What? Commodity prices can influence home values? No way!

Here's an interesting great article from Scott Barlow of The Globe and Mail's Advisor on the correlation between commodity prices and real estate values. I've never heard of this before, but I think it's a unique "global" perspective. What Scott doesn't reference is the key factors that influence the real estate cycle such as demographic (net migration, vacancy rate, employment, new construction, local supply and demand), financial (incomes, affordability, finance availability) and emotional. These would be more relevant for local real estate values.

 

 

Commodities' fall threatens homeowners, too

Wednesday, April 17, 2013
SCOTT BARLOW

sbarlow@globeandmail.com
Even if you don't own gold bullion or mining shares, the recent meltdown in commodity prices may affect your personal bottom line. The reason: Canadian home prices seem to echo moves in global commodity prices.

Granted, the relationship is far from perfect. But consider this: Canada is one of only a handful of developed nations where housing prices remain well above 2007 levels. While real estate prices fell in the U.S., Spain, Britain, Ireland and Japan, the domestic market has escaped the carnage and is actually up by 20 per cent since the financial crisis.

Another market where home prices are still showing double-digit gains since 2007 is Australia, also a resource-rich nation. Is it mere coincidence that two countries to so spectacularly avoid a housing bust are both beneficiaries of the commodity boom? That seems unlikely. And the relationship raises the question of what comes next, now that commodity prices have come off the boil.
The accompanying chart shows that Canadian home prices have followed a similar path as world commodity values over the past few years, as measured by the S&P/GSCI index, which tracks global commodity prices. The correlation between homes and commodities is 0.53, where 1 would mean a perfect one-to-one relationship and 0 would mean no relationship at all.
A 0.53 correlation suggests the two markets are somewhat linked - a point driven home by the chart, where you can see periods where the two moved closely together and other times when they diverged.

Both Canada and Australia were spared from the worst effects of the financial crisis by China's enormous economic stimulus plan in 2009 and 2010. As China's infrastructure boom accelerated, the increased demand for commodities allowed Australian iron ore miners and Canadian copper producers to restore profitability long before the average U.S. corporation. During this period,

Canadian home prices moved roughly in line with commodity prices.
But the relationship broke down in 2010 as growth in home prices slowed while commodity prices spiked higher. The U.S. Federal reserve was largely to blame for the gap. Commodities climbed after the Fed announced a second round of quantitative easing and investors positioned themselves for a weakening U.S. dollar and stronger U.S economic growth. When the Fed's strategy failed to produce the desired results, commodity prices fell back.

Home prices and commodity prices now seem to be moving in the same direction again and that should give pause to people who think that the only threat to the domestic real estate market is higher interest rates.

As departing Bank of Canada Governor Mark Carney is fond of reminding us, Canadians' household
debt has reached precarious levels that threaten future economic growth. In 2007, the debt-to-disposable-income ratio for U.S. consumers peaked at 134 per cent. The average Canadian household now owes 160 per cent of its disposable income.
Interest rates are low enough that Canadians can carry large amounts of debt. But a sustained slide in commodity prices could ignite a housing correction if unemployment rises, paycheques shrink and

Canadians find it harder to manage their large debt loads.
A commodity bear market would be felt throughout the Canadian economy. Oil and gas companies would cut back on construction, reducing the need for workers. Mines would reduce shifts. Banks that depend on investment banking and trading revenues would see slower earnings growth. So would suppliers to the oil patch and heavy equipment dealers.

Canadians should be alert to the dangers posed by the commodity slide. With global growth slowing, there has rarely been a better time to start chipping away at personal debt.

Hey who sold my house...I didn't give authorization for that!

As a part of a local real estate T.V. show that I'm a part of called "Open House" (to air later this year on Rogers TV), I had the opportunity to meet a real pro on mortgage fraud detection:  Rob Kirby, V.P. of loss mitigation of Genworth Canada. What I learned today is that everyone who owns a house may be at risk for fraud as it relates to real estate.

