The Housing Narrative is Starting to Shift

Given the BOC’s recent signals that QE is over and that rates will be going up earlier than previously expected, the media narrative is showing signs of change. We’re now seeing more and more articles talking about a market cooldown or of price growth slowing. A blog post on Toronto Storeys exclaims that even if we do get a serious 50% crash in prices, we’d be where we were in 2014.. such has been the growth in valuations. Inflation is no longer temporary, as we all now know and as Tembo expected, so higher rates are now not only strongly anticipated, the question is will they come in the Spring? Or will they come earlier?

The changing media narrative reflects the growing uncertainty that high inflation and a now uneasy central bank are bringing. The worst case scenario experts and housing watchers consider is if significant rate hikes in quick succession rapidly precede a large amount of mortgage expirations and renegotiations – in other words, can people handle the higher borrowing costs? We have to keep in mind that even if rates go up, mortgages get harder to snag, and prices fall, there will be a significant number of buyers who have been waiting for more affordability and who have been more conservative in their lending and debt accumulation. If investors still have access to the market, many will see all of these conditions as ripe to buy, so a worst case scenario actually presents opportunities for many.

What does matter is how the more bearish outlook that we’re seeing affects mentalities and perceptions. Interestingly, all the hubbub has some real estate professionals advising their clients to sell now and take advantage of high prices before uncertainty kicks in with force in the summer and to take advantage of currently low supply (we don’t know how bad inflation will be by then, and we don’t know how aggressively the BOC will raise rates when push comes to shove). In a recent Royal Lepage survey of 950 real estate professionals across Canada, 79% said they would recommend selling this winter, given the current strength of the seller’s market. This is 15 points higher than the 64% who recommended listing in the winter before the pandemic. Never a dull moment in Canadian real estate!

An Election About Nothing

Election 2021 is finally behind us. The end result of this $600M snap election in the middle of a fourth wave is a parliament that is almost exactly the same as the one that preceded it. As the Liberal Party did not lose any seats, the outcome was not as politically damaging to the Prime Minister as it could have been. Although he lost a good deal of precious political capital in calling this election, taking the risk, and not gaining a majority – for now at least, Justin Trudeau is safe as PM. Over the medium term though, pressures on his leadership are likely to build.

For Erin O’Toole the election was a serious failure. He both failed to increase his seat count and lost a bit of the vote share. He also failed to gain any Tory seats in the crucial 905 mortgage belt or in the city of Toronto. O’Toole is the first Tory leader from the GTA since the party reunified almost two decades ago, and his lack of success in the area is going to hurt him. The Tories actually lost two seats in the GTA (Aurora Oak Ridges Richmond Hill, and Markham Unionville). This speaks to the Tory party’s weakness in the region, the failure of O’Toole’s pivot to the centre, and to the Liberal Party’s local organizational heft and popularity. If O’Toole lost seats in the GTA to a Prime Minister who’s shine is gone and who called an unpopular, expensive election then how will the Tory party return to power under him in the future? Media talk of how O’Toole’s leadership is going to be challenged is already significant (ditto for Justin too).

For the other parties the election was a mixed bag. The Bloc Quebecois won two new seats and increased its vote share – not a bad outcome. The NDP saw a slight increase in its vote share but only gained one new seat – the party failed to recover much of the support it has lost under Singh’s leadership. The Greens gained one seat in Ontario at the expense of the Liberals, but saw its overall vote share fall precipitously, and Bernier’s PPC failed to pick up a single seat. From a strategic perspective, the Liberal Party were the big winners, as they fended off contenders well and actually gained one seat overall (so far). When the next election comes around, it is likely that we could see a whole new cast of leaders (Lib/Tory/Green especially).

The NDP Plan for Housing

In our final Election 2021 housing blog post, we’re looking at the third party NDP’s platform under leader Jagmeet Singh. As is expected for the housing section of an NDP platform, it starts with building affordable housing. The NDP wants to build 500,000 units of “quality, affordable housing” over 10 years. This will be done by:

“Breaking the logjam that has prevented these groups from accessing housing funding, we will set up dedicated fast-start funds to streamline the application process and help communities get the expertise and assistance they need to get projects off the ground now, not years from now. We’ll mobilize federal resources and lands for these projects, turning unused and under-used properties into vibrant new communities.”

In addition, the NDP will waive the federal portion of the GST/HST on the construction of new affordable rental housing units as a “quick, simple” change to help get more units online.

