The stakes get higher as prices continue to soar

Province

Renting can free funds for other investments

TORONTO — Staking a claim in the Canadian housing market has never been this expensive, and it’s enough to make some prospective buyers consider renting a long-term home — but is renting going to save money or is buying still worth the investment?

Financial planners say both are viable options, depending on your lifestyle choice and personal discipline.

Today’s hot housing market has challenges that, while always present, are especially prominent, says Adrian Mastracci, investment counsel at KCM Wealth Management in Vancouver.

He said common struggles include finding an appealing home and then getting it at an affordable price.

“Today there’s more pressure to make your best offer first, and you don’t get the chance to come back with a counteroffer, usually,” Mastracci said.

“The danger is always that the market gets away on you. If it gets away and prices rise dramatically, as they have in certain locales across Canada, it really hurts when you go and plunk your money down on the table for your first purchase.”

According to a recent housing-affordability report by RBC Economics, home prices continued rising faster than incomes during the second quarter.

B.C. remained the least affordable province, but Alberta’s energy boom sent its prices up about 25 per cent, with the cost of a two-storey home jumping $28,000 in just three months.

However, even in a torrid market “you shouldn’t think this is really going to be the end-all and be-all, your best investment,” Mastracci cautions.

“It may not be — especially if you buy at a high time.”

Over 20 to 30 years, most homeowners might get an annualized return of four to six per cent, he estimates.

“If you buy today and, lo and behold, real-estate values roll back, you’re not going to look like such a great investment manager for a while.”

But with the right approach, renting can benefit Canadians working on a strict budget.

Typically these are younger professionals establishing their lives, says Joel Natareno, a regional sales manager for the Bank of Montreal.

Without home ownership tying them down, they’re free to travel wherever jobs are, don’t have to worry about maintaining a house and can concentrate on financial investments such as stocks and bonds.

“From a renter’s point of view, you’ll be able to sock away a little more if you’re looking at putting away a down payment on a house — or just enjoy living a little better as well.”

But Natareno adds: “We’re finding people aren’t saving that much more; they’re probably just spending more.”

That can put renters under financial stress, especially as they age toward retirement.

A poor investment could put a tenant’s future at risk, even with a substantial savings rate.

Natareno warns that most retirement-age Canadians couldn’t live comfortably while paying rent if they were simply depending on their pensions.

It would be hard to pay the rent and maintain the “heightened lifestyle” that many are accustomed to, he says.

Natareno doubts that the rate of home price increases in recent years can be sustained, but suggests now would be “a good time to buy if you were thinking of holding on to your home for a longer period of time.”

He advises sitting down to examine your finances and set out a plan. That means looking at your budget and cash flow, assessing the direction of your career and considering your family, travel and other aspirations.

“The best thing you could do is go and see a financial planner to talk a little bit about how you can budget to save for a house, if that’s what you’re going to do in the next five to 10 years.”

© The Vancouver Province 2006

Design will need to trump residents’ fears and perceptions of change

Bob Ransford
Sun

Retiring city planner Larry Beasley along the sea wall on the old Expo Lands. He was instrumental in creating these new neighbourhoods. Photograph by : Steve Bosch, Vancouver Sun

Work on the new convention centre in Coal Harbour is well underway and will change the face of the waterfront. Photograph by : Mark van Manen, Vancouver Sun

Recreating Vancouver’s downtown is one part of the puzzle in creating a new urban reality in the region.

Two back-to-back residential building booms over the last 15 years have certainly gone a long way to completing that important part of the puzzle.

But now the real heavy lifting starts for planners, developers, politicians and ordinary citizens.

The new challenges are many in securing our superb quality of life and ensuring that urban growth does not strangle our natural environment.

But they are different challenges than those that were tackled over the last few decades. Growth is changing and so is the canvas on which the picture of the metropolitan region is painted.

Vancouver’s two departing senior planners, Ann McAfee and Larry Beasley, listed up a few of them recently at a public forum where they recounted their thirty years plus helping shape Vancouver from their lofty positions at city hall.

Both agreed that the challenge of transforming the city’s first-ring suburbs will be a priority challenge for their successor heading Vancouver’s planning department.

Rather than focusing on the glamorous challenge associated with high-rise signature projects on empty parking lots and old commercial properties in the downtown core, the future focus will be to the south in Vancouver’s first-ring suburbs.

