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.

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. 

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 2018 – What’s in it for real estate?

Ontario Election 2018 – What’s in it for real estate?

In this blog post, Tembo Financial Inc. will analyze the election platform for the Progressive Conservative Party (PCs) and will outline what the official opposition is proposing to do for real estate professionals, prospective homebuyers, and homeowners if it were to replace Premier Kathleen Wynne’s Liberals as the province’s governing party.

 

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1.    Local Infrastructure Fund

This is being touted to create jobs and build infrastructure in small communities.

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2.    Investment in Parks and Green Infrastructure

Investing some money to make certain green spaces across the province more user friendly.

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3.    Increased access to apprenticeships, doubling the loans for tools program

This will stimulate people learning an apprenticeship, and could be beneficial to the real estate and construction industries hungry for skilled apprentices.

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4.    Transit

The PCs are making a big push to invest $5 billion over 4 years on top of existing funding into new subways, particularly a downtown relief line which Tembo discussed previously. They will also upload the administrative and maintenance costs of Toronto’s subway system from the TTC while allowing the TTC to keep all the fairs. In return, they want the city to build more LRTs – especially a connection from the soon to be completed Eglinton-Crosstown to UofT’s Scarborough campus. These initiatives will spur development, improve property values, and stimulate construction.

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5.    Selling transit station air rights to developers

Self-explanatory, the PCs want to develop long along and by transit stations to create more housing stock.

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6.    Reforming the Planning Act

To reduce permit delays, cut red tape, and to stimulate more housing construction and development by sending a clear signal to municipalities.

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7.    Reviewing the province’s property portfolio

In other words, see what the province owns or has rights to and look to sell chunks of it to developers so they can build. Think underused or vacant parking lots, undeveloped land, wills, etc.

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8.    Reforming planning processes

This will encourage municipalities to update their planning and zoning processes and to update them routinely so as to send regular signals to developers about what and how to build, the goal is to ultimately increase supply in the long term.

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9.    Reforming planning processes

This will encourage municipalities to update their planning and zoning processes and to update them routinely so as to send regular signals to developers about what and how to build, the goal is to ultimately increase supply in the long term.

 

Overall the PCs are promising to make big new investments in transit and to increase housing supply. The full platform with all of its proposals is available here: https://www.ontariopc.ca/peoples_guarantee

 


Disclaimer:

Tembo Financial Inc. is non-partisan and looks forward to analyzing the party platforms of the Ontario Liberal party and government and of the third party NDP. Let’s hope that the 2018 election sees issues of housing supply, affordability, and infrastructure discussed thoroughly and qualitatively.

Is Affordable Housing A Human Right?

Is Affordable Housing A Human Right?

Prime Minister Trudeau

Prime Minister Justin Trudeau announces the government’s National Housing Strategy at the Lawrence Heights Revitalization Project in Toronto. (Photo Source: https://pm.gc.ca/eng/photos).

Prime Minister Justin Trudeau seems to think so, and recently declared that the federal government would make “adequate housing” a right in Canadian law. At the same time, the Prime Minister announced a $40 billion plan over 10 years to a national “Human Rights-Based Housing Strategy.”

What Is The Rights-Based Housing Strategy?

The strategy has several components, first the government will provide $2,500.00 in annual rent support a year for low-income vulnerable families called the Canada Housing Benefit. Second, more social housing will be built across the country. Third, 100,000 new affordable housing units will be completed, along with repairs to 300,000 affordable housing units, and removing hundreds of thousands of households from “housing need.”

The plan is also geared to “protect” 385,000 households from losing their affordable housing (social housing), and commits to cut chronic homelessness in the nation for 50%. The aforementioned Canada Housing benefit will cost $4 billion over 8 years with cheques starting to get mailed in April 2020 until 2028, shortly after the next federal election in late 2019. The Canada Housing Benefit is the only part of the overall strategy that is receiving new government money, most of the funding for the $40 billion plan was announced in last year’s federal budget. The plan will also see certain federal lands transferred to private sector partners for housing development if they meet strict environmental standards.

