Proposed Ontario Bill 66 Gets Squashed

In last week’s blog, we outlined proposed Ontario Bill 66, which had a provision in it which would have given municipalities the power to approve commercial and industrial development in protected green spaces. This would have opened the Greenbelt to potential industrial and commercial development – if local municipalities were to approve, and with subsequent Ministerial approval.

Ontario Green Belt
However, after a wide swathe of negative media coverage, strong opposition to the bill from municipal governments across the province, and angst from important stakeholders, the Ontario government changed its mind. After the Ontario Federation of Agriculture (a group friendly to the governing PC party) voiced its nervousness to the Bill and its ‘unworkability’, it was becoming increasingly clear that opposition went across ideological lines. 
Late last week, the Ontario Government stated it would pull the key Schedule 10 provision of Bill 66 (the bylaw giving municipalities power to bypass the Greenbelt Act) from the law. With this move, the government effectively defanged the bill of its most contentious component and showed a novel capacity to change its mind. The announcement came from Housing and Municipal Affairs Minister Steve Clark, one of the government’s most experienced figures.
With these changes, residents of Ontario can have peace of mind that their protected green spaces will not be chopped up. The government will now likely unveil new measures to spur development and increase the housing supply in the province. Tembo will keep its eye on the provincial government very focused, as many structural changes and policy announcements will be unveiled in the coming months given the concocting of a provincial budget in April. 

What Does Ontario’s Proposed Bill 66 Mean For Its Residents?

In early December of last year, the Ford Government introduced a proposed law titled the Restoring Ontario’s Competitiveness Act. The bill is a comprehensive piece of legislation that alters several existing laws and introduces new ones – referred to as an omnibus bill.

 

Bill 66 is receiving increased attention lately given some of its controversial provisions.

Open For Business Zoning

The Bill introduces a new type of zoning, called OFB ZBL (Open for Business Zoning By-laws). This new zoning type is designed to not have to conform to legal standards set out in a number of major provincial environmental and planning laws, such as the Greenbelt Act, the Great Lakes Protection Act, and the Lake Simcoe Protection Act. The provincial government argues that this provision will provide municipalities with the capacity to quickly approve major industrial and commercial projects to create jobs and tax revenue. 

Critics Fear Environmental Impact And Out Of Control Development If Bill 66 Is Passed

Critics, on the other hand, say that the proposed by-law provisions would create the potential for massive environmental degradation and the transformation of protected green spaces into industrial and commercial areas. Water, soil, and air contamination could increase, and municipalities could embark upon aggressively competitive squabbles with each other to attract revenue generating projects.
Some City bureaucrats around the province claim that Bill 66 will upend traditional provincial planning arrangements and lead to out of control development. Tembo is keeping a close eye on the provincial government’s stated move to spur development and construction. Bill 66 has the capacity to alter land values by introducing industrial projects to areas that are designation for safer development. This could have drastic consequences. 

As Economy Slows, Bank Of Canada Holds Off On Interest Rate Increase

Instead of raising rates again the BOC (Bank of Canada) decided to hold off. With oil prices still low and the national economy losing the consumption boost of the holidays, the bank decided to give the economy a breather. Rates remain at 1.75%, with inflation having fallen to 1.7%, under the BOC’s benchmark of 2%. 

Bank of Canada Governor Stephen Poloz

The BOC’s decision mirrors that of the Fed in the U.S., where Chairman Jerome Powell recently outlined that the U.S. Central Bank was ‘flexible’ and would also ease off on money tightening given recent stock market fluctuations. The BOC pause flies in the face of the past consistency of its rate rises. It’s also likely that there is growing pressure on the BOC from a wide variety of market sources, especially given recent negative real estate statistics.

Keep in mind that this is an election year in Canada.

Prime Minister Justin Trudeau

Politicians despise higher rates for obvious reasons. The BOC would be wise to include political considerations into its decision making, and stretching out the rate rise schedule would be helpful to Prime Minister Trudeau.
Overall, the pause will be beneficial to the real estate sector, especially given recent difficulties and poor stats. Political efforts to cool the market could easily shift to a desire to cushion the sector and strengthen it. Lower oil prices and weaker consumption will also reduce inflation, further pressuring the BOC to hold off on rate rises. To facilitate economic stimulus in the event of a hypothetical future recession, the BOC would ideally need to quickly cut rates by roughly 4%. This is the likely target long term. 

