A sizzling September

It’s striking to see the shift in the media’s tone on real estate over the last few months.

The positivity started in earnest in late June and early July, and began to pick up as the summer ended and the school year began. With September 2019 now behind us, a clear and objective picture is available with all the new data that’s been released. Stats show that prices for all types of housing went up strongly from Sept. 2018 figures. The increase was 5.2%. The significance of that growth was highlighted by the Financial Post, which noted that the now median $805.5K benchmark was just $10,000 short of the all-time record high median price set in 2017. What a year for real estate that was. We are a few percentage points away from all-time record real estate highs.

The energy behind all of this good news is the surge in sales we’ve documented a few times now. Double digit increases have returned to the market in all categories. Holy grail detached homes led that charge with 29% increases in sales. Toronto is not the only city in the country recording strong sales, Vancouver’s are up over 46%. Buyers have clearly adjusted to the strict new mortgage rules and developers aren’t able to come up with enough supply to meet demand. Canada’s population is growing very rapidly. Even as immigration targets have risen to well over 300,000 newcomers annually, natural population growth is edging up the overall net increase to well over 500,000. Most of those people settle in the GTA and Vancouver.

Some realtors are firing on all cylinders to meet the demand we’re now seeing. One realtor sold 30 condos in a single weekend and says the stats are returning to 2017 hyper-boom levels. One of the reasons supply is so limited is that so much inventory, particularly condos, are being held by investors from all over the world who rent out the units or put them on Airbnb. Estimates of the total number of condos dedicated to non-permanent use vary, but some high-end numbers put the figure at over 40%. Market watchers are noting that with luxury condo sales exploding supply is not a class issue; everyone is having trouble finding their nest!

What the banks are now calling a ‘rental crisis’

RBC’s lauded economics division recently released a report called Big City Rental Blue: A look at Canada’s Rental Housing Deficit which has grabbed a decent chunk of media attention. The report is an interesting read.

It shows that Toronto needs over 9,000 rental units as of last year to achieve a healthy vacancy rate of 3% (this gives prospective renters meagre, albeit decent options and flexibility in their rental options). The current rental vacancy rate for apartments is 1.1%, only Vancouver has fewer free rental units. For condos the vacancy is 0.7%, a stunning figure that probably ranks as one of the lowest vacancies in the world. The Vancouver condo vacancy rate is 0.3%.. These are tremendous figures. This is the supply situation, and it’s dire.

And the demand picture? You guessed it, even more dire. RBC’s report estimates that there will be a need for an additional 22,000 rental units in Toronto from 2019 to 2023. To give the market a meagre degree of rental unit balance, over 26,000 rental units were needed in Toronto this year, but only 4,300 rental apartment completions were noted. Even if all condo completions are included, the figure still falls thousands of units short. This is why vacancy rates are so low. While 53,600 condo units are under construction as of July 2019, only 33% of these units go into the rental market and many of these will take years to complete. Rental apartment construction has stalled in Toronto for decades as developers find it is far more profitable to put up a 30 storey condo, rapidly sell, and take the proceeds to finish up another quick project.

RBC called for a comprehensive and targeted policy to outline clear goals and to provide strong incentives to build. Apartment rents in Toronto are increasing at twice the rate of inflation (4.5%), and these price increases will likely accelerate as the demand and supply situation won’t be shifting dramatically anytime soon. As we outlined in previous publications, the rental situation is so dire in Mississauga and many surrounding municipalities that prospective renters are offering landlords higher rents than are publicly outlines to be competitive with their counterparts. Congratulations to all Torontonians are are satisfied with their rentals and the rents they are paying! Good luck for those of you on the rental hunt!

On the threat of a war with Iran

There’s been significant media attention in the last few months on escalating tensions in the Persian Gulf between the U.S., Israel, Saudi Arabia and its allies and Iran.

Not long ago, the Saudis claimed that an attack on a major oil refinery in their oil rich Eastern Province was the work of Iranian backed forces, even though Yemeni Houthi militants claimed responsibility (there is a brutal, ongoing war in Yemen between Houthi rebels and a Saudi backed former President). Israeli newspaper Haaretz claimed that President Trump had ample reasons to attack Iran given recent tensions but was backing off from doing so. Trump has spent the last 3 years implementing and reinforcing severe sanctions on Iran and ripped up a nuclear deal negotiated by Obama that international monitors repeatedly stated Iran was abiding by.

