What Impact Will The New Mortgage Rules Have On The Market?
First off the sky is not going to fall due to the changes however we will see a slowing in the market for the next market cycle. Typical market cycles for Vancouver Real Estate are the spring market which is March to June and the fall market which is from September to December. Market cycles are a period of time that there is the highest volume of transactions.
The impact of the rule changes will most affect the upcoming spring market cycle. During this time the market will adjust to the changes in buyers affordability. This adjustment will likely result in a reduction in the amount of transactions and thus put pressure on prices to come down if the inventory levels rise past the demand of the buyers. In the short term we will see the market pick up as buyers try to capitalize on the mortgage rules that are still in effect.
If the past is any indication of the future we would predict that potential sellers will either hold firm on their pricing or wait until the buyer’s confidence has returned before they put their properties on the market. This was the case when the Foreign Buyer’s tax came into effect in August of 2016 and I suspect it will be the case here.
Once the dust has settled at the end of the spring market we feel that the lack of transactions will create a pent up demand for housing in the Vancouver area. Buyers who need to find housing will see that the market has not “crashed” and will step back in. This spike in confidence should take back any reduction in the overall bench mark prices and the market will do what we like to call a bounce. Rebound to where it was at the peak once the buyer confidence returns.
So overall the effects of the mortgage rule changes will be that Buyers will have to adjust their budget down by 20%. In simple terms this year you can afford a 1000sqft 2 bedroom condo with a view and next year you can afford an 800sqft 2 condo with no view. People still need a place to live if they are going to live in this city so they will just need to accept less to do so.
Over the years we have seen real estate prices increase to a point where your average person may not ever be able to afford to live in this city. If you spend time reading the comments on any real estate article you will find there are a lot of people that are upset at the lack of affordability in the city and are looking to the government to step in to change things. We are in full agreement that changes need to be made and we have seen progress made on this with the Federal, Provincial and local governments implementing new rules and guidelines. These new rules and guidelines are simply an insurance policy to ensure that we will not see an economic meltdown like we saw in the US in 2008. Unfortunately we do not predict this will have a large affect on overall prices.
In accepting that Vancouver is an amazing city in an amazing country with an amazing diverse and welcoming culture and the only way to decrease the demand for people wanting to live here is to give up one or more of these qualities. Given the state of the world these days it is no wonder that people want to live here. Whether we like it or not we live in a capitalist based society and it is expensive to have it all.
What Makes Buyers Tick?
When it comes time to sell your home, taking the time to understand why buyers make their decision to buy can put you one step ahead of your competition.
There are 2 fundamental parts to the buying process. The scale starts at emotion and ends at justification. Every Buyer makes buying decisions based on these 2 factors, or a combination of both, and when it comes to buying big ticket items like real estate, these factors are generally amplified.
Buyers will tend to lean to one side of the scale or the other rather than in the middle depending on their personality. To one extreme, Buyer’s will make their decision based on a feeling. Often we will hear the words “it just feels right”. On the other end of the scale a Buyer will only make the decision to buy if their spread sheet says that they should.
Knowing how Buyers make these decisions is key to having the best possible outcome for a Seller. It is highly recommended that you measure each decision you make during the sales process against this scale. Will your home appeal to a Buyer’s emotions? Can the price be justified in comparison to the competition? If you can accomplish both well, you will attract the greatest amount of potential Buyers to the table.
The Best Way to Get Your Home Evaluated.
What’s my home worth? This tends to be on most people’s mind if you own Real Estate. You may have a good idea based on your observations of the market but truth be told the only real way to know what something is worth is to sell it. The definition of market value is; ~The price range for an item within which both a buyer under no unreasonable duress will buy and a seller under no unreasonable duress will sell.~ I am not suggesting that you hang a for sale sign on your lawn and say to the market “tell me what it’s worth” it is a bit more scientific than that. We use an appraisal technique called a Comparative Market Analysis. The ‘CMA’, is an analysis and comparison of listed and sold properties comparable to your property that is conducted for the purpose of identifying its expected market value. So by looking at similar properties to yours that have recently sold we can come up with a probable outcome of what your property is worth today.
