What the banks are now calling a ‘rental crisis’

RBC’s lauded economics division recently released a report called Big City Rental Blue: A look at Canada’s Rental Housing Deficit which has grabbed a decent chunk of media attention. The report is an interesting read.

It shows that Toronto needs over 9,000 rental units as of last year to achieve a healthy vacancy rate of 3% (this gives prospective renters meagre, albeit decent options and flexibility in their rental options). The current rental vacancy rate for apartments is 1.1%, only Vancouver has fewer free rental units. For condos the vacancy is 0.7%, a stunning figure that probably ranks as one of the lowest vacancies in the world. The Vancouver condo vacancy rate is 0.3%.. These are tremendous figures. This is the supply situation, and it’s dire.

And the demand picture? You guessed it, even more dire. RBC’s report estimates that there will be a need for an additional 22,000 rental units in Toronto from 2019 to 2023. To give the market a meagre degree of rental unit balance, over 26,000 rental units were needed in Toronto this year, but only 4,300 rental apartment completions were noted. Even if all condo completions are included, the figure still falls thousands of units short. This is why vacancy rates are so low. While 53,600 condo units are under construction as of July 2019, only 33% of these units go into the rental market and many of these will take years to complete. Rental apartment construction has stalled in Toronto for decades as developers find it is far more profitable to put up a 30 storey condo, rapidly sell, and take the proceeds to finish up another quick project.

RBC called for a comprehensive and targeted policy to outline clear goals and to provide strong incentives to build. Apartment rents in Toronto are increasing at twice the rate of inflation (4.5%), and these price increases will likely accelerate as the demand and supply situation won’t be shifting dramatically anytime soon. As we outlined in previous publications, the rental situation is so dire in Mississauga and many surrounding municipalities that prospective renters are offering landlords higher rents than are publicly outlines to be competitive with their counterparts. Congratulations to all Torontonians are are satisfied with their rentals and the rents they are paying! Good luck for those of you on the rental hunt!

On the threat of a war with Iran

There’s been significant media attention in the last few months on escalating tensions in the Persian Gulf between the U.S., Israel, Saudi Arabia and its allies and Iran.

Not long ago, the Saudis claimed that an attack on a major oil refinery in their oil rich Eastern Province was the work of Iranian backed forces, even though Yemeni Houthi militants claimed responsibility (there is a brutal, ongoing war in Yemen between Houthi rebels and a Saudi backed former President). Israeli newspaper Haaretz claimed that President Trump had ample reasons to attack Iran given recent tensions but was backing off from doing so. Trump has spent the last 3 years implementing and reinforcing severe sanctions on Iran and ripped up a nuclear deal negotiated by Obama that international monitors repeatedly stated Iran was abiding by.

If a war breaks out between the U.S. and Iran, it will have a direct impact on Canada and its serious implications are worth outlining for readers. Iran will respond to a direct attack, however limited, with broad retaliatory measures. First, it will strike back at U.S. forces in the Gulf, U.S. bases around the Middle East, and at Saudi Arabia and its oil facilities and military installations, along with other Gulf Arab states. Second, it will move to effectively cripple oil production and exports from the Gulf. Analysts believe a war with Iran would result in oil prices rising to $150-300 a barrel. This would have a rapidly devastating impact on the global financial system and the world economy, imagine the impact of $3 a litre gas here at home, it would likely cause a deep recession internationally.

Israel would also be attacked, as Iran would see the outbreak of conflict with the U.S. as inevitably drawing in Israel at one point or another. U.S. forces in Iraq, Afghanistan, and around the Greater Middle East would be direct targets and both Iraq and Afghanistan would be profoundly destabilized to crisis levels. The war in Syria would intensify and with Russian troops stationed there, major escalation and a regional war could result in casualties that would rope in major powers. Hezbollah, a powerful military group in Lebanon and close Iranian allies, could potentially attack Israel with a volley of missiles if they see their major patron and ally under direct attack. In short, the implications of the Middle East being torn apart by yet another major war, would have immediate, profound, and direct impacts on Canadian society. 

