Mortgages Stress Tests Are Slowing Canadian Real Estate Market

The head of one of the country’s largest and most influential real estate bodies has made a strong case to one of the nation’s foremost regulatory bodies to ‘revisit’ its support of stress tests. The head of the Toronto Real Estate Board has complained that stress tests are too cautious and are having an extreme dampening effect on the market.

As a reminder to our readers, stress tests were implemented by the federal government in 2017 to reduce risk of poor mortgage lending and to shore up the housing market.

Stress tests scrutinize mortgage buys from prospective buyers with deposits at less than 20% of the purchase price and with no mortgage insurance. Stress tests provide incentives to purchase mortgage insurance, which can be costly, and add another layer of analysis to the already comprehensive mortgage approval process. Canada’s already notoriously conservative banks were made even more scrupulous with the introduction of the stress test.

Stress Test Have Dampened Demand

Stress tests were designed to demonstrate whether a low deposit mortgage could withstand a 2% added interest rate cost from the BOC. The effects of these stress tests have been to dampen demand. Research has shown that stress tests effectively blocked up to 100,000 first time home buyers from being approved for a mortgage. They were supported by risk-averse bureaucrats and economists who fear a housing bubble and who are worried about the quality of mortgage issuance in the country.
In response to these complaints, the OSFI, or Office of the Superintendent of Financial Institutions, Canada’s core banking regulator, stated that it will be sticking to the stress tests. In addition, it made the point that the stress test adds a margin of safety that is ‘prudent.’ With weakening real estate data spreading around the country, pressure from real estate bodies and experts on regulators and the Bank of Canada will continue. 

US Fed Made Some Significant Shifts In Tone & Policy Last Week

We’re addicted to covering the Federal Reserve at Tembo for the simple reason that it effectively runs the global economy and sets the tone for Canada’s economy, exchange rate, and real estate market. It is that important an organization.

James Powell, US Fed Chair
The Fed has made big changes in tone and policy lately, it appears growingly certain that its previous zealous push for higher rates has now been put on a deep pause. The word on the street is now all about ‘rate hike pausing.’ The Fed has been under huge pressure from business leaders, Wall Street insiders, softening economic data, and Donald J. Trump himself. 
Fed Chair Jerome Powell did not raise rates at the last Fed policy announcement. Former Fed Governor Neel Kashkari said the pause would allow the economy to keep growing. Global markets have reacted to the news timidly. While no big falls in stocks occurred, global markets at best were static.
There is simply too much negative news, too much uncertainty, and too much increasingly bleak data around the world to heighten optimism to boom levels. Here in Canada, the Fed’s pause is likely to reinforce the BOC’s own caution given Canada’s own worsening economic data. This pause will be good news for Canadian real estate, already under big pressure.
At the same time, the Fed issued a paper suggesting that negative interest rates, where the Central Bank pays borrowers to borrow money, would have engendered a fasterand deeper economic recovery. This not so subtle message to the market suggests the Fed is making it clear that it is still in the business of inflating stock, asset, and real estate bubbles and making money dirt cheap if need be.

On 2018’s Final Real Estate Stats

For Tembo’s final blog of 2018, we want to leave you with some interesting GTA statistics. All of our predictions for 2019 were outlined in our final newsletter – many of which are beginning to look on point given big falls in the markets marking the end of 2018.

fireworks

Stress Tests Have Kicked In 

Some 100,000 Canadians have been locked out of the housing market because of federally imposed stress tests. Already stringently cautious banks were made even more particular in approving mortgages because of the impact of the federal government’s stress tests. These tests force families with lower than ideal deposits for home purchases to buy insurance to cover their investment and reduce risks.

Pensions Are Pumping Up Real Estate Holdings

Trusteed pension funds have boosted their holdings in real estate by 2.5% to almost $190 billion as 2018 closed. Despite seeming like a small percentage change, this represents billions in added investment. In our last blog and newsletter, we highlighted the importance of real estate to the nation’s wealth, and this stat shows the reliance on real estate to the nation’s trusteed pension funds. All sectors of the economy are all in on real estate, and expect dividends and returns from a continuously healthy real estate market. 

Global Markets Are Falling Fast

stock market crash

The DOW underwent its worst day of Christmas trading in history, dropping over 600 points (3%). The Fed’s decision to increase rates last week was to blame. In addition Wall Street was spooked by news that U.S. Treasury Secretary Steve Mnuchin made calls to the CEOs of America’s biggest banks without authorization from the President to check on their liquidity. This was viewed by many as an act of panic. The contagion quickly spread around the world, with some international headlines using the term ‘panic selling’, for the first time since 2007.

