You read that right…

The biggest of the banks are all writing down investments and claiming huge losses. In fact, in the case of some institutions, they have had to go back to the equity markets to raise capital.

TD Bank said it was forced to raise up to $1.4 Billion in new capital to shore up their reserves. This is a very large step (selling a stake in itself) and has made it one of the few institutions in the world to issue common equity given the state of the markets.

RBC said they too would be raising $225 Million, a far more modest amount, by selling recallable preferred shares on the heels of disclosing over $1 Billion in losses on its investments that have depleted its reserves.

Scotiabank also announced that they would be taking a $595 Million dollar after-tax loss due to the turmoil in the financial markets. The charges include $115 Million in trading revenues related to the Lehman Brothers bankruptcy, and $370 million in adjustments to the value of their investments.

So, the big banks are taking losses all over the place. The market is changing, and the mortgage offerings that people will receive will no doubt change as well to account for this. I will be posting a lengthy post tomorrow about how the Canada and US markets differ, and I hope this makes the case that even price-heavy markets such as Vancouver do not have to worry as much as the US.

Looking back at the past, oh, 15 years that i’ve been consciously aware of the banks, finances, and the market, I cannot remember seeing the banks take these steps: even during the massive losses that were incurred in the tech bubble. Change is in the wind and I have no idea where it will take us, but I’m sure that wherever it is, money will remain tight for a very long time.

The bank of canada moved rates more than expected today by lowering its target overnight rate by 0.75% to 1.50%. Usually, this means the banks will follow suit by lowering their prime rate by 0.75%

USUALLY…

Does this mean the banks “have to lower prime rate” by 0.75%.

NO.

There is no legal mechanism that preserves this relationship. The Bank of Canada is not able to force the banks to lower their rates as doing so would be tantamount to forcing the banks to potentially take a loss. Highly unlikely.

The inital reaction was the TD, RBC, Scotia, and several other lenders lowered their prime rate. But, by how much? In EVERY case so far, prime rate at the banks has only fallen 0.50%.

The exact same thing happened the last time the Bank of Canada lowered its prime rate: initially the banks didn’t follow suit. However, competitive pressures (not the Bank of Canada) resulted in them ultimatley all lowering rates to same level as the Bank of Canada.

With the recent declines in trade, real income growth, and consumer confidence, the Bank of Canada no doubt hopes that this move will spur some further consumer spending. With sales this year already higher than last year at retailers (so far) , the lower rates paid by consumers may be working, but lower rates usually take several months to filter down to higher spending, so likely we are seeing the results of prior rate cuts.

With lower rates available in Canada, look for the Canadian dollar to tread lower in coming days. Why? Rates have been falling on fixed rate mortgages (and term deposits) for a few months now. As rates available to investors go lower, the demand for Canadian dollars falls, and therefore, the price falls. The relationship is more complex than this, but this provides a macro look at why we may see a lower dollar in the future.

The Bank of Canada will continue to monitor the economic conditions and will make another planned announcement on January 20th, 2009 when they next meet.

So, I am happy to see rates falling, as this always makes my job as a Mortgage Broker easier and easier. That said, there is a reason that the banks have eliminated discounts off of prime rate in past months: lower profits (or sometimes losses). Most institutions are still at prime + 1% for variable rate mortgages (with a couple at Prime + 0.60%). With the rates falling lower, and therefore their profits, how low can the banks allow the variabler rate mortgage to go?

My asnwer is that clients that have a discounted variable product (whether it is at prime – 0.90% or prime – 0.35%) you should hold tight and NOT convert to fixed until we see an upward bias appear in rates. Currently, rates appear to be poised to fall further. For clients looking at variable rates on a NEW mortgage, you may want to take advantage of some of the low 4.80% fixed 5 year rates that are available. However, you personal situation may make the prime + 0.60% variable an attractive offer. Call me for a free consultation and to determine what is in your best interests at 604-657-6775 as I am a registered mortgage broker and AMP (Accredited Mortgage Professional).

