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Canadian Real Estate Market Commentary
Don Campbell, Canadian Best-selling Author
At our recent REIN™ workshops across the country,
our theme was "Finally, It’s Here". The buying opportunity we have
been waiting for is now upon us. For the past 12 months, we have been witnessing
multiple offers, rapid price increases, and low inventory. All that has lead to
a seller’s market. Well, finally the tide has turned in the buyers’ favor.
With the large amount of listings showing up,
you can now negotiate better pricing, Vendor-Take-Back mortgages and even long closings.
Many of these have been foreign to Western Canada for the last 12 or more months.
Some of the deals negotiated from motivated vendors have been very impressive.
As sophisticated investors know, the real estate
market is a living and breathing entity that is in constant flux. We are always
on the lookout for those short periods when the buyers take a break and the sellers
don’t, and that opportunity is right in front of our faces today. That’s why you
are seeing so many serious investors moving so quickly to buy ‘at a discount’ during
this unbalanced period. The economic fundamentals didn’t change over the summer;
in fact, they got even better with additional major announcements that were made.
What happened was that many people had the time
to sit back and reflect on how much their properties had gone up. They spent time
cleaning them up and decided to do a little market fishing. They listed their properties
right as the home buyers stopped buying to go and do a little real-life fishing
up at the lake. This imbalance invariably leads to quick-flip artists being stuck,
vendors feeling a little panicked and sophisticated buyers relaxed and happy and
ready to take action. Having studied markets for the past 14+ years, we have seen
these ups & downs, and right now is a great buying opportunity - pretty easy
In these coming few months, we will definitely
see a tightening of mortgage availability. Mortgage (and other business) financing
will become more difficult as financial institutions take stock of the mess they
have created by giving out mortgages like candy. We are already witnessing an unwillingness
by the banks to take on new ‘sub-prime’ types of mortgages. The lending institutions
will also use this so-called ‘sub-prime’ crisis to change other rules (that aren’t
really attributable to that situation); however, it gives them a great opportunity
to slide these changes in under the guise of lowering their risk profile.
All of this being said, the pendulum has to swing
back in the other direction because banks make money by lending out money (not holding
it). In the new year, we’ll once again see a loosening of the new ultra-tight rules
as banks start to see their loan portfolio profits under perform. I believe we will
see new fees added to the whole mortgage transaction. Application fees, etc would
not surprise me in the least. So be prepared when your mortgage broker asks you
for a fee in the new year for a regular residential mortgage.
The week of September 10th (odd how that correlates
with September 11th again) will be a very interesting and volatile week in markets
around the world as over $113 Billion of commercial paper comes due for re-financing
on the world markets, while at the same time banks are reducing their purchase of
this important financial vehicle. This exceeds the $100 Billion that came due in
mid-August and sparked this whole situation. This situation should run until September
19th or 20th.
So hold onto your hat as you start to read headlines
that should be quite spectacular this week (such as "The Great Depression Returns",
"Liquidity Crisis", "World Heading For Recession?", "Worst Crisis in 20 Years",
2) Subprime Crisis? What Crisis?
Don Campbell, Canadian Best Selling Author
“Only when the tide goes out do you discover who’s been swimming naked.”
- Warren Buffet
As the credit market tightens and the real story begins to emerge, we’re starting
to see who’s been exposing themselves to unhealthy levels of risk and who, by playing
the game conservatively, will end up happy and fully clothed as the tide rolls out.
Many are calling this the “Sub-Prime Crisis,” which is quite misleading. This is
a more a crisis of greed, and every investor, large and small, has had a part to
play in the development of the wall we find ourselves up against. Hedge funds, M.I.C.’s,
corporations, banks, mutual funds and private equity groups have been stretching
their risk profiles, looking to eke out a couple of extra percentage points on their
return. They're doing this to make their quarterly report look better, all in the
name of satisfying their shareholders, whose short-term investment horizons drive
short-term business decisions. This has occurred in both Canada and the U.S. The
good news is, Canada may come out of this situation relatively unscathed.
