A Comment -- General Comments From an Expert (A Commentary)

Ron Butler:  A vendor take back mortgage is when the buyer pays a deposit, and the seller (vendor) gives the buyer the mortgage. So the buyer pays the seller the mortgage payments.

The good side is that is makes it a bit easier to sell a piece of vacant land. The really awful side is that the seller becomes a bank, and most people don't really understand the implications of that. What if they don't pay? How am I going to resolve this? How do I get them off title if I'm not receiving the money? You're going to end up with a lot more complications.

At the end of the day, the best possible choice is to just sell the land and walk away.

Bob Dugan:  Think about the way people qualify for a mortgage. You go into a bank, give them your income, the bank factors in the interest rate, and then it spits out a number of how much of a mortgage you qualify for. In an environment where interest rates were low, that number's a much bigger number than when interest rates are higher. Low rates can certainly drive a lot of demand for home ownership, and allows lots of people to go from renting to home ownership.

The story has really evolved. From 2012-2018 or so, a lot of the escalating costs were really a Toronto and Vancouver story. The rest of the country had fairly slow-growing house prices. Since the pandemic, it's been a more generalized problem of declining affordability across the country. A lot of it had to do with accelerated population growth, which exacerbated the supply issue. But it's always been a supply issue.

Seeing this not only in house prices, but also in rent prices upon turnover. In Toronto, turnover rents grew by 40% last year. Vancouver's closer to 30%. You're seeing big increases in numbers because supply is insufficient. That's one of the key reasons why house prices and rents have gone up.

Rob Butler:  When there's no spouse to pass a house on to, the house goes into the estate, and capital gains applies.
At the end of the day, it's not all going to be taxed, but there will be some tax. People worry about it but, sadly, it happens every day. A lawyer handles it and it goes through probate. 

If there are 2 people on title, and one dies, their interest will transfer for free to the other titleholder. In that case, there would be no tax implication.

Lauren Haw:  In the condo market, investors have been a dominant force. Over the past 15 years, you can think of investors as one of the "funders" of condo development. Very often the end user isn't going to know 5 years out that they'd like this 1-bedroom condo. So it's been investors speculating that the value would go up.

That means that they've provided the capital for the developer to be able to build the building. Then, sometimes, 5 years down the road they'll have sold those units to end users ready to buy them. Sometimes investors get a bad rap, especially in the pre-construction world. However, they're an important part of enabling the development of a lot of these units.

Bob Dugan:  These investors are a crucial part of rental supply. Not all of them are just speculating on prices going up. Some of them have long-term views and want to become landlords. As Rob said, the math doesn't always work on these investments.

In Canada, about 95% of the rental market is privately supplied (by both large and small investors). We need investors to come in and take that risk on housing. The math not working for them makes this very challenging, because investors are part of the supply solution.

Home ownership is a nice-to-have. If you can't afford that, you can fall back on the rental market. But if you can't afford that, where do you turn?

Lauren Haw:  Absolutely. In Ontario, and especially cities like Toronto, the cost of ownership of an average condo is in the $5000 range, but the rent is going to be in the $2500-2600 range. Rents just don't cover the costs.

We're seeing a runup in the number of available condos for sale in Toronto, and a lot of those are the investors. A lot of them wanted to buy land and get into real estate investing. The people who are in hot water right now are those who took on short-term debt to buy a 1-bedroom unit. The investors who took a long-term view and set themselves up financially are OK.

Rob Butler:  This problem is severely acute in the 416 (Toronto) area code. We have a very large group of real estate investors who discovered the famous "find out" stage of the famous social media graph. The math just doesn't math. 

It's particularly worse for new construction condos, just completing in the next 18 months, where there's a building across the street from them with units on sale for less. Even if rates come down (he doesn't expect much below 4%), they're still running massive negative cashflow compared to what rents are bringing in. It's going to be some sort of a bloodbath in the next 18 months.

Lauren Haw:  She doesn't do a lot of pre-construction sales. What we have seen is a lot of buildings being cancelled. It wasn't only smaller investors that did some speculative buying back in 2019-20. Some names got a little over their skis when short-term loans became quite tough to pencil. So it's been really devastating that for some purchasers who bought pre-construction at 2019-20 prices, even though prices have softened now, they're not back to pre-Covid pricing.

If the project gets cancelled, yes they'll get their deposit back most of the time, but they won't be able to rebuy the same product.

Ron Butler:  No tax implication on the debt side. But you'd have to do a fresh application. If you want to raise the amount of the mortgages on your rental properties to pay off your owner-occupied property mortgage, you can do so, but it's all a fresh refinance application.

Lauren Haw:  Ron's answer covers it all. People are having to make decisions when they can't afford to keep holding everything. Do I sell my principal residence, which is a tax advantage? Or do I sell the income properties? 

Selling a tenanted property is very challenging. You will not get top dollar for the property because showings are harder, and they may need to assume the tenants. Though it may be easier to sell your principal residence, you then need to find somewhere to live.

If you're looking to buy a property for yourself, it's a good opportunity to look at tenanted properties, as you can get a discount.