Does This Mean Housing Prices Will Start To Cool?

While stakeholders and expert groups say the plan will have a positive impact on disadvantaged, low-income Canadians, the overall state of housing affordability for middle class Canadians will continue to worsen. The below graph outlines average family incomes and average home prices in some of Canada’s major cities. Overall, as supply constraints and price increases continue, first-time buyers will have to save and leverage more to afford their first home.

2017 mEDIAN fAMILY iNCOME VS. oCTOBER 2017 AVG HOUSE PRICE ACROSS CANADA

Source: CREA, StatsCan, Bank of Canada

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Millenials better at saving than their parents?

Labelled as the “lazy and entitled” generation, Millenials have seen their share of criticism. But revel in this – a recent study shows that millennials are better at saving than their parents, the baby boomers.

According to bankrate.com, 60 percent of 18 to 26-year-olds are planning ahead compared to just 25 percent of the older generation. Another study, conducted by Nerd Wallet, shows that millennial parents are putting away 10% of their annual income, compared to Gen X saving 8% and Boomers saving 5%. NerdWallet also found that only 7% of millennials surveyed were not saving for retirement. These numbers are most likely linked to the fact that Millenials had a front-row seat to the 2007 financial crisis. If millennials continue to save at this rate, Nerd Wallet say’s the will outsave previous generations

Regardless of the fact that Millenials are paying more bills than their parents, and facing a much higher cost of living, they still lead when it comes to savings and retirement plans. Given that most millennials have between 20 to 40 years before they retire – there is plenty of time for that money to grow. This is a very smart financial decision on their part.

 

 

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The Market Rebound Begins

In a promising sign that the traditionally positive seasonal effects of Fall on the real estate market are once again kicking in, October sales of homes in Toronto rose over 12% from September figures. The increase will be well received by realtors and prospective sellers, as it shows that the market is showing renewed resilience and that demand and buying potential remains firm. Growth in October is usually expected by teal estate professionals in a usual year, but the 12% increase is slightly stronger than usual metrics.

Prices for average homes also increase slightly, hitting roughly $780,000.00. Prices have been increasing for very conservative but the October increase shows an acceleration from September numbers – again, this is a very promising sign. The increase in prices and sales shows that a market that had faced rapid and dramatic cooling from a long list of government and regulatory measures after peaking in May is once again begin the slow but steady process of warming up again.

While sales and prices are slowly returning to health, concerns about a continued large gap in the supply of homes versus still shy demand remain with close market watchers and realtors. The gap may be bad for those wanting to sell, but benefits buyers, who at the height of the market in May were hard pressed to get a bid in a prospective home, let alone a fair shot of sealing the deal with a buy. The large amount of supply continues to place downward pressure on sales and price growth.

Condo market surge continues

As a previous Tembo blog has outlined, the condominium market in Toronto remains very strong and shows strong price and demand growth. Although many pockets of the GTA have lukewarm and slow condo markets, the overall market, and particularly activity in the core continues to surge. Average October prices increased over 20% in October. The average price of a condo in Toronto now exceeds $520,000.00

As Tembo has repeatedly stated, the fundamental underlying pillars of the GTA real estate market remain firm and strong, and in the long term, the market will continue to be resilient and will continue to offer opportunities for buyers and sellers.

Now Creative Group November 13, 2017 No Comments

The Rebound We’ve Been Waiting For

After having been walloped by a combination of new taxes, higher interest rates, tougher financing rules, and a massive glut of housing listings, the Toronto housing market showed positive signs of resilience and recovery by posting a 6% increase in re-sale home prices in August from September. Market watchers and realtors pointed to the increase as a good sign the market was finally pulling out of a period of price stagnation, low buyer interest, and dampened demand.

