On The Value Of Land In The GTA

In May of 2017, the RGF Real Estate Fund LP bought the Toronto Region Board of Trade’s Woodbridge area golf course. The 290-acre course was iconic, the sight of many golf tournaments, networking events, and business function since its opening in the mid 1960s. Many golf courses are being sold across North America. High land values, declining golf use, and enormous demand for housing is driving the changes.

Woodbridge Golf Course
Only one third of the land sold can be developed; roughly 100 acres. The other two thirds of the sold golf course are green space off limits to real estate construction. Even though this is the case, the developer has said that the capacity to develop the 100 acres will be very profitable. The developer plans some 600 detached residential units and 60 townhomes. This plan was presented to the city of Vaughan and has yet to be fully approved. Many local residents are opposed to the development proposal, fearful of increased traffic, noise, and pollution.
In April of 2015, the 400 acre York Downs golf course was sold for $412 million. Both York Downs and the Country Club are courses adjacent to valuable suburban real estate and they are similarly sized. Assuming a similar valuation, it can be assumed that RGF bought the Country Club for roughly $300 million. Despite the fact that only a third of the course can be developed, this massive purchase will likely be very profitable. These transactions highlight the extent of housing demand in the GTA.

Bank of Canada’s Huge Announcement On Mortgage Bonds

On Friday, November 23rd at 10am, the Bank of Canada issued a ‘market notice’ announcement with big implications. For the first time, the Bank stated that it would begin making innovative additions to its balance sheet: the purchase of mortgage bonds, or mortgage backed securities.

The news was not announced in a press conference or a press release, but a sleepy ‘market notice’ at the bottom of the Bank’s media/press page on its website.

So, What Are Mortgage Bonds?

A mortgage bond, or mortgage backed security (MBS), is a financial product that is made up of many mortgages, let’s say 100 for example. These mortgages are usually issued at the same time, at the same mortgage rate, and generate interest (income for the purchaser). Buyers could be Canadian banks, foreign banks, and domestic and international investors. 
Mortgage backed securities were at the heart of the 2007-8 financial crash. The bonds were given the highest credit ratings, (what’s safer than a mortgage/house as an investment?) and were scooped up by clients all over the world. What buyers didn’t know was that many of these mortgages were poorly underwritten, and very risky. When foreclosures started kicking in the bonds went bust, and clients lost tons of money.

Why Is The Bank Of Canada Announcement So Significant? 

By now purchasing these bonds, the Bank of Canada is directly providing a powerful stimulus to the banking system and the real estate market. If Banks can now profitably sell mortgage bonds to the central bank, it is likely that their incentive to further increase mortgage debt will rise. This could have a negative impact of the quality of bank underwriting, and will provide a boon to housing prices by facilitating higher demand.
Tembo will keep an even closer eye on the Bank of Canada, this news signals that simply watching rates is not enough. This added central intervention into market brings more risk to Canada’s housing system. You heard it here first.

On Rent Control

In yesterday’s Fall Economic Statement, Ontario Treasurer Vic Fedeli outlined that new housing units and previously unoccupied rental units would be exempt from the Wynne government’s rent control reforms.

Caption: Ontario Finance Minister Vic Fedeli
The Fall Economic Statement is an outline of fiscal and policy changes and economic news a government seeks to outline before its budget, where overall fiscal policies and most spending plans are explained. 
The previous government under Premier Wynne implemented its ‘rent control’ reforms shortly before this year’s election which limited rent increases to 1.8% for 2018 and broadened tenant rights at the expense of landlords. Tenants and poverty groups applauded the reforms, while  landlords complained that the changes would make them more selective of tenants. Developers stated that rent control would redirect their attention to build units for sale, not rent, further augmenting southern Ontario’s housing and rental supply problem.
With vacancies at absolute rock bottom record lows, the competition for favourable rental housing space in downtown Toronto is relentless. Builders and renters are applauding the Ford Government’s dilution of rent control, saying it will result in more supply, but over the long term and not immediately. Poverty groups and tenant advocates say the move will cause rental costs to skyrocket and will result in evictions. While it is agreeable to have strong protections for tenants in place, rent control has been proven to restrict supply and reduce the quality of housing stock in most of the jurisdictions where it is implemented. 

