Rental Housing, We Need It

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

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.

Why Toronto is Immune from a Real Estate Crash

The imposition of a foreign buyer tax, stricter and more comprehensive rules and regulations, higher interest rates, and higher taxes has upended the Toronto real estate market. What was once the most dynamic sellers’ market in the history of the region in February of this year has now shifted in a much more balanced way towards buyers. A market where sellers were seeing double digit price increases and massive demand has been extinguished and now prices and sales are faltering with huge influxes of inventory hitting the market.

The talk now is of where the market will be in the medium to long term. Will prices and demand remain steady, recover, or crash? This is the grand question on the minds of professionals, buyers, sellers, politicians, regulators, bankers, and everyone else interested and affected by real estate. The best way to predict and ascertain the future is to look back to the past. The last time the market experienced a genuine, painful, and widely feared crash was in 1989. At the time speculation was rife, price growth explosive, money reasonably cheap, and demand strong.

But what triggered the ultimate inflection? What was the spark which led to a near decade long depression with a 40% real drop in prices? Ultimately, two factors broke the back of Toronto real estate. The first was a rapid increase in interest rates unveiled by the Bank of Canada to stem the inflation from the cheap money of the 80s boom and the second was a subsequently massive and sudden spike in unemployment. These two forces unleashed the early 90s recession which particularly hurt Ontario and caused 11% unemployment.

For the Toronto real estate market to crash, rates and joblessness would have to soar. The Bank of Canada has little reason to spike interest rates, as inflation is very low, and the economy is stable. Canada’s banks are healthy and sound, prices for many key commodities still remain competitive, and there are several economic sectors which are growing, particularly real estate, high tech, robotics, and advanced services. Leaving out a spectacularly sudden and damaging event, likely offshore, stability remains foreseeable in the medium to long term and jittery observers have little to fear from a full on 1989 real estate crash occurring

Canada’s Banks are Booming

Strong and sustained real estate activity nationwide, coupled with high consumer spending and a reasonably strong Canadian economy means the latest bank earnings are hitting all time records. Recently released figures show essentially all of the country’s banks generating massive quarterly profits. The first bank to disclose was RBC – generating a massive $2.8 billion quarterly profit.  The bank’s retail banking division posted a 6% increase in profits, showing that the recent increase in interest rates and the changes in the housing market did little to shake the bank’s trajectory and growth. One of the first acts the bank did after reporting the strong result was to increase its dividend by 5%, beating all expectations and fulfilling its obligation to shareholders.

CIBC, the smallest of the big 5 banks reported a $1.1 billion profit, also beating expectations and also increased its dividend. The bank recently acquired a Chicago based bank and has been expanding aggressively in the United States. Further results for TD, Scotiabank and BMO are incoming by the end of this week and next week. Analyst expectations are that strong results will be in the cards. A recurring theme among commentators and experts was to remain conservative and to brace for worse than expected news due to recent turbulence in real estate even as earnings expectations were high because of a strong economy.

The banks that did report voiced their approval of recent government measures introduced, particularly in British Columbia and Ontario, that were designed to halt rapid price growth and which have succeeded. The strong bank results underpin the general message that Tembo has repeated for the last several months; that is, that while ebbs and flows in real estate should always be expected, the fundamentals underlying pillars of the real estate sector are strong and will remain so for the foreseeable future.

Toronto’s Condo Market Crackles On

As Tembo previously reported in its newsletter and past blogs, the Toronto condo market is undergoing a massive upsurge in activity and dynamism. In the last 20 years, Toronto’s real estate sector has enjoyed tremendous growth in activity, prices, and supply, especially in the form of condos. The city’s previously impressive skyline is now on track to surpass many American megacities traditionally viewed as architecturally and structurally more imposing, such as Chicago’s. A huge number of the new skyscrapers and high rises built in the city are condo buildings.

New figures show astronomical price increases in many Toronto neighbourhoods, particularly in Scarborough, where some prices increased over 60% from a year ago. As the price of detached homes continues to steadily increase with demand remaining strong, many first-time buyers continue to turn to the condo market to begin their respective real estate journeys. Despite a vast slew of new factors impacting the market, condos continue to be available in strong numbers and are far more affordable than detached, semi-detached homes or townhomes.