Like the Liberals, the NDP will double the first-time Home Buyer’s Tax Credit, and will reinstate 30 year mortgages, as are widespread in the United States, to lower monthly costs. Finally, the NDP will tackle speculation by implementing a 20% Foreign Buyer’s tax on the sale of homes to individuals who aren’t Canadian citizens or permanent residents. The party also promises to tackle speculation and money laundering, as the other two major parties.

The NDP’s housing proposals are the least detailed and most concise of the two parties, but this could be an advantage in getting their message across to the public. You can read more here.

Is It Finally Almost Over?

In a recent briefing to the media, Premier Ford had the following message: “Everyone’s worked hard: healthcare folks have worked hard, the people of Ontario… we just can’t go back, we have to go forward. We can’t afford another lockdown. I’m 99 per cent sure we won’t face any more lockdowns, but nothing in this pandemic is 100 per cent. And we will always follow the guidance of the health table.” The province does have a plan to fully re-open, to move away from the step system, and to return to ‘normal’ with some public health measures if appropriate. To get to this point, our vaccination figures would have to reach 80% for one shot, and 75% for full vaccination.

Ontario’s new Chief Medical Officer Dr. Kieran Moore had this to say: “If [we hit vaccination targets] and other key public health and health system indicators continue to remain stable, then the vast majority of public health and work safety measures will be lifted… only a small number of measures will remain in place, including the requirement for passive screening, such as posting a sign, and businesses requiring a safety plan.” In addition, every public health unit must have 70% of its inhabitants fully vaccinated. As of July 22nd, we’ve hit 80.5% of people with one shot, and 65.6% who are fully vaxxed.

Some expect us to reach this ‘step 4’ in mid August, given the 21 day rule, and given vax increase numbers. Dr. Moore has been quoted in the media as saying that until 90% of the population is fully vaxxed, the threat of more transmissible variants won’t go away.

Prepare For a Federal Election Very Soon

The media have been whispering about a snap summer federal election for many months now, and the tempo of these ramblings has been increasing. In addition to the media chatter is a relentless amount of federal announcements in the last few months, investments in transit, money for Montreal, cash for steelmakers in the Sault, progress on re-opening the border – the list goes on. Polling for the federal Liberals has been very reasonable for a long period of time. The federal Tories have consistently polled in and around 30%, a number too low for a chance at a win. The amount of money the feds are spending due to COVID is historically unprecedented. Everyone is getting something. More money for student loans, more cash for seniors, Canada Child Benefit cheques to parents, all of this points to good political omens for the government.

On top of all of the news, polls, and cash, is COVID vaccination rates, which have risen sharply in the last few months. This trend is good news in and of itself, while also easing any potential criticism that a federal election would be opportunistic and dangerous in difficult times. With 155 seats in the House, the Libs only need to pick up 15 seats to win a majority government. The last Ipsos poll from late June had the government with a 10 point lead over the opposition. The Liberals are dominating in seat rich Ontario, performing strongly in Quebec, and also polling very well in BC. Given the low popularity of Alberta’s provincial Conservative government, the Liberals have improved their polling in Alberta. The opposition only have a big polling lead in Saskatchewan and Manitoba.

The Liberals have leads with basically all major voting groups (millennials, seniors, middle aged parents). The trick for the Liberals is how to trigger the election without appearing too greedy. Nanos polling shows that very few Canadians want an election (only a quarter). The federal government’s stimulus measures and COVID response is crunching through the legislative process with the help of the NDP and Bloc abstentions, so there’s no argument over dysfunction. This is not the early Harper era, where an election was always around the corner and the opposition were all eager to pull the trigger. How and when the Libs make their move, no one knows, but a late summer election would give them the momentum.

What happens if they actually raise rates?

The Bank of Canada’s language on rates has tightened dramatically in the last several months. It was not long ago that BOC Governor Maklem was saying that rates would stay ultra low for many years to come – this to support the economy that was battered by COVID-19. His language has changed since re-opening has intensified and since economic activity and inflation have picked up. Now we’re hearing that rates will likely go up in 2022, and we’re all aware of the inflation figures which are close to 4%. The language from the Federal Reserve is even more hawkish, suggesting a hike could come soon given unprecedented U.S. spending and money printing and inflation – albeit tapered with plenty of talk of stimulus, bond buying, REPO market support, etc. Will the BOC raise its rates early, or earlier than the Fed? That’s a big question.

