A Very Good July for Real Estate

Just look at these numbers, a 4.4% increase in prices from June figures, sales up over 24% from July 2018, and overall sale prices up 3.2% from July of 2018.

The average Toronto home sold for just over $806K. The number of properties that were sold went up to 8,595 from 6,916 from June. This is a huge increase, and all of those numbers were well above official inflation rates. As always, supply of the most desired real estate was tight, driving up prices, limiting options, and redirecting supply to less dense markets and different real estate products. Listings were down 9% from July 2018 numbers, outlining the extent of declining stock. In the rules of supply and demand, when supply contracts prices rise, and the cooling of the market that we’ve been used to recently definitely cooled the market.

tress tests are still around, but their shock has subsided. Families that were locked out by the tests have had more than a year to re-calibrate, to save more money, and discover new financing options. Some may have decided to buy a condo instead of a town-home, or decided to start their real estate equity in a small town as opposed to a cozy suburb. Prospective buyers who saw a cooling market pulled their listings and decided to wait the market out. The contraction in listings that followed are now seeing their impacts fully felt and that pressure is starting to turn 2-3% increases into 4% price increases. All in all, the market is re-orienting back to a more dynamic state, at least for now. 

 

But Tembo feels that certain international pressures could align to add even more oxygen to GTA real estate. First off, as we’ve reported, the Fed cut rates. Within a few days, President Trump lambasted the Fed for not cutting rates FURTHER. Market changes and instability that Tembo will outline in its newsletter have created immediate international reactions to the Fed rate cut and other socio-economic and political changes. Tembo predicts that the BOC will cut rates soon, especially if the pressure to keep monetary easing going builds up in Washington and around the world. Home prices across Canada have remained roughly static for the last two years and rate cuts at home could shift that momentum to price growth. 

On the Fed Giving In

As predicted, Fed Chairman Jerome Powell acquiesced to the relentless pressure from the White House and yesterday announced a 25 basis point cut in rates. The constant stream of snipes from Trump’s twitter account finally wore Powell out. His news conference in announcing the cut sent mixed signals and received mixed reviews.

He cited a number of factors which influenced the decision to cut; international risks, low inflation, trade tensions, and weakening growth. He claimed the cut would support U.S. economic expansion and provide extra leverage to the country in trade negotiations. Powell was highlighting an economy at risk and slowing, but simultaneously preaching a favourable long term outlook. Market reaction to the cut was negative. Stocks went down, the dollar dropped, and precious metals rose. 

Some pundits lashed out, claiming the move was unnecessary, politically weak, and that the extra stimulus would overheat stocks. Trump immediately doubled down, furthering his criticism of Powell and suggesting that the Fed should have cut deeper with a clear outline of an even lower  rate trajectory longer term. Another mixed signal from Powell came in the form of his responses to questions about what the Fed would do next. Powell claimed that the cut does not mean interest rates won’t go up again in the near future while also providing vague answers on whether further cuts were on their way. Some pundits believe this cut, or ‘mid cycle adjustment of policy,’ signals an ‘inevitable’ move towards 0% rates, quantitative easing (money printing), and potentially negative rates (where the Fed pays banks to borrow). 

The impact will be felt in Canada soon. Rob Carrick, The Globe and Mail’s Finance Columnist heralded the cut as a positive move which ‘cancelled the apocalypse for overextended borrowers.’ He effectively outlines the case that rates in Canada will now be coming down as well. History has shown that the BOC’s interest rate trajectory takes it cues from the Fed. Governor Poloz has already said the orthodox BOC line, that a Fed cut won’t impact the BOC’s decisions and that Canada doesn’t need lower rates. At the same time though, the BOC has made it clear that it will analyze and keep a close eye on the Fed’s decision and ‘dissect’ the reasons provided for the cut. In the medium term, Powell’s decision will continue to reverberate, and the pressure on easing at home will continue to build. 

