A common concern I hear is that the Calgary/Canadian housing market is in a bubble.  That a client wants to wait for the market to “come down”, and then they can afford to purchase what they really want.  They point to all the markets of the world (especially the United States, and more recently, Europe), where home values have dropped, often times 70% off their peaks. Are these clients fears right?  Caveat:  I do NOT have a crystal ball nor am I an economist; these are simple my thoughts and interpretations.

First, the house market is local.  People pay for a location.  What happens 100 miles away, let alone 10 000 miles away, often has little impact on the local housing market.  People are only willing to travel a certain distance between work and home, and it is events in this radius that impacts pricing the most.

So, while I am always aware of what happens nationally (interest rates, mortgage financing rules, and general economy) and internationally, I am most concerned about local events.  The most important of local events, in terms of the housing market, is the economy.  As the local economy grows, it eventually needs more workers. In Calgary, this local growth is usually fuelled by the oil patch. The “patch” needs more skilled workers, and raise their wages to attract these workers, often canabilizing skilled employees from other sectors, which also raise their wages. As the local wages increase, it becomes worthwhile for people to move to Calgary to take advantage of the higher wages, and the worker shortage is filled.

The increased population needs more housing, and it’s this increased housing need that drives up the cost of housing. House prices are local, driven largely by the local economy, which in Calgary’s case, is fuelled by oil & gas. If the local economy is not creating jobs, if there is no population growth, then there is little upward pressure on housing.

For those that are still concerned about international real estate markets, I would put forth that they were MASSIVELY overvalued in comparison to Canadian standards.  An interesting article can be read here: http://www.canadianrealestatemagazine.ca/news/item/958-compared-to-global-real-estate-markets-canada-is-mostly-average

People point to Ireland who has recently had 3 years of price declines, but what most fail to realize that over the longer term, it’s HUGELY up.  Starting from 1992 to 2007 home prices gained 330% , and even after 3 years of decline is up 150% (inflation adjusted). Australia 114%.  UK 149%.  The US is more balanced, returning to a mid 90′s valuation (they also overbuilt more than others and have more of a mortgage financial mess than other countries, sparking the recession in 2007/8).  So, short answer, is that Canada is AVERAGE in terms of valuation, compared to other western countries (relative to valuations from the 1990s).

Some also point to some news releases that show that certain markets in Canada are overpriced, relative to other Canadian cities.  It is true that Victoria, Vancouver, Toronto, and even parts of Saskatchewan and the Maritimes have had double digit price appreciation last few years. I’m not qualified to make judgements for the entire country, but I know that Alberta’s economy is a stellar performer (compared to most other provinces), and that I have MUCH less concern about investments here than other provinces.

Real estate is local.  Our economy is strong. We are not grossly overvalued.

Every so often, I hear from a first time buyer “is there anything more affordable?  Someone told me about mobile homes”.  And, on first glance, mobile homes are a good idea.  Relatively inexpensive (older units can be purchased for under $20 000), offering 3 bedrooms, and your “own” space (no condo board disallowing the dog).  However, these advantages are usually offset by a slew of negatives.

Disclaimer: many people do confuse MOBILE homes and MODULAR homes.  Mobile homes are made to be transported and have a metal frame underneath to make transportation easy. Modular homes are constructed off-site, in a factory (like the mobile homes), but are an all-wood construction intended to be moved ONCE.  Modular homes are placed on a normal concrete foundation and can be almost indistinguishable to a stick or site built product.  The following discussion is addressing the shortcomings of MOBILE homes.

The biggest disadvantage is that while you might own the actual HOME the land under it is owned by the mobile home park. In Calgary, these lot rents can be $600-700 a month (verified, Greenwood in the NW is $675/mo).  If I were to reallocate the same rent towards a mortgage, it would pay for the first $160 000 of a house/condo (and, yes, there are a few places that can still be bought for this much in Calgary).  Of course, in comparison to a mortgage, lot rents tend to rise (Greenwood rose from just over $400 to just under $700 in the last dozen years), while you pay down a mortgage (about 37% of the payment is principal) reduction.

