How Will the Latest Bank of Canada Rate Hike Impact the Housing Market? With Kyle Green

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Does another BOC rate hike mean we’re in for a summer market slowdown? Adam and Matt sit down with Kyle Green of Green Mortgage to find out how the latest Bank of Canada rate hike will impact the housing market, what mortgage term he recommends, and the best opportunities in a tough market!

Who is Kyle Green?

I’ve been in the business for 17 years. I started working with real estate investors in 2008. At 21, I was doing big presentations – the first one was because the guy didn’t show up so I had to talk in front of 600 people with next to no notice. You do it and you figure it out.

I own a mortgage company, Green Mortgage, and a mortgage brokerage. We have over 50 agents and fund $1.1 billion in mortgages each year. We help build brokers up to be their best.

And I just got married! Now that all of the wedding planning is over, we can relax.

Have you seen anything in your 17 years that resembles this moment?

No. This has been the most challenging market I have ever been in. In a high interest rate and high inflation marketplace, investors don’t want to come back in. They’re not buying and for good reason. Many people want to wait and see what happens.

We make money when people buy, renew or refinance. Obviously no one is refinancing right now because they don’t want to give up a better rate. It’s hard to win on renewals right now; you often have to go with what the bank is giving you. So it’s a tough time.

The last time we saw a market that resembled this was the early 80’s, but not many of us were brokering mortgages then, so we don’t have a good comparison.

Has the market sentiment changed with the latest interest rate hike?

Yes. Everything happens so quickly in this market.

The bond market, which determines fixed interest rates, is a predictor. But it’s hard to predict the future today. Because the market is hard to predict, the bond market is shifting a lot. It’s hard to operate when things keep changing.

We had a client where a variable rate made sense, we sent it into the lender, and then things changed and a short term fixed rate was the best option just a few days later. So we had to can the first deal and start all over again with a new lender.

Are you still recommending a 2-3 year fixed rate mortgage?

I think so. It protects you on the upside and allows you to take advantage of the soon-to-come downside when rates start to drop. A lot of our clients are looking at a 2-3 year fixed rate that balances a decent rate and not being locked in for too long.

We’re in a weird spot right now. A one year fixed rate is about 6.5% right now and a two year is 6.25%, three year is 6% and so on. So you’d be inclined to take a five year fixed rate because it’s lower. But because the marketplace is expected to change, you don’t want to be locked in at 5.5% for five years.

If you take a variable rate mortgage, you’re not protecting yourself from potential future upswings. And it’s been a crazy time of everyone under-predicting how high rates will go.

A lot of lenders aren’t offering a very good discount off of prime for variable rate mortgages. So you’re not even getting a good discount for taking a variable mortgage. Some lenders do still offer deep discounts but most banks are in a prime minus 0.2 or 0.3.

Do you think we’ll see distressed sales? Are there quick fixes for distressed sellers?

No, there are not a lot of great solutions in this climate. We’ve had a lot of customers reach out and ask about their options. In the past, refinancing was often a great option to lower mortgage payments and get out some cash. But now that’s not an option. Sometimes the only solution is to slap on a big second mortgage at 12%.

You have to find out from a distressed client what their primary objective is. Do they want to pay less interest? Or do they just need to get through the next few years? If you need relief immediately, that might mean locking in sooner to save money now.

In hindsight, everyone should have locked in a year or two ago. But with the information we had at the time, no one thought they should.

People are still sitting on more savings and liquid cash than they’ve ever had. That’s why we have inflation. They can use that money to cover themselves and get through this period. But the question is what happens if rates stay high and people’s savings run out.

Are we in for more pain in the market before it improves?

It’s so hard to predict this market. I’m cautiously optimistic. I’m not expecting this year to be great; I think it will be okay and we’ll ride it out.

We have very low supply, which is buoying this market. There’s a lot of pent up demand and we saw that in the spring. When the interest rates dropped, we saw a huge swell of people in the housing market and that was concerning for the Bank of Canada. So they raised rates again to kill that hot market.

I don’t think supply will change drastically. In the next 6-12 months we may see some more distressed sales. But I think the demand will still outpace supply.

In the next couple of years, we have massive migration coming to Canada. We will see decreased rates, even if it’s not until late 2024. And we have developers who are choosing to not start projects today, which is going to cause further supply issues in the future. I would expect a mini boom in 2025 or late 2024.

Is this a good time to buy?

Not really, but it’s better than two years from now.

It’s tough to make it work when cash flow is so tight. But if we’re expecting a mini boom two years from now, then today is a better time to get into the market.

If you take a short term fixed rate mortgage now, you might be negative on cash flow but you can renew your mortgage at a lower rate and potentially turnover a tenant for higher market rent. Your cash flow position could change by $1000/month two years from now and you got in the door at today’s prices.

What is driving low inventory? Is it the fact that people aren’t wanting to sell and part with good mortgage rates they got back in 2020?

Demand is lower because of interest rates and general market sentiment. Supply is low because people have faith in Vancouver real estate for the long term. They get in for long term appreciation and not a quick flip. A lot of clients agree that this is a tough time but they don’t want to sell.

There’s a pride of ownership in Canada and people are willing to commit their income to their housing. They are willing to do whatever it takes to hold onto it. That might mean we’re more likely to enter into a recession than the US.