Although the incidence of mortgage fraud is low in Canada, things like falsifying documents to obtain mortgage loans and also someone trying to sell your house from under you can happen. And it's not just banks who are doing it, mortgage brokers can be implicated as well.  Sometimes even organized crime is involved where they pay people to obtain an identity and then get a mortgage for money laundering purposes.

I've seen it even in my own business, when I get a desperate client who wants to buy a home at any cost. False employment letters and falsifying documentation on the source of a down payment sometimes comes from people I would rarely suspect. If these individuals end up getting a mortgage, they often find themselves strapped in a year because they no longer can pay the monthly mortgage payments and end up defaulting on the loan.

Here are some good resources that I would recommend to help you avoid mortgage and identity theft and fraud.

http://www.genworth.ca/homeownership/c_on-your-terms/resources_fraud.asp

But I've been pre-approved for a mortgage...what's the problem now?

In the past week, I've worked with three separate clients whose expectations where skewed regarding the mortgage financing they could get. Now I'm the first to admit, I can get tough mortgages approved. But getting a borrower approved with credit or income issues at the best discounted mortgage rate is unlikely in this mortgage market no matter how skilled the mortgage professional is.

BUT BEWARE! There are almost as many mortgage brokers out there as there are real estate agents.  The barriers to entry for mortgage brokers/agents is very low, which means that there are more unskilled brokers/agents out there then there are skilled ones.  That's why it's important when you call a mortgage professional, ensure they have the experience that can help you get qualified for a mortgage.

ANOTHER BEWARE! Ensure the mortgage broker is being realistic with you, not just telling you what you want to hear.  I've had clients come to me from other mortgage professionals or banks that where pre-approved for a mortgage, and they've put an offer on a home, now they can't qualify for a mortgage. The main reason this happens is that the borrowers income or their credit history wasn't qualified properly.

Here's a short list of the documents that you'll need to provide to confirm your income.  If you haven't been asked for these documents, you can assume that that your mortgage pre-approval isn't legitimate:

If you are an employee with a salary (this is the easiest):
- employment letter
- 2 pay stubs
- your 2011 Notice of Assessment (NOA) from Revenue Canada (to confirm that you don't have any outstanding income taxes)

If you are an hourly employee:
- T4 from 2012
- employment letter
- 2 years of Notice of Assessments from Revenue Canada
* Most hourly employees work overtime, with 2 years of the NOA's we can use an average income that's above your base hourly pay. This can help you qualify for more mortgage money.

If you are self-employed:
- T1 Generals for 2011 or 2012
- NOA's from 2011 and 2010
- articles of incorporation or a business license
*Stay-tuned for another article on qualifying for a mortgage when you're self-employed. Please be aware there are still good mortgage programs out there for individuals who declare low incomes because of tax write-offs when you are self-employed.

Call or e-mail me if you'd like to discuss your own personal mortgage situation or have had difficulty qualifying for a mortgage. I've helped just recently who have been turned down by their own bank.

Sandra
tel: 519-763-3900 ext. 1001
e-mail: lastovic.s@mortgagecentre.com

YIKES...you need to remove your financing condition in two days!

I've recently noticed a trend (especially in Guelph, Ontario, but it may be applicable to your own real estate market) where home buyers are either remove the conditions of financing or need to turn around their financing in only a couple of days.  Although we are in a balanced market in the area, nice homes that are priced correctly sometimes have multiple offers and realtors are advising buyers to remove the financing condition to make their offer "stronger".

Even if the borrower has been pre-approved for the mortgage, getting mortgage financing can still be an issue for buyers as the qualifications for mortgage lending have become more stringent. Borrowers who where once able to qualify (event six months ago) may find themselves in a position where they cannot now get a mortgage.

Here are some recommendations if you want to remove the financing condition from an offer:

1. Speak to a mortgage profession who is confident in explaining the risks. If they cannot clearly explain the risks find someone who can, because they do not understand mortgage-lending as thoroughly as they should. Do you really want to work with a banker/broker who doesn't know what they are doing?