The History of Home Prices in Toronto

A few generations ago in the halcyon golden age of 1950s prosperity in Toronto, family homes were incredibly cheap. With newfound post-war home loans for returning GIs, abundant land for development, and a rip-roaring economy, young couples were blessed with plentiful real estate opportunities. The disparity in prices to what is considered average today is mind-boggling. Using the handy Bank of Canada inflation calculator, this blog post will outline decade by decade house transactions to show the state our prices over time. 

Late 1950s

A couple buy a home in midtown Toronto for just over $30K, adjusted for inflation this comes to $130K in today’s dollars. The house is two stories, detached, in a fairly large lot in the Davisville and Yonge area, and considered suburban at the time. (The area of Forest Hill was developed in the 60s and 70s, and was well outside the city’s limits at the time). The house was sold a few years ago for $1.6 million, more than 50 times the purchase price. At the time, a $30K purchase was considered high end, given normal suburban homes in North York, East York, and Scarborough averaged $15-17K at the time. Bidding wars were unheard of, paperwork was minimal, and property taxes were low. 

1960s 

By the late 1960s home prices had risen, but modestly. The average price was in the mid 20K range, or 180K in today’s dollars. Couples could buy comfortable family homes just outside the traditional city core for prices in the high 20K range. Price increases were much more modest and organic then the fluctuations we’ve seen in the last 10-20 years. At the time the economy was not as financialized as it is today, and credit and money supply growth was much more constrained. Throughout the 1960s, homes generally sold for less than 200K in today’s dollars. 

1970s

A similar picture as the 1960s, but with slightly stronger price growth and some fluctuations. Average prices were in the 30-40K range. 

80s

The financialization of the economy took off in the 1980s, and loosening credit and a big stock market boom stimulated a concurrent real estate boom. The late 80s boom was felt worldwide and in almost every economic indicator, Toronto real estate saw incredible growth in that time. But it all ended in 1989. 

90s and transition to 2000s and present

The 90s were a difficult time as interest rates were very high and the bursting of the 80s bubble took its toll. Only by the late 90s, as rates had come down, the dollar had gone up, and prices had recovered, did the seeds of our current boom truly begin to sprout. The rest, as they say, is history. Only 2007-2009 saw a slight blip in the pace of price increases, the rest of the period from the early 2000s to the present has seen rapid price growth. 

Stress Test Relief!

There’s a very big real estate story that isn’t getting much widespread coverage in the community. When federal regulators announced the unveiling of tighter rules on uninsured mortgages and mortgages with down payments of less than 20 percent, the market sputtered.

The move was designed to clamp down on risky mortgages, tighten confidence in the housing sector, and to cool a market that was literally on fire. The tests required that borrowers needed to prove they would be able to manage the costs of their mortgage if rates were to rise. Experts believed the move single handedly knocked out 10% of prospective buyers from having a shot at sealing the deal on a home purchase. We’re talking about tens of thousands of people, at the least. The stress tests were praised by experts, economists, and some bankers but were lambasted by the real estate lobby and politicians. 

After almost a year of criticism and calls for reform we finally have some relief. The rate at which a mortgage holder has to qualify being able to pay for has now gone down from 5.43% to 5.19%. While not a significant change, it will have an impact on those prospective buyers on the margin. Some experts believe that the continuation of a lessening trajectory could have a significant impact on the market, with as little as a further 0.50% reduction lifting thousands into home ownership. Tim Hudak, CEO of the Ontario Real Estate Association asked for federal regulators to restore 30 year insured mortgages, to further ease stress test rules for new homebuyers, and to scrap the requirement that those who change their lender on an existing mortgage have to also pass stress tests. With an election rapidly approaching, don’t be surprised if further loosening of these rules continues, real estate has been repeatedly polled as one of the biggest concerns on peoples’ minds.

 

Finally, when Canadians were asked to pick which city they would own real estate in, the result, quite strongly, was Toronto! That’s right, our city is seen by most average Canadians as the best place in the country in which to own a home. Despite Vancouver’s beautiful natural environs, great weather, and lack of winter blues, and Montreal’s thriving cultural scene, affordable prices, and great food choices, Toronto still won out. Unfortunately for those polled, rents and home prices continue to rise in the city, with one metric showing that the price for two bedroom and one bedroom units is effectively the same. The demand for ANY space is so great that it doesn’t matter how many bedrooms it has. This summer continues to deliver positive news on the real estate file. 

