harbour any surprises with modern building code regulations and oversight and with seller disclosure requirement and latent defect legislative provisions.  Older homes should be examined more carefully, but a good Realtor can often tell if a building inspection report may be warranted or not. 

I’m told by building inspectors in Victoria that their business has dropped off dramatically in the past two years regardless of the increase in sales activity as a direct result of buyers forgoing them in bidding wars and offer competitions.  

As the offer deadline approaches your buyer’s agent will keep in constant contact with the seller’s representative to monitor the number of offers expected by the deadline, how many are expected to be unconditional, and to get as much information as possible about the competition.  It is surprising how much information can sometimes be gleaned from the seller’s agent by asking the right questions in a strategic and tactical manner about the other offers. 

Typically, it’s easy enough to find out if competing offers are unconditional, if they meet the seller’s preferred dates, and if they are above or below the asking price, etc., though some agents are very tight lipped about everything under the mistaken impression that they are obligated to maintain absolute secrecy. 

It is not illegal or unethical at all for the seller’s agent to reveal information about any offer to other parties, providing it is in their client’s best interest.    

The final offer should incorporate all the intelligence gathered on marketing process and it’s results, be unconditional if possible, bear a large non-refundable deposit, typically in the $20,00 to $50,000 range for properties under $500,000 and $50,000 to $100,000 if the asking price is greater, and incorporate the sellers preferred dates for possession and completion of the sale. 

The price is a factor of the competition you are facing as well as the most recent comparable sales data, and will most likely exceed your expectations, so be ready to pay a bit more than you initially expect. 

Your agent should investigate with the seller’s representative if a “referential offer” would be considered by the seller.   This is an offer where the price in your offer is relative to what your competition is offering that will contain the relevant clauses to reflect this, and provide that you will pay a fixed amount above the price of your highest competitor.   I have found this to be a highly effective strategy providing the premium above the nearest competing offer is large enough.  It should be at least $5000.00 to $10,000 for offers under $500,000 and $10,000 to $20,000 above as a general guideline. 

Agents and lawyers sometimes advise their seller clients against accepting such an offer citing litigation risk, but I believe this is unwarranted and rather a function of laziness on the part of seller representatives, as a properly structured, presented and managed referential offer can easily yield superior results for the seller in a bidding war without any risk of litigation whatsoever. 

Winning a multiple offer competition is both rewarding and exhilarating while being on the loosing side is not only extremely disappointing but also rather exhausting and discouraging and not something you want to go through multiple times.   For these reasons the right agent and the right tactics and strategies are ever so important to greatly improve your odds.   

Happy bidding.  

Aug. 16, 2017

What's Happening in Real Estate Victoria

Victoria Real Estate Market

Understanding the Victoria Real Estate Market.       

The key to understanding the current Real Estate market cycle is by a comparison of the dynamics that precipitated the previous one of the 2000 to 2007 period with the present.    

Lending standards, interest rates and mortgage underwriting criteria became most favorable to home buying shortly after the collapse of the 2001 tech bubble in an effort by governments and the banking industry to prevent the economy from sliding into a recession, by an expansion of the money supply through consumer and corporate borrowing.  Many other monetary expansion measures were implemented implemented also in hopes of preventing a recession or even depression level economic event that was sure to follow the correction in the stock market. 

Fractional reserve lending standards were eviscerated by clever new bank instruments like Collateralized Debt Obligations, (CDO's) and Credit Default Swaps (CDS's), and other credit derivatives that permitted banks to repeatedly sell loans to third parties in order to create new debt and turning existing debt into new cash reserves to circumvent the fractional reserve limitations that were designed to keep inflation in check, permitting them to cycle their reserves, virtually without limitations. 

The ensuing liquidity bubble then finally came to an end when consumer debt expansion had reached a saturation point whereby the origination of new debt could no longer keep pace with repayment of the gross aggregate existing private and public debt, causing a contraction in the M1 money supply and consequently a monetary recession.