2. If you are selling and buying a home, know exactly how much equity you have available when you sell. I find most people assume that they have more equity than they really do because they haven't accounted for all the costs and debts that need to be paid out. Your mortgage professional should review in detail the numbers with you.

3. If you are putting less than 20% as a down payment, you will likely need to obtain default insurance on the mortgage (sometimes referred to as "CMHC"). What I've found is that in cases where the mortgage financing becomes an issue, the borrower cannot get approved through the requirements of the default insurance provider.  The requirements are clearly laid out so be sure your mortgage professional knows them.  You can also get them at CMHC's web site.

It's Friday....should you keep working?

Okay, it's Friday and I haven't posted anything on my blog in two weeks...why? Here are some of my excuses:

- it's the middle of February and I'm starting to really dislike the cold weather (what has that got to do with posting on my blog?)

- I've been swamped with my mortgage business...it sure is busy around here (but Louis is doing all the paperwork...I just need to keep focusing on new clients!)

Forget the excuses...here are a few comments that I'd like to share from some of my clients...these are real "Success Stories"!

From Trevor Grieb (Guelph, Ontario):

My wife and I were Canadian citizens but just immigrated back to Canada from overseas.  We wanted buy our first home but where unsure of the process or even if where eligible to buy a home. I came to see Sandra on the recommendation of my realtor. Sandra was kind and patient, but also flexible. She worked with me to help guide me on the proper documentation required so that we were able to buy our first home in Canada: a home that was suitable long-term for our family.  She was also able to negotiate a great mortgage rate.

From Laurie Lamontagne (Rockwood, Ontario):

 

I first contacted Sandra on the advice of my realtor. We were looking to move to a bigger home because our family was outgrowing our old house.  However, we had debt that was making it difficult to even consider moving up into a larger home.  Sandra helped us consolidate our debt and get us back on track, while lowering our monthly payment.  The interest rate was great and the advice was honest.  After a year, we found the ideal home for us and we called Sandra again to help us make the move to our new house.  We would recommend Sandra to anyone.

From Angela Lauryssen (Hillsborough, Ontario):

I have had good and not-so-good experiences owning rental properties.  Because Sandra owns rental properties, I can ask for her ideas regarding different situations I encounter with tenants.  Part of my long-range retirement plan is rental property ownership. I can trust Sandra to give good and honest advice.  I’ve also contacted Sandra on several occasions just to get her opinion on interest rates and if I should be locking in my variable rate mortgages. I would recommend Sandra to anyone who owns rental properties or is thinking about buying one.

Guelph residential properties will continue to gain value, Guelph Real Estate conference hears

Thanks to Joanne Shuttleworth, Guelph Mercury Staff,  for covering The Guelph Real Estate Pulse Conference, on January 29, 2012...great summary on what's happening in the local real estate market in Guelph!