I was listening to the president of CAAMP (Canadian Association of Accredited Mortgage Professionals) today and he was making mention of his take on interest rates, where they are, and where they are going. I thought his comments were quite insightful, while also providing some good advice to callers. However, several points were, again, glossed over, and I think we need to cover them here.

WHERE ARE RATES TODAY:

Here is a list of the BEST rates that I am currently offering:

1 Year                – 4.35%
2 Year                – 5.10%
3 Year                – 4.79%
4 Year                – 4.89%
5 Year                – 4.80%
7 Year                – 6.05%
10 Year              – 6.20%
Variable:
5 Year Closed    – Prime + 0.60% (4.60% Currently)
5 Year OPEN      – Prime + 1.00% (5.00% Currently)
Line of Credit     – Prime + 1.00% (5.00% Currently)
Prime                  – Is Currently 4.00%

Since posting these rates I have taken a plethora of question and emails and I will attempt to address them here…

I have received several emails saying, “Rowan, my bank is offering me an open mortgage at PRIME RATE,” and you are posting prime + 1% on an open. How come?”

The answer: If you are an existing client of a bank (RBC for example) and are trying to renew early, and not take any new money, and keeping the same amortization they MAY offer you this deal as it requires no re-registration with a lawyer (it’s already registered at that rate). I say “may” because I have yet to see one of these offers in writing. For a new client, buying a home, or seeking to refinance, this offer is not being extended.

I also hear the question, “Rowan, why is your 5 year rate so much lower than my bank?”

The answer: My firm chooses to do a lot of business with the top lenders in the country. As we send them hundreds of millions of dollars per year, we get treatment that a single client may not receive. Think of it as financial clout or “mass quantity discounts.” Just the same way that you can buy 1 orange for $0.25 or 100 oranges for $20.00 (just an example). The more business we do with specific lenders, the more efficient we are, and the more they like doing business with us – thus they offer better pricing (rates) than they offer – sometimes better than they even offer through their own branches. The bottom line: it pays to use a broker that is associated with a high volume office.

Another common question is: “Yeah, I know your rates are low, but are they with a reputable bank?”

The answer: Of course! They are with a nationally chartered bank! We don’t deal with unstable, unscrupulous institutions. We deal with all the major lenders out there (and some smaller ones you may or not know) but they are chartered banks that are offering my low rates currently.

Lastly, I hear the question from other BROKERS: “Where are you getting that rate?”

The answer: Unfortunately, I am not willing to divulge this information to other brokers. I have worked hard, and so have the team in my office, to establish our relationships with our lenders. This is what makes us different, better, and a cut above the competition: our relationships. If a client wants to discuss who the lender is, that is fine, but I will not give the “keys to the kingdom” to another broker who is unwilling to do their homework. Sorry. This is the same reason I don’t post which lender has which rate on my website or blog. If you like what you see, please give me a call.

Happy hunting!

A realtor friend of mine gave me an article she read recently on the Vancouver Real Estate market by Jim Rohn. I have no idea where it was published, but it was his, and it is VERY good and accurate describing how Vancouver’s Real Estate Market is a “Buyer’s Market” yet no one is buying. I wanted to reproduce part of it here for your reading pleasure:

A Buyer’s’ Market should be just that – a buyers’ market. It’s not a fence sitting, waiting , loitering, delaying, dawdling, postponing, vacillating, hesitating, wavering, faltering, pausing, foot-shuffling market. It’s a buyers’ market. By its very name it means buyers should be doing one thing and one thing only – buying. So where are the buyers and why aren’t they buying?

The irony of a buyers’ market is that even though the opportunity to buy is high, buyer urgency tends to hit an all-time low. The media becomes excited purveryor of negative news and uninformed advice, and buyers buy it all. Actually, it feels like the only thing they’re buying. Their reluctance is ironic since not so long ago buyers were incredibly excited about buying – and it was a sellers’ market. Prices were escalating and it was perhaps one of the most difficult times to buy value and yet people were buying like there was no tomorrow. Buyers were afraid of losing out by not buying even though the advantage was all to the seller. Now a shift has occured and it’s a true buyers’ market and what happens? Fear is in the driver’s seat but the tables are turned – the fear of paying too much seems to stop most in their tracks and immobilizes them.

