Canada Housing: Correction vs. Bust – Let the Finger Pointing Begin

Article written by Boris Bozic, in Canada,Current Events, Merix Financial




One doesn’t have to be an expert in the real estate market to grasp that there’s something different in the market today. Call it what you will, a sense, intuition or just plain old gut feel but there’s little doubt that things are changing. The only question that remains is the degree of change?
 
Here are the facts as we know it:

• Home sales have dropped month over month by 5.8%, which is the biggest monthly drop in two years
• Number of newly listed homes is down 1.7% month over month
• Greater Vancouver Real Estate Board states that re-sales were down 30.7% as compared to August 2011.
• Toronto Real Estate Board states re-sales were down 12.5% as compared to August 2011
• According to the August 2012 CMHC quarterly report, second quarter insured mortgages unit volumes were down 25%

Indeed, things are different today. The data speaks for itself, and the debate today has been reduced to correction versus bust. I think it is far too early to come to come to any final conclusion but that will not stop stakeholders and the press from jumping into the debate. This issue is way too sexy to resist, and there’s a lot on the line for our economy and policy makers. I came across an interesting quote from Wayne Moen, President of CREA., “August’s sales figures will no doubt provide comfort to policymakers, providing the first clear indication that the recent changes to mortgage regulations aimed at cooling the market are working as intended”. Very eloquent but policymakers may find the end result as comfortable a slipping into a pair of size 34 jeans, when you’re a size 38! Policymakers insisted the most recent changes to mortgage rules targeted the tail end of the credit curve; therefore, the overall impact to the market would be marginal. Nothing about the statistics indicates marginal, and I suspect home owners in Vancouver and those in the mortgage industry would agree.

Look for the Vancouver market place to garner special attention in the coming months. As an example, “the housing market correction appears to be under way, driven by the sharp downturn in Vancouver”, according to TD’s Chief Economist, Craig Alexander. He went on to say, “we expect the slowdown will become broader based following a fourth round of mortgage insurance regulation tightening by the federal government”. The way I interpret this is what goes for Vancouver, also goes for the entire country. And then there’s the obvious, if it all goes bad, you know who to blame.

Did OSFI Kill the Smith Manoeuvre?

Rob McLister, CMT, CanadianMortgageTrend.com


Tens of thousands of Canadians employ leveraged investing strategies like the Smith Manoeuvre. They rely on these techniques to magnify their investment gains and to pay down their mortgage faster.

For those not familiar with it, the Smith Manoeuvre entails:

• re-borrowing your regular mortgage principal payments
• investing that money in the market
• writing off the investment loan interest, and
• using the resulting tax refunds to prepay your mortgage.

You need a readvanceable mortgage (a.k.a. HELOC) and at least 20% equity to employ the strategy.

The Smith Manoeuvre hit a roadbump this past June when Canada’s banking regulator, OSFI, officially announced lower HELOC borrowing limits.

As of October 31, 2012, investors with bank-issued HELOCs will be able to borrow only 65% of their home value via a revolving credit line, as opposed to 80% before the changes. Most banks have already implemented this new guideline, impacting the Smith Manoeuvre in the process.
Fortunately, leveraged investing is far from dead.

“The Smith Manoeuvre is still a huge potential benefit to Canadians,” says Rob Smith, son of author Fraser Smith, founder of the Smith Manoeuvre.

“The limit drop is occurring only on the non-amortizing facility,” he notes. That means lenders will still offer 80% loan-to-value (LTV) financing—giving leveraged investors the option of a 65% credit line plus a 15% mortgage portion.

To the extent that lenders “allow readvancing on the 65% portion, but not on the 15% portion,” then the effect (of OSFI’s changes) “relates mostly to the lower amount of principal that can be readvanced,” says financial planner Ed Rempel.

“This effect could be minimized by amortizing the mortgage portion as long as possible (e.g., for 30-35 years), while paying down the readvanceable portion more quickly.”

While it’s not typical, “the fact that 15% of a readvanceable mortgage is now amortizing does not mean that 15% isn’t useful for investment purposes.”

"Qualified candidates can still use a regular mortgage for investment borrowing," he says. Albeit, borrowing from an amortizing mortgage and deducting the interest requires additional tax/accounting considerations.

