Mortgage 101 – real estate construction in Halifax | June 2022 Part 3

In this episode of Mortgage 101 with Clinton Wilkins and Todd Veinotte, as heard on CityNews 95.7 and CityNews 101.1, the guys talk about what’s going on with real estate construction in Halifax right now. From new construction homes and turnkey homes to rental units and condos, you can catch yourself up on all the building that’s happening in HRM.

Mortgage 101 with Clinton Wilkins & Todd Veinotte: Real estate construction in Halifax

Don’t feel like watching the video? Check out the transcript below.

Transcript:

The advantages of a variable rate

Todd Veinotte: [00:00:00:01] Welcome back to Mortgage 101: Your Guide to Homeownership with Clinton Wilkins and myself, Todd Veinotte, we talked a lot about monetary fiscal policy from the from the government, the Bank of Canada. And I guess to just kind of wrap that up, to finalize what we were talking about, your feelings are basically how might that impact the market when all is said and done, projecting out over the next number of months?

Clinton Wilkins: [00:00:24:08] You know, I think there’s already been some softening in Ontario. I’m sure our friends that are listening in Ottawa might be able to speak to that. You know, there are some properties that are even, may have purchase agreements on them right now that the valuations are coming in a couple of hundred thousand dollars below what the consumer has made an offer on. So, that’s certainly concerning.

In B.C. I think things are soft as well. We are not feeling that here in Atlantic Canada. And I think part of the reason is our real estate is still very, very affordable compared to the rest of the country. The average home price for a detached home here in Halifax is about $500,000, which is still some of the most affordable real estate from across this country. Will a higher interest rate impact Canadians? Yes, it will. Obviously, the amount of money that you’re putting out every month to service the debt, that’s going up. But will it retract on what’s going on in the real estate market here in Halifax? I’m not convinced yet. You know, I think it’s going to be a wait and see.

I think we need a lot more supply in the marketplace before we get into more of a balanced market. And the market’s just been so crazy, even pre-pandemic, it was still very, very busy. So, wait and see. One last thing I want to say about rates, you know, might come up again. You know, I love talking about rates. Friends don’t let friends take a fixed rate, Todd. So, you know, if you’re in a variable, stay the course. If you’re going to go and get a new mortgage, take the variable rate, you will thank me later.

Todd Veinotte: [00:01:56:12] And one of the big pluses is obviously, like you said, if you had to sell the property, it’s only three months.

Clinton Wilkins: [00:02:01:07] It’s only three months interest to get out. It will be lower. You will weather a storm over the next 12 to 18 months and the rate will go up, but it will then likely go down, especially if we get into like a recession type situation. So stay the course.

Do lenders take inflation into consideration?

Todd Veinotte: [00:02:14:17] Okay. I wanted to kind of get into the inflation conversation and how that impacts or might impact somebody when they’re determining or when you’re determining what they can borrow. Because the old sliding scale, I guess, has changed a lot with a lot of these variables, when it comes to a cost. Fuel, on and on it goes. Are underwriters considering that right now?

Clinton Wilkins: [00:02:39:25] Like the cost of everything else outside of the house.

Todd Veinotte: [00:02:42:14] Right, I guess, for example, when you when you looked at somebody a year ago, exact same budget and all of that stuff, things cost so much more now. So is that considered at the underwriting process?

Clinton Wilkins: [00:02:56:10] It hasn’t caught up yet, Todd. You know, really what we look at when we are qualifying someone is we look at what their monthly costs are to service their debt. So that’s one thing. And we look at the operating costs for the property. So we look at what the property taxes are and there is a heat calculation.

And then we need to obviously qualify people on either the stress test with the qualifying rate or the contract rate plus 2 per cent, which is ever higher. So as the property taxes go up, Todd, that’s going to have an impact. If people take on more debt, that’s going to have an impact. But do we look at things like consumer goods and fuel and stuff like that? No.

Todd Veinotte: [00:03:38:14] But to me, if I’m a lender, that that should be a consideration, should it not?

Clinton Wilkins: [00:03:42:24] Yeah. And I think in some instances, some lenders will allow some more extended debt servicing ratios. There are some banks, some of the big five that have policies specifically for bigger markets, and they’ll allow a higher debt servicing kind of ratio than they might in smaller markets. Will they retract on some of that? It’s really going to depend on what happens with the risk.