We have found that the best way for us to conduct an accurate evaluation on your home is to break the CMA into two steps.
Step 1 (The Tour)
Our first meeting will be at the property where you will take us on a tour of your home so that we familiarize ourselves with it and get to know each other. The goal of this meeting is to get to know the property and its condition so that we are making an accurate comparison to the recent sales. Apples to apples so to speak. We will discuss your willingness to make improvements that may increase the value and/or saleability of the property as well as your short and long term real estate goals. With all of this information in mind we can now go off and create the most accurate and comprehensive CMA on your home. This meeting usually takes about 15 to 30 minutes.
Step 2 (The CMA)
On our second visit we will have done all of our work and prepared a comprehensive CMA tailored to your specific home and real estate goals.
Goals of this Presentation
• Discuss and review your immediate and long term real estate goals.
• Review current market conditions and projected market trends.
• Review the 3 fundamentals of a successful sale.
• Establish your home’s unique features and benefits as well as its challenges.
• Discuss any improvements that may increase the value and/or saleability of the property.
• Establish who the target market is for the home.
• Review similar properties that are listed on the market and recently sold.
• Review and discuss a suggested list price range for your home.
• Establish a realistic price range that you can expect your home to sell within.
• Discuss price strategy options.
• Review all costs associated with the sale of the home.
• Review your home’s unique marketing plan.
• Discuss strategy and timing for putting your home on the market.
• Present our Service Guarantee.
Thanks for taking the time to read and fill in the market evaluation request form. We look forward to meeting with you.
Bret and Dana
Are you going to get a better deal?
It was a typical Saturday afternoon and I am hosting an open house. There is a knock at the door and in walks a couple. I greeted them with a welcoming hello and handed them a brochure on the property. They spend quite some time looking around. We had the usual conversation about the market and I answered a few questions they had about the property. As there were making their way to the door the gentleman said “I have a question for you, I was told by a friend of mine that if I work directly with the listing realtor when I buy a property I can get a better deal than if I have my own realtor. How does that work?” It was a great question and one that I have heard before so I thought I would explore this with you so that you can make up your own mind as to what way you think is best.
First off, I will explain how this all works. We have a great document that is provided from our Real Estate Board call “Working with a Realtor”. It is a few pages long so I will paraphrase it to make this a bit easier to read. Click here to see the full document.
There are 3 types of professional relationships a buyer can have with a realtor. Designated Agent, Limited Dual Agency and Customer Relationship.
A Designated Agent is a realtor that works for you and only you. They provide undivided loyalty to you by negotiating in your best interests and protecting your negotiating position at all times, disclosing to you all known facts which may affect or influence your decisions. Such as:Building condition
- Market value
- Neighborhood information
Limited Dual Agency occurs when the Designated Agent (the Realtor) represents both the buyer and seller in the same transaction. The realtor cannot be concerned exclusively with your interests in the transaction, since they are acting on behalf of the other party and must deal with both the buyer and seller impartially. The realtor must do the following;
- Must not disclose what the buyer is willing to pay other than what is written in the offer, nor disclose what the seller is willing to accept other than what is contained in the listing;
- Must not disclose the motivation of one Client to the other Client, unless one of the Clients has authorized such disclosure themselves;
- Must disclose to the buyer any defects about the physical condition of the property that are known to the realtor.
The Customer Relationship is where the buyer is not represented at all by a realtor. They represent themselves. In this situation, the realtor is not permitted to recommend or suggest a price, negotiate on your behalf, inform you of their client’s bottom line price. However, the REALTOR® can provide you with other services, such as:
- Explaining real estate terms, practices and forms
- Assist in screening or viewing properties
- Prepare and present all offers and counter offers at your direction
Now back to the question. Can you save a few bucks by going directly to a realtor to buy? I would say that it’s possible but at what cost.