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Related Factoids:

• Most existing HELOC holders are not affected by OSFI’s new 65% LTV HELOC limit unless they make changes to their HELOC. Any such changes would likely lower their credit line LTV to 65% maximum.
• “There will be a regulatory gap between OSFI-regulated banks and provincially-regulated lenders,” says Sandy Aitken, president of Tax Deductible Mortgage Plan (TDMP). “Therefore, it’s possible that some non-OSFI-regulated lenders (like credit unions) might exploit the opportunity to provide highly qualified HELOC borrowers with an 80% LTV credit line after the banks abandon this market segment.”

Strategies like the Smith Manoeuvre entail risk and are not suitable for all. Consult a licensed financial and tax adviser before initiating any such strategy.

Housing market cool down widespread across Canada

OTTAWA — Canada’s housing market appears to be cooling across the board in the face of tighter mortgage rules that affect many first-time buyers of modest means, a new analysis from the Conference Board shows.

The think-tank’s snapshot of resales for August shows a widespread decline in sales of existing homes, with 21 of 28 metropolitan markets registering a drop from July, and 16 of the markets showing a falloff of five per cent or more.

As well, listings fell in 17 of the 28 markets, an indication that owners were reluctant to place their homes for sale due to soft conditions.

Senior economist Robin Wiebe of the Conference Board said there was evidence of cooling in some markets — particularly Vancouver and Victoria — before the new rules went into effect July 9. But the new data shows the slowdown has spread to most markets and from coast to coast.

“When you see sales down in three-quarters of the market, that means it’s pretty widespread,” he said. “It’s knocked down previously high-flying markets like Regina and Saskatoon down a peg. Vancouver had been showing signs of cooling, now it’s spread out into the Fraser Valley.”

At the time Finance Minister Jim Flaherty announced maximum amortization period for mortgage would be reduced to 25 years from 30 years, the government estimated it would increase monthly payments by $184 on a $350,000 mortgage.

It had been the fourth time Flaherty tightened mortgage requirements in four years, but the July measure was regarded as the one likely to be the most effective.

While sales and prices were only temporarily sidetracked by the previous announcements, only to recover a few months later, this might “be the one that broke the camel’s back,” said Wiebe.

Last week, the Canadian Real Estate Association reported that sales of existing homes fell 5.8% in August from July, and were down 8.9 per cent from August 2011.

Still, the latest data shows that while sales and listings are down, prices appear to be holding steady.

The report found prices fell in only nine of the 28 markets in August from the previous month. Compared to last August, prices were up in 25 markets.

Economists have generally been forecasting a correction of between 10 and 25% in prices over the next two or three years. Vancouver, which had for years been Canada’s hottest market, has seen a tumble of about 30% in resale homes.

 

But Wiebe is not so sure the correction will be as severe as many predict, or that Vancouver’s market is as cold as the numbers suggest.

He notes that Vancouver’s average home prices are skewed by the number of high-end property sold — many to investors from China. Both the meteoric rise and current decline are “overstated,” he said.

Homes in the Toronto area, Canada’s largest market, are also likely to retain their value, he said, because the economy in the city remains healthy and the greater metropolitan area continues to experience strong population growth.

The Canadian Press

Canada's economy 'at a crossroads,' TD report says

TD expects 10% house price correction over the next 3 years
CBC NEWS

The Canadian economy is stuck in neutral, dragged down by debt-laden households and deficit-fighting governments, Toronto-Dominion Bank said in its quarterly forecast released today.

"Canada’s economy is stuck in a soft patch," the bank's economics team said. "Fatigued households and debt-laden governments have recently been shifting their attention to restraint. Meanwhile, a weak global environment and an elevated exchange rate are weighing on the export sector."

They're all adding up to keeping Canada's economy in a funk, with growth below two per cent and unemployment above seven per cent for the next while, the bank says.

'The tide seems to have finally turned.'—TD on Canada's housing market

"With no engine firing on all cylinders," TD says it expects Canada's economy will grow by 1.8 per cent this year, before moving slightly above two per cent in 2013 and 2014. "Canada’s economy appears to be at a crossroads."