GUELPH — House prices in Guelph will continue to rise, Chris Bisson told a room full of real estate agents, mortgage brokers, real estate lawyers and clients at the Guelph Real Estate Pulse Conference this week.
“Homes in Guelph have always had good resale value and that’s not going to change any time soon,” said Bisson, president of The Mortgage Centre and organizer of the Tuesday evening conference.
Bisson also said over the last 45 years, homes in Guelph have consistently increased in value by almost seven per cent a year. He said big price swings in Toronto and Vancouver skew all the averages and have lead some analysts to conclude Guelph’s record is a “bubble.”
“Good things happen in Guelph,” Bisson said. “That’s why that (annual price growth) number is not outrageous.”
In his address Tuesday, Bisson also predicted “interest rates will be the same in 2014 for variable and fixed.”
Inflation drives interest rates, Bisson said, as he gave a rudimentary Global Economics 101 primer to explain why there’s such a rosy outlook here even though other countries continue to fight high inflation and low job recovery after the recession of 2008.
China’s economy is booming, for example, and while rapid growth often drives inflation upwards, China’s growth is coming from other countries, Bisson said. While devastating to those impacted economies — Mexico is particularly hard hit by China’s growth — the net effect for the global economy is unchanged.
Bisson said the United States — another global economic game-changer — is recovering from the recession because it invested in infrastructure when the dollar was strong.
“As a result, they are more productive and are seeing growth at two or three per cent. We can’t forget that seven million people lost their jobs in the U.S. It will take a long time for the country to get back to the 6.1 per cent unemployment rate. But it’s steady,” he said.
“Compare that to Europe, where unemployment continues to rise,” he said.
The price of oil also affects inflation, but oil is at $115 a barrel, which is the same price as 2008 before the recession. For these reasons, Bisson predicted mortgage rates would remain at three per cent for a five-year fixed.
Lloyd Longfield, president of the Guelph Chamber of Commerce, and Guelph Mayor Karen Farbridge also spoke at the event Tuesday — about the city’s economic outlook and growth plans as they relate to real estate.
Farbridge said the Places to Grow legislation has caused the city to re-examine its growth strategy. As a result, it has updated its official plan, downtown secondary plan, and transit hub.
Four commercial nodes in the north, south, east and west will anchor commerce in residential subdivisions with intensification along the key corridors.
She said development of the site of the Guelph Correctional Facility on York Road, now referred to as the Guelph Innovation District, will have a huge impact on the future of Guelph. The property is about 1,000 acres (436 hectares) which is larger than the University of Guelph campus’s 817 acres (330 hectares).
“You can see the size of it,” she said pointing to a map of the city. “It will be a key part of our future.”
Longfield said the city’s growth plan will add 55,000 more people and 31,000 more jobs.
“Our job at the Chamber is to position ourselves to make that happen,” he said.
Innovation Guelph, an offshoot of the Chamber of Commerce, is helping local businesses expand their products and markets.
Longfield said Guelph is also gaining a reputation as being a centre for water technology and solar technology, and has an arts centre.
“We’re lucky in Guelph. Now, we have to get this all working for us.”
jshuttleworth@guelphmercury.com

Financing student rentals: lenders see them as “the plague” of properties

An area of mortgage expertise I focus on is financing and refinancing rental properties. As a rental property owner myself, most clients appreciate the first-hand knowledge on the pros and cons of owning real estate as an investment.  I have made some great decisions with real estate and also some bad ones. 

Student rentals are popular in Guelph since it’s a university town. But they’re becoming more challenging to get good mortgage financing on because of the perceived risk lenders have. As a mortgage broker, we have access to many sources of financing. I’m finding that most mortgage-lenders are not offering competitive mortgage financing on student rentals.

Here are some things that you need to be aware of when buying a student rental or refinancing it to access the equity for future investments:

• In most cases the finance company will approve the mortgage based on the borrower qualifications. Where I’ve seen problems arise is through the appraisal of the property.  Lenders are now conditioning appraisals on almost all conventional mortgage loans.  Although you may have been pre-approved or approved for the mortgage loan, the student rental property will be an issue with most traditional mortgage lenders.  If you’re buying a new student rental be sure to have the appraisal completed before the financing condition is up.  This can save you a lot of last minute problems on the closing day.

• For those mortgage lenders who will finance a student rental, you may be required to put up to 35% as a down payment versus 20% which is typical on a regular residential rental property.

• If you son or daughter will be living in the property while they are going to school, these properties are viewed differently than a student rental property purely for investment purposes. Your mortgage professional should be able to give you advise you on how to structure the mortgage loan to benefit you financially. Also seek the advice of an accountant to discuss the capital gains implications once you sell the property.

I’ve rented to students and I find most are respectful of the property and make good tenants.  As an investor, student rentals typically have good cash flow. The rent is traditionally charged per student per month and in Guelph the rent per month per student is about $500.

When you buy a student rental ensure you work with a mortgage professional that has experience financing them and can take you through the process so that you get a mortgage approval, with a competitively priced mortgage.

If you’d like to discuss your own mortgage situation, I would welcome your call or e-mail! Please contact me at: 

-          tel: 519-763-3900 ext.1001; or,

-          via e-mail at Lastovic.s@mortgagecentre.com