They’re Called Sub-Prime For a Reason
As a point of clarity, sub-prime does not mean the interest rate is below the Bank’s
prime rate, as many believe. In this case, it means that the borrower is below being
a prime candidate for a mortgage, hence the term sub-prime. This small confusion
alone has caused many Canadians to panic unnecessarily because their mortgage is
a floating rate below the bank’s prime lending rate, thinking that this means they
have a sub-prime mortgage.
In the United States, borrowers with little or no income, little or no equity and
a history of not paying their bills have been handed variable rate mortgages they
can’t afford. By any standard, these loans are high-risk. So now is it a surprise
to anyone that in early 2007, one in every eight U.S. sub-prime loans was in default,
with projections of this number doubling between now and June 2008? I don’t think
Why would sub-prime lenders put themselves in this precarious position? They simply
thought they had a system designed to mitigate their risk while still making a profit.
After they got the borrower to sign on the dotted line, the lending institutions
packaged up the loans as Collateralized Debt Obligations (CDOs) and sold them to
those looking for a high return on their investments. These CDO buyers included
hedge funds, mutual funds and private equity groups looking to feed shareholders’
incessant short-term greed.
To make matters worse, many of these CDO buyers used borrowed funds, in some cases
upwards of 90%, thus adding another layer of debt on top of an already shaky foundation.
The shares of these companies were then bought by pension funds and insurance companies
looking for high returns. However, these same funds would never have bought the
risky mortgages outright. You can see how this has rippled out into all areas of
the financial markets.
This whole sell-on strategy takes the high-risk loans off the lender’s books while
providing them profit through the fees. The CDO buyers expect higher returns because
of the higher interest rates and they expect some security as the loans are backed
by a real asset.
The mad dash to create large short-term returns has led many of these investment
teams to the brink. Some will topple over the edge and shut their doors, while others
will put the brakes on just in time, hopefully learning a major lesson on short-term
thinking in the process. This layer upon layer of risky debt was created to fuel
one thing: North Americans’ focus on short-term results. Shareholders complain when
the return isn’t high enough and in reverse, are now complaining that they didn’t
think that the investment company should have taken such high risks on these sub-prime
It’s You and Me Driving this Bus
These large institutional investors are not the only ones driving this bus towards
the cliff. There are many others who are standing with their greed glands exposed,
now that the tide has rolled out.
Over the last 5 years, there have literally been thousands of new mortgage brokers
entering the market in Canada and the US and they must have thought they’d hit the
lottery jackpot. With financial institutions’ willingness to lend to just about
anyone who could breathe and, at the same time, lining up to pay almost double the
commissions on sub-prime mortgages, these new mortgage brokers had the time of their
life. It was so easy in Canada at one point that an investor or home-buyer could
get a mortgage just by ‘declaring’ their income, no proof required. Anyone watching
from the outside could see where this was leading.
You could also see why many individual real estate investors got caught up in the
sub-prime market game. “Little or zero down, what could be better than that?” they
thought. Many who have only been investing during the last 5 years of good times
have felt very comfortable in exposing themselves to undue risks by taking advantage
of the sub-prime mortgages that were being handed out like candy.
And now that lending criteria are being tightened, with many Canadian and U.S. institutions
ceasing sub-prime lending all together, we’ll quickly begin to see who the real
mortgage brokering and investing pros are and which ones have mistakenly focused
on the easy ‘sub-prime’ dollars. The shifting tide will expose the truth.