If people continue to pay their bills and they’re not having losses, lenders are in the business of lending people money, you know what I mean? So although they don’t want to take undue risk and obviously, you know, put the bottom line at jeopardy, they will take enough risk within the risk tolerance to still be doing business.

New clauses in new construction contracts

Todd Veinotte: [00:04:24:20] Okay. When it comes to reconstruction or construction loans or all of that component of it, how difficult is that when it comes to, because we know it back to inflation, what the price is, it’s unpredictable what you’re going to pay for materials. Even a few months down the road.

Clinton Wilkins: [00:04:43:27] We talked a little bit about this a few months ago. We talked about, you know, what does a contractor draw type mortgage look like, a self build versus a turnkey. Obviously, we know turnkey is are a lot safer right now, Todd. We don’t personally do draw financing here in this office anymore. It’s too risky for the appetite that we’re really able to take on. And there’s too many variables.

You are 100 per cent right. There’s a lot of challenge even with contractor builds right now. We’re getting new agreements that have some very special clauses in there. It talks about things like inflation, the cost of materials, and they’re talking about overruns. And there are some provisions in some of these contracts that I’m seeing that the borrower has to pay up to X number of dollars for any overages. And I think that’s going to become more of the norm than the exception.

As we know, over the last couple of years, the cost materials have really gone up. We’re going to see an increased cost in the labour likely, Todd.

And just imagine if you were a contractor and you went into an agreement with a consumer, but then your costs go up significantly? Somebody has to eat that. Either it’s coming out of the bottom line of the contractor or the buyer has to pay some more money. So we’re going to see some of these provisions and it really kind of protects both sides.

Pros and cons to new construction homes

Clinton Wilkins: [00:06:05:05] We had a news story here a couple of months ago where a contractor basically just went AWOL on four homes. Part of the reason was obviously the cost of construction went way up, but the values of those homes went up significantly compared to when they made those agreements. So essentially, they could resell those homes for almost double what they were in the agreements for. So, I feel for both sides.

Obviously, we do business with contractors every day and obviously we do business with people who are buying new home construction. Challenges on both sides of the table. And I think it’s a risky time for anyone that’s in construction, and I think it’s a risky time for anyone buying a new home construction. Honestly, there’s a lot more knowns when it comes to a resale home. Yeah, it’s not brand new, but somebody else worked out all the problems, probably. And you know, you have a solid product.

You know, not all new home construction is challenging and not all new construction is a walk in the park. But, you know, there’s pros and cons to buying a new home versus a resale home. And there’s pros and cons from buying a resale home compared to a new construction. So I think it’s, you really need to weigh the pros and cons and make an educated decision on what type of real estate you’re going to buy when you’re gonna buy a home.

What’s happening with real estate construction in Halifax?

Todd Veinotte: [00:07:21:26] So when it comes to, I guess, the amount of new construction that’s going on, is that impacted by what’s happening? What’s your take?

Clinton Wilkins: [00:07:30:12] We certainly need a lot of it here in this market.

Todd Veinotte: [00:07:32:08] We need a ton of it.

Clinton Wilkins: [00:07:33:09] We need a ton of it. So I think we’re certainly fast tracking some lots. You know, the municipality here in Halifax has fast tracked, I think, of 20,000 building lots. So there’s going to be a lot of construction over the next couple of years, which we do need. We need real estate at all levels. It’s not just single family, detached homes that we need. You know, we need apartments, we need condos, we need townhomes. We need all types of real estate here in Halifax to really keep up with the demand.

And, you know, the more real estate that we can get into the market, we’ll move maybe more towards a balanced market, which right now we’re not quite in. It’s still obviously so much a seller’s market. And I do feel for everyone who’s buying new homes, but I can tell you there’s a lot more real estate on the market today, Todd, than there was even a couple of weeks ago.

Todd Veinotte: [00:08:23:08] Wow.

Clinton Wilkins: [00:08:23:12] I don’t know if you’ve seen it, but there’s a ton of listings and I think some of the listings are not moving. I saw a listing in Dartmouth that went up probably they put it low, they put it on a program is what they call it, and they were expecting a ton of offers and they didn’t get any. Took it off, relisted it for a couple of hundred thousand more than what they had had listed at the first time and still not getting any action.

