On Canada’s Wealth

There has been a fair amount of media coverage over the last few days from an interesting, recently released stat from StatsCan on Canadian net wealth. It seems we’re a lucky country – our net wealth has topped $11 trillion, and our economy produces goods and services worth near $2 trillion.

Toronto Banks
The $11 trillion net wealth number was not a surprise for experts, but what has piqued the interest of observers has been the real estate component of that huge net wealth figure. The value of real estate represents over 75% of our net wealth, or just under $8.8 trillion. 
Over the last decade, real estate rose from comprising roughly 62% of Canada’s net wealth to the aforementioned figure. Canadians are much more dependent on real estate for their wealth than Americans – in the US, real estate has generally held steady at just over 70% of net wealth. This statistic corresponds to the general macro-economic trend that has continued in Canada over the last decade, where low interest rates and government policies have leaned on real estate and construction to drive growth. Low interest rates, strong demand, and the inability of the private sector to consistently build enough housing has all acted as fuel to real estate prices, and thus equity and net wealth.

Canadians Are More Dependant On Housing For Their Wealth Than Ever Before

Most Canadians hold the view that inevitably over the long term, their home equity will continue to rise. Many baby boomers and older Canadians are depending on this (rising) equity to supplement their pensions for consumption in retirement and to pass resources on to their children and grandchildren. This belief in relentless home price increases should have been tempered given the turbulence the national real estate market experienced over the last year and a half. The stats show that we are more dependent on housing for our wealth than ever before in our history, and even more so than our real estate crazy neighbours to the south. What we must all remember is that so much of this wealth is based on debt, and that debt needs to be serviced through discipline. 

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

Now Creative Group September 13, 2017 No Comments

Bank of Canada tightening tough on Markets

The Bank of Canada’s (BOC) decision to raise interest rates by a quarter basis point again last week came as a surprise to many and solidified the reality that the Bank has taken an aggressively hawkish position on the cost of money. The BOC had already reversed a historically unprecedented 7-year policy of record low interest rates on July 12th by topping the rate up to 0.75%. The second-rate rise in less than 2 months sent the value of Canadian dollar up but also had a direct impact on increasing mortgage costs and making business and commercial lending more onerous on borrowers as well. 

Canada’s big five banks immediately responded to the hike by announcing that their own respective mortgage rates would increase as well. The increase will have a powerful impact on the national housing market. In some regions where recent changes already had a significant cooling effect, the increase will only further make borrowing costs higher, particularly for first time buyers trying to enter the market. The move will also dissuade better prepared buyers who already have equity in the market from buying more or better-quality housing as equity growth and buying demand cools due to loss of market dynamism.

30% of Canadian homeowners who have variable rate mortgages will now have to adjust their household spending to make ends meet. While the rate rises may seem insignificant, the pace of the rate increases means that incrementally more expensive borrowing costs will accumulate and add up. This month’s increase also suggests that the Bank will likely increase rates again in October, as this matches the now emerging pattern of accelerating rates and lines up with the BOC’s increasingly hawkish and tightening rhetoric, and market expectations.

Why?

Many are scratching their heads as to why the BOC is raising rates so quickly. Inflation is very low at 1.2%. The BOC is known and respected throughout the world as one of the most successful inflation targeting Central Banks. This reputation was earned in the late 80s and early 90s as the Bank increased and maintained very high interest rates to break the back of double digit inflation caused by the 80s stock market and credit growth booms. The effect of these rapid rate rises on real estate, borrowing costs for consumers and businesses and consumer spending will be adverse. Tembo has several ideas.

First, the national economy is experiencing a big growth spurt and GDP growth rates increased by 4.5% in the second quarter. This was largely due to strong consumer spending, made affordable by a stable and healthy job market, some modest wage gains, and cheap borrowing costs. By raising rates, the BOC expects growth to cool to more sustainable medium to long term levels while sending signals to consumers to spend and borrow more Conservatively. There is also a broader international push by Central Banks to end the era of dirt cheap money, and the BOC, in the trendsetting style its admired for, is charging ahead.

Now Creative Group August 24, 2017 No Comments

Buying A New Home Vs. Buying A Resale

There are many decisions to make when beginning your search for a home in the current real estate market. Not only do you have to consider financial aspects such as your budget and mortgage costs, it is also important to consider the type of home and area that you would like to live in. There are advantages and disadvantages to purchasing both a new development as well as a resale property.

Move-In Date

From the time of purchase, new homes can take years to build and are often met with delays that prolong your move-in date. If you are looking to make a quick move, purchasing a resale home is your best option as you are able to secure a move-in date within a reasonable time frame.  On the other hand, purchasing a home that will be built within a few years from the purchase will allow the buyer to save more money over time for the down payment and closing costs. Depending on your needs and financial situation, it may be best to purchase a new development and make smaller payments until closing.  