The Good News For Canadians
In Canada, our Bank Act has forced our lenders to be more conservative than down
south. In fact, all loans in excess of 80% of the property’s value must be insured,
protecting the lender from loss. It is true that some Canadian lenders dramatically
dropped their lending criteria and almost doubled the commissions paid to mortgage
brokers if they put their borrowers into sub-prime mortgages. Still, the percentage
of sub-prime lending is substantially less in Canada. In mid 2007, over 21% of mortgages
in the U.S. were sub-prime compared to only 5% in Canada. Of this 5%, all are insured
While Canada is approaching a record low number of mortgages in arrears (only 0.24%
according to Canadian Bankers Association), we will see an increasing number of
U.S. loans go into default, as $850 Billion of their sub-prime loans become re-set
with much higher interest rates and higher payments between now and June 2008. So
watch for an increased tightening of credit availability across North America as
Canadian lenders respond to U.S. results.
Unlike its American counterpart, the Canadian housing market has not been artificially
driven by bad lending practices. In most regions, it has been driven by economic
and demographic demand. This will provide home owners and investors continued long-term
resiliency. There will be economic bumps in the road that will shake out the short-term
investors, but the long-term economic fundamentals that drive our real estate market
are solid. We have the fastest growing population in the G7, our energy production
and commodities are in increasing demand around the world, our average personal
incomes are increasing, job creation is strong, creative Eastern-based manufacturers
are hiring to supply goods and expertise to the booming Western provinces, our consumer
confidence is high, the issuance of building permits continues to be strong, and
we are attracting more international investment capital into Canada’s real estate
market than ever witnessed before. These are just a few of the many positives supporting
our real estate market, none of which are artificially stimulated.
The seed of this so-called Subprime Crisis is a lack of accurate information, a
lack of transparency and a focus on the next quarter’s financial results. Without
a fundamental change in our investment expectations, a few years from now we will
witness another ‘so-called crisis’ hit our financial markets as the next scheme
tumbles. But investors are a resilient bunch and the market eventually takes over
and rights itself, just as it will after this storm is over.
Accurate Knowledge and Long Term Focus = Investment
Guessing and Chasing Returns = Speculation
What’s the lesson in all of this? Simply, chasing short-term returns can and will
lead to an inevitable correction in any market. Investors can justify just about
anything once the greed glands kick in. Just look at the well respected institutions
who bought the sub-prime mortgages expecting high returns. We can say we’re following
new and more accurate algorithms and computer models for risk management, but the
bottom line is that the market will always expose those who insist on swimming naked
of knowledge and foresight.
One year from now, we’ll look back to today and thank the market for being such
an efficient self-cleaning system. Removing the naked swimmers and leaving the rest
for long-term focused investors.
3) Brand New Resource For Canadian Real Estate Investors
REIN™ Forums Administration Team
Canadian Real Estate investors have been asking, and now they are ready. After almost
a year of research, you are now being provided an additional tool to help you succeed
in your Real Estate investing. The brand new Canadian Real Estate discussion forums
will help Real Estate Investors all across the country communicate with other Real
Estate investors, sharing the knowledge across the country.
The new My REIN™ Space forums are ready to be launched to all members of the public.
Already over 800 people have registered (and this number grows daily). You now have
the ability to join in the conversations with fellow Real Estate investors across
Please follow the instructions below to set up an account and gain access to the
Public Section of the new website.
This site is very easy to use and has a full function search tool and an easy one-button
access to "What’s New" on the site (click on "View New Posts" whenever you visit).
It will take you less than 5 minutes to start posting in the public forums.
Three easy steps to register:
Step #1: Click on to myreinspace.com..
Step #2: Click on "Not Registered Yet? Click Here to Sign Up".
Step #3: Read the Forum Terms & Rules and check the box as "read", then click
"Register". Enter your desired username (usually FirstnameLastname or a variation),
password, and valid e-mail address. Under "Type of member", select "Not a REIN™
member". Make sure that you enter all the required information (none of your personal
information will be available to the public, and we will not share it with anyone).
Enter the security code and click on "Submit my registration". An e-mail will be
sent to the e-mail address that you provided to confirm your forum membership. Click
on the link contained within this e-mail and you will be approved for access to
the Public forums.