I found that this was an EXACT description of the Vancouver Real Estate Market. Buyers are ready, willing, and able to buy, but are so concerned about “getting a deal” that they are ignoring the fact they are sitting on the sidelines in one of the best buying opportunities in the last 8 years. I am seeing East Vancouver homes, with basement suite income of $750 per month, selling below $500,000. Instead of looking at the low carrying costs of real estate versus the high income potential, people are treating their home like it is an investment.

YOUR HOME IS NOT AN INVESTMENT!

By it’s very definition, an investment is something that generates returns or profits and that is it. If you rented a home instead of purchased, you would be throwing money away every month. It would be better to buy a home, and ride it out for the long term despite price fluctuations as, at the very least, you would be paying down the principle and would eventually own something. Those people sitting on the sidelines are building no equity at all.

Many people are acting like their financing options will be the same in 6 months, with lower prices. The truth is that financing DRIVES prices, and if the prices are lower, it is because the financing isn’t there (or is there, but is more expensive – thus making the purchase less attractive). A person who purchased a home 6 months ago with a variable rate mortgage of prime – 0.75% for $500,000 and financed 100% of it would face a payment of $2,078 per month (including all fees). However, that some home, today, would require a down payment of 5% ($25,000 cash up front) and would now have payments in the amount of $2,426 per month for the SAME HOUSE. Nothing about the home is better.

“But prices have fallen 10%!” some smarty pants may cry. Ok, so the house is $450,000. With 5% down that is still $22,500 cash out of pocket as a down payment, and payments will still be $2,184 per month! So, you’d have to find a way to save $22,500 AND pay $106 more per month for a house worth $50,000 LESS!!

Are you better off waiting and buying when prices are falling and the financing market is tighetening up? I don’t think so. There are EXTREME cases of prices falling in markets that are far, far and away ahead of them selves (Las Vegas, Nevada comes to mind…) but Vancouver isn’t one of them. With upstairs rent easily $1,500 and downstairs rend easily $750 per month. That still more than covers your entire mortgage payments. Not surprisingly, if you bought then OR now, the rent essentially covers the mortgage and not much more. That is the sign that prices are in line with cost and value – in my opinion.

I have had many clients bail out of this market in the past month claiming they will wait until spring to see if the market is better. Meanwhile, they are paying $1,500 a month in rent, for 6 months ($9,000) and the payments on the same home they wanted to buy before will likely be HIGHER.

Pay attention to this point: the sticker price isn’t what you need to be worried about – it’s the payment. Payments on homes have risen, so of course the prices will fall. So if payments continue to rise with global instability, does that mean prices will continue to fall? Yes! Of course it does. Does it mean you shouldn’t buy? If you are buyinga home, you should still buy and start paying it off. Vancouver has value that cannot be ignored. If you are a buyer and flipper, then I would stand out of this market as quick returns will likely be unavaiable for a very, very long time.

So there is my opinion. Happy shopping!

Despite the chaos going on in the US, the Canadian real estate market has done fairly well. With builders going out of busines all over the US, housing starts in Canada remained steady at 218,000 in September. This is shocking considering it is a slower part of the year to start building with only 200 units difference from August, and at the same time, it is interesting to note how the housing start numbers are broken down.

The number of housing starts for single family dwellings (houses) fell by 6,200 which is a 8.1% decrease month over month. However, the number of starts for multiple family dwellings (Condos, Townhouses, and Aparments) increased by 6,400 (or 5.5% month over month) offsettng the number of houses almost 1 to 1.

This trend of less houses and more multiple family dwellings is consistent with the last year and a half where we have seen a 65% growth in these units from July of 2007 to August of 2008.