Federal Reserve is cutting rates, again

Global accommodating cycles are intensifying as economic apprehension and wariness over the potential of a slowdown grows.

A few days ago Fed Chair Jerome Powell announced that the Fed would cut rates again from 2% to 1.75%. This comes as the rate of home flipping (buying early, renovating and/or holding, and then rapidly selling) has reached 8 year lows and news of a manufacturing recession in Germany transitioning to the services sector hit markets. Trump can claim another big win with the Fed’s decision. Market reactions have been mixed, with many claiming the cut was premature and obviously a political sign of subservience to the President. As rates are falling, the price of gold is hitting many-year highs, the pressure on emerging market currencies are also rising.

Bloomberg, a major U.S. financial services and news organization is predicting that Central Banks in Brazil, Russia, Nigeria, South Africa, Australia, and India among many European countries will all cut rates to stimulate credit creation and softening economies. Several trends are of concern to market analysts, the aforementioned Germany slowdown one of them, but Mexican car production is also going down, as is some U.S. industrial activity. The emerging signs of industrial weakness around the world was repeatedly cited by Jerome Powell as one of the reasons he chose to cut rates again so quickly after his earlier cut. A reminder for readers that U.S. interest rates are determined by members of the FOMC (Federal Reserve Open Market Committee).

CBC News is reporting that the two rate cuts by Powell will likely force Bank of Canada Governor Jerome Powell to reduce rates here in Canada. While Bloomberg reported that it doubts a BOC rate cut in Canada for 2019, there is still time left in the year for a decision in the fourth quarter. A late 2019 rate cut would have a positive impact on real estate and consumer spending for the holiday season and would help the economy prepare for 2020. A rate cut would have a positive and immediate psychological impact on the real estate market as it would lower mortgage costs; within a few days possibly.

On Money Laundering and International Property Ownership Laws

On Thursday, May 30th, the federal government revealed it had found over $1 billion in new tax revenue. Where did the Feds get the money? From real estate. Four years of drawn-out, complicated CRA audits saw almost 42,000 files reviewed in the key housing markets of B.C. and Ontario. The results netted over $100 million just in penalties based on flimsy tax compliance done in real estate transactions. The Feds are doing what they can to shake this ‘money tree,’ and have allocated some $50 million in additional spending to further these audits and to root out more non-compliance. This is on top of hundreds of million of already announced investments in the CRA which started four years ago, all aimed at rooting out tax dodging and generating more revenue for Ottawa to spend without raising taxes. 

 

Canada has established itself as a one of the real estate money laundering hotspots of the world. Some $50 billion was laundered across the country in 2018, with just over $7 billion laundered just in B.C. This is a very rough estimate, as it is impossible to put an exact figure on all of the washed monies. This represents a drop of the many trillions of dollars of ‘dirty money’ floating around international markets. Canada offers anonymity to real, or ‘beneficial’ real estate owners, just like notorious tax havens like the British Virgin Islands, the Isle of Man, or the Seychelles. We are recognized for some of the weakest money-laundering laws in the world. And the truth is, our economic stability and quality of life depend on washing dirty money. Without it, the real estate lobby, the big banks, and governments across the country would be starved of business, capital, and revenues to spend. We’re all complicit. 

 

Canada is one of the few countries in the world where there are virtually no restrictions on foreigners buying real estate here. The system depends upon an openness to foreign capital and as many high value transactions occurring as possible. In rapidly growing Thailand, for example, it is almost impossible for a foreigner to own a controlling stake in land or housing. There are very few ways to get around Thai property rules, so Canadians who’d like a beach house in Thailand have to jump through many, many hoops to pull off a buy. In New Zealand, previously lax rules for foreign ownership are being tightened and New Zealand government was elected in 2017 on a campaign of restricting foreign ownership. Prime land in our country is open for their world to buy. 