If you hire your own realtor you have the highest likelihood that you will not pay too much, have an expert negotiate in your best interests and have a clear line as to who is on your team.
If you opt for working with the listing realtor under a Dual Agency Relationship then you are being represented by a realtor that has to be impartial to both the buyer and seller and who I must point out will more than likely have a stronger relationship with the seller as they have only just met you.
For all of you gunslingers out there who feel that they know as much about real estate as a professional realtor the Customer Relationship will be the route to choose. All I can say is buyer beware and best of luck.
Before I finish this up I will give you an interesting statistic. The majority of the complaints and lawsuits that come in against realtors are a direct result of the realtor representing both a buyer and a seller in a Dual Agency Relationship. It would seem that both buyers and sellers don’t feel that they are being represented properly under these circumstances. The trend for realtors these days is to make every effort to not represent anyone under dual agency. They are choosing to either have the buyer find their own representation or to work with the buyer under a customer relationship.
At the end of the day you as the buyer can decide the scenario that works best for you. Do you want to be fully represented, partially represented or not represented at all? The cost of each decision is difficult to put an exact number on but it is very clear that some choices are risker than others and when we are working in hundreds of thousands of dollars or even millions you should really give it some thought as to whether your decision will add up to perceived savings or actual savings.
What gives Kitsilano its Vibe?
Location (location, location…)
There are not a lot of true beach communities within a five minute drive from downtown Vancouver (or a five minute drive from any city center anywhere in the world for that matter). Kits offers just that. In the summer, people from all around the city flock to the joys of the beach, swimming pool, cafes, etc. and infuse energy and a life-is-good vibe into the neighbourhood. As the summer fades, the locals quietly rejoice as they take back the jewels in their backyard and Kits once again finds its trendy and laid-back attitude.
Since the late 1960’s, Kits have put Vancouver on the world map, initially as the flower-power hub of Canada. The hippies found a heaven here where mother nature showed what Vancouver was, and is, all about; ocean, beach, mountain views, tree lined streets with heritage homes – a neighbourhood with character and soul (or good energy as they would have said…)
This Kits counter-culture fostered Greenpeace, probably one of the most famous movements to come out of Vancouver and an important contributor to the DNA of Kits today; the co-existence with the great outdoors, the praise of organic foods and a healthy lifestyle, and, not at least, the grassroots idea that real change comes from the individual fighting “the man” – an example being the recent successful overthrow of the city plans to carve a bicycle path through the Kits Beach area.
In recent history, the healthy lifestyle focus has produced the yoga powerhouse of Lululemon whose global head office welcomes visitors coming off the Burrard St. Bridge (and also produced Canada’s most expensive residential home owned by Lululemon founder Chip Wilson located on the “Golden Mile” of Point Grey Road in Kits).
Given Kits top-notch location with easy access to the downtown core, yet offering some of the best outdoor scenery of Vancouver, it is not a surprise that real estate prices are among the most expensive in the country. But, as opposed to other upscale neighbourhoods on the Westside, Kits has maintained a very diverse mix of residents brings a genuine community feel. One of the reasons is that the real estate stock is mixed. The multi-million dollar home sits next to the $900/month rental condo building. The residents might have different financial profiles but because Kits attracts a lot of young families with kids, either as home owners or home renters, the streets are alive with street hockey, neighbour projects and familiar faces. Block parties are a big deal around here.
Location, history and diversity. A formula that is difficult to duplicate for any neighbourhood and the reason why Kitsilano is such a coveted and famous part of Vancouver.
Buy a Home vs. Rent & Invest
There was an interesting article recently in the Globe and Mail. What is the best financial decision – to buy or rent a home?