Much time will be spent on smaller infill projects, painstakingly consulting neighbourhood residents who fear change in any form–whether a conversion of a single-family lot to a duplex site or the entire re-development of a once sleepy local shopping plaza into a mixed-use centre.

Neighbourhoods like Oakridge, Kerrisdale, Hastings Sunrise, Main Street, Marpole and many others have the capacity to absorb more growth while becoming complete communities.

But how complete will those communities become?

The real challenge will be one of design. Design will need to trump residents’ fears and perceptions of change.

McAfee sagely pointed out that change in these neighbourhoods will need to bring not just new forms of housing, but a whole range of community amenities so that residents will be able to calculate the net community gain brought by change.

Contrast these challenges with the work of transforming Vancouver’s downtown. Remaking the downtown seems easy in comparison.

The transformation of Vancouver’s downtown peninsula over the last two decades likely represents one of the most significant achievements in re-making a North American inner-city.

We doubled our downtown population from about 40,000 to more than 80,000 people while most other North American cities are still struggling to stop the flight to the suburbs.

It was made easier in Vancouver because of the scale of a few big projects, their location and their past uses.

The north shore of False Creek would never have become the Yaletown inner-city residential neighbourhood that it is today if the provincial government hadn’t acquired a huge chunk of the land from the CPR and assembled other smaller parcels from a patch-work of industrial land owners prior to Expo 86 and then sold it as one huge site to Li Ka Shing.

Coal Harbour was also a brownfield re-development site with CPR’s Marathon Realty completing the master plan for the transformation of the old port-side rail yard into a spectacular high density waterfront neighbourhood.

Vancouver also had a beautiful shoreline with untapped potential, a huge wilderness oasis at the edge of the downtown–Stanley Park–and the Downtown Eastside as, unfortunately, a dumping ground for what’s left of the gritty industries and those forms of housing many other neighbourhoods won’t accept.

Larry Beasley rightly pointed to the Downtown Eastside as one of a few failures during his watch, albeit a huge failure.

We don’t often think of the contributing role this district played, to the detriment of the people who live in it, as the rest of Vancouver’s downtown became shiny and polished.

Tackling the tough challenges of this special district–challenges mainly man-made as most are–also must remain a top priority as Vancouver looks ahead to the next two decades of the new urbanism.

Bob Ransford is a public affairs consultant with COUNTERPOINT Communications Inc. He is a former real estate developer who specializes in urban land use issues. Contact him at [email protected]

© The Vancouver Sun 2006

Mortgage insurance on interest-only loans may do more harm than good and leave taxpayers on the hook

Ray Turchansky
Sun

Canada Mortgage and Housing Corp. recently announced moves that critics say will drive many home buyers to the poor house, as it were, and could leave Canadian taxpayers on the hook.

CMHC is offering mortgage insurance for interest-only loans and on amortizations up to 35 years, while also scrapping the typical $165 application fee on high-ratio loan products for people with less than 25-per-cent down payment.

With an interest-only loan, a borrower can pay interest only for the first 10 years, then pay both interest and principal.

Payments are initially low, but since the entire loan must still be paid off within the original amortization period, payments balloon as the principal starts being paid down, and again if interest rates rise.

The first issue is whether a government agency like CMHC should be competing with private companies like Genworth Financial in the business of offering mortgage insurance on interest-only loans.

If CMHC has to pay out a rash of defaults, the money will come out of Canadian taxpayers’ pockets. The argument has also been made that mortgage insurance protects the money lender, not the homeowner.

A recent report by CIBC World Markets noted that outstanding residential mortgages rose by 10.9 per cent during the year ending this past April, adding that “the current wave of growth in mortgage outstanding is of a higher risk,” and that the moves by CMHC imply that “we will see increased default risk in the mortgage market.”

The second issue is the wisdom of making mortgages easier to get by Canadians who are already in a massive hole of debt, with a savings rate that has fallen from 16 per cent in 1985 to negative 0.5 per cent in 2005, meaning they are now spending more money than their current disposable income.

Many people have pooh-poohed that concern, saying much of the money being spent is on mortgages, and that Canadians are actually building up equity in their homes, which is a form of savings. Indeed, borrowing money to buy an appreciating asset is generally “good debt,” as opposed to paying rent with no return.

But a survey released this month by BMO Financial Group showed that while 80 per cent of baby boomers own homes and 19 per cent have a second house, only 30 per cent intend to sell their assets to fund retirement.