On The End of the Era of Central Bank Independence

It’s all over folks. We’re going down a new road. After intense pressure from President Trump and other members of his Administration to lower rates and boost stimulus, Federal Reserve Chairman Jerome Powell folded.

In his latest Committee Hearing with the House of Representatives in Washington, Powell outlined his view that the U.S. economy was showing signs of weakness and that the Fed would intervene more actively to stimulate it. Tembo watched the Hearing carefully and noted a stark shift in tone for Powell to a much more accommodating rhythm with a more humble persona than his usual confident, lawyer-investment banker stern self. Powell was in full listening mode. The transformation from Hawk to Dove is complete for Powell. This shift marks what is in many ways the end of Central Bank independence. Never again will the Fed be able to march on with its policies undeterred when a political figure with as volatile a record as Trump threatens the Chair with termination.

What was interesting about the hearing was the fact that Powell said that the Fed’s current huge balance sheet (now in the many trillions of dollars) was not an issue in again buying stocks and bonds ‘if it decided to do so.’ In other words, Powell was saying that even though we’ve become such an interventionist, buying bank to the tune of trillions of dollars, we’re happy to buy more if we need to. The Fed’s shift in tone was so strong that gold prices surged to multi-year highs. Markets enjoyed the capitulation of the Fed and showed solid gains. The Fed’s shift is a big win for Trump, as the political benefits from the likely economic gains from stimulus will help the President as he gears up for the 2020 election. Not since President Lyndon Johnson’s era in the late 1960s has a Fed Chair been under so much pressure from a President. But unlike the privately intimidating Johnson, Trump has been arms length, open, and very public about his disdain for the Fed’s unease of more stimulus and lower rates.

What this all means is simple. The Fed is now almost guaranteed to lower rates. It will also be much more open to reigniting the quantitative easing it pursued in the immediate aftermath of the last recession (buying assets in the open market). It is a huge political win for Trump, as his unadulterated, raw strategy of open criticism has now yielded results. When Trump started criticizing Powell he was widely mocked and attacked from across the spectrum. Nobody was used to this, and in previous political eras it would have been inconceivable for a mainstream, run of the mill politician at any level to attack the Federal Reserve or its Chair. For Canada, the Fed’s surrender will result in huge pressures on the BOC to cut rates as the game to lower the value of the dollar and lower the cost of money overall now begins in earnest.

The Return of Surging Detached Home Sales

Toronto had its best June for real estate in over 2 years. With over 8,800 units sold, we beat our 2018 and 2017 figures. Only in 2016 was the number of sales around this time of year higher. Also recall that 2017 was a blockbuster year for demand, price growth, market activity, and general enthusiasm. The slight drop in sales compared to last month also matches historical averages – we usually see a surge in Spring and April/May that dips slightly as we head into the summer. New listings declined slightly, to 15.8K, and all in all, we saw a price increase of 3.6% from a year ago, with $798.5K now representing the average. A 3.6% boost is solid, well above inflation, and nothing to sneeze at. Stats show price gains in semi-detached, condos, and townhouses. But the really big news from last month was that sales of detached homes surged 19%, a very handsome rise indeed.

The average detached home price is now $832K, with average sale prices now at early 2017 levels. If trends continue we could see a return to the plateau of just over $900K that was attained in the last bull run for prices in the 1st quarter of 2017. The cause of the positive sales numbers was the fact that supply didn’t change, and demand didn’t relent in its chase for housing. Condo sales were down, mostly in the core, but rose generally throughout the rest of the city and across the region, likely as a result of higher prices downtown and lower inventory. Stats also show that people are leasing condos at much higher rates as opposed to outright ownership (15% in the 2nd quarter). Listings are generally rising across the GTA. Rents keep going up, and past inflation, but at a lower pace than what was the trend in the last year or so. The average one bedroom condo in Toronto will cost dwellers just under $2,200. 