Tell us about the opportunities in private lending.

We’ve seen an increase in supply and demand for private lending. It’s harder to qualify with traditional lenders, so private lending is in higher demand. I’m having to qualify borrowers at 8-9%. A standard private lending deal is prime plus 4 and there are a lot of high quality borrowers in the market right now.

You can invest in a one-off private lending situation with an individual or with a MIC (mortgage investment corporation) where you have a little less control and a slightly smaller return but it’s less work and your money works faster. The term is usually one year for private lenders.

A lot of the deals I see are 13-18% return on investment from buying property. Or you could make 10-12% return on lending out your money and it’s all cash flow. A year ago the spread between your return on investing in property and lending cash was much wider. So if you’re not sure if you want to buy in this market, you could be a lender. And in a year from now, you can reevaluate.

Usually private lending is one-to-one. You can bundle lenders up but there are some securities laws that come into play which makes it difficult. If you want to work with first mortgages and non-risky buyers, you’ll need to have deep pockets. First mortgages in Vancouver are $500,000 or $1 million or more. But for second mortgages, you could get in with $50,000.

Of course, the more money you have available, the more deals you’ll see. If you only have $50,000, I might only see one or two deals a year where they need $50,000. So in that case, it might be better to put your money in a MIC and start getting returns right away.

With private lending, you’re looking more at the property and exit strategy than the borrower. A good way to look at it is to ask if you’d be okay owning the property for the loan-to-value amount. If a lender defaults and you don’t want to own the property, you can go into foreclosure, but it’s a long process.

Can you tell us about your Airbnb in Victoria?

We bought that property in late 2021 and renovated all of the units. We also themed all of the units. We did some research on why people were visiting Victoria and themed the units based on that. So we have an orca theme, garden theme, parliament theme, west coast theme, Chinatown theme and NAVY theme.

We have a lot of people who inquire based on their trip, like people who want to stay in the orca room if they’re in Victoria to go whale watching. The idea was we could charge more and deliver more of an experience with the themed units.

We had all of the units done by May 2022. For the first few months, we were crushing it. With our six units, we were making about $40,000 per month, minus expenses, so it would be $10,000-15,000 net. September went down to $33,000 gross then it was down to $13,000 in October and lower in November. It picked up a bit in December but was down again in January and February. That was a bit of a shock because the seasonality rating for Victoria is very good, meaning that there isn’t much seasonal volatility.

I think a lot of investors decided to do short term rentals, which exploded the supply in Victoria. My thought was that supply had decreased during covid when a lot of people had to turn short term rentals into long term ones. And because it’s almost impossible to kick out a long term tenant in BC, I thought the short term rental supply would be very sticky.

I’m optimistic we’ll be able to hold on for longer than others, which should lower supply. But even the hotels in Victoria suffered last winter. Since people could finally travel, they all wanted to go somewhere hot for the winter.

If we ever want to convert our Victoria Airbnb to a long term rental, we can jump in at market rates anytime. If we had gone long term rental from the beginning, we’d have tenants paying under market rate and wouldn’t be able to get rid of them.

What and where would you buy?

Personally, I’m focusing on investing in my business. I bought a mortgage brokerage last year and am working on some technology solutions. But if I was to buy something, I’m not sure Airbnb would be the best route. I’m nervous about people buying properties to put on Airbnb if their area doesn’t have the zoning for that use.

I like Vancouver Island as a general rule of thumb. You have a growing population of people from across Canada looking for a retirement spot, looking for work in healthcare, etc. Specifically, I like Sooke, as it’s becoming more accessible.

Prince George is kind of the hub of Northern BC. It’s well diversified and you can expect good cash flow and reasonable appreciation. Kamloops is another hub of blue collar work that I like.

Calgary is an interesting market but it’s hard to get cash flow because there are less suited homes. You can usually get better rental income with more suites in a home.

Downtown Vancouver condos are actually something I would buy right now. If you look at prices from five years ago, they’re not much higher today.

We saw a ton of people moving east because of covid but they’re coming back downtown now. A lot of new immigrants to Canada will be drawn to major urban centres, like Vancouver and Toronto. You’ll also have supply and demand factors in downtown Vancouver, since you can’t build much more.

The 5 Wire: Getting to Know Kyle Green of Green Mortgage

What is one book you recommend?

Shoe Dog by Phil Knight. It’s the Nike story. I thought it was really cool!

What new belief, behaviour or habit has most improved your life?

Five years ago I started on a keto diet. I don’t mind eating the same thing all the time. I find it easier to always eat natural food and maintain my weight.

What have you been binge watching lately?

We watched a cool movie called Tetris last week. It’s the story of how they tried to get the rights to the game from the guy who invented it in Moscow. It was really intriguing!

Favourite band?

I heard Tool is coming back to Vancouver in October. I used to be a big metalhead growing up. They’re one of my favourite bands of all time.

What is something you’ve purchased recently for under $1500 that has changed your life in a positive way?

Before Christmas I was looking at buying a nice jacket for the season. And I found a green velvet sport coat. Pop on a gold bowtie and you’re festive! I play up the “green” thing pretty often but people love it.

• Green Mortgage Team