October Was A Good Month For GTA Real Estate

Positive numbers marked the overall situation for GTA real estate. Both the detached and semi-detached home and condo markets saw positive figures. Condo prices rose 7.5% and semi-detached home prices were up 6.6%. The average selling price for a home rose past the $700K range where it has languished for roughly to hit $810K, This was the first significant increase in prices in over 3 months. 

The positive sale price increases highlight a recovery that is steadily building momentum. Analysts saw the figures as proof that the perennial forces of supply and demand were returning to their general positions in the GTA market. The supply of homes continues to be a significant factor impacting the market – with recent inventory showing a tightening of listings. The slowdown the market saw exacerbated this issue because many prospective sellers are waiting for prices to increase again before listing their homes.
The condo market continues to show its heft. Impressive price figures and demand has not been shaken by government intervention. Higher interest rates in the medium to long term may damage the health of the condo market but it continues to be seen as a haven for young professionals trying to get into the market affordably. The recovery continues. 

The Fed eases off on its tightening

Federal Reserve Chairman Jerome Powell did not signal another rate hike in its most recent announcement this week. The Board was unanimous in its support for the not raising rates. With the U.S. economy absorbing large stimulus through tax cuts, increased government spending, and still very low rates, economic activity and job growth is on the rise. This has strengthened the Fed’s longstanding argument that rates have to be increased.
Caption: U.S. President Donal Trump shaking hands with Fed Reserve Chairman, Jerome Powell at the White House
The big opponent to higher rates has been Donald Trump. Irritated at the propensity for these rate increases to dampen economic growth, the President has vocally attacked the Federal Reserve. He has argued that all of its actions have been ‘wrong.’ It’s a possibility that the Fed’s decision to hold off on rate increases could have been prompted by this language and a desire to placate the President, especially given the U.S. mid-term elections.
The results of these mid-terms has been mixed for the President. On the one hand, his party gained Senate seats and tightened up its control of the U.S.’s upper house. On the other hand, the Democrats won back control of the House, albeit not with the momentum many in the media had predicted. Many key gubernatorial races were also won by Republicans, particularly in the key states of Ohio and Florida. The next two years will be tumultuous and difficult, and the partisan divisions in America will only increase.

Are Further Rates Hikes Coming?

Another blog, another rate hike. The BOC (Bank of Canada) announced on Wednesday that its overnight rate would be increased from 1.50 to 1.75%.

Bank of Canada Governor, Stephen Poloz.
This is the fifth increase in rates in the last year and a half. As Tembo has repeatedly mentioned, a stable economy and good stats would lead to the BOC increasing rates – this is the signal they’ve been consistently sending for some time now. Rates are now back to where they were in late 2008, right before the last financial crisis.

Bank Of Canada Plays It Safe

The Bank made several comments and offered rationale for its decision. The conclusion of trade uncertainty with the United States and Mexico with the signing of the USMCA was cited. As was strong economic data (job growth, GDP growth, low unemployment). In the words of experts, with the economy in such decent shape, stimulus in the form of low interest rates is not needed. Increasing rates also serves the goals of policymakers in Ottawa and Toronto who want less credit available to heat the property markets. As we’ve mentioned in previous blogs, the Bank is following international counterparts in raising rates. 

What Does This New Hike Rates Mean For You?

We want to make two points in this blog in response to this increase. One, it will result in higher overall borrowing costs and it will make mortgages more expensive. And two, that rates are still extremely low. Even in the medium term, rates will be at historic lows. Please see the attached graphic from the Bank of Canada to see the objective picture of rate movements in the last 11 years. In addition, Tembo recommends its readers prepare their finances for higher borrowing costs.

On Government Owned Real Estate

Few Ontarians know this, but hundreds of properties worth many billions of dollars are sitting empty across the province.

Previously a psychiatric institution, Century Manor in Hamilton is one of more than 800 disused buildings owned by the province of Ontario. (Sourch: Samantha Craggs/CBC) 
These properties are owned by the province of Ontario and number some 800 vacant buildings. Given that the province of Ontario is the second-largest property owner in the country, second only to the federal government, some vacancies are understandable. In total over 4,500 buildings are owned by the province, covering some 44 million square feet of space. 

