Hello Hello, 

Hope all is well and you’re getting ready for winter, even though it does’t seem like it’s coming this year. 

A lot has happened since I wrote last but you’ve been reading my monthly updates religiously, knew the government was going to introduce the 2% stress test for mortgages and where not alarmed or surprised by the announcement.

Let’s begin with October Real Estate Stats.

Sales volume is down 26.7% month to month and 25% year to date. Prices continue to rebound from the dip seen earlier this year and are up 14.9% year to date.  For those of you who don’t follow Warren Buffet, one of his key strategies is to acquire investments that grow at least 15% annually.  At 15% annual, compounded growth, the value of an investment doubles every 5 years.  Listing are down slightly from a 2017 peak from 19,021 in September to 18,859 in October. 

We should continue to see a decline in listings and sales volume over the next couple months due to the coming holiday season.  

As you are aware the Government of Canada has announced the new mortgage stress test regulations coming into effect January 1st, 2018.  I’ve discussed the ramifications of this legislation in previous posts, but would like to share some new perspectives. 

The money supply is tightening and will continue to do so.  I have worked with several buyer clients within the last 30 days specifically looking to purchase and close on transactions before the end of 2017.

I believe the Government is tightening access to the money supply through legislation because they cannot raise interest rates enough to significantly cool our real estate market.  

Western media and Government sources continue to report economic growth as reason to end quantitative easing (QE – easy access to money and artificially low interest rates meant to stimulate the economy) and raise interest rates, yet the International Monetary Fund(IMF) and Bank of International Settlements(BIS) warn that raising interest rates will slow global growth.  Although I’m not in the habit of taking a government official or bankster’s word at face value, in this instance I will lean towards the opinions of the IMF and BIS simply because they don’t have budgetary spending that needs balancing based on the assumptions of future revenues or elections coming up next year. 

What can our poor, little, multinational, financial corporation’s do to grow profits in an environment where interest rate increases may negatively impact global growth?  

Luckily the boys and girls in Ottawa left an interesting loophole when developing the stress test legislation.  Although the legislation requires purchasers to qualify for mortgages at 2% above the posted interest rate, there is no requirement for a specific amortization(AM) period to be used in the stress test calculation.  In order to offset the 20% reduction in mortgage financing available to purchasers, banks can, if they choose, offer clients 30-35 amortization periods.  A 35 year AM period completely offsets the 20% mortgage financing reduction caused by the 2% stress test. 

Currently only two financial institutions offer 30-35 year AM. Lenders will choose which client to offer the product to and they will charge a higher interest rate for the product. Perhaps this is the beginning of the normalization of the 30-35 year AM. Let me show you where the money is and how dramatically the total interest payment increases simply by stretching the AM period without increasing the interest rate.  

$100’000 Mortgage at 3% 5 year term over a 25 year AM period payed monthly. 

Monthly Payment = $473.25/M

Total Interest Payments for 25y/AM = $41,973

$100’000 Mortgage at 3% 5 year term over a 35 year AM period payed monthly. 

Monthly Payment = $383.81/M

Total Interest Payments for 35y/AM = $61,203

To me it is clear that this legislation tightens the money supply for those who need it most while increasing profits to financial institutions.  If one has the money (investor, seller/re-buy) one can simply offset the effects of the stress test by increasing the down payment. If you’re a first time buyer you’ll have to pay to play. 

This legislation will further the dip in the market but will not make it easier for first time purchasers contrary to statements made by the current government.  I’m not suggesting that the main intent of this legislation is to make it harder for borrowers while increasing bank profits, I’m simply pointing out this is one of the things the legislation will do, very well. 

Buying opportunities are coming.  If you are looking to make a play over the next several months I suggest you speak with your lender to fully understand your financing options moving forward.  

 If you have any questions feel free to call me at any time. 

 If you’re looking to make a move call me first and I will make sure you make the right one.

 God Bless!

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About me

Jimmy Vlachos

Jimmy Vlachos

I am not driven by selling or buying. It’s not what gets me up in the morning nor what keeps me working late into the night. I am driven by a desire to be free, to do what I please with my time, to travel and experience all that life has to offer. My desire to be free is what lead me to Income Producing Property Investing. More...

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