Government and household spending accounted for roughly 90 per cent of Canada's GDP last year, and those two factors show no signs of being able to pick the economy up by its bootstraps anytime soon. Household debt has hit a record of 152 per cent of disposable income, and government debt-to-GDP ratios have risen considerably in recent years, especially at the provincial level.

"With the household and government sectors preoccupied with repairing their balance sheets, the stage is set for Canada’s export-oriented business sector to step up to help sustain Canada’s expansion," the bank says.

Canadian corporations have quietly amassed significant amounts of cash in recent years. That should serve them well to invest now, with the Canadian dollar strong.

Housing correction underway, report says

Gradual progress against the major international headwinds such as the ongoing European financial crisis, an anemic U.S. recovery and slowing emerging economies should improve Canadian exporters' performance, but not until early 2013, the bank warns.

"Overall, corporate profits are likely to advance at a healthy five to seven per cent pace over 2013 and 2014 on the back of improved global demand," TD said.

On the housing front, the bank says it looks like the correction is underway, driven by a sharp slowdown in the Vancouver market. "The tide seems to have finally turned."

TD expects the slowdown will become more broad-based after the government recently moved, for a fourth time, to tighten the rules surrounding who qualifies for a mortgage.

"The economy is now left with a debt overhang and an overbuilt, overpriced housing market," TD said. The bank estimates that on average, Canada's housing market is likely about 10 per cent overpriced, and is due for a slow, gradual correction.

"The adjustment is expected to occur gradually over the next [two or three] years, which should be quite manageable for most Canadian households," TD said.

The true cost of home ownership? Ouch!

By Ryan Starr, Moneyville, TheStar.com


Buying a home can be such an exhilarating and nerve-wracking experience for first-timers that they often overlook the true costs.

“They’re so emotionally charged that they forget the cost of the house isn’t just what they need to account for,” says Farhaneh Haque, director of mortgage advice with TD Bank. “There are ancillary costs you need to budget and save for.”

We asked experts what first-timers should expect to pay when purchasing a home, and the costs of ownership over time.
Begin with a budget:Before you begin house hunting, examine your income and create a budget to determine a monthly mortgage payment you can live with. The basic rule of thumb is that your total housing costs shouldn’t exceed one-third of your gross income.

Short-term pain: Initially you’ll need money for a down payment. A typical down payment ranges from 5 to 15 per cent of the home purchase price, or appraised value, whichever is less. The more you put down up front, the less you’ll pay in the long run.

You’ll need a home inspection as part of the condition of purchase agreement: this can cost up to $500.

Then there are closing costs, which can run between 1.5 to 2 per cent of your purchase price.
There’s the provincial land transfer tax and, for homes in Toronto, an additional municipal land transfer tax. On a $400,000 home, that’s a combined one-time payment of $8,200.

Notary and legal fees should be factored in; about $1,000 to $1,300. You’ll also pay $200 to $300 for your title insurance fee.

Dizzy yet? Wait, there’s more! A few other costs to consider:

If you’re buying a condo, you might need to pay for a status or estoppel certificate from the condo corporation.

And if you’re purchasing a new house from a developer, or one that’s been significantly renovated, you’ll likely be paying HST on the transaction.

Finally, there are the costs associated with the actual house move and furnishings to spruce up your new digs.

Not surprisingly, experts recommend establishing a decent-sized financial cushion ahead of time.

“I always tell my clients not to cut themselves short,” says Frances Hinojosa, a mortgage specialist at BMO. “Create a buffer in there for any incidentals, such as moving costs or upgrades to your property; maybe you want to paint or get window treatments.”

Ongoing obligations: Notwithstanding the mortgage payments, there are several other ongoing, long-term costs associated with operating a home.

There are property taxes, which in the GTA are usually about 1 per cent of a home’s purchase price and are based on the assessed value of the home. (Total taxes on a $400,000 home in Toronto are about $3,000 a year.)

A condo will have maintenance fees, which tend to increase over time.

And if you’re buying a house, there will be the ongoing cost of utilities and maintenance.

A home inspection will give you a basic sense of its state of repair, “but something like a furnace can go out overnight,” Haque notes. “So having a little bit of a safety net set aside for that is a good idea.” $100 a month for home maintenance is a safe bet.