The BOC is increasingly pointing to rate hikes in the second half of 2022, and the Fed, while adamant that rates will only go up in 2023, has few in the market fully convinced, especially if high inflation numbers hold. More and more U.S. banks are releasing reports and warning their clients that the ‘transitory’ nature of inflation is under-reporting the reality of the situation. In other words, it won’t be a blip, but it’ll stay with us longer than we’re being told. In an interview with the Financial Post, CIBC Deputy Chief Economic Benjamin Tal suggested that the BOC and Fed would coordinate a joint rate hike in the second half of 2022, especially if inflation pressures keep up. Tal also made the point that the Canadian government is more vulnerable to a rate hike than the U.S. government, and that private debt in Canada has continued to grow in the last several years even as U.S. consumers slightly paid down their credit cards.

Another striking point made by Tal was that the effect of a rate hike would be more pronounced in Canada today than it would be in the past, given our greater dependence on debt: “Our estimate is that a 1% increase in rates today would be equivalent to a 2% increase ten years ago, so the effectiveness of monetary policy is crucial.” Tal’s worry is that the BOC waits too long to raise rates, or increases them too quickly, suggesting that such a move would be very risky for the market, the economy, and government finances. On a positive note, Tal is bullish on the second half of 2021, agreeing that the economy will see strong growth (some 6%) because of increased consumption and a post-lockdown boom.

Inflation has finally arrived to Canada’s shores

For the last decade Canada has enjoyed inflation that never rose over 3%, hitting the Bank of Canada’s target. There were times when inflation was so low and unalarming that economists and public figures called for massive government spending and even interest rates to stimulate economic growth and employment gains. Now, because of the financial and economic aftershocks of COVID-19, the party is over given the arrival of the latest inflation stats. May saw inflation hit 3.6%, the highest rate in a decade. This is notable because it shows that Canadian inflation is almost as high as the U.S. (3.8%), where multi-trillions have been printed and spent by governing bodies in the wake of COVID-19.

Not since the early to mid 1990s has Canadian inflation approached 4%. This inflation is the result of low interest rates and huge increases in government spending across the board, coupled with supply shortages and labour disruptions. Housing and rental costs increased by 4.2% in May, furniture and appliance costs rose almost 4.5%, and gas prices have surged by over 43% from May 2019 figures. Car prices are going up, health care prices are rising, and some food items are getting more expensive – especially meat. The overall 3.6% inflation was not unexpected, economists expected a 3.5% increase, and Tembo has been writing about the potential for higher inflation and its importance to the real estate market for years.

The big question now is will this inflation remain, will it get worse, or will it begin to dissipate? All eyes are on this. If inflation sustains itself rates will have to go up. Economists are all saying that this inflation is transitory, that it’s a temporary offshoot of COVID, and that it’s a natural bounce from the low point where prices fell in the immediate aftermath of COVID. We’re already seeing that the ‘lumber bubble’ has apparently popped, and that lumber prices will now begin to fall from serious highs – so that could back up the ‘transitory’ argument. But with restrictions lifting, and people eager to consume and spend money, demand for goods and services will only grow. There’s unpredictability out there, but let’s all hope that inflation will go away.

Canada’s Population and Housing Needs Are Soaring

Canada’s 2011 census saw the population tick in at just under 33.5 million, a 6% increase from the 2006 census of 31.6 million. By 2016, the national population had risen to over 35 million people, and Statscan estimates that over 38 million live in Canada as of this year. In just a decade, over 4.5 million more people live in this country, and that has placed huge pressures on housing, employment, and our environment. That’s the net equivalent of adding the population of Toronto, Mississauga, and Brampton to the country. Long term estimates project 46.5 million people living in this country in 20 years. Immigration will continue to increase throughout the 21st century. The bulk of immigrants settle in three regions, already plagued with serious housing supply issues (the GTA, Greater Vancouver, and the Greater Montreal area).

How will we house the many millions that have arrived and that have ambitious housing aspirations, let alone the millions more that are coming? Experts are calling for ambitious, broad public policy measures. The dependence on urban sprawl, and building vast suburban lots of detached housing can’t continue forever. Accessible land is in short supply, and is extremely expensive. Canadian society is far too decentralized, individualistic, and suburban to fully embrace the kind of densification that has been the norm in many societies around the world where populations are large and where land is limited – Hong Kong, Tokyo, London, Manhattan. Experts, however, believe that intensification, redevelopment, and densification are the only ways enough ‘affordable’ housing stock can be brought onto the market to meet growing demand.