Second, mobile homes tend to DEPRECIATE in value, much like vehicles. Homes tend to APPRECIATE and go UP in value.  A new mobile home can cost easily $200 000 (double wide, 1700 sq ft manufacturer site), and, much like how your new vehicle drops 10% in value when you drive it off the lot, your new mobile home does something similar. In contrast, homes/condos appreciate, like a rare collector’s item.

Third, banks don’t really LIKE mobile homes. In Alberta, there are only two lenders who usually even consider a loan request. Banks like making loans on assets which are secure and hold their value. If they loan you $100 000 for your home, and it DECREASES in value, there is a greater chance of you defaulting.  Also, if they ever did have to foreclose, they also need to pay for the lot rent.  As such, the banks treat mobile homes like a car loan. Short amortization, higher downpayment, higher interest rates.

Fourth, the actual construction is also a MAJOR disadvantage.  Unless it’s a double wide, the limitation of constructing a home that is only 14 feet wide has a major impact on the layout. Beyond the layout, given the constraints of keeping a low weight, for transport reasons, means that the walls are thinner compared to a conventional home. Apart from just being weaker (ever feel the vibrations of a washer machine in these homes), it also allows for less insulation. This might not be bad in the US, but I like my walls 6 inches thick, with lots of insulation. When it’s -30 insulation DOES matter.

I do think that mobile homes have a role in housing.  They are great for temporary settlements, either for commercial reasons (ATCO made an entire industry setting up small cities for the oil patch, and moving these as the needs dictated) or as emergency shelter (possible to ship in hundreds and quickly create a new city/temp housing, after a devastating calamity like the Slave Lake fire).  But, in the city of Calgary, I do NOT think they are a smart long term investment.

The city of Calgary is an amazing diverse city, with 176 (according to their count) subdivisions, all with different needs and developed in different times. Our housing is slowly progressing towards increased density (witness the current mayor’s battle to allow secondary suites), with increasingly skinny lots in new communities and increasing number of condo townhouse and apartment developments. In the inner city, this drive for increased density has primarily been seen with the development of infill lots.  This is where a developer buys an older home, knocks it down, and constructs a new dwelling(s).  Most often, the developer/builder is building a duplex, but also larger single family homes and triplexes/multifamily sites if the land is large enough.

Over the years, I’ve been asked by many clients what the criteria is for infills.  Some have asked as they have thought about the “easy” money of doing these developments. Some have been just curious. Let’s go over some of the details.

The first is the correct zoning, usually some form of R2/RC2 or better.  Second is 15.2 m of front exposure (50 feet wide), such that each property is at least 25 feet wide (7.6m lot).  While it is possible to fit a single family home on 7.6m/25 ft, it’s often wise to utilize a duplex/attached home design.

For a detached home, I need a few feet on each side yard (2 side yards * 4 fee) leaving 17 feet of housing.  The walls are an additional foot (6 inch walls, either side), leaving 16 foot wide house.  Now assuming that it’s not just a big open box on the inside, you have SOME hallways.  Each hallway is 4 feet, leaving a maximum of just under 12 feet (accounting for interior walls) for room widths.  As a duplex, these COULD be 16 feet.  Those extra 4 feet can massively change the feel of a home.

The city has some rules in regards to how much of the lot we are allowed to cover.  While this does vary from community to community, it’s usually around 45%.  That is, 45% of the lot can be covered by the HOUSE, raised DECKS, covered PORCHES, and GARAGES.  It is surprising how little this 45% coverage actually is when you are attempting to increase density.

Most of the infill communities want to preserve the existing streetscape and getting a double front drive garage home approved by the city is the exception, rather than the rule.  The city usually makes it a condition of subdivision approval that you must provide 2 parking stalls per home; anyone paying $500 000 – $1 000 000+ wants to park indoors, so the developer builds a garage.

Keeping the math simple, lets say 20×20 minimum or 400 sq ft (24×24 or almost 500 sq ft would be preferred, but let’s use the minimum for now).   And let’s say you bought a lot that was 50 feet wide by 100 feet deep, for a total of 5000 sq feet.  You divide the lot in two, leaving 2500 feet each side. Of this, we are allowed to cover 1125 sq feet.  If 400 is used by the garage, we have 725 sq feet left for the house.  The mathematics ensure that we build UPWARDS, so you’d have a house that is 1450 sq feet, using this example.

