A snapshot of Toronto’s economy & construction sector as we wrap up 2019

In this blog post, Tembo will give its readers an overview of the state of Toronto’s economy and its major financial indicators. In this way, Tembo hopes to reveal the overall good shape, flexibility, and versatility of Toronto’s economic state. All in all, Toronto’s economic indicators are very positive.

The Macro-Economy

  • Unemployment is at 6.9%, slightly higher than the national figure but still a decent number, remember that population is rising by 70,000, placing pressure on job creation.
  • Mean hourly wages in Toronto meet provincial and national averages, at $29.
  • GDP is growing by roughly 2%, at the rate of inflation, it’s projected to stay at this amount for the next several years. The economy had a strong growth spurt from 2014-2017
  • Toronto’s economy boomed from 1998-2001, averaging rates of well over 5% in those years
  • There are 1,572.4 million jobs are in Toronto, contributing to an office vacancy rate of 4.1%, there have been only 10 business bankruptcies in our City this year
  • The industrial vacancy rate is 1.5%, down from 5.5% in late 2013
  • Consumer prices rose by 1.7% this year
  • Retail sales in Toronto will exceed $32 billion for 2019, most of which was cars and car parts

Buildings under construction

  • There are 246 mid and high-rise buildings under construction in Toronto as of October 2019, up from 202 in October of 2018
  • The pace of building continues to rise, Toronto is competing with New York City for the title of most mid to high rise construction in North America
  • 2022 will be a giant year for construction in our City as there are a huge number of supertall buildings that will be completed in that year
  • These will include the 83 floor The One building at Yonge-Bloor, YSL Residences at 85 floors just down the street, and Sugar Wharf Tower D on Queens Quay which will reach 70 floors
  • This article from the Financial Post has lots of information and an interactive video of some of the supertall structures that are being built right now: https://business.financialpost.com/real-estate/property-post/vertical-city-80-new-skyscrapers-planned-in-toronto-as-demand-climbs

Housing

  • Disappointingly, housing starts in Q3 2019 were 9% lower than in Q3 2018 but are up 11.5% from Q2 2019
  • There were roughly 5,000 housing starts in Q3 2019, most of which were apartments and condos
  • The average house price in our City is $925K

Most analysts and experts consider Toronto’s economy to continue

to remain healthy and reasonably stable in the coming years. Analysts believe the biggest threats are high debt levels, a rapid rise in interest rates, or a severe recession from abroad.

Rate Decision Coming Up This Week

The BOC will be announcing its next move on rates on the week of October 28th. Whether they stay even or go down is a big question, but they most certainly won’t be going up anytime soon.

If rates do go down, expect the recovery and renewed dynamism in the GTA real estate market to be reinforced, and given added momentum. If they stay the same, the higher price and strong demand trends will stay healthy. Most experts predict that the BOC won’t cut rates. The number is low as is and the economic overall is perceived to be in very good shape. While BOC policy generally does not diverge much from the monetary policy of the Fed, many market watchers expect that the Fed’s recent push to lower rates and revive QE (quantitative easing) won’t be necessary in Canada. Unlike the U.S., Canadian politicians rarely criticize or even talk about the BOC at all. At the height of the very high interest rates of the mid 90s, the Bank was politely scolded, and politicians sent letters asking for rate relief. Lately in the U.S., as many of us know, the President is openly at war with Fed Chair Powell; his own appointee. The C.D. Howe Institute, an elite, neoliberal think-tank based on Bay St. is calling for the BOC to hold off on rate cuts now and to wait until early 2020 for cheaper money.

In Washington, the consensus appears to point toward a 3rd consecutive cut in rates by Chair Powell this week. U.S. economic data is weakening, with manufacturing and housing showing slowdowns and the bulk of now much more subdued GDP growth dominated by consumers maxing out their credit cards and increased government spending. The Fed has also quietly began to increase its book of financial assets, and has long since ended its previously strong commitment to incremental reductions of its massive balance sheet. This basically that the Fed is once again buying assets, intervening in the market, and artificially raising asset prices while providing cheap money stimulus to Banks. There is growing repo activity, where the Fed is selling government bonds to investment only to buy them back within days at higher prices – effectively providing the buyers with excess capital that is not loaned. Repo activity is oversubscribed lately and is running the many tens of billions of dollars. This suggests a need for capitalization among U.S. financial organizations. 