Ontario Provincial Government Has Way Too Much Office Space

The Auditor General criticized the previous Liberal government repeatedly over its real estate practices. One of her complaints was that the province uses too much real estate, wasting $174 million in overused office space. Almost $20 million is being spent a year servicing and maintaining the vacant buildings. In response, previous Liberal politicians have mentioned that much of the vacant real estate stock is not desirable, such as decaying old jails, remote buildings, or dilapidated property. The province has failed to meet sale targets of the vacant buildings, only 25 were sold in 2017, even though the desired target was twice as high.

Government Owned Real Estate Needs Be Managed Much Better

Experts have repeatedly mentioned that government owned real estate is under-utilized and poorly managed. For example, ad revenue at GO Stations is very low despite high traffic. The City of Toronto also owns considerable vacant property, underused buildings, and brownfield (unused industrial zoned land), that it could sell and/or return to greater productivity to the private sector. Solving real estate problems and opening up opportunities for purchase is not only about restricting foreign buying, or tightening up lending standards, it’s also about changing the status-quo. 

US Fed Is Eager To Raise Interest Rates

For this week’s blog, Tembo once again turns to one of our favourite topics, interest rates. Important news out of the United States once again requires unpacking for our readers.

US Federal Bank

“Trumponomics”

Under President Trump, the U.S. has pursued a ‘supply-side’ economic strategy. The government has increased spending, especially on the military, has lowered taxes, largely for big businesses and high income earners, and has pursued deregulation. All of these moves have acted as stimulants to the U.S. economy, and have lowered unemployment rates and increased growth.
GDP growth has shot passed 4% and official unemployment statistics are the lowest they’ve been in many decades. While few doubt the economy is being overstimulated, all of this positive news is fueling conservatism at the Federal Reserve. The practice of raising rates and ending the historically unprecedented period of ultra cheap began at the end of the Obama Administration. Now, with inflation beginning to pick up, wages, growing, and the economy considered ‘strong’, the Fed is even more eager to return rates to more historical averages. 

What Will Higher US Interest Rates Means For Canadians?

Fed Reserve Jerome Powell made it clear that the Fed will continue its unpopular push to raise rates with even more enthusiasm, a point that has been lambasted by Trump. What this will mean for Canadian homeowners and consumers in the short term is higher rates, as the Bank of Canada will be under huge pressure to match U.S. interest rate rises. Every Fed rate hike places downward pressure on the dollar and squeezes the purchasing power of Canadian firms and consumers. Tembo will keep a close eye on the Canadian economy and the Bank of Canada’s next moves. 

On The New NAFTA 2.0 Deal

On October 1st the Canadian federal government announced that an update of NAFTA had been achieved and that trade negotiations with the U.S. and Mexico had concluded.

NAFTA announcement

Caption: Prime Minister Justin Trudeau and Minister of Foreign Affairs Chrystia Freeland arrive to hold a press conference regarding the United States Mexico Canada Agreement (USMCA) at the National Press Theatre, in Ottawa on Monday, Oct. 1, 2018. (Sean Kilpatrick/The Canadian Press via AP)

Uncertainty over the potential dislocation and chaos of a bad deal or a breakdown in talks is now no longer a major concern. So, what happened? What is the new deal? And what did Canada get out of it? 

Details About The New NAFTA Deal – Now Called The USMA

The deal was signed at the last possible minute, just meeting U.S. determined timetables. The new deal transforms and ‘modernizes’ NAFTA, now renamed USMCA (US, Mexico, and Canada Agreement). In many ways, Canada netted very few tangible gains from the agreement. The biggest benefit of the deal, as stated by the Prime Minister and his Foreign Minister, is that the deal was signed to begin with and that the trade pact didn’t collapse. The second main benefit was that the potentially devastating Trumpian threat of tariffs on Canada’s auto exports didn’t come to pass. These are not net benefits.

Who Got The Better Deal – Trump or Canada?