It used the following scenario; save up for five years for either a down payment on a home or take the money and invest in stocks and then continue to buy stocks every month as you save money being a tenant. The finer details can be found in the article itself (see link below), but the conclusion was that it is financially more prudent to rent than to buy. Yes. This might surprise quite a few, including us realtors who tend to rave about the financial benefits of owning your own home. So, are we all idiots having bought our home? Well, not so fast. Here’s why:
– Theory vs. reality. The assumption in the rent & invest scenario is that you take the money saved by renting and add that to the stock portfolio. Great in theory, but how many have the opportunity and discipline to do that? The vast majority of renters we come across do not put money aside every month based on theoretical savings compared to “if-I-owned-my-home”. Paying into your home is almost a forced savings plan that continuously builds your equity base and thereby improves your financial situation.
– Leverage. One of the financial advantages of owning your home is that it gives you access to equity and at the same time preserves the asset itself. An example; You buy a car with a line-of-credit on your home as opposed to selling stocks in the same amount (if you were renting). The long term appreciation on your home will continue to be on the full market value, not affected by the line-of-credit, or mortgage for that matter, but had you sold the same amount in stocks, the future dividends would have been negatively affected by the diminished stock portfolio.
– Feel good factor. It just feels better to sit in your own living room. It’s a very subjective and emotional factor, but based on the conversations we have with our clients contemplating to buy a home, its significance cannot be ignored.
Besides that, life as a tenant comes with the uncertainty of not knowing how long you can stay in your rental home. Your landlord is in control and most likely cares more about the profitability of his or her income property than your peace of mind. So, in relation to the comparison of buying vs. renting a home, this might help to explain why people become homeowners despite the financial conclusions in the mentioned article.
The New Reality of Buying a Strata Property in Vancouver
The reality of buying real estate in Vancouver has changed over the past couple of years. The perception in Vancouver for the past 10 or so years has been that you are going to make money on anything to do with real estate, whether pre-sale or resale.
In most cities in the world, people haven’t been “trading up” every few years. Historically purchasers would buy a property and keep it long term. In Vancouver, that changed when real estate started to appreciate rapidly and our city saw an abundance of smaller homes become available (bachelor pads and one bedrooms), with the big push for densification.
It used to be that you would make money on real estate twofold. Not only were you reducing your debt by paying down your mortgage, but you were also seeing a substantial increase in the value of your property.
These days, some sellers can’t quite wrap their head around that what they paid for their property two years ago, is what they are selling it for now. In fact, with transaction and moving costs, they aren’t recognizing the profits that they have grown accustomed to.
If you are looking at purchasing a strata property now, your goal should be to hold onto it for 3 to 5 years, more if possible. If this is the difference between stretching yourself a bit now in order to acquire a home that will suit your needs for a longer period of time, it can mean the difference between realizing a profit or not.
Buying a strata property now is still a winning proposition in terms of building your equity by paying down your mortgage.
Just remember to think long term. Gone are the days of the fast flip for profit.
Will You be Using a Realtor to Buy or Sell Real Estate in 10 Years?
Realtors have the key. The key belongs to a little club called the Multiple Listing Service or more commonly referred to as the MLS. This coveted database of valuable information has grown over the years to the point that the information and services of its members is the only good market data option for the public when it comes to buying and selling real estate. As we all know, when one entity controls a whole industry, we like to call it a monopoly.
The public has long been concerned about this monopoly and the government has started to listen. The Competition Bureau showed up at the door of the real estate industry and asked that the club be more inclusive. The real estate industry put up a valiant fight at the gates but ultimately through negotiations they had to open up the doors and start to share.
What does this mean for Realtors in the years to come now that they are not the gatekeepers of all of the information and the public has inexpensive, easy access to the same information? The bottom line is that things are going to change.
The real estate industry will change much in the way that many industries have changed in the last 15 years with the advent of easily accessible information and technology. We will start to see a polarization of the real estate industry. On one end, the market will be filled with real estate firms that will provide real estate services a la carte. The consumer will be able to choose the products and services they want and nothing more. For example, if you want to sell your home, you can pay a fee to list it on the MLS, another fee for professional pictures and another fee if you want a realtor to negotiate the contract and so on. The benefit to the consumer is that they have the choice to pay for services that they see value in and opt out of services that they don’t.
