A Recovery That’s Gaining Steam

The latest stats are out and they’re very good for Toronto real estate. Sales last month rose by 19% from May 2018 figures. The number of transactions almost hit 9,900 and are approaching more robust historical averages. Home prices also went up by 3.5%, higher than inflation, and condo prices shot up 5%. The average home price in Toronto is now $838.5K, and the average condo price is $590K. Detached housing prices increased by only 1% to $1.042 million, but were marked by a much lower inventory and number of transactions, thus dampening dynamism.

Prices for condo townhouses are growing at the fastest pace, with a 6% increase recorded last month. Their combination of being relatively affordable and slightly more spacious than traditional condos has afforded them a great deal of attention with prospective homebuyers. Overall, new listings barely grew, and real estate experts claim that there is little capacity for this figure to expand, so further increases in prices and demand are anticipated – especially is sales continue to recover. If we have more positive months like May, expect price growth to rapidly rise once again. To put this very positive month in perspective, the market has now returned to the levels it was at shortly before the introduction of stress tests. This shows how strong the underlying fundamentals of GTA real estate are. 

While we have a long way to go before we see prices and demand for detached houses reach the dizzying levels of March and April 2017, semi-detached and condo townhouse figures are almost at their Spring 17′ peaks. Condo apartment prices almost never fall in Toronto, so positive trends for a quarter or two should get numbers to meet Spring 17′ peaks as well. The $1.2 million average detached home price levels which marked Spring 17′ are a long ways away but not impossible to revive. GTA monthly unit sales reached a high of almost 13,000 in mid 2016, and at the beginning of 2019 were barely at 4,000. If trends continue we should see a few more months of rising sales. Keep in mind that there are growing rumours of an incoming BOC rate cut, in addition, Canada’s big banks will likely work to revive growth in domestic credit and mortgage operations, so incentives and lower rates may be well on their way!

Have You Ever Heard of Section 37?

Planning law and regulation in Toronto and the province is complicated, cumbersome, and difficult to understand. It is overwhelmingly written by Queen’s Park, given the Constitutional arrangements in Canada which afford provinces so much legislative punch and power, especially in comparison to regional and municipal governments. Planning law reviews do occur on a routine basis and everyone has their own opinions and views on the state of the overall system and on what should be reformed. One interesting component of planning in the region is Section 37 – which refers to a section of the Ontario Planning Act. 

Section 37 is a clause which gives municipalities, through local Councillors (elected politicians), the power to negotiate changes to planning and zoning in exchange for monetary commitments to certain arbitrary projects. For example, let’s say you’re a developer with a fair bit of cash and you want to build a 30 storey condo in an area where zoning says 20 is the max. You’ve got access to a deal to buy a plot of land for a decent price, now want to make some profit, but calculate that a 20 storey building won’t net you the kind of proceeds you want. So, what do you do? Well, you activate S. 37 and ring up your local City Councillor.

Negotiations start. The Councillor hears you out and thinks what you want is not too unreasonable – it’s only a few extra storeys. What’s wrong with making money? Now in exchange for the immediate zoning change for your extra 10 storeys, the Councillor wants you to scratch his back. You see, he wants to get re-elected, and there’s a neighbourhood where he didn’t get as many votes in the last election that he could use in the next. He wants you to promise $250,000 to upgrade a park in his tricky neighbourhood. You say sure, why not, and the deal is done. Under Section 37, the commitments to projects in exchange for zoning changes are designed to be used to help the community add resources in needs in exchange for the heavy duty development changes. If a developer builds a 60 storey condo instead of a 20 storey condo, the impact on roads, sewers and local schools will be massive.

Councillors have huge power to negotiate these deals for their own political ends and the Section 37 system has come under serious scrutiny in recent years, especially under now deceased former Mayor Rob Ford. With the planning system undergoing massive reforms by now Premier Doug Ford, expect Section 37 to be changed thoroughly.  

Thaws, Rebounds and Real Estate Leaders

In our last blog, Tembo expressed optimism and positivity over the latest real estate stats in Toronto. Sales did well in April, and the amount of listings of new homes rose sharply.

 

Analysts were particularly optimistic over the rise in prices, which went up for two consecutive months. This combination of successively positive data suggest a healthy underlying market and the potential for growth and opportunities over the summer. Toronto’s market continues to dominate Canada’s housing sector, with almost as many homes sold in our city as Montreal, Calgary, and Ottawa combined. Positive expectations for increased demand, sales, and higher prices over the next few months are not without merit.

From May 20-23, Toronto will host Collision, one of the pre-eminent technology and AI Conferences in the world. One of the highlights of this Conference has been the focus on the growth and dynamism of tech. job growth in the city. Over the last 5 years Toronto has created more jobs in the tech space than any other urban area in North America, including mighty Silicon Valley. All of these young tech. professionals will need quality housing in the city and the amount of FDI (foreign direct investment) going to tech is expected to grow ever more rapidly in the next few months and years. This will be a big boon to housing. Economic growth in the city is projected to continue growing in real terms (above inflation), and immigration is growing, not slowing. These two macro trends suggest overall demand will continue rising.

