Bully Bids and Bans

Ontario’s powerful realtors and their respective lobbying vehicle, the Ontario Real Estate Association (OREA) have asked Doug Ford’s provincial government to outlaw the practice of ‘bully offers.’

A bully bid is an offer submitted by a prospective buyer ahead of a seller’s established offer time. These bids are largely designed to aggressively pre-empt purchasing activity from other potential buyers and to place pressure on the seller to accept. This aggressive bid is submitted before the designated offer day. Sellers accept the bully bid if they believe that it will exceed what they will get conventionally. 

The practice can occasionally result in one buyer out-muscling potential counterparts and entices a seller to close a deal quickly without reviewing and considering other potential bids. The move is seen as unfair and limiting to realtors, who have little room to bid up prices if only one bid is submitted and ultimately accepted. Realtors also feel banning bully bids would enhance fairness in the market and allow all prospective buyers, or at the very least a greater number of them than present, will be allowed to participate in bids. OREA submitted 28 recommendations on reforms to their profession to the government which is currently reviewing the Real Estate and Business Brokers Act; the landmark legislation governing real estate professionals.

OREA is headed by Tim Hudak, the former Leader of the now governing PC Party of Ontario. The organization is heavily staffed with politically minded employees and is close with the present administration and enjoyed reasonable ties with the former Liberal Government. Several PC lawmakers and government staffers are former realtors and the government is keen to develop and maintain strong ties with realtors, developers, and the construction industry. These groups have heavily bankrolled the PC Party in the past. 

 

This Year’s Federal Budget

Budget 2019 is the final Liberal budget before this year’s election. It outlined billions of dollars in new spending to please key Constituencies across the country. The Federal government has seen its revenues rise by over $10 billion from a strong and growing economy and wasted no time in maintaining its deficit figures and boosting outlays.

The budget does, however, deliver major initiatives designed to address housing anxieties, this blog post will discuss those measures.

 

First time home-buyer incentive program

The Feds have announced a $1.25 billion first time home buyer incentive program. Households with less than $120,000 in income will be able to receive up to 10% of a home’s down payment interest free from the CMHC (Canada Mortgage and Housing Corporation). This amount of money is expected to be repaid on the eventual sale of the home. For a $400K condo, this equates to $40K in government money for a down payment. In other words, the government will provide you with tens of thousands of dollars which will be taken away from the overall equity of the home. This will also lower monthly mortgage payments by roughly $200 a month.

 

RRSP usage

The budget also boost the amount of money a first-time buyer can withdraw from his or her RRSP for a home purchase. Individuals can withdraw up to $35,000, and a couple can withdraw $70,000 for their home purchase. This was the first time this amount was amended in over 10 years. The Feds are aiming to get both the RRSP increase and incentive program initiated and out the door by September.

 

New housing builds

The Feds also announced the construction of over 40,000 new housing units in low-supply areas to be built over the next decade. These units will be rental. This announcement builds on past promises to build more housing and honours the government’s election promise of adding housing stock.

 

On Real Estate Predictions for Spring 2019

It’s hard to predict real estate trends and long term changes. Experts, economists, and real estate watchers will all have their views. Southern Ontario and GTA residents are generally positive about the long term fundamentals.

 

They believe that immigration, a stable economy, and a sound financial system will all facilitate long term growth and general real estate stability. This positivity comes from the fact that since the early 1990s, the real estate market has been on a positive upswing. Only two brief periods saw prices and demand ease, in the early 2000s with the popping of the dot-com bubble, and in 08-09, with the Great Recession.

 

Overall, given the data we now have and the trends we’re aware of, there is little that suggests there will be drastic changes to the real estate market. Expectations suggest that the price growth we saw in the last few years are unlikely to return. Interest rates will remain stable. While the BOC will want to raise rates when necessary, there is the dual pressure of not overwhelming consumers with higher borrowing costs and managing economic expectations.

 

Demand will continue to be strong. Experts are predicting stable or increased demand for luxurious apartment and detached home units as international money shifts out of Australia, the UK, and New Zealand in favour of Canada and the U.S. Condo prices and demand are likely going to trend higher, as detached home prices are still too high for first time buyers. As for prices and sales, both are expected to trend upwards in the Spring. A 30 year fixed rate mortgage is trending at 4.375%.

 

 

Mixed Real Estate Conditions and a Potential BOC Rate Cut

 

The Greater Vancouver Real Estate Board released rough real estate stats earlier this week. Reports showed that year-over-year Feb. residential home sales fell over 30%. This represents the worst Feb. sales total since 1985, over 40% below the last decade’s average.

Detached homes lasted roughly 55 days on the market before sale, while townhouses averaged 39 days and apartments and condos at 40. Prices also fell by over 6% year-over-year, while at the same time, inventories are piling up. Total listings rose by over 48% year-over-year to almost 11,600.

In Toronto, prices rose by 1.6% while listings fell 6.2%, sales fell by 2.4%. Canada’s banks are also feeling the heat of an inconsistent real estate market. Credit losses rose by double digits at the big 5. The same credit losses were seen in the Australian banking and real estate markets as well and in other countries dependent on real estate.

Economic stats have dipped into such negative territory so quickly that news is spreading of the possibility that the BOC may cut rates soon. Tembo has consistently made the point that the BOC will stick to an aggressive and consistent rate hike trajectory until economic conditions change. While most experts believe that rates will stay put, the potential for a cut will grow if economic conditions continue to worsen. As we previously reported, the economic recently contracted by a very narrow margin.

On an additional note, the City of Toronto will convene on Thursday, March 7th to pass its 2019 budget. The budget outlines a massive drop in land transfer tax revenues because of stalling real estate conditions. The City has become addicted to the previously perpetually rising land transfer tax which financed large increases in city spending. That era has come to a close.

SNC Lavalin Scandal Could Change Canada’s Government

The Federal government is reeling from the pressure of a scandal that has shaken elite circles across the country. Extensive media coverage in the last several days has widely revealed the scandal to the public – we are of course talking about the Jody Wilson Raybould and SNC Lavalin. 

In essence, former Attorney General of Canada, Jody Wilson Raybould refused to provide a deferred prosecution agreement for SNC Lavalin – a Quebec based engineering giant. SNC Lavalin had previously bribed the government of Muammar Gaddafi in Libya for construction contracts. Despite tremendous pressure from the Prime Minister himself, high ranking public servants, and other leading political figures, Jody Wilson Raybould refused to yield. 
SNC Lavalin employs thousands in Quebec and Montreal, the home province and home city of Justin Trudeau. It is a well connected and storied company, with deep political connections. The Liberal Party of Canada has long had deep ties with large Montreal firms and the city’s old money aristocracy. As for Mrs. Wilson-Raybould, she revealed the extent of her principled core values and followed in the footsteps of her father – who fought political battles with Justin Trudeau’s father, Pierre Elliott Trudeau. Mrs. Wilson-Raybould and her father are well known and respected Indigenous Canadians. 
The now fully unveiled scandal has led to a media frenzy, a sharp drop in opinion polls and support for the government, and Ottawa’s dirtiest laundry now out in plain sight for the public. Media commentators were all ubiquitous and sharp in their criticism of the Prime Minister – many of whom suggested that he should resign or that the government’s reputation is now seriously compromised. The scandal also led to the shock resignation of Trudeau’s Principal Secretary Gerald Butts, the second most powerful man in Ottawa and one of Trudeau’s closest personal friends.
While this year’s federal election is still 7 months away, an eternity in politics, the SNC Lavalin scandal continues to unfold. The instability could fuel more political drama and both opposition parties will look to take advantage. 

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. 

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. 

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.

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.

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).