What First Time Homebuyers Need to Know

Welcome back. I did a video on CMHC's predictions and it's a video that actually got quite a bit of traction, lots of engaging comments on it so thank you for that. Since that time CMHC has come out and now actually changed some of their rules around their mortgage insurance program that they offer to people. So if you're a first time home buyer, I think this is particularly important for you to tune into. But if you're not, and you're just interested in what is going on in the Canadian real estate market, or what the government is concerned about what's gonna go on in the Canadian real estate market, then I recommend that you stay tuned.

What is CMHC?

For those of you that don't know, CMHC is the Canadian Mortgage Housing Corporation and it's actually a crown Corporation. So a corporation owned by the government. And part of what they do is they offer lenders insurance on mortgages that are what they consider high ratio mortgages. So if you are somebody who can't afford to put more than 20% down on the purchase of the property, then you require mortgage insurance on that mortgage. So the minimum requirement is 5% and that's what most first time home buyers will put down is a 5% down payment, and then they'll have to pay some CMHC fees as well on top of that, and that CMHC fee is an insurance fee that the lender requires you to get.

Changes to the Rules

CMHC has now changed some of its stipulations on what that buyer is required to have and those stipulations relate to basically debt service ratios, which I'll explain in a minute and credit score as well. Originally their standard was that somebody had to have a minimum of a 600 credit score, they've now jumped that up to 680. What does that actually mean? It just is kind of them moving that goalpost a little bit higher, to show that somebody has a strong history of actually paying their debts back. So they're just making that a little bit tighter. The meat of their announcement actually came through their debt service ratio. So there's two different ratios that a lender looks at and CMHC looks at. One is called your gross debt service, and one is called your total debt service. Gross debt service includes the cost of your mortgage payment, the property taxes associated with that property, and the utilities associated with that property. They don't want those expenses to make up more than 39% of your gross annual income. They've now reduced that to 34%. Total debt service is taking all those same expenses plus any other debts that you have, whether it's student loans or car payments or credit card debt, they group 'em all together, they originally said that can't be more than 44% of your gross income, they've now reduced that down to 42%. They basically want to see Canadians carrying less of a debt load and so you have to fit with inside of those ratios in order to get approved for a mortgage, or at least get approved for a mortgage with CMHC insurance on it.

So how does that affect you?

Well if you put 5% down and you make about $60,000 a year that could decrease your actual borrowing power or purchasing power by about 10%. So the big question is, what is their goal behind changing these numbers? And some of it I'm gonna refer you back to the video that I shot last. And you can go back and look at some of the methodology and thoughts and concerns that CMHC has about where the Canadian housing market is going. So I'm gonna read a quote here from Evan Siddall on what he actually said, and this will give us a glimpse into what CMHC is thinking as it relates to some of these changes. So I think there's a few things that you actually need to look at in that sentence.

So what home buyers will they protect? Well they'll protect first time home buyers, or at least they say that they will. What's the other part? I think this is the biggest part of it. If you look at CMHC, they carry the insurance for so many of those high ratio mortgages, with their predictions that they made about seeing a potential of housing prices drop, the unemployment numbers that we're facing in the midst of this pandemic, as well as just a stunted economy because it was basically shut down. They look down the road and say, wow, we could potentially see an increase in the number of people that are going to default and eventually foreclose on their property. So they're looking at and saying, we need to protect the government and the taxpayers who are essentially writing the checks for this CMHC insurance. So one of the other efforts that evidently they're trying to make is to basically tamp down demand in the market. They've got this weird thing happening where they're making it harder to get approved but then they're dropping interest rates and they're saying, we want to curtail demand. Well, lowering interest rates is certainly not a way to do that, you know, rule changes like this are going to impact first time home buyers who want to get into home ownership.

Is it those first time home buyers that are driving demand?

I would argue at least in our market here in London and the surrounding community, it's folks like myself that are really driving demand. It's younger families, where they are generally higher income earners than they were 10 years ago when they bought their first home. Not to mention that they've still got a lot of runway ahead of them as far as being able to pay off mortgages. So they're the ones that are actually pushing, you know, those five, 600,000, $700,000 price point, which certainly isn't a first time home buyer price point. But what happens is it has this trickle-down effect where the buyers that can operate in that price range, they move down to the next price range, and they pursue heavily on that and it just moves down and down and down. And that's we've seen prices go up and we've seen it actually affect everybody from here all the way down, right to first time home buyers.

So if you want to curtail demand you need to go after the people that are the ones that, like myself, I certainly have more than 20% of equity in that so I don't have to worry about any of these CMHC rules. And so I've got quite a bit of capital to go and invest in another property if I want and continue to push that demand along, providing that the people in my demographic are actually still gainfully employed. And that's something that's more important to look at for driving demand than trying to impair first time home buyers.