Despite this positive news key stakeholders and real estate bodies continue their calls for more accommodation, relaxed regulations, and a winding down of the stress tests that have locked out an estimated 100K people from getting into the market. Interest rates are holding steady, and as we’ve repeated, momentum seems to be shifting to more monetary accommodation around the world as opposed to a gradual rising of rates. In Japan, Europe, and China, central banks are maintaining, and in some cases boosting money supply in their regions, lowering rates, and buying more stocks and bonds to ‘stimulate’ the economy. This trend is going to come to North America, and sooner rather than later. Overall, given where we were not long ago, when pessimism and disappointment were building, the underlying fundamentals are getting better! 

Toronto’s Biggest Real Estate Project

Oxford Properties, the real estate arm of OMERS, the pension plan for Ontario’s municipal workers, has signaled its intention to build a $3.5 billion mixed use project just north of the Rogers Centre and CN Tower. The proposed development would see two office towers of 58 and 48 stories respectively, 800 rental apartments in two buildings, and 200,000 square feet of retail space built; just over 20% the size of the Eaton Centre. The project is innovative for several reasons and is receiving a buzz of largely positive attention.

For one, the designers involved are internationally renowned: Pelli Clarke Pelli Architects. Responsible for the International Finance Centre in Hong Kong, the well known Petronas twin towers in Kuala Lumpur, and other major landmarks. The building designs appear sleek, curvy, and modern while avoiding the usual uniformity of Toronto high-rises. Second, the towers will be largely re ntals with an integrated day-care on site. The units will also feature 2 and 3 bedroom units which Oxford claims are sorely lacking in Toronto’s downtown core. The office blocks are designed to cater to large scale tech. and financial employers undergoing rapid growth with young work forces who prefer downtown living to their older counterparts. A fair amount of retail space and a connection to the PATH will provide convenience and more employment opportunities to locals as well.

The real unique aspect of the project is that a large park will be built over the rail lands the project is adjacent to. The rail deck park complements recent proposals to build a $1-2 billion park above the rail corridor to provide the downtown core with much needed green space. To put the scale of this project in context, in total Union Park represents over 4.3 million square feet of retail, office, and residential space, more than twice the size of the square footage of the Toronto Eaton Centre complex and 25% bigger than the West Edmonton Mall, once the largest mall in the world. The project is a gamble. It is a expensive proposition and depends on a large number of tenants occupying its retail and office spaces in particular. Bold and ambitious, Union Park highlights the scale of Toronto’s ongoing construction boom and signals to the world that we’re just getting started!

Higher Inflation in Canada

Canada is an expensive place to live in. With a generally high quality of life comes high taxes, prices, and fees. Canadians pay some of the highest airfare, phone bills, and property taxes in the world. They also pay huge sums for modest real estate, as well all know all too well. Last month, inflation in Canada hit 2.4%, driven by a surge in food prices. Fresh vegetables and meat along with new car prices rose significantly. The only commodity that saw prices fall was gasoline, which recorded a 3.7% decline. Without the fall in energy prices, the inflation rate would have been 2.7%.

There are different definitions of inflation in the economics community. Some economists hold the view that inflation is solely an increase in prices. Others believe that inflation is almost always a direct result of an increase in the money supply driving up prices, more money in circulation means higher prices. In Canada, inflation monitoring, data collection, and targeting is sophisticated and well regarded internationally. The BOC has an inflation target rate of 2%, and is zealous is maintaining this rate. 

What last month’s figures mean is more difficulty for the central bank. On the one hand, economic growth is very modest and pressure to reduce rates to spur demand and lower housing costs is strong. On the other hand, the BOC is mindful of high debt, the need for a normalized rate environment, and now a growing trend of incrementally rising inflation. An interest rate rise now to blunt the modest increases in inflation we are seeing and would honour the BOC’s commitments to 2% inflation, but it would dampen the economy and irritate a number of sectors in need of debt. An election year makes the BOC’s task harder still.