On the other side, you will see real estate firms enter the market place that will provide industry leading services implemented by the most productive, knowledgeable and experienced professionals in the industry. The key here is the realtors ability to add knowledge to the, easy available, market information. What does the specific data mean? The benefit to the consumer on this side of the equation will be that they are working with a real estate consultant that will, through his or her knowledge and experience, be able to provide a service that will produce the best possible outcome. The consumer will pay for the best and get the best. Over time, these firms will hopefully earn the respect that is so lacking in the perception of the real estate industry today.
It is inevitable that with this polarization of the industry, the service providers that try to appeal to everyone, will not have a place. It has happened time and time again with industries. If you try to appeal to everyone, you will appeal to no one. Consumers of real estate services will need to choose between an elite group of knowledgeable, experienced professionals that can provide the highest level of service, or a firm that provides real estate service a la carte.
Should buyers work under contract with their agent? Yes! Do they? Read on…
We support buyers’ agents’ contracts- however, our industry is only slowly adopting this practice, and many buyers still work under a verbal ‘handshake’, or a set of presumed expectations. As they do for sellers, contracts greatly protect the buyer’s best interests, and clarify exactly what a buyer should expect from their representative. They also clarify and control the fees, ensuring the agent’s compensation is set out clearly. This provides transparency between the buyer and the professionals being paid via the sale proceeds that are ultimately paid by them. The buyer can control and/or negotiate how, and how much, their agent is getting paid, instead of letting the seller and selling agent influence or control this. There is a commitment and engagement benefit that is mutual between client and agent as well. We recommend working under contract, but being very careful choosing your agent. Interview a few, and choose based on both professional qualifications and personal ‘fit’. Read on for further explanation…
Buying a home is a major undertaking, and some of your money will go into a realtor’s pocket. In just about any other professional services industry, you would directly pay the professional providing you with services, particularly if any sort of ‘representation’ is involved. You would expect to understand, be comfortable with, and perhaps even negotiate, the fees and how they are paid to the professional providing you with services and/or representation. The compensation model in our industry is NOT like this, at least for buyers. Some context is needed here: as in any professional services market, there’s a pretty clear ‘typical’ range for fees. Currently, the seller’s agent and the seller negotiate a fee in a listing contract, with a portion of that fee (approximately 47%) being designated, within the listing contract, to be offered to an agent that represents the buyer. This portion is then posted on the ‘realtor only’ side of MLS for all agents representing buyers to see when selecting properties for their clients to view. So, when a selling agent offers a reduced buyer’s agent commission or a bonus on a buyer’s agent commission, there is an opportunity for bias based on compensation that is not in a buyer’s best interest. The commission being paid to the buyer’s agent is disclosed to the buyer at some point in the process… but it can easily be glossed over as just another initial in a myriad of contract-related documents. It is not uncommon for a buyer to be unaware of how, or how much, their representation got paid.
Why and how the industry developed this process of agents who are representing buyers having their fees defined or greatly influenced by the seller and agent of the seller is beside the point here. In any mediation or negotiation of any legal or financial importance, why on earth would one want the other side controlling or influencing how their own representation was compensated?
Buyers should directly negotiate and control how, and how much, their agent gets paid, and this should be discussed at the beginning of the relationship. Agents should be completely comfortable demonstrating their value. The home buying process should ideally begin with a fair and contractual expectation of fees for services and services for fees… just as with any other professional service… just as the seller of the eventual home purchased will have done!
De-Spinning the hype…media’s presentation of the numbers.
‘Prices are up and rising’, ‘market up 40%’, etc., etc. We’ve always said and believe it’s still very relevant to opine about today, that Vancouver’s market is at least somewhat ‘hype’ driven. We are addicted to real estate or at least our real estate headlines and it’s fair to conclude that the media knows it. The presentation of statistical numbers by the media and even by our own industry publications (BCREA, REBGV market updates) is, by and large, accurate of course. However, the interpretation of these numbers and often how these numbers should be ‘framed’ in context is often left up to the reader. The obvious conclusion to some of these headlines, excerpts, soundbites, etc., can influence broad general impressions of market direction if not examined in more detail and then placed within context. When this happens a whole market can be influenced. When considering multi-hundreds of thousands dollar decisions, or even when loosely evaluating the value or direction of value of one’s own largest asset, it’s important to ‘de-spin’ the hype.