If immigration continues to surge, and the Trudeau Government is banking on it to, a detached home will become a luxury with average prices hitting well over $1 million in more and more parts of the country. While Canada is an enormous country, only 4% of its surface area is arable, and 90% of the rapidly growing population lives within a very narrow belt of this land adjacent to the U.S. border. It is estimated that every day, Ontario loses 175 acres of land to development. Population density in southern Ontario is rapidly increasing, and some believe that unless densification proceeds effectively and rapidly, we will have to build homes on protected and designated land to meet demand and consumer choices.

Historic News for GTA Public Transit Will Spur Densification and Higher Home Values

The Federal government has finally taken a strategic leadership role in the construction of public transit in the GTA. Several weeks ago, Ottawa announced that it would cut a cheque for over $12 billion on key strategic transit projects in the GTA. This is the first time in living memory that Ottawa has contributed significant funding (we’re talking about multi billions) to a broad number of public transit projects in the GTA.

In Toronto over $10.4 billion will be allocated to the Ontario Line, the Scarborough Rapid Transit replacement, the Eglinton Crosstown LRT and the Yonge-North subway extension. This funding will cover about 40 percent of each project and guarantees construction will start soon and that provincial and municipal bodies will fully commit themselves to accelerate work. In Hamilton, almost $2 billion in federal money will go toward building the long debated LRT in the downtown core. The federal funding puts to a complete end the debate over an LRT or BRT in Hamilton, which had raged for over a decade. The Hamilton LRT will spur an increase in density and a more cohesive and communal downtown core which is dominated by bus and car traffic.

None of these transit lines will be done soon, tunnelling hasn’t even begun, and given how slow we are at actually building transit, it’s likely these projects will take 10 years to get done. Governments are using 2029 as the completion date for all of the Toronto transit projects. Either way, the projects in Toronto encompass and back up Premier Doug Ford’s GTA transit expansion plan, including the province’s bold Ontario Line, which is said to be the largest subway expansion in Canadian history, as well as the Eglinton Crosstown West LRT, and the Scarborough and Yonge North subway extensions. The Ontario PCs have estimated the cost of those projects at $28.5 billion.

Property tax rates in the era of COVID-19

Torontonians continue to pay some of the lowest proportional property tax rates in Ontario, despite an above inflation increase that was passed by City Council earlier this year. Today Torontonians pay 0.6% of their home values in property taxes compared to 1.77% in Windsor, the highest in the province, and 1.5% in Thunder Bay. The average property tax bill in Toronto ranges from $3,000 – $5,000 a year, depending on home values. $740 of that bill goes to fund Toronto’s $1.1B a year police force, $540 goes to fund the TTC, and $400 goes to pay for long term capital projects. The GTA generally has much lower property taxes than rural and outlying regions of the province. 

We will see how COVID will affect these rates, given that Toronto is now looking at at least a $1.5B financial shortfall from the impact of the pandemic. The worst case financial hit to Toronto could be nearly $3B. The City has a GDP, or economic output of $250B, so it has the economic base to support going into debt to manage the difficulties of COVID. However, due to provincial rules and laws, the city has considerable limits on how much it can borrow. Those rules could be changed or loosened up for the city in lieu of a provincial bailout – which not only would be extremely expensive but would be looked upon with anger by other cities who are also facing serious financial and economic problems. One bailout to one city will lead to other cities asking for the same. Toronto has been leaning on debt and green bonds to patch up the city’s huge infrastructure, transit, and capital repairs backlogs that total many billions of dollars. This dependence on debt and debt servicing will only grow. 

Toronto’s growing tech. and financial sectors have helped the city enjoy significant prosperity (and high housing costs) prior to COVID, and will be counted on to support recovery from the pandemic. The city’s politicians have pointed to the strength of these sectors are reasons to bailout the city – claiming that its economy is interconnected to the rest of the country and a key driver of revenue for provincial and federal governments. Mayor Tory has repeatedly spelled out that deep cuts to services will have to go ahead if the City does not receive a bailout (firing police officers, gutting bus routes, and cutting down road funding – but not lowering the high salaries of senior bureaucrats or reducing the city’s 55,000 bureaucrat payroll through attrition).