How to Slow Down Price Growth and ‘Normalize’ Momentum

There’s been more and more talk in the media and by real estate experts on the need to implement some rule changes and stringent new measures to the real estate market to slow down the double digit, and record breaking sales and price growth activity we’re seeing. Many believe that the federal government’s budget measures and actions have been symbolic, and that tough changes are being avoided to leave construction and real estate booming to help the overall economy recover.

Rema has some broad suggestions:

“Only by grossly increasing supply in the Canadian housing market to reach the majority of homebuyers, making all purchases conditional on financing to reduce financial overextension of buyers, and implementing regulations concerning listing price thresholds, will we find the answer to cooling the exuberance enveloping Canadian real estate.”

National Bank CEO Louis Vachon thinks a solution could be banning ‘blind bidding’:

“Regulators may need to implement additional tweaks to Canada’s mortgage underwriting criteria and consider new measures. That might include banning blind bidding — the practice of bidding on a property without knowing the value of competing offers — to slow the speed of the home price growth.”

Others have called for a capital gains tax on the sale of primary homes, a political, economic, and socio-cultural sacred cow in Canada. It should be noted that the current Governor of the BOC, Tiff Maklem, when he was number 2 at the BOC, warned in 2013 that real estate was eating up too much capital, investment, and labour, and that there was insufficient investment being made in production and long term growth. Even some senior Top 5 Banking figures are calling on aggressive new measures to cool the market – that’s how dynamic things have gotten.

Federal Budget 2021 and What It Means For Real Estate

There’s almost $8 billion in Budget 2021 for housing, while this may seem like a huge figure, consider that those resources are for the national housing picture, and keep in mind that overall spending in budget 2021 is over $509 billion. 2021 revenue is at $355 billion. In just two years (2020 and 2021), our federal government borrowed $500 billion. All of this is real money that will have to be paid back, forgiven, printed, or inflated at some point, but that’s another story. As for housing, let’s go back to that $8 billion figure.

Over $2.5 billion will be allocated to the Canada Mortgage and Housing Corporation over seven years, to pay for a number of housing programs. These programs include the Rapid Housing Initiative, the Affordable Housing Innovation Fund, the Canada Housing Benefit and the Federal Community Housing Initiative. Many of these programs were announced months or even years ago, so much of this money will likely be recycled, re-announced, or is simply going to be pushed back and extended over a number of years. Keep in mind that not every dollar of this $2.5 billion will be new.

$1.3 billion will go to build and fix up units and buildings and will see commercial spaces converted into housing – again, not all of this is net new money, much of it has already been announced or deployed. The big chunk of the cash will go to build affordable housing, with over $3.8 billion announced. The feds say that this money will help build, repair and support 35,000 affordable housing units. That comes to about $110,000 per unit, and we’re not sure what kind of housing $110,000 will get you, but let’s see.

As we mentioned in our latest newsletter, a 1% tax on the value of vacant properties will be potentially implemented by 2022, but this will only generate some $700 million. It is unlikely that a 1% vacancy tax will have much of an impact on the national real estate market. Overall, this is not a budget focused on housing. It’s a budget focused on COVID-19 support, child care, and sprinkling money to key electoral groups (families, seniors, parents). Compare this budget to some of the very aggressive and macro measures the New Zealand government has implemented to deal with their supply crisis, and you’ll get the picture.

Toronto Homes Are In The gold Standard of International Real Estate

Demographia, a U.S. based consulting and research firm, just released some data on urban real estate markets. The data was used by the Visual Capitalist in one of their sleek graphics. What it showed was Toronto remaining as one of the world’s top ten expensive real estate markets. Canada’s biggest city ranked 7th on the world’s most expensive housing markets, ahead of tech mecca San Francisco (famous for extremely high rents), London, and Adelaide (an Australian city that’s seen some incredible price growth in recent years.) Toronto was beaten by Sydney, Melbourne, Vancouver, Los Angeles, and Hong Kong. Marking the huge economic and real estate disparities between upstate New York and Ontario, Buffalo NY was listed as a city with one of the lowest real estate values in the 8 countries and multiple cities listed in the Demographia study. Demographia’s data is from the third quarter of 2019, and there’s been even more price growth in Toronto since then.

