Ontario’s parliament resumes October 28th

After one of its longest recesses in history, the provincial PC government will be back at work when the Legislature resumes on October 28th.

The PCs took many months off to rest and re-calibrate, and to allow the Federal election to unfold and take its course. The reality is that Premier Doug Ford has made a number of serious blunders and his personal popularity has taken a beating. Cuts to autism funding, clashes with Toronto’s municipal government, and a terribly received first budget all took their toll on a government that has now well passed its honeymoon with voters. Doug Ford’s personality popularity has reached lows which even Wynne surpassed at the height of the public’s fatigue and frustration with the previous Liberal government that ran Ontario for 15 years. In order to have a competitive shot at winning re-election in less than 3 years, Ford will have to do work assiduously to rebuild his standing with voters.

His first major challenge will be to respond to growing labour strife. Powerful public sector unions are gearing up for what many believe will be a protracted fight with the governing PCs. Relations between the party and the public sector unions, particularly teachers have been poor for over two decades, since the tumultuous Harris PC government of the late 90s and early 2000s. The unions’ relationship with former Premier Wynne did not end well and the previous Liberals engaged in varying forms of austerity to cut the province’s significant budget deficit. The last thing the pub. sector unions wanted was a PC Government led by Ford. While a deal was reached between education support workers represented by CUPE through the government pouring money into slightly higher wages and a maintenance of the workers’ sick leave plan, other unions may be harder to please. The OSSTF, which represents high school teachers is voicing increasingly battle-ready rhetoric on news that Ford wants to cut average class sizes from 22 students to 25 to save money. Strike votes are ongoing for high school and elementary teachers across Ontario.

The Ford Government would be wise to strike a balanced compromise with the unions if possible. A full strike of teachers would be extremely disruptive and would place pressure on stressed out parents who’s kids will stay home. Teachers unions have huge member lists, tons of money to fight a government, and have significant support among the public. Every Ontario Premier who took on the teachers eventually lost his or her job – Rae, Harris, Eves, McGuinty, and Wynne all had their disagreements with this powerful interest group. While the average Ontario teacher earns 90K a year, a healthy salary that many private sector workers will never achieve in their lives, teachers are also under constant scrutiny, have lost authority in their classrooms, and are dealing with a youth population addicted and distracted by smartphones, technology, and social media. A protracted fight between the unions and the government will deplete political capital and take attention away from other important issues, like housing, the economy, and middle class pressures. 

Where will GTA housing be next year?

The CMHC recently released a report which attempts to predict the state of housing in our city next year.

The report is bullish, suggesting prices on average will rise by roughly 5% – taking the average home price to between 740-850K. By 2021, the CMHC thinks prices will hit almost 950K. These huge home prices are expected to be sustained even as the same report suggests that home construction numbers will rebound to levels at the time of the 2017 boom peak. The big factors which will underpin these price rises are the predicted strong gains in employment in Toronto, growing migration from other provinces, and growing levels of immigration to the city. The recently re-elected Liberal government will push the immigration level to over 400K, a move that is unlikely to be opposed by the Green Party or the NDP. 

While housing starts (new home construction) are predicted to go up to as high as 36K units by 2020, this is still completely incapable of even remotely satiating demand. Only in late 2021 will pressure on the rental market begin to ease slightly, as the number of new units going online in the market is reaching multi-decade highs. This is sad news for the hundreds of thousands of Torontonians who are living in housing insecurity and who are dealing with bidding wars for rental units, a dream for landlords – who have never had it this good. In other words, don’t expect big changes, things will remain tight, competitive, and above all, expensive. Additionally, CMHC believes that mortgage payments will remain stable over the next years, suggesting that interest rates won’t be swinging widely up or down – this is one of the few good pieces of news in the report for prospective buyers and homeowners who are not interested in selling. 

On the supply side, as we’ve written and explained many times, there’s simply very little capacity for builders to meet the huge demand needs we have. Toronto is building more high rises than any other city in North America, and much of our best land for low density suburban subdivisions has been eaten up. Even with the provincial government already pushing through anti-red tape deregulation measures that will benefit and speed up construction, there is not much that can be done unless all three levels of government come up with a serious, meaty, and very aggressive pro-development housing policy with strong incentives and specific targets. But this is unlikely. At the end of the day the factors which are keeping demand strong aren’t budging, and the forces preventing supply from growing massively aren’t present.

Rate Decision Coming Up This Week

The BOC will be announcing its next move on rates on the week of October 28th. Whether they stay even or go down is a big question, but they most certainly won’t be going up anytime soon.

If rates do go down, expect the recovery and renewed dynamism in the GTA real estate market to be reinforced, and given added momentum. If they stay the same, the higher price and strong demand trends will stay healthy. Most experts predict that the BOC won’t cut rates. The number is low as is and the economic overall is perceived to be in very good shape. While BOC policy generally does not diverge much from the monetary policy of the Fed, many market watchers expect that the Fed’s recent push to lower rates and revive QE (quantitative easing) won’t be necessary in Canada. Unlike the U.S., Canadian politicians rarely criticize or even talk about the BOC at all. At the height of the very high interest rates of the mid 90s, the Bank was politely scolded, and politicians sent letters asking for rate relief. Lately in the U.S., as many of us know, the President is openly at war with Fed Chair Powell; his own appointee. The C.D. Howe Institute, an elite, neoliberal think-tank based on Bay St. is calling for the BOC to hold off on rate cuts now and to wait until early 2020 for cheaper money.

In Washington, the consensus appears to point toward a 3rd consecutive cut in rates by Chair Powell this week. U.S. economic data is weakening, with manufacturing and housing showing slowdowns and the bulk of now much more subdued GDP growth dominated by consumers maxing out their credit cards and increased government spending. The Fed has also quietly began to increase its book of financial assets, and has long since ended its previously strong commitment to incremental reductions of its massive balance sheet. This basically that the Fed is once again buying assets, intervening in the market, and artificially raising asset prices while providing cheap money stimulus to Banks. There is growing repo activity, where the Fed is selling government bonds to investment only to buy them back within days at higher prices – effectively providing the buyers with excess capital that is not loaned. Repo activity is oversubscribed lately and is running the many tens of billions of dollars. This suggests a need for capitalization among U.S. financial organizations. 

As Tembo predicted, the once high GDP growth achieved months ago by a Trump tax cut and low interest rate stimulus is now falling back into traditional territory. If Powell does cut rates again, it will signal that the Fed is both concerned at U.S. economic data and also sensitive to the pressure and open criticism it is facing from a President who refuses to temper his language and who revels in his own bombast. Under Trump, the U.S. federal deficit is climbing again and is now close to the $1 trillion dollar mark. If the U.S. goes into a protracted and deep recession, it will have little wiggle room, little capacity for sustainable government fiscal stimulus, and almost no room to lower rates. A recession anytime soon would likely spell serious political trouble for a President who is staking his political future on a booming stock market, stable economy, and gradual, albeit ephemeral foreign policy retrenchment. 

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.