Homes going for triple figures over asking is probably over

So, borrowers ask me all the time, and I’m not a realtor, I’m never gonna be a realtor. But my opinion is when you were selling real estate listed for what you want to get and what you think it’s worth. And if you get a little bit above cool.

Todd Veinotte: [00:09:01:24] Yeah.

Clinton Wilkins: [00:09:02:05] I think these days of getting like hundreds of thousands of dollars over what is listed for are probably like in the past.

Todd Veinotte: [00:09:08:16] Like only a few months ago that was happening.

Clinton Wilkins: [00:09:11:14] I know. But like that’s not, it’s not good for anybody.

Todd Veinotte: [00:09:15:06] Well, it’s good for the person selling.

Clinton Wilkins: [00:09:16:19] It’s good for the person selling. But guess what? They had it listed way below the what the market value was, probably, if they’re getting hundreds of thousands of dollars over. I think listing real estate at a more realistic price is going to help rebalance the market a little bit as well. It really sets the expectation for the seller and for the buyer.

Building more rental units in Halifax

Todd Veinotte: [00:09:35:10] Yeah. So these big, huge construction builds that we’re seeing with the cranes all around, all around HRM, I’m sure Ottawa has got something similar, maybe not to the same degree, but certainly new builds going on. A lot of those are condos, are they?

Clinton Wilkins: [00:09:50:19] I would say a lot of them are actually rental apartments.

Todd Veinotte: [00:09:53:05] Rental apartments, but there would be some for purchase units in there with it?

Clinton Wilkins: [00:09:57:03] There certainly are some condo projects on the go right now. I would say they are the minority of the constructions that are going on. Most of the constructions that’s happening around the city right now is rental stock and our rentals are, we have about a 1 per cent vacancy here in Halifax. So obviously a high demand not only to buy a home, but also to rent a home. So we certainly need a lot more rentals here as well.

And I think, you know, obviously getting that type of real estate on board as well is going to help with the market. You know, people need a place to live. You know, if people are still going to migrate to Halifax and Atlantic Canada, they need to have a place to lay their head at night.

Buying a condo vs a home

Todd Veinotte: [00:10:35:08] It’s condo purchasing, I guess, is what I was getting at, is that a different animal when it comes to lending?

Clinton Wilkins: [00:10:39:20] It certainly is a different animal. Not every lender likes condos. I can tell you a lot of new construction condos do not come with new home warranty, which can be a concern for lenders. You know, some of the condos are very, very small square footage, which can also be a concern. Sometimes they are worried about things like resale.

Todd Veinotte: [00:10:59:10] Yeah.

Clinton Wilkins: [00:11:00:05] And there’s a lot of pros about condos. You know how much your operating expenses are going to be. You know, most of the things that pop up in a condo are being covered by your condo fee. So, you know, there’s pros and cons to every type of real estate. Is the condo market as hot as the freehold market? So like a detached home? No. Will it ever be? I don’t know yet.

You know, Halifax, I think is very new in the condo space. And I think it’s a kind of a growing market. In other, bigger cities, condos are kind of the norm. Here, we certainly have a lot of condos, but not as many maybe as some other markets. And I think it’s not quite as desirable to live in a condo. It’s not sexy. Everybody wants a single family detached home.

You know, Nova Scotia, you think you can just be a cat, you can have a huge swath of land, obviously there’s less and less land available, so I think we’re going to see more condos in the years to come. If I was a betting man.

Todd Veinotte: [00:12:03:18] Yeah. Yeah, for sure. But they can be problematic for a lenders?

Clinton Wilkins: [00:12:07:23] They certainly can. They can be problematic for the lender. You know, if the condo wasn’t well managed, they might not like the estoppel of the condo. You know, maybe if the finances aren’t good with the condo, maybe there’s some construction issues with the condo.

There certainly have been some condos here in Halifax that have had special assessments. And guess what? You know, the people who own those condos, they have to write a check and they need to cover, you know, any of those, like, unforeseen costs.

Todd Veinotte: [00:12:31:08] All right. We’ve got another segment left. Mortgage 101: Your Guide to Homeownership. We will be right back.

If you have any questions, get in touch with us at Clinton Wilkins Mortgage Team! You can call us at (902) 482-2770 or contact us here.

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