So, does this mean the market is not slowing down the production of homes? Well, let’s discuss that for a moment. Firstly, single family dwellings are much easier to plan, finance, and build. Many of the single family homes being built are by those people that intend to live in them. Owner occupied builders. However, multi family dwellings take a LOT more time (months or years) to secure the land, get the relevant studies and architectural work done, environment work done, geological work done, and other long-term soft costs. This means that the number of multi-family dwellings that we see still being built may be the result of a much longer pipeline that has been approved and ready to commence for quite a long time. This trend of reducing single family dwellings was thought to have leeched into the multi family sphere when there was a massive drop in the number of multi family dwelling starts in july. However, August was a similarly large bounceback and september supports that this trend may not yet exist. However, it appears only a matter of time before multifamly dwelling starts begin to reduce as financing for them on a commercial level is far, FAR more difficult.

Regionally, starts were pretty stable except the Ontario was down 6.3% and BC was UP 9.3%!!! This is good news for Vancouverites as continue to build and maintain a stable market. TD Economists have predicted, however, that housing starts in BC will fall off by up to 15% over the coming year as there is significant weakness in the pricing of the historically pricey BC markets.

SO WHAT DO HOUSING STARTS HAVE TO DO WITH REAL ESTATE PRICES IN VANCOUVER?

Well, that question and answer are twofold:

1. What does it tell us about the economy NOW?

2. What does it tell us about where th economy is going in the FUTURE?

THE PRESENT:

Think of basic supply and demand, if housing starts are relatively solid, the supply of houses coming onto the market should essentially replace what is being torn down, plus some small increase to account for population growth. If we see a rapid spike in housing starts, it may indicate that the builders are getting good money for their properties and are wanting to ramp up production to capture profits. On the other hand, when we see starts falling, it may indicate that builders are not being compensated properly for their efforts and they are scaling back their construction or business in an effort to reign in costs or cut losses.

THE FUTURE:

Housing starts are often seen as a “leading indicator” which gives clues as to which way the economy is heading. When housing starts rise, it tends to mean that the outlook on the future market is good as builders take several months (or years) to complete a unit. If the housing starts are falling, this is generally considered an indicator of a slowdown, downturn, recession, or possible crash (depending on the severity of the indicator). As long as housing starts are continuing their stable trend, it should indicate a relatively stable market in the future.

MY TAKE ON THIS:

I personally don’t like the trend away from single family dwellings into multi famly units. I think this indicates a problem with the market that the growth of condos is overlooking. Clearly, we have a lot of spare land in Canada (and still in the Greater Vancouver market) so there is no need (as in japan, for example) to always build high density. Also, with the fact in mind that multi-family units tend to take so much longer to show up in the stats, I suspect our housing start numbers are lagging in terms of accuracy. If I am correct about this, we will see a slowdown in housing starts, likely starting next spring and continuing until the market is out of whack – and yes, I do believe our BC market is slightly overpriced, although there is a very good value that you get by buying and living in BC.

That is all for now. As always, any questions, leave a comment or call / email me.

So I haven’t posted in over a week, and it’s been because i’ve had my head down working like a dog while reeling from the effects of the last week’s meltdown in the financial sector. Finally, after an up and down week, and Fed in the US approved the bailout. You would think that this is great news for the real estate industry, right?

I’m not so sure. What this plan effectively did is nationalize a private problem. There is a saying somewhere that when profits are made they are private, but when losses are taken, they’re public. I know that isn’t a direct quote, but it is close enough to get the gist of it. It is also very very true. So long as the market continued along unabated, with profits being made, private investors got to keep all their profits, spend it as they wished, and not have to pay anything other than taxes. When the problems set in, and the investors all stood to lose a lot of money, enter the Fed and a massive public bailout that effectively increases the national debt that took them over 100 years to build by 10% in a single blow. I don’t like the precedent that this sets, and hope that the bailout doesn’t totally bail out all the lenders and institutions that acted irresponsibly over the past 8 years. That said, I also don’t want the market to go into a tailspin and melt down.