Furthermore, the concept of good debt doesn’t necessarily hold in the case of interest-only mortgages.

If a person spends 10 years paying down only interest, they save nothing if the value of their house doesn’t appreciate during that period.

In fact, many people are now buying at the top of a housing boom, particularly in Western Canada, and face the likelihood of selling after the market has cooled off.

Said the Edmonton firm Hendrickson Financial in a recent commentary: “When home prices begin declining, homeowners who have recently purchased with 100-per-cent financing will have to come to terms with owing more than their home is worth. Debtors are always punished more severely in a declining economy since they are less able to service their debt and the value of the assets they have collateralized are also falling.”

That’s when you get people walking away from their homes — when they have no equity to lose and can start all over with a cheaper house that will require smaller payments.

“I understand the government is trying to encourage people to get into the housing market and that, in rising housing markets, this may be of assistance for them,” said Ottawa bankruptcy lawyer Stanley Kershman, author of Put Your Debt on a Diet. “But I think that encouraging people to do this only works if they have planned this whole process out.”

For example, with a $190,000 mortgage at six per cent over 25 years, a person paying interest only the first 10 years will spend $222,000 on interest ($410,400 overall), while a person paying principal and interest will spend $177,300 on interest ($367,300 overall).

Kershman said we’re seeing people declare bankruptcy for the second, third, fourth and fifth time, and cites a judge who over the years has had a father, son and now a grandson appear before him facing bankruptcy.

“They’re getting in too deeply, with too much debt, and as people go to either renew their mortgages or consolidate mortgages, they’re going to end up paying higher and higher interest rates.

“We are a society of minimum-down-payment people. Once they’ve got themselves four or five or six of these minimum-down-payment things, and all of a sudden the rates rise, they’re saying ‘I can’t afford the minimums anymore.’ “

As happened in the early 1970s and late 1980s, people will walk away from their homes.

Ray Turchansky is a freelance writer and income tax preparer. He may be contacted at [email protected]

© The Vancouver Sun 2006

Residents will enjoy a boutique hotel type of environment with downtown’s attractions close at hand

Rebecca Osler
Sun

Artist’s impression of how The Sapphire will rise above Coal Harbour.

VANCOUVER SUN PHOTOS Everything about the Sapphire is designed for luxury living, with counter space and closets giving ample room for easy living.

VANCOUVER SUN PHOTOS Truly the best of both worlds, The Sapphire has a fabulous location (see map) with interiors that meet the requirements of residents who expect the best.

As odd and anatomical as it sounds, think of The Sapphire as a tongue.

No, it isn’t a particularly bizarre foray into experimental architecture — Pinnacle International’s latest Coal Harbour highrise is only akin to the tongue in that it enables its residents to savour a multitude of “urban cravings.”

Located on Pender Street, it is equidistant from both the Robson Street shopping hub and the waterfront.

Grace Kwok, who is marketing the project for Pinnacle, says this “best of both worlds” situation indulges the many desires of the quintessential downtown dweller.

“Last minute, if somebody has a pair of hockey tickets, if you feel like going out, that craving could be satisfied,” Kwok suggests.

Likewise for chilling out by the water, spontaneous dining and impulse shopping.

And Kwok should know. Not only is she turning a piece of Coal (Harbour) into a Sapphire, she has been responsible for marketing seven other developments in the neighbourhood, including Classico and Vantage at Pinnacle on Pender Street and The Ritz.

Another thing she can say with certainty is that three bedroom condos, which are available on floors 27 through 33 by combining two one bedroom units, are “a very rare find in any project.” And they result in more owner-occupiers seeking to establish a permanent home.

All apartments are north-facing, and many have excellent “view corridors”.

Like a boutique hotel, The Sapphire thrives on exclusivity and luxury, starting with a concierge on duty 16 hours a day. And the structure’s slim stature means intimate floors, each hosting but three or four units.

Kwok anticipates that the concierge will be on a first-name basis with the tenants in no time.

Familiarity also means heightened safety. Kwok says that several self-sufficient, high-income female executives have purchased at The Sapphire for just that reason.

“People just feel very secure because there are fewer people on the floor. They lock up and they know their neighbours,” says Kwok.

Another buying trend Kwok has seen at The Sapphire is parents buying a two bedroom unit for themselves and an additional one bedroom next door for a grown-up child.

“So basically someone could live there with the parents next door, and you could go home for dinner,” laughs Kwok.