For example, when it’s represented that the market is ‘up 40% since last year’, is this price… or activity? And if it’s activity (number of sales), ok, it’s up 40% since last year, but what was happening the year before and more historically? If activity is up overall by 40%, yet this is in comparison to a very, very big dip in activity one year ago (as is the case currently vs. October of 2012), how ‘up’ is it in comparison to say, the 10yr activity average? If it is just barely up relative to the 10yr average, is it objectively accurate to lead with ‘market is up 40%’? So the ‘de-spin’ could reasonably be that the market has barely recovered.
Another example is the offering of the simple average price over any given larger area; this is very easily and dangerously spun. If there is a dramatic spike in the demand for multi-million dollar homes, this will drive the average up dramatically… and the reverse will be true if this demand then suddenly disappears. Within this ‘overall’ or ‘regional’ statistical summary, all sorts of very relevant market segments can be misrepresented. For example, recently when there was a spike in Westside detached home prices that drove up the overall average, there was a concurrently happening significant drop in some segments of the condo market (which is more relevant to more people). When as a result the headlines are blaring ‘average price is up’, this can pre-dispose buyers and sellers within alternately performing market segments to optimistic or pessimistic conclusions regarding values or prices, which can then lead to inaccurate expectations, concussions and buying and selling strategies or decisions.
So, what’s happening with the median? What’s the HPI (Home Price Index, a formula that much more accurately depicts the swing of the average price) doing? What’s specifically happening with 2 bedrooms in Kits? Or 1 bedrooms downtown? How about townhomes and 1/2 duplexes? What’s the trend of activity within price bands for a specific type of product? Are higher end products actually selling for their asking prices? If there’s lots of sales happening within a segment, is there even more inventory coming on, or is the current inventory clearly about to dry up? For example, 1 bedrooms in Kits and Fairview are hurting, with good inventory, few sales and decreasing prices, yet 2 bedrooms are stable, and townhomes and 1/2 duplexes are stable and rising a bit. Houses up to the $2,000,000 mark or moving quickly, but activity and prices have recently dropped for homes above this barrier.
So, and we’re dating ourselves here, ‘don’t believe the hype’…. or at least, take it with a grain of salt and always dig deeper if any conclusions the media influences you towards might have ANY effect on a potential decision. We at RRG all love our numbers and are always available to provide an accurate overview of any niche in the market.
Will the rise in interest rates affect property values?
This really depends on what type of property and price range is being focused on, as well as how dramatically or why the rates rise. In general, a rise in rates will affect those segments of the market that tend to be more leveraged. Investor class product and first time buyer product will certainly be affected, as well as more moderately priced homes in most segments other than expensive detached homes. IE, those segments wherein buyers typically have large amounts of capital and/or income are far less affected. Generally speaking in today’s heavily government-influenced rate environment, the raising of rates would indicate an increased general confidence in the economy, which in turn creates a bit more confidence in home values, so these two factors can somewhat mitigate each other and cause values to stay stable or slowly appreciating, despite moderate rate increases. However, if rates were to increase drastically and/or suddenly, and not in some sort of lock-step with local economic conditions and market confidence, this would certainly negatively affect affordability and therefore prices. So to nutshell, volatile increases bad, steady/slow increases not so bad. And keep buying stock in crystal balls!
Vancouver – one of the world’s least affordable real estate city. Or is it?…
The annual survey about global home affordability is out (click here) and as usual it has created a lot of attention and discussion in our fair city. This year, Vancouver is the second-least affordable city to buy a home based on average home price compared to average household income. No doubt, buying a home in the most desired neighborhoods of Vancouver is expensive – and for good reasons, we might add. Premium products command premium price points, and on the lists of best places to live in the world, Vancouver ranks in the very top (for instance quality of living; click here or global reputation; click here).