Donald Trump

Trump’s repeated key goal was to open up Canada’s protected dairy industry to U.S. producers. Canada conceded on this to the consternation of our nation’s agricultural sector. Canada made concessions to its generic pharmaceutical sector which experts say will raise drug prices. We conceded by doing nothing to have newly imposed tariffs on steel and aluminum lifted, which will do long term damage to manufacturing. Gains were few. Duties on internet purchases will be lessened, and Canada kept the dispute resolution mechanism and protections to our cultural sector – two advantages we had with the original NAFTA.
While the end of uncertainty is good for Canada’s economy and real estate sector, the concessions made were disappointing, considerable, and will cost average Canadian consumers. 

On Toronto City Council

Yesterday, the Ontario Court of Appeal ruled that Bill 5, the Legislation passed by Premier Doug Ford’s government to reduce the size of City Council from a planned 47 seats to 25 is the law of the land.

City hall toronto

Bill 5 was originally struck down by Judge Edward Belobaba who argued it violated voters’ Charter Rights. The Court of Appeal harshly criticized the Judge, effectively arguing he went out of bounds by striking down a perfectly legal and constitutional bill.

So What Impact Does Bill 5 Have On The Toronto Council?

Toronto’s upcoming municipal election will see a completely new Council. For the first time in decades, many incumbent Councillors will be facing off against other incumbents in the now larger wards. This will create genuinely competitive democratic races, as many incumbents in the old smaller wards were able to comfortably stay in office for decades using the advantages of incumbency. These 25 total wards now match the provincial and federal ridings for the first time. A Torontonian will now have 1 MP, 1 MPP, and 1 City Councillor all representing the same territory for the first time.
 Doug Ford
The new Council, with fewer Councillors, will be able to make decisions faster. Decision making will be streamlined by having fewer delegates competing for access to the bureaucracy. Toronto City Council is famous for its dysfunction, entitled politicians, and lack of real change. Journalists, academics, public policy experts, and residents have noted this for decades. A smaller Council will eliminate much of the squabbling and endless flip-flopping on major policy files, especially transit and housing, which is the now status-quo.  

A Brief Post-War History Of Real Estate Development

Before 1945 most of the GTA was farmland. Large suburban cities, Mississauga, Vaughan, Maple, Brampton were either small towns, non-existent, or farmland. Toronto was largely relegated to what most now consider the city’s downtown core. Then it was known as Metro. From 1945 to the mid 60s the first true ‘suburbs’ were built. Forest Hill, now Canada’s most affluent neighbourhood tied with Rosedale, was one of them. Government guarantees and mortgage support, along with large scale infrastructure spending facilitated these suburbs.
Downtown Toronto Queen street and spadina 1945
Caption: Major intersection of Queen Street and Spadina Avenue, May 1945. (City of Toronto Archives, TTC Series 71, Item 15135)

The 1950s Real Estate Boom

At the height of the 50s economic boom, the Chair of Metro, effectively the head of Toronto’s development and planning, was Fred Gardiner – the namesake of the famous downtown highway. Gardiner claimed that Toronto was so prosperous and growing so fast that the local government could build whatever it wanted. Gardiner claimed that: “Money is not an issue for us, we have the resources to build whatever we choose.” This strong activist government supported a massive real estate boom. From the 60s to the 80s, much of Scarborough, Etobicoke, and North York were completed. Mississauga began its explosive growth in this period. Over time other suburbs and developments were completed.
Looking southwest from around Jane and Lawrence 1950s
                                   Looking southwest from around Jane and Lawrence 1950s

The 1980s Toronto Real Estate Crash

The late 80s was a time of real estate speculation and overbuilding. This lead to an eventual crash which took 7 years to recover from. From the mid 90s to 2008, the GTA underwent a massive housing and condo boom. This continued after the conclusion of the Great Recession and peaked in the summer of 2017. While significant downturns have occurred, southern Ontario and the GTA have been development and real estate hotspots for almost 80 years running. 
Yonge Street, across from the Eaton Centre and looking north, Toronto, Ontario, Canada
Yonge Street, across from the Eaton Centre and looking north, Toronto, Ontario, Canada (This image is available from the City of Toronto Archives, listed under the archival citation Fonds 124, File 3, Item 130).