Toronto Home Prices Up In November

Prices for detached homes rose 3.5% to mark the end of 2018, even as listings and sales dropped slightly. We end 2018 with the average price of a detached home in Toronto now hitting some 788K. While listings declined slightly in November and early December, they were still 12% than in 2017. Home prices are still significantly lower from their summer 2017 record highs. 

On Government Owned Real Estate

Few Ontarians know this, but hundreds of properties worth many billions of dollars are sitting empty across the province.

Previously a psychiatric institution, Century Manor in Hamilton is one of more than 800 disused buildings owned by the province of Ontario. (Sourch: Samantha Craggs/CBC) 
These properties are owned by the province of Ontario and number some 800 vacant buildings. Given that the province of Ontario is the second-largest property owner in the country, second only to the federal government, some vacancies are understandable. In total over 4,500 buildings are owned by the province, covering some 44 million square feet of space. 

Ontario Provincial Government Has Way Too Much Office Space

The Auditor General criticized the previous Liberal government repeatedly over its real estate practices. One of her complaints was that the province uses too much real estate, wasting $174 million in overused office space. Almost $20 million is being spent a year servicing and maintaining the vacant buildings. In response, previous Liberal politicians have mentioned that much of the vacant real estate stock is not desirable, such as decaying old jails, remote buildings, or dilapidated property. The province has failed to meet sale targets of the vacant buildings, only 25 were sold in 2017, even though the desired target was twice as high.

Government Owned Real Estate Needs Be Managed Much Better

Experts have repeatedly mentioned that government owned real estate is under-utilized and poorly managed. For example, ad revenue at GO Stations is very low despite high traffic. The City of Toronto also owns considerable vacant property, underused buildings, and brownfield (unused industrial zoned land), that it could sell and/or return to greater productivity to the private sector. Solving real estate problems and opening up opportunities for purchase is not only about restricting foreign buying, or tightening up lending standards, it’s also about changing the status-quo. 

Rental Housing, We Need It

toronto skyline

The rental vacancy rate in Toronto is at a record low of 1.1%. In other words, there are few, if any, vacant rental units available in the rapidly growing city. Prices for a bachelor apartment now exceed $1,500 and condo rent is also rapidly increasing to reach $2,000 in many cases. The lack of affordable rental housing, once plentiful, consistently built, and widely appreciated in Toronto, is crunching and distorting the real estate market. From the 1950s to the early 1980s, rental apartments were consistently and routinely built. Much of the existing rental stock was built in the 1960s.

Why Building More Rental Housing Is A Good Idea

There are many financial disincentives to building rental housing. Permits are hard to come by, government intervention has interfered in building plans; mandating certain number of affordable units, and it is easier and more profitable in the short term to rapidly sell newly built condo units. Rent control measures recently introduced by the outgoing Liberal government in Ontario will make disincentives to build rental housing greater as it adds red tape to removing troublesome, potentially costly tenants. The new PC government will maintain these rent control measures, but also have the opportunity to introduce measures to spur new rental housing development.

Are We Paying Too Much To Rent?

Tenant organizations and groups have released polls showing that over half of Toronto rental tenants are reporting that they feel that they pay too much in rent. More affordable rental housing will help young millennials, student, and families save for an eventual condo and house purchase. It will also take some pressure off the condo market, under huge pressure to meet demand which is showing no signs of abating. Most housing experts believe that a heathy rental vacancy rate should be from 3-4%, four times present levels.

top ten median rent across canada

Ontario Election Predictions And Real Estate Implications

Housing Is One Of The Biggest Issues In The Upcoming Ontario Elections 

With the middle class increasingly squeezed out of the housing market, government intervention will be increasingly called for and more and more political capital will be tied up in ‘resolving’ real estate issues. Whichever party wins Ontario’s 2018 election and forms government will grapple with growing discontent and increasing expectations from an electorate focused on housing issues. On the one hand, there are equity affluent baby boomers content with the status quo, and millennials and generation Xers struggling with low supply, high costs, and stringent demands desiring systemic change. Here’s Tembo’s analysis on how party’s would handle real estate if they win.

PC Candidate Doug Ford

PC Candiate, Doug Ford

PC: A PC government under Doug Ford would likely focus on supply side reforms, incentivizing and encouraging developers to build more housing. Permitting and regulatory processes would likely be streamlined, more land would be freed up for development, and financial incentives and corporate welfare to housing builders would not be out of the question. Funding for affordable housing is not expressly cited as a priority for the PCs and never has been. The PCs philosophically believe that affordable housing is not a prudent use of resources and that the market can solve the supply and price problems.