If you have any questions, first click on the question mark (?) on
myreinspace.com. and see if your question is answered there. If you
still have questions or comments, please email firstname.lastname@example.org or call our office
You will find yourself coming back to this site often. As one early participant
on this site states "My name is Gord Mackie and I have been investing in Hamilton,
ON for about 4 years now. I think that this site is amazing... I am on it almost
every day, and I am learning tons from all the experienced investors out there."
Click Here to get started on this site immediately.
5) Is A Summer Vacation Home
Your Best Investment?
Are you making financial decisions today that are consistent with your goals?
Or, are you letting emotions dictate your decisions?
My wife and I were driving up to Penticton the other day for her Grad Reunion. I
love the Okanagan but have lived virtually all of my life in Vancouver. My wife,
needless to say, being an Okanagan gal, often finds herself pining for the sun-drenched
days of her childhood on the shores of Skaha Lake. This usually occurs on one of
our ubiquitous rainy days in Vancouver.
Suffice it to say that as we approached Hwy 97 and the reflection of the sun on
the lake came into full view, our annual discussion about buying property in the
Okanagan was renewed. Being real estate investors ourselves, we started to think,
“Hey, maybe we should be investing our money in this area? After all, if this is
where we love to come to every summer, why not invest here as well?”
In fact, by the time we had arrived at our friend’s place, we were already scouting
out the ‘For Sale’ signs and asking about sale prices. By the time the second day
had rolled around, we were looking at a $900K view home less than a block from our
friend’s house and began to calculate the probability of renting it out for 11 months
of the year and having it for our ourselves for one month every summer. Alas, we
had fallen into the same trap that so many summer travelers and novice real estate
investors do every year. We began to let the emotions of the moment rule our buying
and investment decisions.
This is the same reason so many timeshares are sold to Canadian Snowbirds every
winter down in Mexico and other exotic places around the world. The sentiment and
the emotion of the moment wrap you up in a cloud of poor judgment and you slowly
shift away from focusing on the fundamentals.
Now don’t get me wrong, Penticton and other cities in the Okanagan offer up a multitude
of investment opportunities and many of them can be quite lucrative. However, before
you jump into any investment, you have to ask yourself two simple questions:
Why am I buying real estate in the first place?
What end result does this real estate need to produce for me?
When I asked myself these questions, I came to the realization that we’ve chosen
real estate as our investment vehicle of choice. We have a specific goal and a specific
target in a specific period of time, so we need our real estate to produce specific
results. Our objective is to use real estate to develop a significant net worth
that will eventually produce two things:
Equity that can be leveraged into the ultimate lifestyle that we have defined for
Cash Flow that will help to create options for how we live that lifestyle.
Both of those are future needs, not current needs. The challenge with being on a
holiday and enjoying the immediate pleasures of the ‘house on the lake’ or the ‘villa
on the beach’ is that they create a desire for instant gratification and clash with
long-term goals that can often require delayed gratification.
Now I know that someone is reading this right now and you’ve just spent a week up
at ‘the cottage’ with the kids and you’re thinking, “Wow, that was so amazing, I
want my kids to enjoy that lifestyle today! I don’t want to delay gratification
so long that by the time we buy the cottage our kids have all grown up.”
You’re absolutely right, and if that is your goal, then make the move today. In
fact, there may well be a way of having your cake and eating it too. My point is
Are you making financial decisions today
that are consistent with your goals?
Or are you letting emotions dictate your decisions and sabotaging your long term
goals in the process? I always remind my clients that I am not judging their decisions,
I am simply making sure that they are making decisions that are congruent and consistent
with their stated goals.
Let me give you an example of what I am talking about. Let’s go back to the house
in Penticton with a lake view and look at some of the facts from an investor’s point
of view, not an emotional one:
Cost - $890,000 – beautiful home with a salt water pool and panoramic view of the
lake, close to friends, great place for the kids to be when we come up to visit.