As Tembo predicted, the once high GDP growth achieved months ago by a Trump tax cut and low interest rate stimulus is now falling back into traditional territory. If Powell does cut rates again, it will signal that the Fed is both concerned at U.S. economic data and also sensitive to the pressure and open criticism it is facing from a President who refuses to temper his language and who revels in his own bombast. Under Trump, the U.S. federal deficit is climbing again and is now close to the $1 trillion dollar mark. If the U.S. goes into a protracted and deep recession, it will have little wiggle room, little capacity for sustainable government fiscal stimulus, and almost no room to lower rates. A recession anytime soon would likely spell serious political trouble for a President who is staking his political future on a booming stock market, stable economy, and gradual, albeit ephemeral foreign policy retrenchment. 

On The End of the Era of Central Bank Independence

It’s all over folks. We’re going down a new road. After intense pressure from President Trump and other members of his Administration to lower rates and boost stimulus, Federal Reserve Chairman Jerome Powell folded.

In his latest Committee Hearing with the House of Representatives in Washington, Powell outlined his view that the U.S. economy was showing signs of weakness and that the Fed would intervene more actively to stimulate it. Tembo watched the Hearing carefully and noted a stark shift in tone for Powell to a much more accommodating rhythm with a more humble persona than his usual confident, lawyer-investment banker stern self. Powell was in full listening mode. The transformation from Hawk to Dove is complete for Powell. This shift marks what is in many ways the end of Central Bank independence. Never again will the Fed be able to march on with its policies undeterred when a political figure with as volatile a record as Trump threatens the Chair with termination.

What was interesting about the hearing was the fact that Powell said that the Fed’s current huge balance sheet (now in the many trillions of dollars) was not an issue in again buying stocks and bonds ‘if it decided to do so.’ In other words, Powell was saying that even though we’ve become such an interventionist, buying bank to the tune of trillions of dollars, we’re happy to buy more if we need to. The Fed’s shift in tone was so strong that gold prices surged to multi-year highs. Markets enjoyed the capitulation of the Fed and showed solid gains. The Fed’s shift is a big win for Trump, as the political benefits from the likely economic gains from stimulus will help the President as he gears up for the 2020 election. Not since President Lyndon Johnson’s era in the late 1960s has a Fed Chair been under so much pressure from a President. But unlike the privately intimidating Johnson, Trump has been arms length, open, and very public about his disdain for the Fed’s unease of more stimulus and lower rates.

What this all means is simple. The Fed is now almost guaranteed to lower rates. It will also be much more open to reigniting the quantitative easing it pursued in the immediate aftermath of the last recession (buying assets in the open market). It is a huge political win for Trump, as his unadulterated, raw strategy of open criticism has now yielded results. When Trump started criticizing Powell he was widely mocked and attacked from across the spectrum. Nobody was used to this, and in previous political eras it would have been inconceivable for a mainstream, run of the mill politician at any level to attack the Federal Reserve or its Chair. For Canada, the Fed’s surrender will result in huge pressures on the BOC to cut rates as the game to lower the value of the dollar and lower the cost of money overall now begins in earnest.

On Real Estate Predictions for Spring 2019

It’s hard to predict real estate trends and long term changes. Experts, economists, and real estate watchers will all have their views. Southern Ontario and GTA residents are generally positive about the long term fundamentals.

They believe that immigration, a stable economy, and a sound financial system will all facilitate long term growth and general real estate stability. This positivity comes from the fact that since the early 1990s, the real estate market has been on a positive upswing. Only two brief periods saw prices and demand ease, in the early 2000s with the popping of the dot-com bubble, and in 08-09, with the Great Recession.