If a war breaks out between the U.S. and Iran, it will have a direct impact on Canada and its serious implications are worth outlining for readers. Iran will respond to a direct attack, however limited, with broad retaliatory measures. First, it will strike back at U.S. forces in the Gulf, U.S. bases around the Middle East, and at Saudi Arabia and its oil facilities and military installations, along with other Gulf Arab states. Second, it will move to effectively cripple oil production and exports from the Gulf. Analysts believe a war with Iran would result in oil prices rising to $150-300 a barrel. This would have a rapidly devastating impact on the global financial system and the world economy, imagine the impact of $3 a litre gas here at home, it would likely cause a deep recession internationally.

Israel would also be attacked, as Iran would see the outbreak of conflict with the U.S. as inevitably drawing in Israel at one point or another. U.S. forces in Iraq, Afghanistan, and around the Greater Middle East would be direct targets and both Iraq and Afghanistan would be profoundly destabilized to crisis levels. The war in Syria would intensify and with Russian troops stationed there, major escalation and a regional war could result in casualties that would rope in major powers. Hezbollah, a powerful military group in Lebanon and close Iranian allies, could potentially attack Israel with a volley of missiles if they see their major patron and ally under direct attack. In short, the implications of the Middle East being torn apart by yet another major war, would have immediate, profound, and direct impacts on Canadian society. 

Federal Reserve is cutting rates, again

Global accommodating cycles are intensifying as economic apprehension and wariness over the potential of a slowdown grows.

A few days ago Fed Chair Jerome Powell announced that the Fed would cut rates again from 2% to 1.75%. This comes as the rate of home flipping (buying early, renovating and/or holding, and then rapidly selling) has reached 8 year lows and news of a manufacturing recession in Germany transitioning to the services sector hit markets. Trump can claim another big win with the Fed’s decision. Market reactions have been mixed, with many claiming the cut was premature and obviously a political sign of subservience to the President. As rates are falling, the price of gold is hitting many-year highs, the pressure on emerging market currencies are also rising.

Bloomberg, a major U.S. financial services and news organization is predicting that Central Banks in Brazil, Russia, Nigeria, South Africa, Australia, and India among many European countries will all cut rates to stimulate credit creation and softening economies. Several trends are of concern to market analysts, the aforementioned Germany slowdown one of them, but Mexican car production is also going down, as is some U.S. industrial activity. The emerging signs of industrial weakness around the world was repeatedly cited by Jerome Powell as one of the reasons he chose to cut rates again so quickly after his earlier cut. A reminder for readers that U.S. interest rates are determined by members of the FOMC (Federal Reserve Open Market Committee).

CBC News is reporting that the two rate cuts by Powell will likely force Bank of Canada Governor Jerome Powell to reduce rates here in Canada. While Bloomberg reported that it doubts a BOC rate cut in Canada for 2019, there is still time left in the year for a decision in the fourth quarter. A late 2019 rate cut would have a positive impact on real estate and consumer spending for the holiday season and would help the economy prepare for 2020. A rate cut would have a positive and immediate psychological impact on the real estate market as it would lower mortgage costs; within a few days possibly.

The First-Time Home Buyer Incentive

As of September 2, 2019, one of the biggest federal programs to help home buyers in many decades is now in effect. The First Time Home Buyer Incentive, or FTHBI, offers eligible buyers up to 10% of a home’s purchase price (money towards the down payment).

This program will lower the borrowing costs of a hefty mortgage, and gives homeowners slightly more flexibility and options in purchasing their first property. To be eligible, your household income should not exceed $120,000. Second, you should have at least 5% of the purchase price of up to 500K and 10% for more than 500K ready. Third, you should not be borrowing more than four times your qualifying income. And finally, you must be a first time home buyer. 

If you’re buying a $700K home, and you have $70K, the federal government will provide you with $70K so you manage a 20% down payment and so you avoid a stress test or extra mortgage insurance. The $70 the federal government gives you as part of the incentive is not a grant, it’s a loan but with special conditions. You pay no interest and no monthly payments on the incentive. However, after 25 years, or if you sell the house, you have to pay the federal government back 10% of the home’s equity. This is where the incentive may complicate matters for those who qualify and have to decide on going ahead with the money. Over the last 25 years, property values have appreciated by almost 220%, or over 8.5% a year. Let’s say that $700K home appreciates at the very conservative rate of 5.5% a year over the next 25 years just to be safe; that would result in a home value of roughly $2.8 million by 2044.

