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Should Real Estate Investors Fear the New Mortgage Rules?

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In this episode, Andrew la Fleur shares his own thoughts on what has happened with the new mortgage rule changes in Canada and what it means for the market and real estate investors.

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Automated: Welcome to the True Condos Podcast with Andrew Le Fleur, the planks to get the truth on the Toronto condo market, and condo investing in Toronto.
Speaker 2: Hi, and welcome back to the show. We’re going to talk about the mortgage rule changes in Canada, in today’s episode. If you’ve been following the podcast, and if you’re a regular listener, you know I’ve done a couple of episodes all about the mortgage rule changes already. I’ve interviewed Jamie Johnston, broker record for Remax Condos Plus, and we talked about his take on the mortgage rule changes and how they might affect the market.
I also interviewed James Laird from CanWise and RateHub, huge mortgage brokerage group to talk about it and see what his take was on it, and I’ve had about a week or so to think about it. I wanted to give you some of my thoughts now, on the market.
First thing, first caveat though, for this whole conversation, is to really say that we don’t know all of the rules and exactly how they’re going to be implemented yet. We’re still waiting on details, on all the details from the government, which we don’t have. There is still some waiting and uncertainty around, what exactly all the rule changes actually are. A lot of this is, you know, take it all with a grain of salt, until we actually know what the exact new requirements are going to be across the board, we know most of it, but we don’t know all of it, and the nitty-gritty details. Consider that, of course, as we continue. We do have a pretty good idea of the direction of what is happening here, we have a pretty good sense at least of what the government is attempting to do, which of course is to slow down the real estate market in Canada, and in particular, in the top cities of Vancouver and Toronto. They’re really looking to ease things up.
Obviously, it does make sense on the surface, that they’d be looking to do that. When you look at prices in Vancouver and Toronto that have been increasing into the high double digits, over the past year or two, it certainly makes sense to want that not to continue. If it did continue that sort of growth, and this sort of explosion in prices, is certainly not a sustainable pattern. Especially, we as Canadians in our conservative ways, we don’t want to see that happening.
What do we know for sure? Well, we know that the government has greatly restricted the ability of people to borrow money, who are putting less than 20% down, which essentially for all intents and purposes, we’re talking about first time buyers, and for some second time buyers as well. Mostly, we’re talking about first time buyers. Essentially, what the government has done, they have in effect increased prices of all real estate by about 20% for all first time buyers. If you’re a first time buyer out there looking a month ago and you’re thinking I’m going to buy something at you know, 500,000, the price of that same piece of real estate in effect to you, that price has jumped up 20%. Your ability to purchase is down 20% from what it once was, a few weeks ago. You’re basically looking at everything is increased in price by 20% for you, a first time buyer, somebody with less than 20% down.
We also … What else has the government done? Well, they basically added, we talk about GTA specifically, they’ve added thousands of new renters to the market. Every year there is a turn over from, if you look at the whole pool of people in the city, there is a turnover from people who go from renting to owning, so new owners are created every year as first time buyers enter the marketplace, they cease to be renters, they become first time buyers.
On the other side, new renters are added to the marketplace every year, as they leave the nest, as they leave their parents houses, as they come-of-age. As new people just move and migrate into the city, both from within Canada and from outside of Canada, the vast majority of those people who are coming in as brand new are renting, so you have this continuous movement of people through the cycle from not in the market, to in the rental market, to in the ownership market.
Basically, the government has just added thousands of new renters, into the rental market. All these people who were going to be buying this year, are not able to buy anymore. Its simply, they simply cannot afford it. You have thousands and thousands, the exact number is really hard to measure, but you got thousands of new renters who are suddenly in the market for rentals, that were not there before.
Affordability has pushed them out of the ownership market, and they will stay in the rental market, as more people, of course, are coming into the city, as people are coming of age and moving out of their parents houses, as they always do, that rental pool will continue to grow as it does, but suddenly, all these people who were supposed to leave the rental pool and become owners, are now staying in the rental pool, so the government has done that, they’ve added thousands of renters.
Possibly, maybe, what the government has done, is they might’ve raised interest rates, mortgage rates, but they’ve done it in an indirect way. Based on what we know and what we’ve heard so far, it seems like the government in a sort of back-handed way, they’re looking for creative ways to raise interest rates, without raising interest rates, because the wider economy couldn’t handle it. It seems as though, they’ve in effect raised costs and prices for lenders to lend money, and so, the thinking from a lot of people in the industry, is mortgage rates could go up a little bit to accommodate for the decrease in their profitability, they’re going to pass those new costs along to the consumer, the person looking for the mortgage.
That is potentially what has happened. Again, we don’t know how that is all going to play exactly, but it looks like that they might, the government might have been looking to achieve something like that, which is kind of sneaky and kind of creative at the same time, if that is in fact what they’ve done. That’s what the government has done, that’s what we sort of know at this point.
What does all this mean? Well, it basically means the market is going to change. We know that now. There is no sense in fighting it or debating that. The market will definitely change from these new mortgage rules, exactly how the market is going to change, we don’t know, we’re going to have to wait it out and see who the market responds. Again, how many renters will stay renters, how many move up buyers will not move up, will just stay where they are. How many people will, who were refinancing their homes will no longer refinance their homes, and not invest that money back into the economy. A number … here’s so many moving parts with this will, its very difficult to know exactly how this is going to play out and how the market will change exactly. Whether it goes up, down, sideways, or somewhere else. We don’t know. The market is going to go through a period of change over the coming months.
