STEPHEN PUNWASI (BETTER DWELLING) - Canadian home buyers may be looking at higher mortgage rates sooner than expected. At least if they want to lock in their mortgage interest rate. The 5-year Government of Canada (GoC) benchmark bond yields in February, are almost double last year’s lows. Since 5-year fixed mortgages are influenced by these rates, they are likely to climb soon. As quickly as falling rates introduced market liquidity, rising rates may reduce it. Even if the overnight rate remains untouched for the next year.
Government Bonds And Mortgages
Credit markets are related, since they tend to compete for a similar group of investors. Bond yields rise when demand for bonds is high, and falls when investor demand for the debt is low. The market basically self-regulates risk this way. There’s less reward when the market is crowded, and more reward when there’s more investor risk. After all, if you’re lending in a riskier situation, you should ask for more incentive to do so.
Now, let’s clarify. Government bonds aren’t risky in the sense that the government won’t pay you – at least in Canada. The largest risk for bond investors is inflation. If you’re stuck with a yield of 0.5% and inflation is 1%, you’re losing 0.5% of your money in real value over the period. There’s some cases where that’s acceptable, but generally it’s not very attractive. As inflation expectations ratchet higher, so do yields to attract investors. The opposite is also true – when inflation falls, investors may accept lower yields.
How does this relate to mortgages? Many mortgage products are influenced by government bond yields. The stronger correlation is between the GoC 5-year bond, and 5-year fixed mortgages. Since mortgages are “riskier” than GoC bonds, they have a premium for risk. Experts have observed the spread between the two is about 120 bps on average. It can be higher or lower, depending on what the market determines to be appropriate. However, generally when the 5-year GoC bond climbs, the 5-year fixed mortgage follows.
Canada’s 5-Year Bond Yield Is Almost 2x 2020’S Low
The 5-year Government of Canada (GoC) benchmark bond yield is rising from all-time lows. The yield reached 0.59% on February 18, 2021, an increase of 17 bps from just a month before. Compared to a pre-pandemic last year, the rate is still 75 bps lower, but also almost double the bottom of 0.30% reached in August 2020. This is the highest rate the market has seen since the first week of April. Granted, it’s still extremely low, but at these levels small moves translate into relatively big changes.
5-Year Government Of Canada Benchmark Bond Yield
Rising Rates Can Mean Less Liquidity For Sellers
Still no clue what that means, eh? Okay, let’s work through an example, if mortgages maintained the average 120 bps spread. The maximum borrowing power would have declined about ~1.9% from just the previous month. From the bottom in August, this would work out to a drop of 3.3% to the maximum mortgage size. It may not seem like much, but every reduction of borrowing power pulls back the velocity of price growth. It’s essentially a reduction in the amount of liquidity sellers have.
Is this conclusive evidence mortgage rates will be on the rise? No, but in context things are starting to look that way. The economic recovery is much faster than the BoC had forecasted. The BoC has also stopped QE for Canada Mortgage Bonds (CMBs), which pushed rates even lower. This likely isn’t to change someone’s opinion on buying, since most buyers have no clue what it means. However, if lowering rates pulls forward buyers, rising rates tend to delay or lead to smaller budgets.
Recent deal saw 614 units owned by Vancouver-based Hollyburn Properties in the West End, South Granville, West Point Grey, Kitsilano and Marpole areas sold to two Ontario-based real estate investment trusts
JOANNE LEE-YOUNG (VANCOUVER SUN) - The COVID pandemic has lowered demand for rental properties and thus what landlords are charging, but investors looking to buy apartment buildings to earn a financial return believe this is temporary, says a B.C. real estate executive.
Lance Coulson, an executive vice-president at commercial broker CBRE, sold 15 rental apartment buildings, nine of them of concrete construction and on the west side, for almost $300 million in late January.
The deal covered a total of 614 housing units in the West End, South Granville, West Point Grey, Kitsilano and Marpole that were owned by Vancouver-based Hollyburn Properties. They were sold to two Ontario-based real estate investment trusts, Ottawa’s InterRent and Toronto’s Crestpoint, for $292.5 million.
Because of its size, the deal is being cited in a motion to Vancouver city council, submitted by Coun. Jean Swanson and calling for “protecting tenants from real estate investment trusts.”
The motion, which is on Tuesday’s council agenda, proposes council write to Ottawa about the growing number of rental units owned by REITs and the “commodification of housing, housing security and affordability for Vancouver residents.”
It asks Ottawa to base tax rates for REITs “on the amount of affordable housing they provide or destroy” and for the federal and provincial governments to help facilitate the buying of rental stock by non-profits and co-operatives. Other proposals include tying financing for these deals with clear conditions to prevent rent increases upon tenant turnover.
More real estate investment trusts, which have deep pockets and make investments so they can pay shareholders, are interested in Vancouver and B.C. properties, but it’s hard to predict if other large deals like this are coming, said Coulson.
“Vancouver is not a big market compared to Eastern Canada. In Ontario and Quebec, they’ve got more land, more product and stock, and these portfolio sales are more common,” he said.
He said that apartment buildings, which offer a basic need of shelter, are a “defensive asset class” for institutional investors like REITs that want to offset some of the losses they face with their retail or office properties that have been hard hit by the pandemic. Interest rates are also very low with financing available on multi-family purchases as low as 1.7 per cent, he added.
Investors have confidence that “when students and migration return” after the pandemic, vacancy rates will once again be very tight and rents will increase.
The sale marks InterRent’s entry into Vancouver. The REIT ranks 15th on a list of the top 25 largest landlords by the number of suites owned in Canada. The list was compiled by a University of Waterloo planning professor, Martine August, for a report in 2018 looking at the shift to rental housing being increasingly owned by funds that consolidate thousands of suites.
August writes that InterRent REIT looks for markets that are “fragmented in terms of ownership and are not generally the focus of larger REITS” and that it identifies “greater opportunities for rent increases” in these markets.
That would be a dim outlook for tenants in those buildings with prime locations who, even with housing costs dampened by the pandemic, face significant affordability issues in an expensive market. Critics of rising REIT ownership of apartment buildings say rent controls would temper rising costs.
However, said Coulson, many of these existing rental apartment buildings need investment. “If your operating expenses are going up and you can’t grow your rents, you’re getting negative cash flow,” said Coulson. “That money is going to go somewhere else.”
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