I usually advise clients to get as much land as possible, as I don’t think many really want a small 1450 sq ft infill.  If the lot is 20 feet deeper, the house could be 1900 sq feet.

Again, these are meant just as a GUIDE as every community is different, but it’s enough for a rough idea.  I’d be happy to meet with you and review your concerns about infill developments.

Most first time home purchasers are rightfully confused in regards to the several different types of insurance that they need to purchase to purchase the home. Insurance protects against risk; different risk, different insurance products.

1. Mortgage Insurance / Default Insurer
2. Mortgage LIFE Insurance
3. Life insurance
4. Property Insurance
5. Title insurance
6. Warranty (not quite insurance, but close)

Looking over the list, it’s no wonder that clients get confused.  Heck, it IS confusing.  Let’s demystify it.

Mortgage Insurance/Default Insurance

To understand mortgage insurance, you have to understand that banks are risk averse.  If there is any chance that they could lose money by giving you a loan, they decline. Historically the banks would want 25% of the purchase price of the home up front as the deposit, theorizing that with such a large up-front sum, even if some calamity struck the family, worst case scenario the bank could always foreclose and sell the home without risking it’s own resources.

Let’s say that the Jones purchased a home for $200 000 (I like round numbers), putting down 25% or $50 000, having a loan of $150 000.  Let’s assume that they get into some financial difficulty, the Jones could always try and sell the home, and worst case, the bank would foreclose. As long as the sale nets $150k, the bank is safe (less selling costs).

Imagine the difficulty in saving $50 000 today. How many years will it take? Will the prices have moved up by then? And, realistically speaking, only a small fraction of home owners will ever have their home foreclosed upon. So, to help all of these people mortgage default insurance came into being.

As a quick example, say the Smith’s purchased the same property, but needed to only save 5% (or 10 000), getting the loan for $190 000.  More risk for the bank, but with the mortgage insurance in place, the bank has a good solid loan. If the Smiths DID get into trouble, and the bank had to foreclose, any shortfall would be covered by the default insurer (most common is CMHC). Let’s assume that the home sold for $180 000 in the foreclosure process, meaning the bank lost $10 000; the default insurer would forward the $10k to the bank. It’s an easy loan for the bank, with little risk.

However, it is the purchaser that pays for this insurance.  The rate charged is a ONE TIME charge that is good for entire life of the loan. The insurance in this case would be 2.75% of the loan value AND the rules allow this to be added to the mortgage. So, the purchase becomes this, $200 000 purchase price, $10 000 down, $190 000 mortgage * 2.75% for a loan total of $195 225. The Smiths saved only $10 000 (not $50k like the Jones), by paying a reasonable insurance fee.

Mortgage LIFE Insurance

A insurance product often pushed by the banks, preying on purchaser’s fears, with advertising touting such lines as:

• “If you die, wouldn’t you like to have your mortgage paid for you?”
• “Protect your family, even when you aren’t there”
• “What would happen to your kids/wife(or husband), if you were to die? Could they afford to still live in this house?”

And many people buy this insurance.  Essentially, if you die, they pay of the debt. Sounds good, but the bank ALWAYS has monetary motivations:

• fees charged are often much higher than comparable term life insurance (next topic)
• insurance coverage declines with mortgage loan balance.  As an example, let’s say you the Smith’s from above paid $100/mo for the insurance (one dies, bank pays off the $190k loan). In the early years, this isn’t bad ($100 / mo or $1200/a to insure $190 000 in debt, a ratio of 150 debt to fee). In later years, it is NOT nearly as good (year 24 when only a few thousand dollars remain of the original debt, let’s say $8000, they still pay $1200/a, or $7/1 ratio debt to fee).
• not portable to following properties

Because of these reasons, I suggest most home owners consider term life insurance (the simplest of the different forms of life insurance, covered next)

Life Insurance

Insurance professionals can explain all of the varieties of insurance, but for this situation/example, I would choose term life insurance. Basic, cheap, and effective. In term life insurance, you will a fixed amount per month for a fixed amount of coverage. There are MANY life insurance providers; it a competitive industry that does provide good value and peace of mind.