A lot of the price appreciation we have seen in Vancouver Real Estate in the past few years is driven by the market being very desirable to live in, own in, and even rent in. As a result, prices have (and should have) risen. However, as someone on the front lines of mortgages and real estate, I DO think that prices have gotten ahead of value, and we are in for a correction.

Unlike the United States market, however, I do NOT think that prices will come crashing down around us. Our lenders up in Canada, (yes, even those based out of the US) were more conservative than there brethren in the US and required a borrower to have more than a pulse and sufficient body temperature to warrant getting approved for a mortgage.

Did we have true sub-prime lending in Canada? Yes, but only at a few lenders, and always at no more than 95% financing with most preferring to remain at less than 80% financing even on rock-solid properties. The US actually had lenders lending (in some rare cases) up to 125% of the purchase price with the hopes that property prices would continue to rise and put the clients back “into the black” in a few short years. While this strategy allowed clients to roll all their other debts into their mortgage as well, it only worked while prices continued their meteoric rise upwards. When they started to roll back, that was the end for those lenders (and insurers who insured the mortgages).

So where are we going from here? I met with a few other brokers over the weekend and we chatted about where the market is as well as some of the large pull backs in prices we have seen recently. Most of us agree that prices are likely still going to continue downwards for a while, and the fact that money is still getting tighter and tighter and guidelines more and more restricted will only compound this issue in the near future. CMHC is slated to release some new guidelines any time soon, and I suspect that their “Self Employed Simplified” program will disappear or reappear in a far more conservative form. This could make it far more difficult for self employed borrowers who show no income to get qualified. Given the very high percentage of self employed borrowers in BC, this will have a disastrous effect on real estate prices if we are correct. I hope that we aren’t.

So, if prices continue to decline, should you still buy?

The answer depends on your plans:

1. If you intend to buy and hold it for 5 years or more, then yes you should still consider purchasing rather than renting.

2. If you are buying an investment property, I would likely shy away from the Vancouver market in the next year.

3. If you are intending to flip the property, DO NOT get into this market. I have many, many buy-and-flip investors who have purchased properties, poured $100K into them, and cannot sell them for their original purchase price at this point. Buy and flip is not shrewd in this market unless you are buying at a substantial discount and putting essentially no capital into it.

The bottom line is that if you are buying a home, long term, you should always get into the market, buy as much house as you can afford, and let history, scarcity, and payments do the rest for you. You will always come out ahead, and I defy anyone to prove a 10 year period in Canadian history where if you purchased you would have been better off to have rented. That period doesn’t exist, and for that reason, buying property in Vancouver is still a good LONG TERM investment.

Happy hunting!

This last week has been perhaps the most harrowing in the financial industry that I have been around to see. The week came out of the gates with the 4th largest investment bank in the US (Lehman Brothers) going down after several failed buyout packages. Subsequently, when it appeared that Merrill Lynch was on it’s way out the door as well, the governement stepped in and bailed the out in an effort to restore confidence. However, the battered and bruised economy wasn’t done! Within hours it appears that many other investment banks, brokerages, and financial institutions were going down the bankrupcty road as well. AIG, one of the largest mortgage insurers in the country then gets a government bailout for $85 Billion dollars leaving many people shaking their head and asking, “why not Lehman Brothers?”

It appears the government is picking and choosing who will be left standing, and this does little for investor confidence. I came upon two graphs on the net today. Here is the first, and it shows in a graphical sense, the money the government has “printed off” to try and print their way out of this pending disaster.

The second chart is a visual representation of the losses taken by the major financial banks in the sub-prime crises. Remember, these are actual dollars that are lost. These numbers are staggering in their size, and the companies that lost the most stand out glaringly.

On the heels of all this news, the government has started issuing a guarantee for mutual funds as people are cashing out of them in a dangerously fast pace as they try to save their capital. The funds are guaranteed for one year, and in my opinion this is silly logic.