Also be mindful of interest rates, which are currently at all-time lows. It’s wise for first-time buyers to account for roughly a 2- to 3-percentage point increase in this rate and provide for that in their budget, says Haque.

Budget stress test: Once you’ve accounted for your housing costs and determined what your new monthly budget will be, experts recommend subjecting your finances to a stress test.

If you’re currently renting, put the difference in the monthly costs into a savings vehicle. “So you actually get used to carrying that expense on a month-to-month basis,’ Hinojosa explains.

“That’s what my husband and I did when we bought our first home; even when we moved up to a second property,” she says. “When the purchase closed and we had to pay (that amount), we’d already been paying it. So there wasn’t this feeling of, ‘Oh my goodness, I can’t afford this.’ ”

Lessons learned from a year as a home owner

By Krystal Yee

A year ago, I made the biggest financial decision of my life and bought a home. Although it hasn’t always been easy, I am still extremely happy with my purchase.

Here are a few lessons I’ve learned:

1. Buy for less than you can affordWhen I first started my home search, I knew that the bank would approve me for more than I was comfortable spending. I was pre-approved for close to $300,000, but decided to cap my mortgage at $250,000, because no matter how stable you might think your life is, things can change.

When faced with the choice between a one-bedroom townhouse, and a two-bedroom option. I ended up buying the one-bedroom option because it freed up more money to put towards other things.
2. Save for home improvement projectsIt can be so tempting to head to Home Depot or IKEA and go on a home improvement and decorating shopping spree. But if you haven’t set aside the money, it’s better to hold off until you can afford to pay for your purchases in cash. Once you’ve made a list of what changes you want to make to your home, and the approximate cost, make sure to save an extra 10 or 15 per cent because you’re bound to spend more than you think you will.

Before I purchased my home, I had saved approximately $4,500 for home improvement projects. I ended up blowing my budget by spending more than $5,000 for new floors, paint, decorations, and furniture. And there's much more I want to do. However, instead of dipping into savings, I plan to set aside extra money for the additional renovations.
3. Buying is for the long-termIf you don’t know where you will be in a couple of years, or if your financial situation might change drastically, home ownership might not be right for you. In today’s real estate market, you might need to stay put in your home for at least four or five years – maybe even more – just to break even. So for that reason, it is extremely important to evaluate where you think you will be in the next five years, as well as whether your home will still be functional for your lifestyle within that time frame.

When I bought my home, I had no idea that, eight months later, I would be presented with the opportunity to move overseas. I consider myself lucky that my mortgage payments are small enough that I was able to afford to take that opportunity to move to Germany for seven months.

4. Have all your finances in order
Before you even start looking at homes, you should be working to get your finances in order. This includes taking into consideration your work history (many lenders look at an average of the past two to three years of income), credit history, and cash savings. You might not think those late payments to your credit card company were a big deal, but the cleaner your overall financial history is, the better chance you will have at snagging the best interest rate possible on your mortgage.

I started thinking about becoming a homeowner six years before I closed on my townhouse. In that time, I eliminated all of my debt, saved for a down payment, created an emergency fund, and tucked money aside for closing costs, moving expenses, renovations, and furniture.

Doing my research and making sure I had enough money to cover every expense made my home buying experience a lot less stressful.

5. Be friendly with the neighbours
You might be annoyed with your neighbour’s loud sound system, or the fact that their cats are always on your porch, but it’s in your best interest to be friendly. You never know when you’ll need someone to pick up the mail when you’re out of town, watch your pet for a few days, or water your garden.

Krystal Yee lives in Vancouver and blogs at Give Me Back My Five Bucks.

New Mortgage Rule Impact

People are itching to know what short-term damage the new mortgage rules will inflict on real estate prices.

So far, in the first full month of tighter insured lending, home sales are down almost 6%.

Additionally, we hear (anecdotally) that insured mortgage application volumes are noticeably lower, even after accounting for seasonal adjustments.

CREA economist Gregory Klump says, "The broadly based decline in August sales activity suggests that some buyers may no longer qualify for a mortgage now that amortization periods for high ratio mortgages have been shortened."