Rob Dugan:  Part of the reason they're shorter in Canada has to do with the Bank Act, and how banks are compensated when a contract is broken. For mortgages up to 5 years, banks get full compensation for the forgone interest on that loan. Above 5-year amortization, it goes down to 3 months of interest or something like that. Plus, we don't have a very active 20-30 year money market in Canada compared to the US.

Starting to see longer terms. You can get 7- or 10-year mortgages now. Tend to cost you a bit of a premium in terms of interest rates, as the financial markets aren't well developed around those products yet.

Rob Butler:  There's also absolutely no consumer preference for these long terms, because they are more expensive. For example, there are 10-year terms available, and the uptake on those mortgages was about 3%, a negligible number in Canada.

The 5-year is your lowest cost mortgage. Comparatively, the US 30-year mortgages have almost consistently been 1% higher than the 5-year offerings in Canada. And if consumers are going to stay in an expensive housing market, they want the lowest cost they can get.

Ron Butler:  The current Finance Minister has made it clear recently that all the banks must allow for re-amortization. If a mortgagor is facing the fear and stress of financial hardship, then they should apply to their lender and expect to receive at least a 30-year amortization schedule. It's certainly available to people who can prove real financial hardship.

The bank regulator, Peter Routledge, remains fairly silent on that issue, but rest assured he knows who his boss is.

Lauren Haw:  This is rather a non-answer, but it's always specific to the person. The really important thing is length of time because of transaction costs such as land transfer tax, realtor costs, and moving expenses. If you bought a short-term principal residence, and sold it 3 years later, you're probably going to burn any equity that you've built in transaction costs.

If you're thinking short term, always rent what you need in the moment. In the meanwhile, sock away your savings. If you have a long-term mandate of at least 5-7 years, and potentially longer, then you have to look at the numbers to see if it makes sense. Homes are tax-advantaged in Canada. There are buying opportunities today, but it really depends if you can float it.

Rob Butler:  It's always better for families to own a home than to rent. But regrettably, over the past 15 years of numerous policy errors, it's become almost impossible for young people to own a home in major cities in Canada. Prices are too high, and it's effectively unmanageable without a great deal of parental help.

The universal thing he's heard over his entire career is that every renter wants to own a home. The desire is there. Lots of reasons to do it, but it's becoming almost a financial impossibility.

Bob Dugan:  He reiterates the views of the other panelists. It's a very individual decision and what you can afford. He'd hate to say to someone "you have to own", and then they eat macaroni and cheese for the next 60 years because they can't afford the payments.

Assess what you can afford and, if you can afford home ownership, it's a fabulous way to create wealth over your lifetime. With supply gaps, he thinks prices are going to continue to rise. It's going to be difficult to build the kind of housing that's needed to balance supply and demand. 

Will continue to see an erosion of affordability. Good long-term investment, beyond the short term of 3-5 years. If you have a long-term horizon, it's probably a very good time to buy, but you have to make sure you have the financial ability to do it.

Lauren Haw:  There used to be the adage "Drive until you can afford it." So if you started looking in Toronto, but you wanted bigger, you just kept driving further and further until you could afford the size you wanted.

Yes, people are choosing. Do I want a longer commute or more time with my kids? Location and size have always been the tradeoffs. As Rob said, the desire is still there. People desire a home like the one they grew up in, it's natural. But it's becoming harder and harder. People are having to make the tradeoff to smaller.

Rob Butler:  We are seeing pushback on sub-450 sq. foot condos. Those micro-condos are just too small.

The truth is we have a tremendous problem with pricing. If you go back only a short 25 years, the average person in Ontario could buy a home for roughly 3x their income. Today, we're looking at between 9-11x. There's no question that the flaw is in the pricing.

Bob Dugan:  Homes getting smaller is a necessity in certain markets. CMHC has done work in Toronto and Vancouver showing that 80% of the price of a home is the land it sits on. The only way to reduce the burden of that land price is to create more people per square foot. We need more density.

Toronto and Vancouver are relatively affordable in an international context, compared to places like Tokyo. But those centres are on trend to become more like those international cities. People may have to accept smaller living spaces, or rent instead of buy. Costs are going to drive those decisions for people.

Bit of a pullback last couple of days in the NASDAQ, but no one can really complain, as it's gone parabolic the last 19 months. Market now is just reacting to the fact that the NASDAQ went straight up, plus rumours and news coming out every day about the US election.

The bottom line for him is strong earnings, interest rates probably coming down, and inflation looking like it's been tamed. All good ingredients for a strong market for the rest of the year.

He's thinking that it's clear that interest rates are going to be cut across the globe. US has not started to cut yet. No one expects the Fed to cut in July, though that could happen. Expects interest rates to be cut in Canada, and for many months to come. 

Canada's rate could come down by 1.5% over the next 12-18 months. So when your GIC at 5% comes due, you're not going to get 5% anymore. So he expects that money to flow to markets and other risk assets. If you're only getting 3.5-3.75% on your bond or GIC, that's not so attractive after fees, taxes and inflation.

Expects good earnings. We just started Q2 earnings, and some companies have reported, especially the big banks. All looked pretty good.