Just a few weeks ago a client mentioned that they were paying their bank $60 biweekly more “mortgage insurance” in case on of them died. The mortgage was for $290 000, the couple was in good health, mid-thirties. $60 * 26 weeks is $1560 ANNUALLY (and remember the coverage DECLINES with the mortgage and is only good for the term of the mortgage, typically 5 years or less). I asked a life insurance professional about what the costs SHOULD be; for about $30 a month ($360 a year) she told me you can buy about $250 000 of coverage guaranteed for 30 years. A quarter the cost, fixed for 30 years (unless you cancel), and fixed (not declining) coverage. Seems like a good peace of mind.

Property Insurance

This form of insurance will protect you against fire, acts of god, theft, vandalism and just about any risk with the proper rider (specialized insurance for a specialized risk added to the basic policy). Depending on where you live you may change some of the insurance coverage. For instance, if you live in a coastal areas or along a river/creek (I’m thinking of High River), flood insurance would make sense. If you lived in Florida, riders for hurricanes would be smart. California has earthquakes.

The bank will INSIST on adequate fire insurance prior to advancing the funds. The mortgage is essentially an IOU (I Owe You) that is secured against property (your home). If your home goes up in smoke, the bank security is gone. So, they’ll insist on having insurance to cover. Some people will add extra insurance/riders to more properly care for the contents of the home. If you have expensive works of art, large sums of cash, electronics, etc. you should ensure that the insurance is adequate.

As an aside, condominiums will have insurance covered in the condo fees, but will NOT cover the contents. My recommendation is to purchase CONTENTS insurance to complement what is provided through the condo corporation. You’ll want to have the money to purchase whatever was lost (clothes, furniture, electronics). This is very similar to what tenants often purchase to protect their valuables.

Title Insurance

A relatively new form of insurance that is relatively uncommon, but CAN provide valuable protection. The most common time that I recommend the use of title insurance is when buying a foreclosure property. Lenders make it a practice of selling foreclosures on an “As-Is, Where-Is” basis with no documentation, disclosure, or warranty. One of pieces of documentation that is provided by the seller to the buyer in most regular purchases (standard clause in all purchase contracts) is a Real Property Report (RPR) essentially a top down map to the property completed by an Alberta Land Surveyor and  with a Certificate of Compliance from the city. This ensures that all the fences were built where they should have been, the garage doesn’t intrude into the rear setback, and the deck is not in the side setback. The home is where it should be. Without this “map”, the buyer has none of this assurance. Lender usually insist that before they advance funds that either this map is available or we purchase Title Insurance.

Warranty

Unless we are buying a new home, there is typically no warranty provided. New homes may be covered under several different programs (my personal favorite is Alberta New Home Warranty) which typically cover EVERYTHING for ONE year, structural items for FIVE years, with an optional extension to the structural to TEN. Individual items in the home are often left to the various manufacturers (ie. Kenmore for the fridge, Lennox for the furnace, etc).

A new warranty is now offered through a partnership with MaxWell in which warranty for appliances, furnace, water heater, plumbing, electrical, etc can be purchased for just $300/a. I think it might be something that clients may want. Contact me directly for additional information or here.

Summary

No one likes risks. We carry insurance to protect ourselves from these risks. I hope that I’ve demystified the various insurances and INsured that you’ll have the proper protection.

I am NOT in the insurance business, and I encourage you to speak to the individual companies/corporations that provide these various insurance products for specific knowledge and questions.

During the purchase process, clients are exposed to a variety of new and unfamiliar products. One of the newest and HOTTEST (pun intended) is tankless water heaters, also called instant water heater. These units are usually much more expensive to install, claim to be more efficient, save space, and offer limitless hot water. Do these claims measure up? Is the extra cost worth it? What is the payback period? No limits on water? Let’s look at a few options.

The regular hot water tank has been a fixture that everyone is pretty much familiar with. We heat a certain amount of hot water (often 50 or 60 gallons) to a pre-set temperature and STORE it until use. The tanks are insulated to help prevent heat loss. As hot water is called upon for bathing, dishes, laundry, etc. fresh cold water enters the tank, dropping the temperature of the water. The tank sensing the temperature drop begins to generate heat, but as most tanks do not have a RECHARGE rate nearly as high as the DEMAND rate, it’s common to deplete the tank.  Just ask anyone that has ever had the fourth shower in the morning and ask if it was a pleasurable experience. These storage hot water tanks have MOSTLY been gas fired in Alberta, but can also be electric. Technology has also been applied in newer tanks, increasing efficiency (more on this below).