"As the lynchpin of the housing market, lower first-time buying activity will have downstream effects over the rest of the market.”

Klump adds that it could take “a few more months of data” before we can “gauge the broader impact of recent regulatory changes on Canada's housing market."

With fall being the second busiest mortgage season, we should get a good read on things by early December. By then we’ll also get commentary and data from banks reporting their August through October results. Q4 will be their first full fiscal quarter under the new mortgage regime.

In the meantime, we in the business all sense what shorter amortizations, tougher refinance rules and tighter debt ratio limits will do. And it’s not bullish for home values in the near-term...which is exactly what policymakers want.

-Written by Rob McLister of Canadianmortgagetrends.com
Link to actual article http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2012/09/mortgage-rule-impact-to-date.html#more

Penalty Avoidance

Rob McLister, CMT, CanadianMortgageTrends.com

If you’re getting a new long-term mortgage, odds are you’re going to fiddle with it before maturity.
The majority of people will either:

• Add money to their mortgage
• Add a readvanceable line of credit
• Refinance to get a better rate (which happens less frequently nowadays)
• Increase the amortization
• Port their mortgage to a new home, or
• Discharge it outright.

Some of the above will require an early pre-payment charge (a.k.a. penalty). This week’s Globe column poses ten questions to help you avoid mortgage-penalty shock.  (Attached below)

Other things being equal, avoiding lenders with costly penalty rules is one of many ways to reduce your overall borrowing costs.

Incidentally, the industry prefers that mortgage penalties be called “prepayment charges.” That’s because these charges aren’t supposed to penalize a borrower. They’re supposed to compensate your lender for very real costs it incurs when you pay off your mortgage before agreed. (“Costs” refer mostly to lost interest, but lenders also incur underwriting costs, originator compensation, securitization costs, etc.)

The problem is, some lenders impose far more severe prepayment charges than others. Major banks sometimes charge more than twice what a smaller lender would charge for the same term mortgage, even though the bank has lower funding costs.



DECODING THE MORTGAGE MARKET
Ten questions to help you avoid mortgage-penalty shock
Robert McLister, Special to The Globe and Mail

Figuring out the penalty on a fixed-rate mortgage is like solving a calculus equation. Homeowners who try often wind up hitting their head against hard objects in frustration.

It’s been that way for years, and as many unwittingly discover, mortgage penalties can be disturbingly expensive.

Historically, lenders have used cryptic penalty language that disguises just how expensive. As a result, folks trying to break their mortgage are routinely shocked and disappointed by four- or five-figure penalty quotes.

Interest rate differential (IRD) charges, commonly called “penalties,” have long been the biggest culprit. IRD charges compensate a lender for lost interest when you prepay large portions of a closed mortgage early. They’re basically the difference between the interest you promised to pay and what the lender can earn today on a mortgage of your size. Without a computer, even most lender reps cannot calculate IRD penalties with precision.

The biggest penalty I ever saw was $99,000 on a multimillion-dollar property. The average is far less than that – in the four-digit range – but for a homeowner with little discretionary income, it might as well be $99,000.

But things are changing for the better. As of this month, the Department of Finance has convinced banks to peel back a layer of opacity. Most banks now agree to a “voluntary” Code of Conduct that requires them to post plain-English explanations of prepayment charge calculations and provide website calculators so people can run their own penalty estimates.

That latter development is a colossal win for mortgage consumers.

Here, for example, are links to the top 10 banks’ penalty calculators: Bank of Montreal, CIBC, HSBC, ING Direct, Laurentian Bank, National Bank of Canada, Manulife Bank, Royal Bank, Scotiabank, and TD Canada Trust

As helpful as these calculators are, there’s one essential piece of the puzzle that most still don’t provide: the discount you received at the time you got your mortgage.

This discount is key for determining your IRD penalty with the major banks. They could easily permit estimation of discounts online (using their historical posted rates), but omitting this data forces you to call in and listen to their sales pitch to retain your business before you can switch lenders.

Another problem is that few non-bank lenders have taken the initiative to create online penalty calculators. That makes comparing penalties between banks and non-bank lenders unnecessarily difficult, which incidentally plays right into the big banks’ hands.