What do we know about change? We know that people don’t like change, people are afraid of change, and we know that when people are afraid, they will often and always make bad decisions. If you’re acting out of a place of fear, you’re going to make a bad decision, as opposed to acting in a rational state.
We know that especially with real estate, real estate is a very irrational sort of market. People tend to buy real estate and sell real estate based on emotion, more than anything else. There are certainly a lot of emotions and fears circulating around for some segments of the market right now. That will play itself out, and we’ll have to see how that … What that actually looks like, we don’t know.
What’s my advice? What is my you know, if I’m speaking to you the condo investor, what do I have to say you? What I’d say is, don’t be afraid. Just be smart. You don’t want to act out of fear, you don’t want to act irrationally, you just want to acknowledge, yes, the market is going to change, but there is no need to fear that change, its just, its something that is happening, its something that is always happening in the market. The market is constantly changing. As the market changes, it creates new challenges and it creates new opportunities. In any market, there is always winners and losers. The winners tend to be the people who are remaining rational, when other people are acting irrational. Winners tend to be people who are not reacting out of fear, but are being smart, and making smart decisions. Not based on fearing the sheer fact that some change has happened.
Now, what this sort of looks like to me, is this is a sort of classic case of the rich getting richer. What I mean by that, is that the government is sort of rigging the deck against the people at the bottom end of the spectrum. The first time buyers, the people who don’t have a lot of money, are going to face this, these changes the hardest. Its going to be the hardest on them. Meanwhile, the people who are already entrenched in the market, real estate investors who own multiple properties, they potentially stand to benefit from these changes, more than anyone else. Assuming that they again, act rationally, and keep their heads on, and don’t do anything stupid or do anything out of fearful sort of state of thinking in the mind.
It looks to me like, with this massive influx of new renters, that rental rates in the next 12 months will probably go up even more than they’re going up right now, which is to say that they’re going to go up a lot. If you look at how rental rates have been increasing in the past year, which is higher than anytime in the last five years or so, those rental rates will probably increase even more. The pool of renters is a lot larger than it ever was.
Also, the demand for smaller condos, which if you’ve been following me of any length of time, you know that I am a big fan of studios, and one of my cardinal rules of thumb in investing, is to buy the smallest unit of a given type. Generally, you cannot go wrong with that type of unit. If you own smaller, cheaper units in smaller, cheaper real estate, the demand for that type of real estate is going to increase dramatically over the next year as well. This comes down to affordability, more and more people are priced out of the higher end of the market, but they still want to buy something, they still need to live somewhere.
The product that is on the lower end of the market will always benefit the most. If you’re buying something that is the most affordable, that you will always have the largest number of potential tenants, customers, for that sort of a product, if you’ve got the cheapest price. Basically, what the government has just done is given those people, like myself and many of my clients, who own these small units, a huge boost, a huge shot in the arm. A huge here is you know, you had 4 customers before looking, now you’ve got … Here is another 10, for this type of product, both on the rental side and on the purchasing the resale market.
There is going to be certainly, a new pressures perhaps, upward pressure on pricing on anything in the low end of the market. Its looking like once again, rich get richer sort of a scenario. If those who were already entrenched in the market, those who already control the assets will continue to benefit to a greater degree, while those who don’t control any assets will potentially continue, will actually be in a worse position. It probably wasn’t the governments intention to do that, but for every action, there is an equal and opposite reaction. Government is trying to plug one whole in the bucket, but they’re just forcing more water out of a whole somewhere else. That’ll be certainly something interesting to watch.
My main takeaways for you on this podcast, again, is just to not be afraid to not act out of fear, to keep your head on as a condo investor, to think rationally, and to, most importantly, understand that whenever there is change in the market, whatever that change is, up, down, left, right, sideways, whatever it is, when there is change, there is new opportunities that emerge from that change. If you are thinking strategically, and acting strategically, you will always benefit versus if you are basically doing what the masses do, which is act out of fear and act irrationally, you’re just going to be, you’re going to lose, and the market is going to chew you up and spit you out.
That’s … Hopefully good advice for this market or any market, whether you’re listening to this right now in October 2016, or whether you’re listening to this in you know, 10 years from now. Who knows what challenges or opportunities might be in that market at that time, but if you understand that basic concept of not acting out of fear and acting rationally, and taking advantage of changes in the market, rather than seeing it as a time to flee the market or do something irrational. Then, that’s where winners are made and that’s where you know, fortunes are often made in times like this. Maybe, this is a smaller scale sort of thing in the big picture, but if you apply that concept to across the board over a long period of time, that’s where fortunes are made.
Hopefully, you found this conversation useful and you got something good from it. If you did, you can go ahead and share this with somebody that you know, that would be great, much appreciated. Make sure you subscribe to the podcast, if you got an iPhone, or an iPad, or any IOS device, make sure you subscribe on iTunes. If you’re on Android, you can subscribe on Stitcher, that’s the best way to make sure you never miss an episode.
Okay, thank you very much for listening, until next time, talk to you soon.
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