This is a continuation of the article published here about the OSFI B20 morgage guidline changes for 2017.
If you are familiar with mortgage brokers at all (which you probably aren’t) you would know that we also have alternative sources of lending for situations where a mortgage borrower will not qualify with a prime institution. We have what we call “B” lenders, who have higher rates but more flexible lending criteria, and we have private lenders, which are individuals and corporations who can lend money on on anything that suits them.
Already this past year, for reasons of high real estate prices, lack of money flowing out of China, and mortgage regulatory changes, and tremendous increases in equity by homeowners who are stretched financially, my private lenders, who are the “lenders of last resort” have been completely SLAMMED! I call many of them and they are short on money to lend because they have been so busy. When the private lenders run out of money, there is no one else left to go to to borrow more money. When people need money and cannot get it, then they start to miss payments. Private lending is a small part of the mortgage market currently, so it is not a US 2007 scenario, but I see it as a storm brewing.
The only reprieve from these changes will be with non-federally regulated lending institutions. I am fortunate enough that I do work with credit unions in BC, who will possibly not change their lending policies to match the federal institutions. If that happens, I will be a great credit union supporter in the coming year, and I imagine most of my colleagues will be also. However, following this through to its logical conclusion, there are three things that will likely happen with these credit unions:
- They will be so busy that they will run short on funds.
- They will increase rates substantially to adjust for their advantaged market position. Or
- They will adjust their policies to be more in line with the federally regulated institutions.
Or some combination of the above.
So, do you buy now, or buy later, or do you sell if you are currently owning?
I don’t believe that question has a blanket answer for every situation. If you are working with me, I can give you my opinion about your situation. However, it would be based on these considerations:
- Are you buying for the short term or flipping? If so, my opinion is to not buy at this time.
- If you want to buy, will you be able to buy in the new year under the new rules, even if prices decrease substantially? If not, it may be best to bite the bullet and buy now while the regulations are more favourable. In the long term, prices will surely recover, and despite the rationale behind my opinion, I may be wrong and we may just see a minor blip in prices before they continue upward. I predicted incorrectly last year as prices took a small dip before recovering and continuing to increase, and the condo and townhouse segments got hot. That was also combined with the foreign buyers tax and the new Chinese regulations restricting the outflow of money from China.
- If sellers cannot get any buyers for their properties at the price that they expect, then they may wait out the market and the inventory on the market could shrink substantially. In that case, buying now may be a better option.
- If you are thinking of selling within the next two months, I would cash out now while there is strong demand and everyone will be looking frantically for a property before January 1.
- If you are selling to move up to a more expensive property and you can wait until at least next April, then that is what I would do. Although the new regulations come into effect on January 1, properties with approvals before January 1 can close in the new year unaffected by the rule changes.
- If you are planning on downsizing or moving to a different real estate market in the next 6 months, I think that right now is a very good time to sell.
Please note that I am not a realtor and I am writing about the market from a mortgage financing perspective and not from a realtor’s perspective. However, for most people mortgage financing is the most important aspect of buying a home, and it is possibly the single largest factor in how a real estate market behaves. You cannot buy a house that you do not have the money or financing to purchase.
In conclusion, I am not completely certain what we will see happen in the new year, but if I were to guess, I would estimate for it to be a moderate to severe correction. As mentioned though, depending on your circumstances, buying a home may still make sense for you.