NDP Candidate Andrea horwath

NDP Candidate, Andrea Horwath

NDP: The NDP have released a platform which heavily focuses on investing in affordable housing. Close collaboration with Justin Trudeau’s Liberals on meeting a national affordable housing plan’s targets would likely be sought out. The NDP would also take a greater hand in mandating certain types of development, increasing tenant rights, and spurring densification. This would have certain short-term benefits but would also irk developers who would likely hold back on investment and see profits decreased. The last NDP government under Bob Rae built affordable housing spaces across the province, in rural and urban communities.

Liberals Candidate, Kathleen Wynn

Liberals Candidate, Kathleen Wynn

Liberals: A centrist approach would continue, with the government occasionally increasing involvement significantly and intervening (foreign buyers tax), with nods to the private sector and developers in balance. As the Liberal party and NDP are largely competing for the same pool of voters, the long term implications of a re-elected Liberal government would see an approach to real estate that would lean to more government intervention over the long term.

Ontario Election 2018: Inside the NDP Platform

With the Ontario election less than 2 months away, the details are beginning to stream out of the political system. The third party New Democrats recently revealed a fully costed, comprehensive platform on what an NDP government would do with a mandate from the people. This Tembo blog will outline the platform and what it has to say on real estate and home ownership.

ontario election banner

supportive housing icon

30,000 ‘Supportive’ Housing Units For The Mentally Ill And The Severely Addicted

This is one of the planks of the NDP’s mental health and addictions policy. 3,000 units of ‘supportive’ housing will be built every year for 10 years. This policy will cost $228 million per year in capital costs and $50 million in operational expenses.

affordable housing

Affordable Housing, And Lots Of It

65,000 affordable homes are to be built over 10 years. The NDP also affirm that housing is a human right. The NDP commit to signing on to Prime Minister Trudeau’s National Housing Strategy, which makes the same clear statement about housing as a human right. Co-Op construction bids will also be supported with a small amount of money.

Zoning Changes And Increasing Repair Funding

 New housing developments will be required to set aside certain number of affordable homes. Rental properties will also be brought in under ‘inclusionary regulations’. The NDP will also encourage densification in key areas, provide municipalities with more powers in planning development. The NDP also commit to fund one third of the costs of repairing social housing at the municipal level.

resident rights act

A Residents’ Rights Act

This will add legal apartments, laneway houses, and granny flats to the properties of homeowners. It would augment the already considerable new rights and privileges of renters implemented for renters by the incumbent government. A rent registry would be created, so tenants know past rent charge history. Further protection for law abiding renters. And ‘guarantees’ of affordable rent in the long term and encouraging rental buildings.

property tax icon

Broad measures against speculation (A Non-Resident Speculation Tax)

Essentially the boldest measure, the NDP will extend the Non-Resident Speculation Tax (NRST) ‘anywhere speculation is overheating the housing market’. A ‘Housing Speculation Tax’ will put a tax on foreign and domestic speculators who fail to pay taxes to the Ontario treasury. This emulates recent measures by the British Columbia government. The tax would be applied annually, would cover the whole province, and would target foreign and domestic speculators aggressively.

warranty icon

Other measures mentioned:

  • “Fighting the use of real estate for tax evasion and money laundering purposes” by calling for a multi-agency working group
  • Reforming Tarion Warranty Corporation to protect homebuyers from shoddy construction and unfair financial risks
  • The above mentioned Housing Speculation Tax is projected to generate $671 million dollars to the provincial treasury annually by 2019-2020, roughly one third of the entire dividend to the provincial budget from the LCBO.

As expected, the NDP are aiming to boost affordable housing investments, increase legislation to protect renters, and to tax speculation more aggressively. Measure to spur more diverse forms of development, to increase densification, and to protect homebuyers are mentioned. Tembo is non-partisan. We eagerly await a fully costed and complete platform from the Opposition PC party.

 

Toronto’s Housing Market Is Stabilizing

Real estate, like many aspects of life, is molded by perception and psychology

picture of toronto houses

When prices begin to pick up consistently, and when demand is healthy, a feeling of prosperity and long-term benefit kicks in, encouraging more people to buy and in turn, fueling positive perceptions and emotions. When this energy runs out, people begin to hold off on purchases, sell rather than buy, and direct their focus to paying off debt and consolidating their finances. Eventually prices level off and fall. Like the stock market, sudden shifts can panic people into a negative stampede – a massive fall in prices and demand. Regardless of the real fundamentals, real estate will always be affected by perception.