We Are Barely Into 2019 And The Stock Market Is Already Making Some Wild Moves

2018 ended with significant stock market turbulence around the world, especially in New York and Asia. Tembo made note of this in its final 2018 blogs and newsletter (you can sign up here). As we mentioned, significant drops in the DOW were reversed by announcements that major pension funds were pouring over $64 billion into stock buys, moving away from their positions on low yield bonds. 

Canadian Stockmarket Turbulence

Apple CEO Tim Cook’s Investor Letters Causes Stock Market Jitters

Even as this news drove up confidence, the market tumbled again when Apple Co. CEO Tim Cook released a brisk letter to shareholders that stunned Wall Street and which the media called a ‘bombshell.’ The letter outlined many positive overall trends for the firm but admitted its revenues and profits were to be negatively affected by ongoing economic disruption. Sales of new Iphone devices, especially in Greater China, did not meet expectations, and gross revenue would be over 5% lower than forecast.
Tim Cook Investor Letter
Apple’s reputation as a practically indestructible giant with an unrivalled brand and relentlessly improving financial performance was hurt badly by the letter. The company’s share price fell by 10%, equivalent to over $70 billion. As so many market participants, analysts, and traders have never experienced a bear market from a low interest rate boom that has lasted a decade, the tough news was not taken well. Markets negatively reacted to the news, with the letter solidifying growing perceptions that the global economy is undergoing significant structural changes.

Fed Tries To Calm Markets

This week some good data restored confidence. Another big boost to the markets came from Federal Reserve Chairman Jerome Powell, who commented that his central bank’s policy was ‘flexible’, essentially calming the market by saying the Fed would act if further market drops occurred. It’s Tembo’s belief that the Fed will cut rates quickly and print money to buy stocks if the stock or asset (real estate) market’s fell harshly – for better, or for worse. 

On Canada’s Wealth

There has been a fair amount of media coverage over the last few days from an interesting, recently released stat from StatsCan on Canadian net wealth. It seems we’re a lucky country – our net wealth has topped $11 trillion, and our economy produces goods and services worth near $2 trillion.

Toronto Banks
The $11 trillion net wealth number was not a surprise for experts, but what has piqued the interest of observers has been the real estate component of that huge net wealth figure. The value of real estate represents over 75% of our net wealth, or just under $8.8 trillion. 
Over the last decade, real estate rose from comprising roughly 62% of Canada’s net wealth to the aforementioned figure. Canadians are much more dependent on real estate for their wealth than Americans – in the US, real estate has generally held steady at just over 70% of net wealth. This statistic corresponds to the general macro-economic trend that has continued in Canada over the last decade, where low interest rates and government policies have leaned on real estate and construction to drive growth. Low interest rates, strong demand, and the inability of the private sector to consistently build enough housing has all acted as fuel to real estate prices, and thus equity and net wealth.

Canadians Are More Dependant On Housing For Their Wealth Than Ever Before

Most Canadians hold the view that inevitably over the long term, their home equity will continue to rise. Many baby boomers and older Canadians are depending on this (rising) equity to supplement their pensions for consumption in retirement and to pass resources on to their children and grandchildren. This belief in relentless home price increases should have been tempered given the turbulence the national real estate market experienced over the last year and a half. The stats show that we are more dependent on housing for our wealth than ever before in our history, and even more so than our real estate crazy neighbours to the south. What we must all remember is that so much of this wealth is based on debt, and that debt needs to be serviced through discipline. 

On 2018’s Final Real Estate Stats

For Tembo’s final blog of 2018, we want to leave you with some interesting GTA statistics. All of our predictions for 2019 were outlined in our final newsletter – many of which are beginning to look on point given big falls in the markets marking the end of 2018.

fireworks

Stress Tests Have Kicked In 

Some 100,000 Canadians have been locked out of the housing market because of federally imposed stress tests. Already stringently cautious banks were made even more particular in approving mortgages because of the impact of the federal government’s stress tests. These tests force families with lower than ideal deposits for home purchases to buy insurance to cover their investment and reduce risks.

Pensions Are Pumping Up Real Estate Holdings

Trusteed pension funds have boosted their holdings in real estate by 2.5% to almost $190 billion as 2018 closed. Despite seeming like a small percentage change, this represents billions in added investment. In our last blog and newsletter, we highlighted the importance of real estate to the nation’s wealth, and this stat shows the reliance on real estate to the nation’s trusteed pension funds. All sectors of the economy are all in on real estate, and expect dividends and returns from a continuously healthy real estate market. 