There are options

All that being said, the other thing that I will highlight if you don't know is that CMHC is not the only company that actually insures mortgages, it's the only crown Corporation and it is the majority insurance holder here in Canada but there's also two other companies. There's Genworth, which is what I more commonly know as, but it's also MIC which I think is Mortgage Insurance Company is a short form for what it stands for, and there's Canada Guaranty. These are two private organizations that also insure mortgages and they have come out in the last day and said that they have no intentions to adjust their lending practices or the criteria to get a high ratio mortgage. So their criteria is less than what CMHC is, but I would keep that in mind if you are a first time home buyer that is looking, you need to know if your lender works with those two corporations to insure your mortgage.

And this is where I would really make the plug for you. If you're not working with a mortgage broker, then you should be. I think if you just walk into your typical bank, they're not gonna have all of these options for you the way that a mortgage broker would, times like this where the the goalposts are kind of changing it seems like almost weekly, it's important to have a strong real estate team working behind you all the way from your realtor, to your lawyer to your mortgage broker, and so on to make sure that you can actually get the house that you want to and do so in a responsible way.

Questions?

Real Estate Market Shutdown | LONDON, ON

Whether you’re a homeowner, in the market to buy or sell, a realtor, or just have an interest in the Real Estate Market, we’re all pretty much asking the same questions - what is going to happen to the market during this shutdown? Let’s take a look for London, ON.

Numbers for March

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If you look at these numbers, it's really just been a banner month, so to speak. The average sales price is up by over 10% compared to the same time last year. The number of sales is up almost by 7% again compared to the same time last year. If you just look at the stats, then everything looks like March was an amazing month, and you would almost not even know, that in the midst of it, the real estate market & the economy got shut down. Taking into consideration the last two weeks of March, they were really fractions of what they typically would be, but despite the shutdown it was still a very very strong month. In fact, it was the strongest March we've seen in the past 10 years with the exception of 2017.

The spring market was really off to a rocking start and then…

The brakes got hit. Hard. There are still houses that are still being actively listed and actively sold - for the number of houses that are being listed, we're seeing about two thirds of that in the number of sales. There's still very much activity going on in the market but it is probably about a third of what we would expect to see this time of year. In the area that I watch, typically there would be about 100 homes listed a day. Today, when I checked there was about 36 properties that have listed and 24 that had sold. You look at those numbers and you can see that there's still activity there.

Open Houses in Ontario: ILLEGAL

Open houses in Ontario have been deemed illegal at this point. If you do not need to move then I do not think you should be out there actively shopping, unless you are very comfortable with looking at houses online and buying a house, either virtually seeing it, or not seeing it at all. Most people still want to walk through a home before they purchase it, though.

There's lots of people that are putting their house search on hold. I've had clients who have bought a property, and now they're just waiting to close with the questions of "What's gonna happen to the value of my home when I close on it in a few weeks or a few months?" "Is it going to be worth the same amount of money?" And the reality is, I just don't know. And nobody really knows, at this point. The real estate market and the economy are not functioning, essentially. It's not even like we've hit a recession, it's like we've just stopped.

Are we going to see lower home prices in London?

I think we may. The properties that are listed today are not adjusting their prices - there's no reduction in price. They're still very much at full market value and I think there's still properties out there that are selling very quickly for very close to asking price. Whether we're going to continue to see that once things come back to normal, even if we don't and things slow down, then we will see a compression in prices. But, is it going to be huge? I don't think so. London is an affordable city to live in. It’s spent so much time catching up to all the other cities, and is very affordable for its size and for all the amenities that it offers.

Uncharted Territory

This is unique. It's very much uncharted territory and it's difficult to make predictions. Don't look to just the numbers. The numbers are good to see and it gives you a bit of an idea of what happened, but at the same time, there's a lot more nuance to it, especially in situations like this. The real estate market and the economy could be shut down for three months, it could be shut down for six months, we just don't know yet. My hope would be that when things start up again, that we really kick things back off. With this strong base in our economy that we have, with the government sector that fuels a lot of our employment, and the diversity of our economy here in London, I think there's a good chance that we could come out of this relatively strong compared to other cities.

Questions? Thoughts? Ask!

If you have questions about the real estate market as it relates to this COVID-19 situation or in general, then please do ask. Let me know in the comments or send me a message with the button below. I would be happy to answer. Stay safe, stay indoors, and only going out when you need to. Hopefully, we will all get to chat sooner rather than later.

Not Business as Usual: Real Estate in London, ON

I wanted to come back to you with a quick update on what's going on in the real estate market as it relates to the coronavirus and just some updates on the economy as well. So, recently I put a poll out on my Instagram account, that asked should realtors be working in the midst of this COVID-19 pandemic? And 73% of you said that we shouldn't and the rest of you were realtors…. Just kidding.

Realtors: An Essential Service

We've been deemed an essential service, that's been deemed by the Ontario government. Our governing body haven't explicitly told us to stop working, but they've certainly made it very, very clear that it is not business as usual. All face to face interaction should virtually not happen. They haven't come out and said it, but you shouldn't really be selling real estate at this point in time. It's more if you have clients that have already bought or sold and they are now waiting to close somewhere in the future. You need to help those clients.