Toronto Real Estate Is Still In Good Shape Despite A Rough Winter

When it comes to the real underlying fundamentals, Toronto real estate is in good shape. Tembo has repeatedly emphasized our region’s strengths and we have always taken a positive, long term view. A stable economy, a peaceful society, strong immigration, and a sense of financial and material comfort underpin the overall strength of southern Ontario and especially GTA real estate. The end of the summer of 2017 and the transition to winter marked a very intense and sudden reversal of fortunes for Toronto real estate, with large price declines and a strong fall in demand. But the very latest data suggests that the modest recovery many experts anticipated is finally beginning to materialize.

Real Estate Figures For March Look Positive

Figures for the month of March show a very modest but welcome increase in average home prices in Toronto: at just over 2%, from February numbers. The average figure is just below $785,000.00. While sales still declined just over 6% from March to February, the fall was less severe than some expected. With prices slowly but steadily beginning to creep up again and with overall sales figures declining less vigorously, the perception that the traditionally buoyant spring market will be healthy is strengthening. This is a welcome psychological change given the impact on the market of a gradually increasing interest rate environment announced by the Bank of Canada, foreign buyer taxes hitting the market, and new stress tests squeezing out riskier first time buyers.

Real Estate Figures March Infographic

 

Despite Market Turmoil, Condo Market Marches On

With house prices and sales falling in Toronto for a rough start to 2018, one of the shining beacons remaining in real estate is this condo market. Since the early to mid 2000s, the condo market in Toronto has boomed continuously, with only a brief blip in 2008-2009. Condo flipping, the practice of buying a condo early, preferably in pre-construction, and then selling it quickly after rapid price rises was de rigueur in Toronto from the mid 90s to the beginning of the dot-com bust and then again from 2002-2008, and was considered a safe and easy way to make money. The practice of course has continued after the 2008-9 recession, but by 2009 and 2010 the entry level price of buying a pre-construction condo had risen considerably.

 

Toronto skyline

 

Condos Construction Is Changing Toronto’s Skyline

condo construction

Condo Market in Toronto Continues 30 Year Boom

Condo housing starts in February of the year rose 103% in Toronto to almost 64,000 units compared to the previous month, making it a record not seen since 1990. Condo demand has remained voracious; foreigners, natives, and retirees all buy condos in huge numbers. For a majority of first time home buyers, condos are the only reasonably accommodative venue to get real estate equity. Despite challenges, the condo market in Toronto continues its almost 30 year boom.

Toronto Condo infographic

British Columbia Moves To Introduce new “Speculation Tax” – Will Ontario Follow?

British Columbia Moves To Introduce new “Speculation Tax” – Will Ontario Follow?

Vancouver Capital

There is big real estate news out of British Columbia. The long-term heat of the Greater Vancouver real estate has made British Columbia a trend setter in broad government measures. The previous British Columbia Provincial Government introduced Canada’s first foreign buyer tax in the run up to the 2017 Provincial Election. Long standing concerns about the affordability and supply of Vancouver real estate and the impact of predominantly East Asian foreign buyers on the market spurred the then Liberal government to act. Tembo has extensively outlined and documented the foreign buyer tax, set at 15%, and applying only to the Greater Vancouver Area.

A new “speculation tax” is in

            The 2017 Provincial saw the incumbent Liberal government narrowly defeated by a resurgent NDP backed by a strong Green Party in a coalition government. The new NDP government has just introduced an annual tax on investors who own empty properties and pay no income taxes in the province. The “speculation tax” of 0.5% of a property’s assessed value in 2018 and will rise to 2% in subsequent years. This will result in a $40,000.00 annual tax on $2 million-dollar homes, as an example. Experts believe the tax will have a minimum impact on speculation and as Tembo has explained, foreign buyers will find and utilize numerous loopholes to evade foreign buyer taxes and this speculation tax. The BC government has made housing affordability and the construction of affordable housing a major priority.NDP Leader

Ontario may follow suit

Kathleen Wynne

            Ontario quickly emulated the British Columbia foreign buyer tax and has already implemented it. Housing is a major political and social issue in Ontario and it is highly likely that the Liberal Government of Kathleen Wynne will introduce a “speculation tax” on empty high value foreign owned homes as well. The political value of appearing decisive and strong in dealing with housing will be appreciated by a government that will have a tough fight ahead of it to win a fifth consecutive term after 15 years in power. Tembo believes that there is a strong possibility of a speculation tax in Ontario. The impact of the tax on affordability, prices, and supply will remain to be seen.