My point: EVENTUALLY, SOMEONE HAS TO PAY FOR THIS PROBLEM!

As I have said in earlier posts on this blog, those that pay will either be Government (you and me), Investors (you and me) or homeowners (you and me). You can see the trend here. We, the public, will ultimately pay for this. The only alternative is that the government buys and prints their way out of the problem, and from an economic standpoint this should totally devalue the US dollar and destroy confidence in it as a medium of trade if the government can just fabricate more of it in a fiat-economy sense. I strongly dislike it when government steps into the way of the market and tries to bail everyone out.

Please do not think that I am just saying this of Americans. The filtration effect that we see in Canada and mortgages in particular is a tightening of the monetary supply and availability of credit. This results in fewer buyers, and fewer buyers translates into lower real estate prices. As a home owner, I recognize that I am going to lose a lot of money, but I also enjoyed the ride up. What the government is doing is trying to give people the fun ride up, without the downside. Long term, this isn’t possible, and a financial reckoning is eventually going to happen to us. I hope it isn’t as harsh and hard a landing as I suspect, but eventually the piper has to get paid.

An article in the Vancouver Sun has once again motivated me to speak up about the prices in Vancouver. As usual, first I will summarize the article and information, and then give my opinions on it.

The article talks about a recent study by the University of BC which claims that Vancouver is a very at-risk market of a major price decline. The way they manage to arrive at this conclusion is by studying rental rates and home prices. The confusing part of the article comes with this line:

“We say a housing market is in equilibrium when the ratio of of house rents to prices equals the cost of capital for owning a house – which is the sum of the mortgage rate and out-of-pocket costs, then minus the expected rate of long-run house appreciation.”

In other words, when rents cover the cost of owning the home (or are relatively close) the market is in equilibrium. This is, in my opinion, a good indicator of equilibrium as it makes no sense for rents to be, for example, $1,000 on average, and mortgage payments $2,000 as the entire market cannot be out-of-pocket that amount of money on an ongoing basis for the long term (unless there is massive value appreication going on to offset the cash shortfall as the owner could sell the property for a profit later on down the road and recoup the losses).

The report goes on to discuss the various Canadian markets and how over or undervalued they are. The cities they looked at are:

Vancouver
Regina
Montreal
Halifax
Calgary
Edmonton
Winnipeg
Toronto
Ottawa

Of these cities, only Toromto was considered “in equilbrium.” I have done a lot of mortgages in Toronto as well as the surrounding areas such as Mississauga and have to say that I agree with the findings. The rental income covers nearly dollar-for-dollar, the cost of owning the property. Now, owners still have to come up with a down payment, so there is some of the cost that isn’t considered in that calculation, but knowing that rental income will, in most cases, cover the cost of ownership seems to me to be a market in equilibrium. The Vancouver market is very different with borrowers needing to put down upwards of 50% (in some cases) in order for rent to cover the mortgage and associated costs.

The report states that, based on this analyis, some of the markets in Canada are VERY overpriced. Vancouver is slighly overpriced by 11%, but some areas such as Regina, Winnipeg, Ottawa, and Halifax would have to fall by 20% – 25% to be brought back into equilibrium.

So what does 11% look like on average? With an average house price in August 2008 of $737,985 this would mean prices would have to fall by $81,178!!! This is a HUGE fall, and given the way prices have moved in the past few months, I would suggest that most of that fall has already occurred. I don’t know how current the data they used was, but suspect it was a little out of date (more than a month anyways).

It’s not all bad news, though. Edmonton actually is UNDERvalued by 8% based on the metric they use and given the recent sell-off and fall in values there this comes as no surprise.

However, for Vancouver the report was a little more worrisome on a different note. The report warns that cities that face the risk of the sharpest decline are those that have a mismatch between the number of units available, and the number of households ready to occupy them. This will become more and more pronounced in Vancouver (especially the condo market) when thousands of new condo units open up in False Creek. I worry that condo prices will go into the tank when this happens, and the report’s conclusions back my suspicions. Vancouver is the market that is most at risk in this regard as the past few years have seen rampant speculation and holding-property purchasing (even of condos!).