The majority of long-term fixed-rate mortgage holders terminate or change their mortgage before their term is up. In fact, the average five-year mortgage lasts only three to four years. Penalties apply in only a minority of these cases, but for those who are affected, they can substantially raise your overall borrowing costs

It therefore pays to guesstimate mortgage breakage costs in advance and avoid surprises later. In doing so, you’ll often find that a lender’s bargain interest rate is offset by its harsh penalty.

Before settling on a lender, try this. If you want a five-year fixed term, have your mortgage adviser estimate that lender’s penalty as if you planned to break the mortgage after 3.5 years (the average breakage), assuming rates stay the same. Then ask the adviser to give you a sense for how this penalty would compare to the “typical” lender.

While you’re at it, here are 10 more questions to ask a lender about its penalty:

1. Is your fixed-rate mortgage penalty based on posted rates, bond yields or discounted rates?
The logic: Some lenders – including the Big Six banks – base penalties on posted rates, which can drastically inflate your penalty. Other lenders use bond yields, which can also cost you a small fortune, depending on bond performance. A few are even bold enough to use posted rates when calculating simple “three-month interest” penalties.

2. If I break the mortgage and stay with you, will you forgive a percentage of my penalty or apply unused prepayment privileges, to reduce my penalty?
The logic: More lenders are doing this as competition grows.

3. If not, can I make a prepayment a few weeks before breaking my mortgage to lower the balance used to calculate my penalty?
The logic: When determining a penalty, some lenders refuse to consider prepayments 30-90 days before you request discharge.

4. What term do you use to calculate the nearest comparison rate for an IRD penalty?
The logic: Some lenders use a shorter term than the nearest term, which can significantly increase your prepayment costs.

5. Can I increase my mortgage without a penalty?
The logic: This is important if you ever upgrade your home or need additional funds.

6. If I sell my home and port my mortgage to a new property, how long can I take to close on that new property and still avoid a penalty?
The logic: Some lenders unreasonably require you to close your old and new home on the same day.

7. If I break the mortgage early, do I have to pay “reinvestment fees” on top of the penalty, or pay back any cash incentives that I’ve received?
The logic: Other things equal, why pay a reinvestment fee on top of your penalty? The latter answer is usually “yes.”

8. Can I get out of my fixed mortgage early if I pay a penalty?
The logic: Some “low frills” closed mortgages don’t let you out before maturity – no matter what – unless you sell your home.

9. Do you charge IRD penalties on your variable-rate mortgage, as opposed to the standard three-month interest?
The logic: Despite being highly unorthodox, a few lenders actually do this and it can cost you.

10. How long will you honour your IRD penalty quote?
The logic: This is relevant if you’re trying to discharge a fixed-rate mortgage while rates are dropping. Falling rates can increase your IRD penalty.

Penalties are a realm where borrowers need knowledgeable advice. Sadly, many advisers are inexperienced with penalty calculations and give you a blank stare when you ask too many questions. (That’s a good clue that you should deal with someone else.)

Fortunately, the Financial Consumer Agency of Canada is doing a noble job encouraging clarity with mortgage penalties. By March 5 of next year, it will go a step further by requiring banks to provide: annual information to help consumers calculate their penalty, written penalty statements upon request with clear calculation explanations, and access to exact prepayment penalty quotes by phone.
These initiatives will encourage fairer penalties and help homeowners minimize them, saving many individual Canadians thousands over time.

Slow real estate market sparks renovation revival

By Tracy Sherlock, Vancouver Sun

More people are hunkering down and fixing up existing homes rather than moving

With resales falling and the new housing price index slipping, people appear to be staying put a bit longer and renovating their existing homes instead of moving.

Peter Simpson, president and CEO of the Greater Vancouver Home Builders Association, said he spoke with several renovators and very few are fixing up homes for resale.

“Some clients have moved in and want to renovate. The others are folks who have lived somewhere for a number of years and want to stay in the same neighbourhood. They’re renovating for their own use,” Simpson said. “They’re not nervous about spending the money either.”

With year-to-date resales down 18 per cent in Vancouver compared to a year ago, it’s no longer the smoking hot sellers’ market it was a year ago. In fact, the Real Estate Board of Greater Vancouver reported that July sales were the lowest since 2000, with sales 31.2 per cent below the 10-year July sales average.