But more importantly, the ranking is based on income, not wealth. Vancouver has may attractions, however high income jobs is not one of them. Top paying jobs are not in abundance here. Rather, it’s a place that attracts and retains people with wealth, either from other provinces or countries, or saved up in local real estate over the last few decades, or inheritance, etc. People who seek world-class quality of life – and that’s the demand that supports and justifies Vancouver’s expensive real estate market. It will never, and arguably should never, be an inexpensive place to buy a home.
That’s why this heavily quoted annual survey is somewhat misleading when it comes to Vancouver; the key parameter is income. If the survey focused on wealth, the affordability of homes in Vancouver would be a different story.
Depreciation Reports – Are they a good thing?
As realtors who have a general, genuine concern in the financial well-being of our ‘condo’ clients and their homes, we are very ‘pro’ depreciation report. The following is a short, basic breakdown of what these new Strata Act regulations are, and our opinion of why they’re a ‘good thing’.
The general reason that these regulations and modifications to the Strata Act have been created and introduced is to standardize how stratas budget, and pay for, long term inevitable expenses such as roofs, plumbing, envelope repairs, etc., etc.. The tool for making this happen is the ‘Depreciation Report’, a standardized report to be created every 3 years by a qualified 3rd party individual or company. Primary functions of the report; establishing asset inventories and depreciation costs, cash flow modeling 30 years forward, record-keeping regarding storage lockers and parking. These are all issues that for decades and to this day have been the cause of endless conflicts and problems for stratas and their members/owners.
The Strata Act currently mandates that stratas maintain a minimum standard contingency fund (equal to 25% of total annual expenses), and perform some generally loose standardized budgeting in regards to utilities, insurances, ongoing service costs, etc.. However, a more and more glaring weakness has been exposed regarding there being minimal-to-no set standards in regards to dealing with long term capital costs. So, stratas would generally elect to budget in one of two ways; either by having higher fees and building a very large contingency fund, accessing this fund when issues would arise and thereby limiting the risks for ‘surprise’ levies or assessments, or by having lower fees and a minimal contingency, and levying/assessing as needed. When larger expenses eventually arose, stratas with large contingency balances would possibly fight over how to spend the funds; however, stratas with minimal contingencies would almost ALWAYS have a major conflict on their hands as to how to raise the funds. As the planning and budgeting decisions would often be made by the council members with minimal active participation from other owners in the strata, when an issue would finally arise that demanded serious financial participation from all owners, accusations of mismanagement and incompetence would often fly in one direction, with accusations of apathy and wilful blindness often flying in the other. Out of the ever-increasing number of arbitrations and legal battles was born the necessity for improved ‘legislative stewardship’ of strata corporations. Hence, we are now entering the era of the ‘Depreciation Report’.
In our opinion, Depreciation Reports and their legislated nature are a good thing. Transparency will be greatly increased for buyers and lenders reviewing documents and financials, many sources of confusion and conflict within stratas will be eliminated, and accountability between owners and their councils will be increased. Yes, fees will generally rise for most stratas that do not have this type of budgeting in place already (many new stratas already have ‘capital plan’ budgeting in place). However, if one were to, based on typical current strata financial practices, amortize (for example) 30 years of fees and special assessments back down to a monthly fee, one would quite likely find this monthly amount to be considerably higher. While many owners may prefer to have lower payments and pay for projects ‘as they happen’, the more practical (and certainly more ‘peaceful’) route is to diligently budget long-term.
The adaption will be somewhat painful as BC stratas phase these reports in, but as a frame of reference, strata fees here in general are considerably lower than in many other provinces where such budgeting is already in place (EG, Toronto has much higher fees on average). In our minds however, this is a new reality that will benefit all owners of strata titled properties in the long run.
As always, we welcome your questions and feedback!