Bottom line: expect some price moves over the next few years. Prices don’t have to fall to come back into line. Even a long-term flat market will bring things back into line, and I suspect that this will be what we witness.

This post is the first of a three part series that I will be writing detailing how and when to use the equity in your existing home or rental properties for investment, recreational properties, and maximizing returns.

The equity in your home can be accessed and utilized to earn even greater returns for those clients willing to look at alternative strategies to doing so. Many Canadians view their home as an investment, but this is incorrect thinking. Everyone needs a home and will have a housing payment unless they own their home clear title. During the time in which they own the home, a person will benefit from the appreciation of the home by building equity in their home. However, it is possible to take advantage of that equity and put it work while still also benefiting from further appreciation. In effect, you can use the bank’s money to go out and make more – and the interest on this is tax deductible!

Before jumping into refinancing, it is important to look at your existing mortgage and determine if there will be penalties to get out of your existing term and into a new product. In over 90% of cases, unless you have an open term, there will be a penalty that is roughly equal to three months payments. The banks have the legal right to exact this penalty, but there are ways to get around it or mitigate if you are using a mortgage broker familiar with the lender’s policies. The options to get the equity out of your home are many, but the most commonly used are:

* 1. Blend and Increase
* 2. Refinance

With a “Blend and Increase” you will leave your existing money at the existing rate, and borrow the new money at the current rates. This will keep your mortgage with your existing lender, and will, in most cases, avoid an interest penalty. However, for blending and increasing there is no guarantee that you are getting the best possible rate on the overall structure. This is where it pays to have a broker shop around for you and go to multiple lenders and see if any promotions or specials are available that would result in a lower overall rate even if you take the penalty into account. Once you’ve made a decision on the most cost effective structure, you can decide on whether to keep your existing lender or go to a new one. Oftentimes, banks compete most aggressively to get new clients, and moving your mortgage instead may be the best option.

By paying out your existing mortgage and getting a new one at another lender but facing a penalty, you would be doing a “refinance” where we would be restructuring the debt and possibly starting the mortgage over again. This may result in substantially reduced monthly payments, more cash flow (to invest, if you wish), and a better overall rate.

Once you have the equity out of your home, how you invest it is up to you. You could buy stocks, bonds, mutual funds, real estate, or invest it in your own company. The choice is yours. At this point you still own the home and are still benefitting from the appreciation of the home, and at the same time can use that newly tapped equity to invest and earn additional income. This is a way of using the bank’s money to make money and is commonly referred to as using “Other People’s Money” to invest. So it is possible to earn double the returns using just your mortgage when it is properly structured. And oftentimes, if you restructure the mortgage properly, you may end up with lower overall payments, and the added benefit of using Other People’s Money to invest.

A couple of caveats here:

You will still need to “qualify” for the extra money with the bank. Just because you have the equity built up in the property, does not mean you can automatically borrow against it. The bank will want to see a good track record of credit repayment and solid, verifiable, taxable income (in Canada) in order to approve you for more money.

Just having a small amount of equity will not allow you to put this plan into action. In general, to avoid any fees (such as CMHC fees which can be thousands of dollars) you will need to have at least 20% equity in the property. Put another way, your mortgage will not be allowed to exceed 80% of the market value of the home. Who determines this value? A qualified appraiser will provide a report to the lender that supports the value of the home, and so long as your mortgage is not greater than 80% of the value, you can avoid any fees from the bank or CMHC to set this up.

Doing a proper analysis of which lender, which product, and which rate is not a simple task and should be left to a qualified professional. Speak to a mortgage broker about the best option, and whoever you choose to deal with, make sure they respond to your inquiries promptly, and clearly understand the concept of refinancing for investment purposes.