 

Overall, given the data we now have and the trends we’re aware of, there is little that suggests there will be drastic changes to the real estate market. Expectations suggest that the price growth we saw in the last few years are unlikely to return. Interest rates will remain stable. While the BOC will want to raise rates when necessary, there is the dual pressure of not overwhelming consumers with higher borrowing costs and managing economic expectations.

 

Demand will continue to be strong. Experts are predicting stable or increased demand for luxurious apartment and detached home units as international money shifts out of Australia, the UK, and New Zealand in favour of Canada and the U.S. Condo prices and demand are likely going to trend higher, as detached home prices are still too high for first time buyers. As for prices and sales, both are expected to trend upwards in the Spring. A 30 year fixed rate mortgage is trending at 4.375%.

 

 

We Are Barely Into 2019 And The Stock Market Is Already Making Some Wild Moves

2018 ended with significant stock market turbulence around the world, especially in New York and Asia. Tembo made note of this in its final 2018 blogs and newsletter (you can sign up here). As we mentioned, significant drops in the DOW were reversed by announcements that major pension funds were pouring over $64 billion into stock buys, moving away from their positions on low yield bonds. 

Apple CEO Tim Cook’s Investor Letters Causes Stock Market Jitters

Even as this news drove up confidence, the market tumbled again when Apple Co. CEO Tim Cook released a brisk letter to shareholders that stunned Wall Street and which the media called a ‘bombshell.’ The letter outlined many positive overall trends for the firm but admitted its revenues and profits were to be negatively affected by ongoing economic disruption. Sales of new Iphone devices, especially in Greater China, did not meet expectations, and gross revenue would be over 5% lower than forecast.

Read: Letter from Tim Cook to Apple Investors

Apple’s reputation as a practically indestructible giant with an unrivalled brand and relentlessly improving financial performance was hurt badly by the letter. The company’s share price fell by 10%, equivalent to over $70 billion. As so many market participants, analysts, and traders have never experienced a bear market from a low interest rate boom that has lasted a decade, the tough news was not taken well. Markets negatively reacted to the news, with the letter solidifying growing perceptions that the global economy is undergoing significant structural changes.

Fed Tries To Calm Markets

This week some good data restored confidence. Another big boost to the markets came from Federal Reserve Chairman Jerome Powell, who commented that his central bank’s policy was ‘flexible’, essentially calming the market by saying the Fed would act if further market drops occurred. It’s Tembo’s belief that the Fed will cut rates quickly and print money to buy stocks if the stock or asset (real estate) market’s fell harshly – for better, or for worse. 

Bank of Canada Hikes Rates

The Bank of Canada to increased rates at its decision meeting on Wednesday, July 11th. The central bank increased its key rate to 1.5 per cent from 1.25 per cent.

The forces that favoured an increase in the cost of money outweighed those that supported continued loose money policies. The Canadian economy remains in very good shape. Inflation hasn’t reared its ugly head, household consumption is neither increasing recklessly nor falling precipitously. Growth and unemployment figures are very positive. Lack of price growth dynamism in the real estate markets, trade issues with the United States, and high levels of private and public debt are the key structural problems. Weighed against one another, the balance skews toward a rate hike.

Central Banks Around The World Are Adamant.

Central banks have begun and will continue a long term policy plan of ever higher rates, and more scrutiny on international banks and financial institutions. The Bank of Canada is no different. The key facts that most worry senior officials, politicians, and Central Bankers are the enormous levels of household and government debt, particularly mortgage debt. A generation of historically unprecedented record low interest rates has blown up large debt bubbles which elites are now desperate to deflate as carefully as possible.

Rates Hike To Negatively Impact Consumers

The likely hike will no doubt have a negative impact on consumers and on the real estate market. Banks are likely to raise their mortgage rates in response. The debt to disposable income ratio in Canada has hit a record of almost 175%, much higher than in the United States before the start of the Great Recession. A rate hike will be of no help to those looking for high prices for their real estate holdings. Debt to income ratios for the poorest Canadians are especially high. The lowest quintile of earners average a debt ratio of almost 350%. While higher rates will come at a cost, many believe they are absolutely necessary, and few doubt they are avoidable.

