Real Estate bomb or smart move by the banks?

January is typically a slow Real Estate month – everyone is receiving their holiday credit card statements and not yet ready to spend even more. Yet this year BMO got everyone talking about housing market soon after the holidays. With 2.99% on a 5 year fixed mortgage offer, no wonder it’s on everyone’s mind! This is lowest offered rate EVER in Canada!

Multiple offers, no conditions are not just common, but a rule again. Demand increased, driving prices up. All that makes some people think about where are we heading? On one hand to slow down this boom government needs to increase prime rate, otherwise people will just keep borrowing. But on another had they can’t do this because this will effect entire economy of Canada.

So is it good or bad that BMO dropped the rate? And what will happen next? Well, to answer this question one needs to read the fine print on this so-attractive-offer. The biggest catch is 25 years maximum amortization. What does it mean? BMO is offering mortgages only to qualified customers, who are ready to pay more each month and therefore act more responsible towards their debt.

So, ones who think that this offer puts more cheep money on Canadian table, increasing total population debt, better think twice. No money down, 40 year amortization rates are no longer on the table. And though government haven't ruled more restrictions on mortgages yet, banks are taking proactive approach.

What that's in all this for a savvy Real Estate investor? Well, first of all, with larger monthly payments (shorter amortization period) housing becomes less affordable. This will increase demand for rental properties and creative approaches in buying properties (such as rent-to-own). On another hand if that goes well, we should expect further toughening of mortgage rules. I wouldn't be surprised if minimal down payment for the first time home buyers will go up to 10% soon. Investment and commercial mortgages will follow. So get ready!

RRSPs and Real Estate

First two months of any year are traditionally very hot for RRSP market. Everyone is trying to figure out how much they can afford to deposit into RRSPs to get maximum refund from CRA.

If you are not very familiar with how RRSPs work, check webpage of any major bank and surely enough they will have RRSP Q&A. But what happens to your RRSPs after you deposited them?

There are 3 main strategies with RRSP investments:
1. Various savings account, including GICs. The only difference from regular savings accounts is no tax (at least until you cash your RRSPs). These are usually low single digit returns.

2. Mutual Funds. A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities. You returns can be higher, sometimes even in double digits, but its hit or miss. Also you have to remember that everyone is buying their share of mutual funds this time of year. Simple law of supply and demand dictates prices to be high. Which means you are buying when price is high. You probably will have better returns buying same funds any other time of the year and selling them now.

3. Self directed RRSPs. This is when you (not a fund managing team) decides where your money is invested. In could be specific stocks again or you can invest in mortgages. If you have enough to give yourself a mortgage, your interest may become tax-deductible even if you are not self employed. Talk to your accountant as there are some requirements for this. Or you can lend money to someone else who will use it as a down payment or a mortgage on a property. Returns on such investments are closer to double digits and usually are guarantied.

So think for yourself what you want to do. And let me know if Real Estate is your way to wealth.

Disclaimer: I am not a financial adviser or accountant and you should consult with professionals before making your mind where and how to invest

CMHC - Source of Housing Market Information

To make the best decisions, you need the best information. Canada Mortgage and Housing Corporation (CMHC) offers complete picture of housing trends and issues in Canada today. New publications can be delivered to you through e-mail or you can access it on-line

One of many useful tools is Housing in Canada Online (HiCO). It incorporates a selection of CMHC's data on housing conditions and core housing need in 2006, 2001, 1996, and 1991. Also this year they introduced Interactive local data tables for over 100 selected municipalities across Canada to help you make more informed decisions at the local level. In contrast to the fixed content of the Data Tables, HiCO enables you to choose the data you wish to explore. With HiCO, you determine the components of the data to be shown or hidden. You can conduct your own analyses of housing conditions and create tables that highlight the relationships, variables, and geographic areas that are of interest to you.

And best of all – this information is FREE!

RENT INCREASE GUIDELINE (and proposed changes)

Each year, the Ontario government announces the province’s rent increase guideline for the
following year.

The guideline is the maximum amount that most landlords can increase a tenant’s rent during the year without making an application to the Landlord and Tenant Board.  It is based on the Ontario Consumer Price Index (CPI), which is a measure of inflation calculated monthly by Statistics Canada, charting the change in the price ща all goods and services in the provincial economy.

The rate of allowable rent increases for 2012 will be 3.1 per cent and applies to rent increases between January 1 and December 31, 2012.  This is up from last year’s guideline of 0.7 per cent. Check this link if you are interested in more details of how it was calculated, as well as historical data

In most cases, the rent for a unit can be increased if at least 12 months have passed since the tenant first moved in, or since his or her last rent increase. The tenant must be given proper written notice of the rental increase at least 90 days before the rent increase takes effect.

Note that  the guideline does not apply to residential dwellings first occupied on or after November 1, 1991. So if you have one of these new condos, the RIG does not limit the amount by which a you can increase the rents.

However there is a new proposed amendment to the Residential Tenancies Act if passed, it will set annual Rent Increase Guideline between one and 2.5 per cent beginning in 2013! According to the Ontario government “tenants would benefit from greater certainty that would ensure affordable and stable rents so they have safe and affordable housing.”

For landlord this new rule means that unless someone moves out in the years when inflation rate is over 2.5% (and they happen more often than not), you have no way to bring rent in accordance to prices of everything else on the market. On top of that, no sublets (aka some finds you a tenant and help avoid vacancy) would be considered by landlords.

I suggest we all keep an eye on this proposed amendment