One of the interesting areas of investigation for the report was land containment and regulatory regimes for house building. Not illogically, the study showed that the cities with the highest priced real estate were those with the most land and geographic constraints to building. Toronto was high up on the list given the large amount of green space, protected areas, national parks, and the Greenbelt in the vicinity of the GTA. The report noted that Toronto real estate prices rose from 4 times median annual earnings in the early 2000s to almost 10 times median annual earnings in 2019. While the overall focus of the report was on the unaffordability of housing, it shows just how valuable Toronto and southern Ontario real estate is in an international context – proving its utility to homeowners, and its growth potential and desirability for those working on getting into the housing market. What is unaffordable for some is a huge source of equity for others, and an opportunity for prospective buyers.

Demographia emphasized that the first order of demand preference in Toronto and across Canada was detached homes and not apartments or condos, pushing the demand for these types of housing up and placing pressure on available land for building. Demographia notes what Tembo has reported on in the rental sector: a recent surge in building, but noted that many of these new units are still too unaffordable for people. Finally, the report notes that London, ON has some of the most affordable housing in southern Ontario. This report is another indicator of the value of our real estate, as recognized internationally, and the strength of our real estate market compared to our counterparts and neighbours.

Mapping Ten Years of Incredible Price Growth

blogTO, always a purveyor of excellent real estate articles, released a relevant and very interesting piece outlining property appreciation in Toronto over the last ten years, from 2011 to 2021. The story starts off with a powerful graphic outlining the price growth of different categories of real estate borrowed from Detached homes tripled in value, rising from $450,000 to over $1.2 million. Semi detached homes almost tripled, rising from $360,000 to almost $830,000. Townhomes doubled from $355,000 to $768,000. Single unit condos also well over doubled from $285,000 to $600,000. Condo townhouses did a little better, going up from $280,000 to almost $670,000. These are historically unprecedented examples of price growth. They also mirror the proportionate decline in interest rates, which fell from 4.5% in early 2008 to their present near zero value.

The article includes a concise and incredible statement from realtor Graham Rowlands worth repeating: “Long story short if you bought any property in Toronto 10 years ago, you’ve likely more than doubled your money, built a fair amount of equity and likely have a mortgage payment well below the average rental price in the city.” This is testament to our property market and what many have gotten out of it in these incredible times. For those of you who fall into this category, enjoy, and for those of you who wish you were in the 2010 buyer’s shoes, we wish you all the best in fulfilling your real estate hopes. If you believe in our long term fundamentals then there’s no reason why you shouldn’t continue working to join this fulfilling and rewarding club.

Affordable real estate communities in the GTA are few and far between but Tembo suggests taking a good look at Oshawa, Peterborough, eastern Durham region, and even Windsor, where real estate for a first time home buyer looking to build equity is relatively cheap. As long as rates are low, global capital continues to flow, and we have a stable economy, Toronto real estate will keep increasing in value – for better or worse. To those who cashed in, we say congratulations, and to those who haven’t, we say there’s always opportunity out there.

The BOC Says the Detached Home Frenzy Will ‘Soften’

In their January Monetary Policy report, the BOC directly addressed the trend Tembo has been watching and analyzing for months now; a rapid, sustained, and comprehensive shift to detached homes – especially in suburban rural southern Ontario. The demand for a small slice of the white picket Canadian dream has never been stronger as people flee the cities, work from home, and yearn for privacy, space, and a ‘back to the land’ quiet and tranquility. We’ve seen home prices in the suburbs and exurbs soar and supply evaporate like never before, echoing the 30% price growth seen in the summer of 2017.

The BOC’s chart on apartment vs. single home price growth last year mirrored the late 2016-17′ frenzy. Unlike 2016-17′, where the demand for apartments and condos was just as explosive, 2020 saw a marked decline in apartment momentum. The BOC believes the COVID inspired ‘elevated’ housing activity will gradually decelerate as we head further into 2021, and that preferences will ‘normalize’, meaning the condo, townhouse, and small unit market will recover over time. The BOC believes that price growth dynamism for detached homes will then also begin to cool, exactly as was the case in mid to late 2017 and 2018 (in response to the late 2016 surge). Tembo acknowledges the logic in the BOC’s analysis, but we note the fundamental supply crunch issue and other fundamentals which won’t take away momentum from detached home demand.

Another key piece of information from the BOC is that it increasingly counts on the strong national housing market to help Canada’s economy recover from the impact of COVID. The dependence on real estate, and its corresponding construction and finance stimulus has been a key pillar of Canada’s economy since the early 2000s, when rates fell. This dependence grew in the aftermath of the 2007-8 recession, when rates fell even more. In a nutshell, this is good for the real estate community – as it signals that the BOC is openly outlining how important the market is, and thus, shows yet another strong reason why they’ll have no choice but to keep rates low. The longer they keep rates low, the longer this market will be relentless, dynamic, and on the up.