For much younger children, a city daycare on the ground level will be a convenient service.

The boutique feel is also apparent in the contemporary classic interior features. There are two colour schemes: sapphire (beachy blues, designer laminate cabinets) and opal (warm oranges, wood-tone cabinets).

In the presentation centre at 1366 West Pender Street, potential buyers can stroll through a 610 square foot, one bedroom display suite.

Highlights include:

– Additional storage space that can be converted into a home office.

– Granite countertops, glass tile back splashes and Bosch appliances in the kitchen.

– Electric fireplaces

– Frosted glass sliding doors leading to the bedroom and mirrors flanking the corridor to the semi-ensuite bathroom.

As for the name, borrowed from the pure, deep blue stone, Kwok says it resonates with the project.

“A jewel is usually a rare commodity, and we just felt that it’s a gem of a piece in Coal Harbour,” she says.

“A Sapphire represents style and elegance.”

SAPPHIRE

Location: 1188 West Pender Street

Hours: Noon to 6 pm daily

Telephone: 604-683-1328

Web: www.liveatthesapphire.com

Project size: 108 units

Residence size: 608 to 1225 square feet

Prices: $439,900 to $649,900 (one to two bedrooms)

$1,199,900 (penthouses)

Developer: Pinnacle International

Architect: IBI Hancock Bruckner

Interior design: False Creek Design

Warranty: St. Paul’s Warranty 2/5/10

Tentative occupancy: Fall, 2007 to Spring, 2008.

© The Vancouver Sun 2006

Heather Travis, with files from Emily Chung
Sun

VANCOUVER – The city’s newly appointed director of city planning, Brent Toderian, says planning for the Olympics looms prominently in his future. But first, he will be attending to the city’s more immediate problems of homelessness and affordable housing.

Toderian, whose appointment was announced Thursday, said he had no specific plans to deal with those issues, but wants to talk with city residents and city council before formulating them.

“I suppose I would worry about anyone coming from outside of Vancouver suggesting they already know the answers,” he said in an interview. “To me, I’m really more interested in a really creative and open-minded dialogue before we come to any conclusions.”

Toderian, 37, has been a city planner for Calgary since 2001, and will begin his work in Vancouver on Sept. 14.

“I am really excited to come to Vancouver,” said Toderian. “I’ll be moving to an urban mindset that more matches my ethic.”

Toderian said he is inheriting a strong planning team that is capable of making the mayor’s vision of Vancouver a reality. He said his first job will be to listen to Vancouver residents and city council to find out the city’s priorities.

“I think focusing on the issues that are important to Vancouverites now is going to be job No. 1,” he said.

In Calgary, Toderian said he made a name for himself by making suburbs more “urban” — encouraging services and small businesses in neighbourhoods so residents wouldn’t have to travel downtown for all their needs. He also pushed for higher density and more walking, cycling and public transit use.

In the downtown core, Toderian said he used a holistic approach to ensure social health by including enough social housing and elements that make a place fun to live in, such as parks, community pools, well-designed streets, community centres and schools.

He said a holistic planning approach to the city’s architecture encourages the growth of arts and culture through the creation of more public squares, more festivals, and ensuring public infrastructure such as bridges, lamp posts and benches are themselves works of art.

“Calgary is at a very interesting point in its history where it can move rapidly towards greatness or rapidly in the other direction,” he said. “It has been really exciting being here right now, helping tip it in the right direction.”

Larry Beasley, one of the city planners Toderian will succeed, said: “He is an excellent candidate.

“He is a very sophisticated urbanist … [and] is very committed to public consultation.”

Beasley has co-chaired city planning with Ann MacAfee for 12 years, bringing many changes to Vancouver’s inner city.

Beasley said Toderian’s most difficult challenge will be implementing Mayor Sam Sullivan’s eco-density plan to develop Vancouver, without encroaching on the natural environment.

Beasley said Toderian will also have to adjust to the geographical and social differences between Calgary and Vancouver.

“This city has a very different attitude about its neighbourhoods and downtown,” he said.

Gordon Price, director of the city program at Simon Fraser University, said the new city planner needs to have an understanding of the Greater Vancouver area, not just Vancouver proper.

He said Toderian has completed SFU’s urban design certificate program and is well experienced in suburb development.

Sullivan said Toderian’s qualifications, as well as his youth make him a welcome addition to the city.