Warranties & Costs

New construction homes in Canada are typically protected by a warranty, which will cover any costs related to issues with the construction and maintenance of the home. In Ontario, these concerns are addressed through the Tarion Warranty Program. This allows homeowners to save on costs and protect themselves financially from any damages related to the assembly of the home. Resale homes do not come with such a warranty, leaving any maintenance or fixes to the expense of the purchaser. Older homes may also require more maintenance over time, as the lifespan of the furnace and other appliances may be limited.

Customization

Depending on what you are looking to do with the home, either option may be feasible. New homes have limited options when it comes to design and available upgrades, whereas older homes can be purchased for a lower price and remodeled to meet the exact needs of the home owner. Some individuals purchase homes as investment properties, which can be renovated and resold. If you are looking to flip a house or customize your dream home, purchasing an older home may be in your best interest. Whereas others may prefer to select a model from a new development and move right into a brand-new home.

There is no definite answer to determine which type of home to purchase. Purchasing a new home versus a resale home is dependent on the buyer’s needs and preferences. Depending on the location and necessary amenities, some may prefer to purchase an older home as opposed to a new development, and vice versa.

Now Creative Group July 5, 2017 No Comments

Canada’s real estate reliance

As our nation celebrates 150 years of straddling the world’s stage, Tembo has decided to prepare a blog outlining how important the real estate sector has become to our national economy and prosperity.

Historically, the bedrock of the Canadian economy has been primary resources. The cycle has been simple. A resource is discovered or harvesting begins, within a short period of time extraction then begins to boom. The boom provides wealth and opportunity and attracts migration, and then the process matures, the resource declines in value or is depleted or made obsolete by market changes: thus paving the way for a new staple to be collected. The first of these resources was Atlantic cod in the 15th century, then fur and pelts, then lumber, and eventually, minerals and oil by the end of the 19th and early 20th centuries.

By the end of the Second World War, the Canadian economy began to aggressively industrialize and the service sector began to grow expansively. Suburbia sprouted and real estate began to boom and grow as a major sector. From the late 1970s to the present, the post-war industrial components of the economy have gradually withered away. Manufacturing has especially declined in southern Ontario, due to higher costs, relentless foreign competition, and a decline of productivity and innovation.

High oil prices from 2003-2015 helped the economy boom, but as those prices collapsed real estate has taken oil and manufacturing’s place as the main economic engine for the country. Statistics show that most of the strong economic growth the country is currently experiencing comes from four major sources: finance/insurance, real estate/rental/leasing, construction, and professional/scientific, three of these four are real estate related. Manufacturing, farming, fishing, and forestry were sources of economic contraction. Without real estate, Canada would be in a recession.

Businesses are pouring money into real estate and new construction is soaring, while renovation activity is also growing strongly. Increases in housing wealth and home equity are also prompting consumers to borrow more money, spend more, and even leverage the purchase of vacation homes or homes for rental income and investing. Real estate has become so robust that recently, the national housing agency, the CMHC (Canada Mortgage and Housing Corporation) declared it would transfer a special $4 billion dividend to the Federal Government over two years. Soaring property transfer and land taxes are one of the main reasons the deficit prone Ontario Liberal government recently tabled a balance budget for the first time in over a decade.

Overall, the importance of construction, housing, and its financially related business has never been more fundamental to Canadian governments, consumers, and households.

Now Creative Group May 2, 2017 No Comments

More on the Ontario Fair Housing Plan

Last week, Tembo released a blog outlining some of the basics of the Ontario Fair Housing Plan; a 16-point government initiative by the province of Ontario to cool the housing market in the Greater Golden Horseshoe region. In this blog, Tembo will explain other components of the plan and what the government of Ontario has been doing in the last few years to manage the real estate market.

The Fair Housing Plan will work with real estate agents and consumers to review rules agents follow to ensure real estate transactions are fair. The government mentioned the desire to strengthen real estate standards and to end the practice of double ending and to educate the public about the practice. Double ending occurs when a real estate agent represents both the seller and the buyer in a transaction.

Another aspect of the plan is to create a Housing Advisory Group which will meet quarterly to provide the government with advice on the real estate market and to provide feedback on the effects of the plan’s other points. This group would be diverse and would include economists, academics, and developers among other specialists.

The province will also work with the federal government to improve reporting requirements so that appropriate provincial and federal taxes are paid on the purchase and sale of real estate. Finally, the government will create an updated Growth Plan for the growing housing needs of the Greater Golden Horseshoe area. The updated Growth Plan will focus on increasing densification of existing suburban and urban areas and to ensure enough land is freed up for development without reducing protected green spaces.

Actions already taken

The government has already exempted first-time homebuyers from paying land transfer tax on the first $368,000.00 of the cost of their first home. Increasing land transfer taxes on high value ($2 million properties). Increasing zoning space for affordable housing, selling off surplus government land, and increasing the collection of real estate data are other measures the government has taken up recently.

Have you sold your home, and now can use an advance on your equity before closing day, perhaps you need money for renovations?  Tembo Financial can help!  Tembo offers this unique service to homeowners in Ontario and the GTA. You could receive your money in as little as 48 hours with no credit check and no appraisal* for expenses that matter to you.  Don’t wait, start today!

*Subject to qualification