Global Markets Are Falling Fast

stock market crash

The DOW underwent its worst day of Christmas trading in history, dropping over 600 points (3%). The Fed’s decision to increase rates last week was to blame. In addition Wall Street was spooked by news that U.S. Treasury Secretary Steve Mnuchin made calls to the CEOs of America’s biggest banks without authorization from the President to check on their liquidity. This was viewed by many as an act of panic. The contagion quickly spread around the world, with some international headlines using the term ‘panic selling’, for the first time since 2007.

Toronto Home Prices Up In November

Prices for detached homes rose 3.5% to mark the end of 2018, even as listings and sales dropped slightly. We end 2018 with the average price of a detached home in Toronto now hitting some 788K. While listings declined slightly in November and early December, they were still 12% than in 2017. Home prices are still significantly lower from their summer 2017 record highs. 

On Oil Prices And A Cautious Bank Of Canada

2018 will end without an increase in interest rates. The Bank of Canada (BOC) announced on Wed. Dec. 5th that its benchmark rate of 1.75% would hold steady. The enthusiasm and confidence the BOC previously expressed about the overall state of the economy was gone in its most recent announcement.

Alberta crude oil

The continuing collapse in oil prices, record high mortgage and consumer debt, and slowing economic growth were the key factors the BOC cited as dead weights to the economy. In response to the lack of rate tightening, the loonie fell to stabilize to 75 cents. The BOC is especially pessimistic of the long term prospects of Canada’s energy sector.
The news will come as a sign of relief to the real estate sector and will result in a pause in the general trajectory of higher mortgage and interest rates seen over the last few months. Mixed real estate data underpins the need for more caution from the Bank. The fall in the exchange rate will also benefit manufacturers, especially those in southern Ontario and parts of Quebec. While static rates will help Western Canadian consumers and businesses, their pain is significant and cries for assistance and greater government intervention are being made by Alberta and Saskatchewan Premiers Rachel Notley and Scott Moe. 
Canadian crude oil is being priced at rates as low as $14 a barrel – even as U.S. crude has rarely ever sells for less than $50 a barrel. With existing Canadian pipelines at full capacity and oil shipped by train overloading rail networks, there is essentially no room to maneuver for exporters who can’t get their product to market efficiently. The Federal government’s plan to expand pipeline networks to B.C.’s coast have failed due to legal challenges and resistance from apprehensive and environmentally conscious First Nations groups. Pipelines planned to the east coast (Energy East) face considerable regulatory, financial, political, and social hurdles. The failure to properly export Canadian oil has been a recurring strategic economic challenge for many decades. 
Oil’s fundamental importance to the Canadian economy was highlighted in the value of the exchange rate from 2010 to late 2014, when Canadian oil sold for $80-100 a barrel. In those years, the Canadian dollar approached or met U.S. dollar parity – fuelling a boom in cross border shopping, and strong domestic and corporate leveraging. How times have changed.

Canadians Are Experience Record Low Unemployment Rates Across The Nation

November was a dynamite month for job creation, with a record 94,000 jobs created, pushing the unemployment rate lower to 5.6%.

two people working at computer
This is the lowest level of unemployment since records began in the mid 70s. Just under 90 thousands of the jobs are full time, and more than 78 thousand were created in the private sector – both are positive elements of the job growth. The strongest job gains were in Quebec and Alberta, with 14,000 new construction jobs created, 27,000 in ‘goods production’, and the rest in services, especially in professional, scientific, and technical services. 
November 2018 Canadian Unemployment Rate
While experts hailed the news as a big and very positive surprise, they also highlighted the fact that wage increases are beginning to lose momentum and to decline. The strength of the economy is boosting pressure on inflation, with the rate jumping to 2.4%. In its latest announcement, the Bank of Economy decided not to increase rates, but will likely adjust its approach in the new year if economic temperatures remain hot. While the economy is strong, rising interest rates and government intervention remain as anchors on the still generally healthy real estate market. 
These two factors have resulted in real estate dynamism in Canada’s biggest city lessening to the extent that the City of Toronto is worried it will lose up to $100 million in revenue from the land transfer tax. In recent years, the city government has become extremely dependent on the transfer tax to finance spending. Tembo will keep a close eye on economic indicators in the new year to see if these record trends continue. 
 

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.