Many officials, market watchers, and financial and real estate professionals predicted the market would begin to recover and that prices would increase again in the beginning of fall. The news that this has been confirmed is yet another sign that the Toronto real estate market is in good shape and that it has strong underlying fundamentals. New listings numbers are also beginning to fall, meaning the supply of new homes is dropping, this is another positive trend for sellers who had a very tough summer selling season.

The price increase brought the average September price to $775,546.00, $20,000.00 more than the same price last year. The rebound mirrors long term trends in Vancouver, where a foreign buyer tax gutted demand and prices for almost a year, only to see prices and demand rebound and exceed past levels later. Market watchers are now eager to see if the positive trend continues into the middle of the fall and whether interest rate hikes and tighter insurance rules from federal regulators further increase pressure on the fragile market.

Housing starts increasing in urban areas

The market is responding to strong economic growth and still reasonably low borrowing costs. Urban housing construction is on pace to reach its strongest level since 2007 with a 8% increasing in urban detached housing starts which exceeded 60,000.00 units in August-September.

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The Bank of Canada Holds its Ground

The Bank of Canada was generally expected to raise its benchmark interest rate from 1.00 to 1.25 this week, but decided to hold its rate at 1.00. The Bank cited strong economic growth and the desire to moderate its pace of rate increases so consumers and the economy can better adjust to more expensive money. The Bank’s decision was met with interest as many expected it to stick to its aggressive rate hike pace. Many, however, believed the bank would hold off as surveys and media coverage showed that consumers were weary about the speed of interest rate increases and were worried about their ability to service the increased costs.

The immediate market reaction saw the dollar fall 0.65 cents and the TSX drop 60 points. Investors reported their view that the interest rate holding would lower economic growth for next year. Market watchers will take mixed views. Those in the real estate sector will cheer, as new taxes and stress test rules recently implemented will inevitably serve as a disincentive for builders to construct new homes and for buyers who are already under tremendous scrutiny from banks and insurers, especially first-time buyers.

The decision to hold shows that the Bank is concerned about excessively pressuring the real estate sector, given the new stress test rules will add cooling effects to an already lukewarm market at best. The Bank is likely to keep a close eye on inflation, GDP figures, and job numbers in the coming weeks and months before deciding to raise rates again in the next quarter. Fundamentally, the international trend is focused on raising rates, increasing the cost of capital, cooling consumption, and adding space and breathing room for central banks to decrease rates in any future economic challenges.

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Stress Tests May Squeeze Homebuyers

Home buyers could lose a quarter of their home buying power if federal officials get their way in establishing guidelines to prevent people from borrowing too much. Federal officials are proposing stress testing uninsured mortgages. Uninsured mortgages are ones with a 20% minimum down payment. The government is wary about the financial sustainability and serviceability of these mortgages if interest rates rise.
If stress testing becomes a norm, it will reduce the ability of Canadians to borrow money and take on mortgage debt, and will place enormous pressures on an already pressured market to respond. Developers will see their pool of potential customers decreased, and demands for cheaper housing, which is already high, will continue to increase.
The federal agency responsible for stress tests in the financial system is the Office of the Superintendent of Financial Institutions (OSFI), located in Toronto with offices around the country. OSFI’s mandate is to ensure that risk and contagion in the financial system is a low as possible. One particular area of concern has been the long-term reality of low-interest rates and their impact on mortgage insurance, banks, overall debt in the country, and the stability of the financial system.
While many recent changes to regulation, down payment standards for housing purchases, and interest rate increases have added stability and cooled what was an inflamed market, OSFI continues to work towards tougher and tighter standards in anticipation of future market risks. When recently questioned about the state of the housing market and the need for tougher measures, Federal Finance Minister Bill Morneau made the point that he felt enough had been done and that further action was not necessary for the time being.
With future interest rate rises on the horizon and the possibility of stress tests, it is clear that regulators are weary and vigilant about the potential risks to Canada’s housing market – a market that has become crucial to economic activity and the livelihoods of hundreds of thousands.