Tembo’s read on all of this is that inflation rising will lower the possibility of a market favoured rate cut. If it continues to build up past 3% expect a rate hike unless the Fed gives in to growing pressures to reduce rates. 

Growing Pressure to Cut Rates

Senior economists from CIBC are making bold predictions on where interest rates will be going. They predict that the BOC will cut rates by 25 basis points next year, in lockstep with the Fed. This would see rates fall from 1.75% to 1.50%, if current rates hold. The rationale for the expectation of a cut follows weakening economic data, slowing growth, and a significant trade and account deficit. Banks have also reported financial data which shows Canadian contributions to their bottom lines seeing little to no growth, with the bulk of profit growth coming from U.S. assets.

In addition, pressure over mortgage stress tests has many believing that lower rates are necessary to give hope to the tens of thousands of prospective home buyers who have now been squeezed out of the market permanently. But the real overhang on this file has been the growing chorus of voices across the border which are demanding that the U.S. Federal Reserve cut rates, pump up the economy with more quantitative easing, and more efforts to stimulate a stagnant U.S. economy. The originator of much of this pressure has been Donald Trump himself. Trump’s language of criticism against the U.S. Fed and Fed Chair Jerome Powell has been consistently scathing for some time now.

Several days ago, the President tweeted that the U.S. stock market and economy would reach even higher levels if the Fed ‘did what China is doing’ by lowering rates and making the U.S. dollar cheaper in relation to competitors to boost exports. He also claimed that the Fed has ‘consistently been raising rates’ on his watch, seeing it as discriminatory. He also has stated the view that the stock market would reach record highs if the Fed lowered rates. At first, many called Trump’s language unprecedented and authoritarian, but now economists, market watchers, and business leaders are echoing his criticism of the Fed and are urging it to supercharge the U.S. economy so it can better compete with China. Lower interest rates are on their way. 

On Money Laundering and International Property Ownership Laws

On Thursday, May 30th, the federal government revealed it had found over $1 billion in new tax revenue. Where did the Feds get the money? From real estate. Four years of drawn-out, complicated CRA audits saw almost 42,000 files reviewed in the key housing markets of B.C. and Ontario. The results netted over $100 million just in penalties based on flimsy tax compliance done in real estate transactions. The Feds are doing what they can to shake this ‘money tree,’ and have allocated some $50 million in additional spending to further these audits and to root out more non-compliance. This is on top of hundreds of million of already announced investments in the CRA which started four years ago, all aimed at rooting out tax dodging and generating more revenue for Ottawa to spend without raising taxes. 

 

Canada has established itself as a one of the real estate money laundering hotspots of the world. Some $50 billion was laundered across the country in 2018, with just over $7 billion laundered just in B.C. This is a very rough estimate, as it is impossible to put an exact figure on all of the washed monies. This represents a drop of the many trillions of dollars of ‘dirty money’ floating around international markets. Canada offers anonymity to real, or ‘beneficial’ real estate owners, just like notorious tax havens like the British Virgin Islands, the Isle of Man, or the Seychelles. We are recognized for some of the weakest money-laundering laws in the world. And the truth is, our economic stability and quality of life depend on washing dirty money. Without it, the real estate lobby, the big banks, and governments across the country would be starved of business, capital, and revenues to spend. We’re all complicit. 

 

Canada is one of the few countries in the world where there are virtually no restrictions on foreigners buying real estate here. The system depends upon an openness to foreign capital and as many high value transactions occurring as possible. In rapidly growing Thailand, for example, it is almost impossible for a foreigner to own a controlling stake in land or housing. There are very few ways to get around Thai property rules, so Canadians who’d like a beach house in Thailand have to jump through many, many hoops to pull off a buy. In New Zealand, previously lax rules for foreign ownership are being tightened and New Zealand government was elected in 2017 on a campaign of restricting foreign ownership. Prime land in our country is open for their world to buy.