That means you’ll be sending the federal government a cheque of $280K in 2044. Yes, you had some assistance along the way and got a bigger, better first time purchase, but it’ll cost you in the long term. The incentive can be repaid early, however, and a smart homeowner will repay the incentive before making significant renovations or structural changes to a home that would boost equity. The monthly savings in mortgage payments can also be invested over time which would generate a fair amount of cash ready to repay the incentive. As is always the case with financial leveraging, the first time home buyer incentive comes with advantages and disadvantages but offers first time buyers an option to manage the huge costs of a real estate purchase. 

The Benefits of Turmoil Abroad

With political and economic instability growing around the world, havens of stability and calm will be increasingly sought out by the aspirational middle classes, the wealthy, international businesses, and savvy investors. Canada is one of those safe havens.

While we are in no way a country bereft of serious issues, our political system is stable and not as divided as structures in the U.S., Europe, and parts of the Middle East. Our economy is in decent shape, and we have lots of untapped potential long term. We are also a tolerant and open society where openness to polarizing rhetoric is extremely limited and always has been. The world is well aware of our positives, and Canada has a solid international brand.

In Vancouver, the foreign buyers tax, shifting psychology, and an activist NDP government in Victoria have all blunted real estate. Developers continue to hold back on new construction and prices continue to fall. Chinese money no longer looks to Vancouver real estate as a safe haven. The city has worn out the welcome of foreigners and the shock of government intervention has not lifted. While Toronto’s foreign buyer tax remains unpopular with the real estate lobby, the city’s economic preponderance and heft have allowed it to absorb the consequences of the foreign buyer tax well. Significant sums of money were redirected to Toronto in light of Vancouver’s foreign buyer tax briefly, and much of that momentum is now moving further east; to Ottawa and Montreal. 

In Hong Kong, the political situation is becoming dire. The Chinese government has assembled significant military infrastructure adjacent to the city and has warned that its patience in tolerating the city’s mass protests is almost up. A direct Chinese military intervention is restoring stability to the global financial hub would have a drastic and immediate impact on the Hong Kong economy and its status as a stable centre of finance and business. Media reports in Canada and abroad are already suggesting that Hong Kong residents of means will begin moving out of the city to Taiwan, Singapore, and Korea. They will of course, be transferring their money and assets out of the city if they fear that a Chinese crackdown on dissent would affect their livelihoods. Either way, for now, Canada is well positioned to continue to be perceived as a financial and political safe place in a turbulent world. 

On The Return of National Real Estate Price Growth

The good news we’ve been writing about haven’t been limited to real estate in Toronto, southern Ontario, and the GTA, it’s spreading across the country.

The national real estate benchmark, which outlines real estate price changes every 4 months, now shows its first uptick since the beginning of the year. After reaching its all time high in May of 2017, when market dynamism was truly ecstatic, the benchmark collapsed and reach a low point exactly 2 years later. September’s number should bring price growth back in the green nationally. What else can be done to help get that number in a better position? Let’s see.

Meanwhile, political pressure on the Federal government to do more to make real estate more accessible to prospective home buyers is building. Finance Minister Bill Morneau has been pressured to extend the amortization of houses from the present 25 years back to 30. This would provide home owners with more time to leverage a mortgage and the possibility of lower monthly mortgage payments. The previous Conservative government cut the amortization period from 35 years to 30, and then the present 25. This aggressive move was done in order to combat excessive dynamism in the real estate market and was welcomed by many, even though it had a direct and immediate impact on the market.

In the United States, 30 year amortization is common, as are fixed rate 30 year mortgages at very low rates. Imagine not having to negotiate and sign for a new mortgage after every 5 years and instead have the comfort of knowing you will enjoy a historically low, locked in rate for the life of the house. A spacious 5 bedroom, 4 bath suburban home in Indianapolis, Indiana, selling for 399K, can be mortgaged out for 1,400 a month with a 3.3% Bank of America 30 year mortgage with an 80K down payment. This is unheard of in Toronto and the GTA. 

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. 


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. 


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


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.