Our purpose for buying the home would be to have a place to stay when we came for
our annual summer trip to Penticton and secure an investment in the Okanagan at
Our 5 year plan is to increase our net worth and develop an alternative cash flow
that gives us more freedom and choices in the future.
Let’s analyze how this investment would match our 5 year plan:
In order to finance it, we would need to come up with 20 to 25% for the down payment.
This would require a down payment of almost $225,000.
With 25% down, the mortgage would be $667,500. The mortgage payment would be almost
After including taxes and maintenance etc, we would need to rent the house for at
least $4,500 to break even.
We would attempt to rent the house for 11 months of the year and have it for personal
use one month of the year.
The market rent for that particular house in that particular neighborhood is currently
just over $1,500 a month.
Our negative cash flow could be as high as $3,000 a month for the 11 months and,
of course, more for the month that it is used personally. This would make financing
at the bank extremely difficult (even if I do know a good broker). The negative
cash flow will also impact any future purchases, since my debt service ratios will
now be completely mixed out, thereby limiting those purchases or forcing me to not
be on title with any joint venture deals.
Assuming an 8% annual appreciation over the next 5 years, the home could be valued
at over $1.3 million in 2012. Our equity position could be just shy of $500,000.
We would have had to service over $150,000 in negative cash flow over the same period.
We would have had the enjoyment of having a great summertime home for our personal
use once a year.
5 years later we would definitely have some equity appreciation, but not the cash
Now let’s take a look at an alternative use of that money that would satisfy both
our short term and long term goals. Let’s suppose instead, that upon returning to
my home in Vancouver, I picked up the Financial Post and read about Shell’s plans
to build a second oil sands upgrader just north-east of Edmonton at a cost of $22
billion with the first phase of construction set for completion in 2012, employing
between 3,000 and 4,000 workers during the construction phase. Suppose that I decided
to take my $225,000 and invest it into 3 solid townhouses in North-East Edmonton
at $280,000 each for a total investment of $840,000. Here’s how that investment
would look in 5 years:
Each unit will attract an economic rent of $1,500, which should be enough for the
properties to break even in the first year, with the ability to increase rent every
year after that and generate a positive cash flow.
Assuming an annual increase in value of 8% (even though CMHC has already predicted
a 28% return for Edmonton this year alone), the value in 2012 would be just shy
of $1.3 million and our equity position would be similar to the Penticton option,
assuming we used excess cash flow in years 2 through 5 to accelerate the mortgage
Over the same 5 year period, we would have had all the appreciation with no negative
cash flow. This would make the financing much easier, not only for these purchases
but for any future purchases.
After 5 years, we would have increased net worth with a growing monthly cash flow.
We could opt to continue to hold the properties, sell all three and use the proceeds
to re-invest for personal use, or sell just one unit and use the proceeds to pay
down the mortgages on the other two, thus increasing our cash flow even more.
Any and all of these options would match our 5 year goals.
Clearly, based on my personal financial goals, option #2 is far better for us, once
we remove the emotion and look at the facts. But wait, you forgot one thing – what
about the kids? What about the need to enjoy the here and now? What about the desire
to have a place to stay for one month a year up in Penticton? Oh, I didn’t forget
about that, I simply figured that instead of making an investment that requires
$3,000 a month in negative cash flow, I could use surplus cash flow from my real
estate portfolio and supplement it with some money from my family budget to rent
an awesome house for a few weeks every summer for less than $2,000. I would satisfy
my immediate family needs without compromising my long term goals.
When you sit back and analyze your investment decisions based on fundamentals instead
of emotions, it’s amazing what conclusions you can come to. And if you’re really
good, you can have your cake and eat it too.
Until then, Happy Investing
Peter Kinch is a Real Estate Mortgage Broker who has been helping Canadians with
their mortgage needs. Peter is one of the co-authors of the Canadian best selling
book 97 Tips for Canadian Real Estate Investors. He will be a major presenter at
the upcoming ACRE System program, teaching you How to Get the Banks to Say YES!
Click here to read all the details.
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