The book Manias, Panics, and Crashes, by the late Charles Kindleberger, illustrates this concept in detail.

http://www.economist.com/node/1923462

Once this inflection point had been reached an exponential decline in M1 money supply was sure to follow causing critical liquidity shortages that quickly spread throughout the financial markets and general economy, and that would have no doubt culminated in a wide spread collapse of the global financial system had the US government and other governments and central banks around the world not intervened with a massive financial bailouts that are indirectly the cause of the current stock market and Real Estate bubbles. 

Bailout funds provided to investment banks, various other financial institutions and corporations around the world and other such mechanisms of the quantitative easing program, spear-headed by Ben Bernanke in 2008, then of the US federal Reserve, and Hank Paulson secretary of the treasury of the US government at the time, provided the necessary liquidity to subsidize the various failing investments around the world that were the result of the abuses of the fractional reserve lending system of the previous cycle by the banks originating these new and now failing debt instruments, which according to Marc Faber, publisher of the "Gloom, Boom & Doom Report, had a notional value, that is original value, of 1.3 Quadrillion in US dollars, or 1300 Trillion.  Quite a sum.

These new bailout funds were then immediately invested into the financial markets via stocks, commodities, government bonds where they could turn a profit until needed to subsidize the failing loans and derivative instruments on the books of these various institutions causing what became known as the "stealth bull market" that is still in play today.

These stock market gains soon found their way into the Real Estate sector where they quickly lead to dramatic price escalations with investors looking to diversity funds away from the increasingly diminishing  dividend returns of stock market investments and risks associated with artificially inflated commodity investments like the risk demonstrated by the recent collapse of the energy sector.   Of even greater significance is the role China plays in all this as a prime beneficiary of quantitative easement with it's vast holdings of failing credit derivative instruments from the reinvestment of a vast foreign exchange surplus connected with consumer debt explosion bubble of the previous decade. 

These funds are being funneled into the hands of a small upper class in China who have been exporting their holdings in vast quantities into safe Western jurisdictions where they are being invested into commercial and residential Real Estate. 

As a result all major North America cities have experienced Real Estate price escalations due to safe haven migration of funds from China; a trend that is now beginning to slow in consequence of changes to Chinese currency export regulations with effects seen in Vancouver and elsewhere in the form of a slowing Real Estate market long before the Property Transfer surcharge on foreign investment came into effect in that jurisdiction. 

To some extent major Real Estate markets in North America are now tied to the continued strength of the Chinese economy and ever tightening Chinese regulations on currency exports. 

In addition to all this excess liquidity we continue to see an influx of retirement and lifestyle based migration into Victoria from the rest of Canada, and more recently, following the election of Donald Trump, a growing trend of US citizens looking to escape their new political reality by coming to Canada.  (Trump Refugees).  

Typically, only those Americans with existing status in Canada who actually buy Real Estate here with the rest typically giving up when they find out about Canadian tax laws on foreign ownership of Real Estate, or when they discover how difficult it is immigrate from the US into Canada, and that they can otherwise only stay for six months at a time. 

History has shown that the Victoria Real Estate market is generally impacted negatively by only two things; either a dramatic rise in interest rates, or a significant correction in the stock market.  Additionally, I think it’s fair to assume that a collapse of the Chinese economy or further currency export limitations by the Chinese government would also have a large negative impact on Victoria Real Estate values. 

In the immediate term the two recent smaller rises in the prime rate, change to mortgage underwriting criteria, as well as the change in regional government to the NDP, recent provincial budget changes impacting Real Estate, and the uncertainties in US politics and geopolitical instabilities appear to have put a damper on our local market.  Prices are not coming down by any stretch of the imagination but they appear to have stopped going up, at least for now. 

We are also seeing a shift in interest from single family homes into the condo sector in response to the impact of these changes to housing affordability, a trend that is expected to continue.  

Victoria has always been a desirable destination with a stable Real Estate market and the most diverse economy in the country, so until some geopolitical event or monetary policy inflection points brings about another stock market crash or dramatic rise in interest rates we can expect continued stability in the housing market.

December 2017.