“[Toderian] recognizes how powerful planning can be in making high-quality communities,” said Sullivan. “He is just the person we need to move Vancouver into its next stage of development.”

© The Vancouver Sun 2006

Home ownership: Life on the edge

Harvey Enchin
Sun

Buy now, don’t pay until 2016! It’s the kind of pitch you’d expect from a low-brow retailer, not a federal Crown corporation. But Canada Housing and Mortgage Corp. appears to have expanded its role as a conduit for government social policy to shill for the real estate industry.

How else to explain its introduction of the “interest-only homeowner mortgage insurance product” that allows a borrower to pay only the interest on the loan for the first 10 years with as little as a 10 per cent downpayment. CMHC has sweetened the deal even more by extending amortization periods from 25 to 30 years and waiving its high-ratio mortgage insurance application fees.

I don’t doubt CMHC’s good intentions to make home ownership more affordable and accessible but the risks may outweigh the benefits to buyers in such a highly-leveraged arrangement. Home ownership should lead to security and stability, not life on the edge.

CMHC maintains that it must respond to consumer demand with new products in order to remain competitive with rival mortgage insurance providers. But if the private sector is already offering these products — and it is — why does a government agency need to compete? Established 60 years ago to help returning war vets find housing, CMHC has evolved into Canada’s largest provider of mortgage loan insurance. It also guarantees Canada Mortgage Bonds, advises on federal housing policy and delivers programs, including administration of Granville Island.

So CMHC has a full plate without battling for market share against Genworth Financial Canada and GMAC Residential Funding of Canada, two of the largest private companies in the mortgage insurance business, and which, by the way, will insure a mortgage up to 95 per cent of the value of the purchase price. If private companies want to risk their shareholders money lending to borrowers who don’t meet standard debt service ratios, that’s their business. If a Crown agency wants to similarly risk taxpayers’ money, that’s our business.

In any case, the real risk is borne by the borrower, who could wind up homeless if expectations of price appreciation, interest rate levels or cash flow turn out to be too optimistic. After a decade, with little money down and no payments on principal, the buyer could end up with almost no equity in the property, which seems to defeat the object of home ownership.

Even Bank of Canada Governor David Dodge, who knows a thing or two about interest rates, criticized CMHC for backing interest-only mortgages. He argued that they could fuel inflation by raising housing prices, making home ownership less, rather than more, accessible and affordable.

CMHC says the interest-only option will give borrowers “with a proven history of managing their credit responsibly” a lower monthly payment, which will increase short-term cash flow. The key word is short-term. On a $190,000 mortgage at six per cent with a 25 year amortization, a borrower who only pays interest over 10 years will pay $115,700 in interest, compared with $100,600 for a conventional mortgage, according the CMHC figures. When the interest-only period ends, the borrower will then pay a higher monthly payment than would otherwise have been the case because the amount of the blended principal and interest payment must be sufficient to retire the loan within the 25-year period.

CMHC counters that most borrowers who choose the interest-only option will likely pre-pay principal at some point over the 10-years.

This rosy view seems at odds with a Statistics Canada study that showed nearly half of all Canadian households spent more of their pre-tax income in 2001, and that the proportion doing so had risen from 39 per cent in 1982. It added that households that spent more than their pre-tax income were likely to be renters and homeowners with a mortgage.

By the end of 2005, Canadians owed an eye-popping $992-billion, of which 60 per cent was mortgage debt. According to StatsCan, Canadian households carry about $1.08 in debt for every dollar of disposable income. A contributing factor to the increase in debt-financing, it said, was a dramatic drop in interest rates, creating an “easy credit” environment. No money down and no interest to pay for 10 years is a no-brainer when house prices are climbing 50 per cent a year. But what if prices drop? It’s been known to happen. Will the drop become a plunge as thousands of homeowners try to sell properties in which they have no equity?

In the United States, where interest-only loans have been on the market for several years, they have captured up to 15 per cent the residential mortgage business. Of course, Americans can deduct mortgage interest from income tax, which makes it a different ball game.

Jack Guttentag, professor of finance emeritus at the Wharton School of the University of Pennsylvania, warns in an online tutorial that “interest-only mortgages are for borrowers who have a valid use for a lower initial required payment, and are prepared to deal with the consequences.”

In other words, they are not for the average home buyer. Paying down mortgage debt is the surest way for most people to amass wealth. But paying interest without building equity sounds like a financial plan built on a flimsy foundation.

© The Vancouver Sun 2006