Ontario’s Housing Revamp Bill 108

The Ford PC government has unveiled a major piece of omnibus legislation designed to promote the construction of new housing and to reform planning in Ontario.

The bill is being passed swiftly by the government, as is the case with most legislation the PCs have introduced. The bill has received a fair bit of media attention and both praise and criticism. One of the key elements of the bill is that it eliminates the two stage appeal process of broad planning reform legislation brought in by the previous Liberal government – returning to a single hearing system. Marking a return with the bill is some of the old powers of the Ontario Municipal Board; namely the return to a single hearing. 

108 also reforms the section 37 system. Section 37 received a considerable amount of attention under former Toronto Mayor Rob Ford. The system allows municipalities to arrange special contributions and payments from developers in exchange for variances and changes to zoning and planning rules. The late Mayor Ford believed the system allowed City Councillors to amass pork barrel spending accounts to spend on parks and other amenities while accommodating powerful and wealthy developers and saw it as a corrupt and inefficient system. Most Section 37 money is accrued in the development heavy downtown core and benefits largely left-wing Councillors and politicians. 108 replaces certain provisions of Section 37 with a new community benefits charge and allows the province to exempt certain types of development from the charge. This reform will intensify provincial activity and interest in municipal and local development matters.

Bill 108 also cuts down on timelines for municipal processing of applications from 180 days to 120 days. It also limits witness activity in an appeal and restricts third party appeals to sub division planning and proposals. All of these changes will speed up development, benefit developers, and restrict the capacity of individuals to challenge construction. These are but a few of the changes Bill 108 makes to the system. The province has also expressed its desire to work with a wide variety of stakeholders and partners to get more housing to market. 

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.

The Fed Rate Freeze

It’s over folks, the Federal Reserve has given up on raising rates to historical levels. The announcement was preceded by rumours and media opinions suggesting the old hike schedule was dead and buried. The Fed’s new schedule outlines no further increases in interest rates for the year of 2019. The next expected rate hike will occur sometime in 2020, if not in 2021. The extent of the Fed’s ‘retreat’ surprised many, given the central bank’s previous dedication to rebuilding its rate cushion to historical norms. The implication of this change will be massive. 

 

The Fed’s decision will pressure the Bank of Canada to maintain a similar trajectory of rate pauses. This will be a boon to the present Canadian status-quo of high debt, ease of credit access, and real estate orthodoxy. There will be positives and negatives to this monetary policy shift. Several factors have pushed the Fed into this corner. For one, economic statistics in the U.S. are worrying policymakers. Home foreclosures are rising and real estate demand is slowing, GDP growth is beginning to falter, and fiscal and trade deficits are on the up. Employment gains have also slowed, in February, the U.S. generated only 20,000 jobs – less than Ontario alone.

 

Political pressure from the White House is also having an impact. Freed from the strains of the ‘Russian collusion’ narrative, Trump is free to enhance his harping on economic and trade issues. This was seen several days ago when he urged OPEC to increase oil production to buttress see-sawing U.S. stock markets. He has repeatedly criticized the Fed publicly and abrasively in a way that no President has since LBJ in the mid 1960s. These attacks and pressures on the Fed prompted a rare 60 Minutes interview where Fed Chair Jerome Powell outlined his views that he cannot be legally fired and that the Fed is concerned over the state of the U.S. economy.

 

The sudden dovishness of the Fed suggests that the underlying state of the U.S. economy is not as healthy as President Trump believes. If the economy is better now ‘then ever before’, than why is the Fed incapable of raising rates to historical averages of 3-5%? The BOC is unlikely to raise rates while they are being frozen in Washington, as this would soften up the Canadian economy and strengthen the dollar at the expense of Canadian manufacturers and exporters. Tembo’s prediction of an end to rate hikes from a slowing economy have come true.

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.