The new housing price index slipped 0.9 per cent in Vancouver in June 2012 compared with June 2011, according to Statistics Canada, while the MLS Home Price Index composite benchmark price for all residential properties in Greater Vancouver over the last 12 months has increased 0.6 per cent to $616,000 and declined 0.7 per cent in July 2012 compared to the prior month.

New mortgage rules introduced by the federal government in July shortened the maximum amortization to 25 years from 30, which is also expected to dampen the market.

Business is definitely strong this year for Jeff Bain, owner of JKB Construction, who said renovations always pick up when sales of new homes fall off.

“Everybody seems to be keen now to spend money,” Bain said. “It’s been good all year long.”
He said kitchens, bathrooms and basement suites continue to be the most popular renovations, but people are also renovating their entire homes.

“People are staying in their homes longer than they ever have in the past. They want to stay where they are comfortable,” Simpson said.

The amount spent on renovations has gone up every year for the past several years, Simpson said, but added that he isn’t sure if that’s because more people are doing renovations or because they’ve become more expensive.

Canada Mortgage and Housing Corp’s third-quarter Housing Market Outlook, released in August, said renovation spending in 2011 was $61.7 billion in Canada. CHMC says that amount will moderate in 2012, growing to $63.3 billion, but is expected to strengthen in 2013 to $65.6 billion.

In B.C., spending on renovations in 2011 was $7.6 billion. Spending is expected to remain stable in 2012 and grow to $7.8 billion next year.

For the most part, business is good for contractors, even in this year’s moderate market, Simpson said.

“One contractor I talked to said he’s having his best year ever,” Simpson said. “He said one client bought a home and they’re spending money to update it, but most clients want to stay where they are and bring their homes up to date.”

Another contractor told Simpson he’s had some customers having a harder time borrowing money from the bank, which may be a result of new mortgage refinancing rules. “Some people seem to be getting a little pushback from the banks, or they might not be able to borrow as much as they want,” Simpson said. “If they can’t obtain the financing, they just have to scale it back a bit. With a renovation, you don’t have to do it all at the same time.”
 

In May, the Greater Vancouver Home Builders Association held one of its twice-yearly renovation seminar for 300 homeowners. Attendees were asked to complete a survey and Simpson shared some of the results with The Vancouver Sun.

Fifty-six per cent of respondents said they plan to renovate within the next year, while 26 per cent said within 12 to 18 months, Simpson said.

“There’s a sense of urgency. They want to renovate soon.”

Homeowners were also asked if they would need financing — 59 per cent said no and 41 per cent said yes.

Next year, when the province reverts back to the goods and services tax and the provincial sales tax, it is possible that labour on renovations will not be taxed because it was not taxed under the old provincial sales tax.

Simpson said that while it’s not known exactly what will happen when the tax reverts, the transition does not appear to be causing people too many concerns when it comes to renovating.

In his survey, he asked if people were putting their renovation plans on hold until the provincial sales tax is back and 35 per cent said yes, while 65 per cent said no.

“They’re doing renovations because they want to do them,” Simpson said. “Interest rates are still really low. People are going ahead and renovating. They want to have their new kitchen regardless of the tax.”

Simpson urged homeowners to verify that a contractor is compliant with WorkSafeBC before contracting with them for any work. It’s something that Port Moody homeowner Jan Jasienczyk wishes she had done when she needed a new roof two years ago.

The contractor she hired had documents showing that he was insured and a member of various organizations, but Jasienczyk didn’t independently verify that they were accurate. She ended up taking the contractor to small claims court when it turned out she had to redo the entire roof and her garage was damage by leaking. She eventually recovered most of the money she had paid the contractor, but she says it caused her a lot of stress and heartache.

“When you get an estimate, verify everything. Are they members of the roofing association? Do they have Worksafe?” Jasienczyk said. “Do all of those things before you commit to any kind of a contract. Do your due diligence.”

Jasienczyk ended up getting her roof re-done entirely by Penfolds Roofing, which recently announced it is launching a warranty corporation to support its roofing warranties.

Simpson said cash deals are always a bad idea, but he estimates that about 30 per cent of renovations are done under the table.