Real Estate Predictions for 2021

A longstanding Tembo tradition is to discuss the buffet of real estate predictions for the coming year. There have been many price predictions floating around. Banks have best case, moderate, and worst case scenarios, as do most financial institutions. Realtors and real estate sites and blogs suggest 2021 will be a golden age of price growth, as always, and the YouTube commentariat suggest that prices can’t go down in Canada, regardless of COVID-19, so here’s the summary:

The Canadian Real Estate Association (CREA) predict a 9% overall increase in national home prices, taking the average to $620K. CREA believes that prices will go up over 13% from 2019 figures, with Ontario prices rising over 16% to $820K.

Evan Siddall, CEO of the CMHC (Canada Mortgage Housing Corp.) made a prediction several months ago that real estate prices would fall nationally by the early 3rd quarter of 2021 due to the lingering aftershocks of COVID-19. Siddall believes that bankruptcies, job losses, and broader uncertainty will force the real estate market’s hand and that the real effects of COVID-19 won’t be felt until months from now. He does believe, however, that a worse case scenario he feared has been averted.

Keep in mind that the CMHC were very bearish on prices when COVID hit, but their prediction of declines did not happen, big price increases occurred instead.

Fitch predicts a 3-5% drop in prices in 2021 due to unemployment issues and affordability concerns. They say that the market will rebound strongly in 2022. Like Siddall, the agency believes that COVID will have economic impacts that will take more time to be fully felt.

ReMax notes that 84% of brokers polled expect a sellers market in 2021 as the demand for houses outside of cities with more space and quiet will continue to drive demand.

Royal LePage predict a modest but sustained increase in prices, citing that many buyers who wanted to move or buy homes this year could not affect their transactions, and will wait to regroup for a purchase in 2021. The real estate firm predict that the national average price for a two storey detached home will hit just under $900K, while condo prices will hover in and around half a million dollars.

One thing everyone predicts is that mortgage rates will remain affordable. For this reason alone, expect the demand for housing to remain very strong in this country, one way or another.

Where The Homes Are Being Built

The Ontario Home Builders Association releases monthly data on where housing starts are being initiated across Ontario. Data for October shows some interesting patterns. The biggest year to year increases in housing starts were in Barrie, Brantford, and Oshawa, at 114%, 95%, and 78% higher than the January and October starts in 2019. All three of these communities have space for construction, economies that are stable or on the up, and are affordable compared to many of their counterparts in the Greater Golden Horseshoe. Other notable mentions where starts increased were Chatham-Kent, North Bay, and Sarnia. While COVID has had a serious impact on Barrie’s economy, the city is still diversified, fairly affordable, and economically resilient.

 November sales were up 25% from November 2019 figures. Home prices are also on the up, rising 25% from last year to an average of $672,000. It’s not just detached homes that are driving the positive figures, sales of condos, apartments, and townhomes are also increasing in the City by double digits. Realtors and urban planning experts are optimistic over the long term, as Barrie has plenty of space in its downtown core and is largely a suburban city. The sprawl and dense road network of Barrie means there are plenty of opportunities for densification, condo construction, and further low rise development. The strength of the city’s economy and real estate market is transmitting to its exurbs and surrounding communities of Orillia and Innisfil, where development and construction continues to boom. 

 Despite the challenges of COVID-19, builders keep planning massive new condos along Yonge Street in Toronto. The latest design is a 55 storey tower on the corner of Yonge and Wellesley that will house a ‘light box’, and that will have slanting, symmetrical designs and a brown steel outer shell to distinguish it from other towers in the area. Other condos in and around Yonge and Wellesley will be set to have Asian styled architectural designs to cater to their clientele and to increase their novelty. While Toronto’s condo market has taken a hit from lessened demand, people moving to the suburbs, and less international traffic, the effect of these challenges has helped to add some normality to the rental market by increasing supply and lowering rents. Also, builders will be more disciplined in their financing, design strategies, and risk taking given the volatility brought on by COVID. 

COVID-19 and the housing market

We are all impacted by lay offs, long line ups at supermarkets, empty toilet paper shelves, working from home, or worse. If our own lives haven’t been completely shifted by the COVID-19 crisis, we know someone else who has. In this blog, Tembo will take a look at how COVID is impacting Toronto real estate and the broader southern Ontario housing market.