Closing? Expect delays.

There's certainly gonna be situations where there's delayed closings, particularly as it relates to builders, as a lot of sub-trades have been deemed to be non-essential. Builders are now not gonna hit the timelines that they need to hit. There might be delays elsewhere as well, whether it's from a funding standpoint for people who have potentially lost jobs that are now in a situation where the bank is saying, if you're not employed, we are not going to fund this mortgage, you should ask for an extension on that. I've heard of a situation for a seller who is supposed to go into an old age home who actually couldn't, because they were not accepting anybody - nobody was going in or going out except for the absolute necessity. So, they had to delay their closing.

There's this whole ripple effect that we need to help clients through and it doesn't mean that we're supposed to be out there trying to actively sell real estate.

Relief Measures for Homeowners

So what I've been doing with a lot of my time is I've been trying to read a lot and watch a lot of videos and take part in webinars as well to just get my mind around what is going to happen here in the economy and what may happen in the real estate market. In my last post, I touched on this whole idea of the government trying to really support, whether it's through providing EI, whether it's putting pressure on the banks to offer us deferrals, which we've now seen the big six banks do, and we've also seen that trickle down to the smaller lenders as well.

And what I would add to that is this idea of deferral on your mortgage payment, it's awesome for those of you that actually need it. And the majority or a large portion of Canadians are going to need that program because they may not be able to pay their mortgage payments and we don't know how long this may go on, but if we look at other countries that are now starting to come out of it, I think it's easy to see that this could be a three month kind of hold on things where the economy is just kind of shut down and people aren't working.

So, deferring a mortgage may be something that is really, really necessary. With this six month deferral you are essentially kicking the can down the road and they're gonna charge you interest along the way. It's not free, you don't just get to say, “Yay, I don't get to pay my mortgage for six months.” In fact, there is a cost to it. For those people that can manage to pay their mortgages throughout this economic shutdown, you should do that, because it's going to cost you money otherwise.

Outside of that, what we've also seen is the government really push to support employers and all the small businesses out there that have employees. As an employer, I think when you hire someone, you essentially make a promise to your employees to say, listen, I'm gonna support you, I'm gonna pay you, I am going to help you keep food on the table. So the thought of laying off somebody like that is just so, so tough. But the government is there, saying we'll help you, we will support you as an employer to try and keep these people employed versus having them on EI - which we've already seen over 500,000 Canadians apply for since this COVID-19 pandemic has hit Canada.

I think if you've got employers that are on the fence about keeping their employees, something like the government coming alongside of them and partnering with them to keep those people employed and support them financially is gonna make a huge difference because the last thing they wanna do is lay people off. Especially small business, where the person that owns the business and is making that decision is also the same person that's sitting in front of that employee telling them that they are laying them off during this time.

Some encouragement

As more and more information comes out about what our government is doing for our economy and from the health side of things, I have to feel super grateful for how proactive our government has been. And when I look back to 2008 and I look at how well the Canadian government handled that economic recession and how well Canada came out of that… I remember thinking at that time how grateful I was, especially when I compared our country to the United States. They took so, so long to come back. And then, I look at it now, and again, I compare it to our neighbours South of the border, and I think they're gonna be hit in a much worse way than we will be, not only from a health standpoint, but also from an economic standpoint. I feel like our government has done such a good job of being proactive on getting out in front of these things. And don't get me wrong, it's not like the future is a super clear picture of where we're going to be, it's still very uncertain and up in the air, but I would say that I would have to feel very, very positive and very, very fortunate to be living in the country that I do and how our government has dealt with this.

Final thoughts

So, I would say the real estate market is basically shut down for now. Now, I take it as my opportunity to get some projects done around the house, hang out with my family, and one of the quotes I read the other day was from Martin Luther who said, "Let joy be your act of defiance." And I loved that quote, especially in this environment. And I think it's very easy to be fearful and be scared, and don't get me wrong, there's elements of that that creep into my life. There's potentially economic impact for our family as somebody who is self-employed, as somebody who is a landlord and has tenants that may be unemployed, these are all things that I am dealing with and working through. But at the same time, I look at it and I think, man, I've basically been forced to stay at home and hang out with my family, and it reminds me more and more on how grateful I am for my wife and how grateful I am to have these five little kids running around here. Today, we just went for an awesome hike out under the blue sky and the bright sun and the warm weather, and what a blessing that is to be able to go and do those things and to not think, I gotta work. That's something that always hangs over me a little bit and I've basically been forced to say, listen, you can't. You can't work right now.

And I hope that you guys as well can find the joy in this time. I know it feels tough at times, but it is there, so I'm gonna leave it at that for tonight.

If you have any questions or anything you would specifically like me to address, then I would love to do that.

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