“It’s rampant. People want to avoid the harmonized sales tax or any taxes,” Simpson said. “There’s about $7.6 to 7.7 billion to be spent on home renovations in B.C. this year; I believe with that much at play there is a lot of opportunities to deal with the underground economy.”
 

He says people are at risk of being sued if a contractor gets injured if they are not covered by Worksafe.

“Unless homeowners want to put the contractor’s kid through university, they better make sure their contractor is fully compliant with Worksafe.”

He said it is easy to check if a contractor is compliant with Worksafe, and renovators can even request a no-cost compliance letter.

Read more: http://www.vancouversun.com/business

Renovation reason

Goals and repairs should rule reno plans

By Mike Holmes, Postmedia News

 

Homeowners plan renovations for different reasons. Sometimes it's because they've seen a friend's new kitchen or something on a design show that sparked their imagination. Other times it could start with a repair that turns into a complete makeover. But by the time the renovation is finished, most homeowners will want to know how much that reno has increased the value of their home.

But value is a tricky subject. Let me give you a scenario: A homeowner decides to renovate their bathroom. They want the kind of bathroom that would be in a million-dollar home - but their house is actually worth closer to $500,000. The bathroom ends up costing $40,000. Has the value of the house increased by $40,000? No. At most probably just $15,000. So was it a bad decision? It depends on why the homeowner did it in the first place.

If they did it just because they wanted the bathroom of their dreams then I say the reno did its job. But if they got the new bathroom to increase the selling price of their home, then a $12,000 bathroom reno would have been enough. In other words, a $40,000 bathroom reno wasn't a smart investment.

Then there are some projects that could cost you a fortune but actually decrease the value of your home. When does this happen? Usually with very specific projects that are important and valuable to the current homeowner but not necessarily to everyone else.

For example, someone might be a huge hockey fan. So much so that they renovated their garage into a hockey-themed man cave. No doubt that reno could have cost upwards of $10,000-at least. While the homeowner sees it as a huge plus, prospective buyers might see it as a huge minus-an extra cost they will have to take on to turn that man cave back into a regular functioning garage.

So, is customizing your home specifically to your taste and needs wrong? It depends on why you're doing the renovation. Did you want to increase the selling price of your home? Or are you planning on living in the house for 20-30 years, or even growing old there? This changes how you should approach renovations.

People used to buy homes to grow old in. They wouldn't care how much a reno increased the selling price of their home because they weren't interested in selling it. But things have changed. Now when most people buy their first home they're already planning to move out within five years. If that's the case, I don't recommend renovations based on particular tastes or additions that potential buyers might see as extra costs.

Things like pools, home offices, man caves and saunas are not smart projects to invest in if you're only interested in increasing the selling price of your home.

Pools take a lot of work and money to maintain. It could be a hard sell to potential buyers. That's why there are so many companies out there that specialize in filling them in. A home office might work great for one family while others would rather have an extra bedroom or playroom. And man caves - well, I love them. But that's me. Most buyers just want a place to park their car and store tools.

As for saunas, I never recommend getting one installed inside your home. I don't care if you're planning on living in the same house for the rest of your life. Getting a sauna means a lot of additional moisture is being created within your home's envelope - not smart. If you want a sauna, build it outdoors. But don't think buyers are going to cover the cost of your installing it. In most cases, they'll get rid of it. And that will cost them - which means it will cost you in your home's selling price.

I like the idea of buying a house that you plan on living in for a long time. That's when renovating and customizing your home to your needs is smart if it makes you happy. But only start focusing on the renovations and additions you want after you've taken care of the ones you need-namely repairs.

If your roof is leaking it should be your No. 1 priority before anything else. Never mind a new kitchen or bathroom. A leaking roof compromises everything below it - trusses, insulation, drywall, joists, flooring. What good is a new kitchen if you have to tear it out because there's moisture, mould or both?

Even if you have other repairs to take care of - like a leak in the basement - address the roof first. A leak in the roof will travel to other areas in the house, damaging everything in its path. But a leak in the basement stays in the basement.

Investing in the most important repairs protects all future investments and renovations. Because when you get your priorities straight, the house always wins.

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