So far, with March coming to a close, the industry is arguably in very good shape all things considered. First and foremost, real estate is considered an essential business by the provincial government. It’s importance to employment, output, and just ensuring people have somewhere to live is crucial – and the government has obviously responded to that and acknowledged it. Guidelines on home showings and social isolation have been updated and restricted but realtors have used technology to manage some of these disease-related challenges.

International commerce and buying continues, and in many respects, the crisis may accelerate foreign purchases and investors scramble to move their money or persons around the world looking for stability in an ocean of unease. Construction is an issue, with pressure on governments to effectively shut down sites growing despite the importance of construction. The short to medium term impacts on construction sites remains to be seen. Media have already reported that construction sites related to government funded public transit will see delays in their timetables.

Prices and demand have yet to be impacted negatively. March’s numbers will be released in the next few days and will be interesting. April and May figures will be interesting, especially if quarantines, shut downs, and further economic disruption continue. Even if prices and demand does fall, it will likely be temporary, as prospective buyers waiting on the sidelines and investors with cash bide their time for opportunities.

The big and very positive news is that the big banks have announced that people will be able to apply to defer mortgage payments, and lowered interest rates means people can refinance for lower mortgage payments. While this is not an ideal measure, it offers flexibility in a time of crisis. All in all, the immediate impact of the crisis has not phased our ironclad market, but the medium to long term impacts will depend on how long this all lasts.

Tembo Financial for Business Owners and Entrepreneurs

During uncertain times, Tembo Financial understands that businesses and personal matters may be affected.

Many businesses are currently facing struggles that were unanticipated, and extremely sudden. Having to close, or operate from home for some is extremely tricky for several businesses.  

How are you going to pay rent? How can you continue to pay your employees? Will your business be able to survive the ongoing and uncertain changes happening? Many new questions arise as different life events take hold of what was your successful and growing business.  

It is in times like this where Tembo Financial may have the product and solution for you, to help you save your business with little risk. Tembo Financial is offering business loans against your personal property, to ensure that you can keep your business afloat. With flexible solutions, this product can assist you in getting your business back up to full speed. Our loans are simple, registering against your personal property, and releasing funds to keep your business the way it was moving before it slowed down.  

Interest will be deferred or prepaid so that you don’t have to come up with the payments until you are ready to pay off your short term, 4-6 month fully open loan. If 4-6 months isn’t suitable for your business, Tembo Financial can assess if your business would be right for a 1-year term.  

If you are a business owner, with equity in your personal home and are looking to tap into the equity in your home to save your business, contact Tembo Financial today to find out more information on how we can help you keep your business afloat!  

What is bridge financing and how does it work?

In the simplest terms, bridge financing is a short-term lending option that helps homebuyers bridge the gap between their old and new homes. It is often a short-term solution for the buyer in order for them to arrange the mortgage for their new purchase.  

Recently, conventional banks have released guidelines, which make it increasingly hard to qualify for a bridge loan.  

The advantages of bridge financing are that you can get the funds you need before your home sells. This can give you the ability to purchase a new home and have some liquid money before your sale closes. The bridge may also give you some money to do some touch-ups or renovations to your home before listing for sale. See our blog on home renovations and increasing your property’s sale price before listing by visiting our blog: 

How does it work? 

At Tembo Financial bridge loans are offered to clients without a lengthy list of criteria. We are able to assist clients with the funds that they need to bridge the gap between their purchase and their sale. Bridge financing works by putting a mortgage on your current property and sometimes your new property also, and only pay us back once your property has sold and closed! With flexible payment structures available, you may not have to make any monthly payments! 

 Need more of an explanation? See the example below:  

You are currently a homeowner at 12 Oneway Avenue and have just accepted an unconditional offer from a buyer for your current property, which has a closing date of September 18th. The purchase price was $700,000.00, and after paying off your mortgage, closing costs, and other costs such as moving or renovations, your net proceeds will be approximately $300,000.00. 

You’ve already placed an offer on a new property at 32 Ridgeway Crescent for $500,000.00, which is accepted, and your new property’s closing date is August 29th, 20 days before the closing date of your existing home

On your purchase, you’ve made a $25,000.00 (5%) deposit, and have decided to use $300,000.00 of your net proceeds from your sale towards your purchase. You’ll need that $300,000.00 on your closing date (August 29th), however, you won’t receive the proceeds from your sale until September 18th. What do you do?  

This is where bridge financing would be used, as you would take out a short term $300,000.00 loan for the 20 interim days between your purchase closing (August 29th) and your sale closing (September 20th). Although this situation is quite common, as exact closing dates aren’t always possible, such financing can be difficult to obtain from a bank, especially if the gap is greater than 30 days.