The appeal of the tankless is that it heats the water as needed, so that there is no need for a large storage tank AND even the fourth, fifth or eighteenth consecutive shower should still have hot water.  For these reasons, they are called INSTANT or TANKLESS water heaters. They also are more efficient (no losses during storage). Sounds perfect. What is the catch?  Well . . . several:

1. cost to purchase
2. cost to install
3. energy savings – how accurate are the claims
4. is the water really limitless?

These instant tanks are more sophisticated and technically advanced compared to the “old” storage hot water tanks. Such sophistication does cost more. The tank cost $800 to a couple thousand, depending on size/capacity and features. As most of these tankless water heaters are powered direct vent, they require to install (assuming replacing existing):

1. electrical connections, meaning a licensed electrician (although same work as the newer high efficiency fan driven exhaust on storage tanks)
2. plumber (extra work compared to replacing an existing unit)
3. venting (will need need venting, including a it’s own fresh air and direct vent to the exterior)
4. exterior penetration of building envelop for fresh air and combustion air. I worry about many unqualified people poking holes in the home without an understanding of how to seal/weatherstrip/finish the project such that water, cold, or vermin don’t have a new access route
5. potentially, new permit/inspections, depending on municipality

To be fair, any new high efficiency storage hot water heater will face several of these same costs, as they will have the same electrical and venting requirements.

Energy savings really is 3 parts: efficiency, gas cost (variable), and waste

1. The first part is how efficient the unit is compared to standard and new high efficient water heaters. Newer storage tanks and tankless BOTH have similar efficiency for ACTUALLY heating the water (anywhere from 80-94% efficient), comparing favorable to older gas heaters at 50-60%. In comparing newer high efficient tank and tankless, the only difference is in the standby heating (costs to reheat the water as it waits to be used). Most manufacturers of tankless products point to this as wasteful (which it MAY be, see point 3)
2. Gas prices have varied GREATLY in the last several years. Prior to the recession, natural gas prices soared (high demand, both as a fuel for electrical production/heating and for the chemical components) making it very expensive to heat homes. Between the recession and the competing new source of natural gas (shale gas), the price has dropped substantially. In the last 5 years, we have hit winter highs of $9 – 11 /GJ. Current pricing (February 2011) is under 3.5 / GJ or roughly, a third. This severe drop in the prices means a MUCH longer payback period.
3. As mentioned above, the “waste” or standby heating loss of tank systems is one of these heaters greatest “flaws”.  But, is it really wasted? In Calgary, the heating season stretches from October to mid May (and often even longer and during the evening/night). This waste/standby IS going someplace as it DOES heat the home. It might not be directed via ductwork as the furnace, but it does contribute to heating the home. The only time this heat is wasted is when it’s unwanted, essentially the summer months of June, July and August.

Limitless hot water. True or false? This is a grey area.  The manufacturer is correct that I could turn the kitchen faucet on, walk away, and come back in a month and the water would still be running hot. However, the tankless system might be incapable of supplying hot water to BOTH a kitchen faucet AND a shower simultaneously; compared to a tank that could have 10 taps running AT ONCE, but only have hot water for a few minutes. This limitation means that you need to ensure that a sufficient sized tankless system is installed, that can handle all of the household needs. In many ways choosing the tankless capacity is the same as choosing between a 40 and a 60 gallon tank system; choose the system that is appropriate to your situation.

The last advantage of tankless hot water heaters is space savings. This is 100% true. Given the costs of today’s homes, you would be able to reclaim about an area 3×3 or 4×4 feet (9-16 sq feet) for household use, compared to tankless which often measure only 9″ deep x 14-18″ wide and 24″ tall, able to be mounted just about ANYWHERE.  These space savings alone might be worth all of the costs without the added incentive of increased efficiency.

Without complicating the choices with integrated systems (a boiler providing heat for both domestic hot water use and space heating; boilers and tankless share many similarities) which will be explained in  a later blog post, I hope this quick guide aides your choice in your home renovation/upgrade/purchase decision.