 

 

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.

News from Washington and Ontario Real Estate

The Federal Reserve is the Central Bank of the United States. Like the Bank of Canada, the Federal Reserve, known as the Fed, manages the U.S. dollar by determining interest rates, and controlling the money supply (regulating the amount of money printed or injected into the system). The Fed also has significant regulatory powers – having a great deal of power in inspecting and administering American commercial and investment banks. It plays a significant role in determining capital reserve requirements (how much money banks keep on hand), and keeps an eye on banks to ensure their activities do not harm the U.S. and international financial system; largely to prevent a repeat of the 2007-8 crisis.

The Fed is the most powerful central bank on the planet by far, and plays a massive role in influencing the global economy and broad economic and financial trends. For the last decade, it led the way and began the international trend of lowering interest rates, printing money to inject liquidity into the international financial system, and loaned commercial and other Central banks trillions of dollars to keep them stable, functioning, and healthy. This Wednesday, Federal Reserve Chairwoman Janet Yellen announced that the Fed would no longer continue its policy of quantitative easing (money printing and asset buying) to support the credit and financial markets. It also sent strong signals that its decade long policy of low interest rates, easy money, and loose credit is fully and totally ending.

The Fed will likely raise rates one more time before the end of the year. The effects of these announcements are very important for Canada and the southern Ontario real estate market. The Bank of Canada almost always mimics the Fed’s actions and follows in its footsteps, as do other Central Banks because of the weight of the U.S. dollar and the size of the U.S. economy. The Bank of Canada has already bucked the Fed and is raising rates faster than the Fed. But the announcement that the Fed will no longer continue its loose policies will only encourage and reinforce the emerging trend by Bank of Canada (BOC) Governor Stephen Poloz in making money more expensive and in increasing interest rates.

A recent report by the Bank of International Settlements in Switzerland (BIS), the “central bank of central banks”, indicates that some members of the BIS believe that higher interest rates will now become the new norm and that the firm orthodoxy of easy money is now truly and completely, a thing of the past. The great international financial institutions of the world are moving to make money more expensive, and in the long term this will mean higher and higher mortgage rates, and less flexibility for our already Conservative banks to approve new mortgages.

An ever-healthy housing market

Despite a fall in sales and a slowdown in prices, the fundamentals underpinning the Toronto housing market remain strong. The impact of a recent rate hike and a slew of measures at the provincial level, largely a 15% foreign buyer tax, have cooled what was once the most dynamic seller’s market in GTA and Southern Ontario history. New data released shows two important trends that underpin the stability and long term strength of the GTA housing market.

The first is that mortgage delinquencies are now at a record low and continue to fall. Data released by Equifax Canada shows that mortgage delinquencies have been falling in Canada, and large banks, like TD, report extremely low rates of default and delinquency. Another important and positive statistic has been the fact that home building has now been found to exceed demand in Toronto. For many years, industry groups, real estate professionals, and some politicians and economists have complained that not even housing stock was being built and that the government should be providing more incentives for builders to develop.

Recent data shows that between 2011 and 2016 there were 146,200 new households in Toronto, compared to the 175,825 homes that were built. This shows that housing supply exceeded established demand by over 30,000 units. While the supply of single detached homes in Toronto remains largely fixed due to space constraints, the latest census data shows that home supply has kept pace with home demand for many years. This proves that the GTA real estate market is adept at responding to the signals of demand and supply.

While having decreased month over month marginally, prices in Toronto are still significantly higher today than they were a year ago. The condominium market is on fire in Toronto, with double digit price and sale increases recorded in the last few weeks. Many realtors are predicting that the double whammy impact of a 15% foreign buyer tax and a small interest rate hike will temporarily cool the market before it heats up again, as was the case in Vancouver. Overall, the Toronto housing market remains rock solid.

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.