So yesterday the Vancouver Sun shamelessly published more sensationalism by making the Vancouver real estate market sound a lot worse than it really is. There are a few highlights I would like to point out from the stats released and they are as follows:

The benchmark price of a home in Vancouver, excluding Surrey, fell by 2.1% from May of 2008 to July of 2008. So in a three month period of time, the market has dipped by 2.1% in the first pull-back that has occurred in prices in around 8 years.

In Surrey, over roughly the same time frame, prices fell 6%. When you consider the average home was over $500,000 this means that someone (every home owner – allegedly) has lost $30,000 in the last few months in real estate.

Is this true?

Short answer: Yes.

It’s right there in the math. The benchmark price of homes has fallen. The real estate market has taken a backwards step, and my opinion is a steadfast, “So What?”

This is what markets do: they fluctuate. You should expect it to happen. In fact, a 10% swing up and down is not only uncommon, it is NORMAL! What we have seen over the last 8 years has not been “normal” with prices steadily increasing by percentages in double digits… 12%… 18%…. 23%… or MORE in some markets. Are people’s wages and income rising this fast? Absolutely not. So why should this type of price increase be sustainable? It simply isn’t.

Now, for those that had the gumption to read beyond the sensationalist headlines, you would see that the actual opinions of the experts is more upbeat than the headline suggests. In fact, Cameron Muir, Chief Economist for the B.C. Real Estate Association, said he does not believe that a housing bubble existed and has now burst. “Typically, at the end of a market cycle you will see home prices remain flat, or even come off a few percentage points a year, until the next cycle begins,” said Muir in an interview.

Note that he said “a few percentage points a year” and not “a few percentage points.” Yes, the market could down trend for the next few years. It is possible, and likely long overdue. People can say, “it’s different this time,” or, “but the olympics are coming,” or, “but this is the best city in the world for x y and z reasons,” and this is the self same rhetoric that people hear before ever major price decline.

So, what is my opinion? Is this the end of the market? Should you NOT get into real estate?

I think that a slight down trend, or a long levelling off period is long overdue. Prices have gotten away from earnings and wages, and as a broker that sees how people qualify for mortgages, almost ALL of them we do are 40 year mortgages, and we do them because without them, the people don’t qualify for the home. When the average family cannot afford the average home, something is out of whack, and one thing about nature and markets is that when something is out of whack, it will eventually be brought back INTO whack.

Does this mean a market meltdown? I don’t believe so. I believe that over the next year or two, there will be a lot of inventory on the market as speculators and “flippers” have to sell their projects or “spec homes” to get out of under the mortgages. I suspect this will extend the already existing “Buyer’s Market” for quite some time with properties staying on the market longer, fewer “multiple offer” situations, and create lots of great buying opportunities for shrewd buyers looking to buy and hold: the only universally successful real estate investment strategy, in my opinion.

I still think that real estate is a good investment. Even if the market repeated the fall of 1981-1985, those people that stayed the course always came out ahead. There has been virtually no 5 year period where someone has bought real estate and lost money except in specific isolated markets with unique market forces at work. Real estate as a whole in Vancouver has been a very lucrative investment for a very long time, and given the attractiveness of the geography, the great employment and jobs, the tourism, and all the things that make a city great, I do not see real estate ever falling off the map as a viable investment.

So what do you do? I still suggest the same thing now as I did before: buy as much house as your wallet can afford, live there for five years, take a fixed 5 year mortgage (or longer) to ensure payment stability, and start paying down the mortgage. Worst case scenario is that you make no money after five years and stay in the home for another five. By that time, no matter what market we are looking at, you will have made money. What is the alternative? Renting? Long term that isn’t a great plan either with no appreciation potential despite the lower risk that renters face of market forces.

So there is my plan: business as usual. Buy a home in a desirable area, close to amenities, close to schools or schopping or other attractiveness, and it will always have value. Try to make a buck on a quick flip and you will be the author of your own misery unless you are very very shrewd and able to move and flip faster than the market currently seems to allow.

Happy hunting!