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Understanding the percentages.

The increase to the cost of borrowing funds from the lenders in 2013 led to an important change of the lending for our multi-family listings. When the five-year CMHC-insured loans were running at 2.5 to 2.6% in early 2013, the most aggressive cap rates that we saw in our sales were at 5.75%. This depended on whether the property was well-maintained, well-located, and able to command above-market rents.

However, this changed significantly in the summer and fall of 2013, and we are seeing the consequences now. Although the interest rates showed a slight increase, the cap rates used by the lenders on CMHC-insured loans rose to 6.25%. This 8.7% increase to the cap rate caused an 8% decrease in the actual loan amount.

This meant that the loans obtained from lenders by purchasers on the same property with the same numbers observed in early 2013 decreased by 8%, despite the fact that we have not really seen much of a decrease to average sale prices in our market. As a result, buyers need more funds for the down payment on multi-family properties today than they did in early 2013.

In order to illustrate these points, here is a breakdown of the numbers.

Early 2013
Net income = $100,000
Cap rate = 5.75%
Bank evaluation = $1,739,130 loan = 85% = $1,478,260

Net income = $100,000
Cap rate with 8.7% increase = 6.25%
Bank evaluation = $1,600,000 loan = 85% = $1,360,000 (an 8% decrease on the loan on the exact same property)

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