On a final note, Toronto’s leadership in the real estate space continues to be cemented internationally. The biggest real estate company in the world is Brookfield Asset Management. It leads all of its peers in sales, amount of assets, and is extremely competitive in terms of the profits it generates. Separately, the volume of condo projects being built in Toronto and the GTA continues to build up. Chinese developers are building major condo towers in Scarborough, Newmarket is seeing its first major condo development in over 30 years, and Peel Region continues to see the ambitious condo projects underway. 

Big Housing Projects and the Benefits of Rapid Transit

In the last four decades, major infrastructure projects in Toronto and the GTA have been few and far between. We have fallen behind. The last two major subway lines that were built benefited low density inner suburbs in North York and Vaughan.While these areas are undergoing building booms and seeing density rise, the lack of a completed downtown relief line is overwhelming Toronto’s subway system. Nonetheless, the Eglinton Crosstown is a project nearing completion that is looked upon more favourably by transit and infrastructure experts. 

 

The Crosstown will provide top notch transit service to the city’s dense and heavily populated midtown area. One major benefit of this massive project is the development and rejuvenation of housing where it is needed most. One such project has received favourable attention; the Crosstown planned community by Aspen Ridge on the corner of Eglinton and Don Mills Rd., just north of the Ontario Science Centre. Right on the Crosstown subway line, this housing project will feature almost a dozen high-rises, townhomes, and low rise buildings. It will also feature considerable green space, restaurants, and rec facilities. This kind of broad, dense, and all-in-one is made possible by the construction of major public transit projects.

 

With recent transit announcements showcasing the desire to pour tens of billions of added dollars into public transit lines in Toronto, projects like the Crosstown community will become more frequent. The 60 acres of the Crosstown community previously consisted of low rise office and warehouse buildings, largely owned by the international tech company Celestica. 

The First Conservative Ontario Budget in 15 years

This week, the new Ford PC government released its first budget. The document outlines a new vision for the province and sets of the government’s fiscal strategy for the next few years. Contrary to the views of many, the budget did not implement massive cuts. Healthcare and education spending will be increasingly modestly, spending for most other areas will either rise extremely modestly and will be effectively frozen over the next few years. When adjusted for inflation, most departments and Ministries will see their budgets cut.

 

The province’s headline announcement is transit related. Premier Ford wants to see a number of new public transit lines built, including a 3-stop Scarborough subway, a subway to Richmond Hill, a downtown relief line from the Science Centre to Queen St .East westward to Ontario Place, a transit line along Sheppard Ave. East, and a subway across central Etobicoke. The province is setting aside over $11 billion to the construction of these lines and expects the federal government and the regional municipalities involved to foot the rest of the project $28 billion cost of these projects. If completed, these lines will have enormous implications for densification, land values, traffic, and economic growth. But massive public transit plans have been announced by provincial governments of all political stripes repeatedly over the last 40 years, and few projects have actually been completed.

There were few mentions of housing, housing affordability, or real estate; these announcements are likely to come later given recent reviews of the industry. There will be a new child tax credit for parents which is quite substantive. Overall, the budget is transit focused and seeks to maintain spending at levels where they are presently.

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. 

 

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. 

On Toronto’s Move For More Affordable Housing

With sky-high real estate prices, extremely limited supply, and a vacancy rate incomparable to its international competitors, Toronto is in the midst of a housing crisis. Housing, transit, and affordability were the key issues for politicians in last year’s Mayoral and Council elections. 

John Tory

Toronto Mayor Pushes Housing Now Plan

Incumbent Mayor John Tory made tackling the housing supply issue a key commitment if re-elected, and many City Councillors emulated that promise. A week ago, the Mayor successfully persuaded his Council colleagues to endorse his Housing Now Plan and to vote it through. The plan is an aggressive measure being heavily pushed through by the Mayor and senior City bureaucrats. 

The Housing Now plan calls on the City to facilitate the transfer of surplus land to private sector partners so as to develop it into housing. A certain amount of the finished units are to be set aside as affordable units with controlled rent. This is geared to benefit low income families. Toronto has a massive list of individuals and families waiting for affordable housing. In total, the plan is expected to result in 10,000 new units of real estate.

As Toronto has a weak Mayor system, its Mayor does not have executive powers and serves more as a glorified City Councillor acting as the Chair of Council. Unlike many of his American and international counterparts, he has no veto over votes, and cannot directly replace the departmental heads of the City’s large civil service. 

Officials have been eager to push the plan through given its importance, and this effort has been largely supported by City Councillors. The Housing Now plan was opposed by many of the city’s more left-wing politicians, who believed it did not go far enough and that its targets and limitations were not ambitious enough.

All levels of government will continue to increase their intervention in the real estate market so as to spur more development for an increasingly impatient pool of prospective buyers.