The most dynamic price growth was seen in much of Scarborough, north-west Etobicoke, and along the downtown core and lakeshore areas of the city. While 20-40% price growth was common throughout the city, it is important to note that base prices a year ago for many condos in the city’s periphery were very low, partially explaining the explosive nature of the price increases. Prices increases were most modest in the city’s midtown area.

The supply of condos continues to increase and generally is meeting demand as approvals and new construction continues to improve market supply. Another important factor is that many millennials are now in a position to afford an entry into the real estate market, and are turning to condo purchases to start building equity. Investors, foreigners, and retired, affluent baby boomers are also buying condominium units.

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.

Predicting The Future Canadian Housing Market

The Canada Mortgage and Housing Corporation is predicting that the fall in sales and property prices for the Greater Toronto Area will soon come to an end. CMHC pointed to the recent history of the Vancouver market, where a foreign buyer tax had a strong impact in reducing prices and sales volume but where the market quickly recovered. Prices and sales in Vancouver are now higher than before the foreign buyer tax was implemented. The CMHC believes Toronto prices and sales will also rebound in the medium term.

Interest rate increases have exacerbated the slight slowdown in the GTA market but were expected and anticipated. Further interest rate increases before the end of the year and next year are also being factored in by consumers and real estate professionals, and have been hinted at repeatedly by the business press. Canadian banks already have very high standards for issuing mortgages, and so interest rate increases should not come as a shock and are unlikely to dissuade the best prospective home buyers from being approved. Canadian banks’ strict regulations and tight monitoring see them enjoy exceedingly low default rates on multi-billion dollar mortgage portfolios.

In terms of prices, the average condominium cost in Toronto has now hit $500,000.00. While overall prices have declined slightly, the picture is not uniform throughout the city, with some neighbourhoods recording slight price drops and others recording price increases. Realtors are still reporting a tough environment in which to sell but also continue to remain optimistic for the long term. The factors which saw the Vancouver market recover so strongly were its strong, underlying fundamentals. A strong economy, limited space for building, a robust international reputation and great weather all propelled the real estate market back. Toronto enjoys many of the same strengths; limited supply, a strong economy, and a solid international reputation.

If the Vancouver story unfolds in Toronto, prices and sales will recover and potentially exceed pre-foreign buyer tax levels.

Tembo Tips: Save on your Remodel

Tembo Financial offers equity advances so you can receive the proceeds of your sale before your closing date. This service helps homeowners purchase a new home faster, assist with moving costs, or even help pay for a vacation or new car. But did you know that you can use advance financing services to help with renovations? Renovating can help increase the value of your property, or can help turn your new fixer-upper into your dream home. Here are a few tips that can help you save when you’re renovating your home!

Increase Efficiency, not size:

Re-organizing and equipping your kitchen or bathroom can help you avoid blowing walls to gain additional square footage. Consider which type of storage is most efficient for space, from lazy susans to vanity mirrors, you don’t need to compromise storage for aesthetic. The best of both worlds is attainable if you maximize your space and research thoroughly!

Donate your trash:

Invite your local Habitat for Humanity chapter to your home before renovating. They can help you remove fixtures and materials for later resale. You will save money on Junk Removal services, you will receive a charitable tax credit, and you are engaging in a good cause! Additionally, this is a much more eco-friendly way of renovating, as you are avoiding sending your junk to a landfill.

Long Term Savings vs Short Term Gains:

Even when it comes down to the type of paint you’re purchasing, consider the long term savings vs the short term savings. Will you need to replace it in the next couple years? If the long term costs exceed the current savings, consider splurging a little bit. You will save in the long run.

Auctions:

You can often find building supplies at a local auction for half the price of the retail cost. If you’re planning on building cabinets, this would be a great place to search for supplies. Home centers will increase prices to cover some of the overhead costs. These extra costs can easily be avoided.

Whether you’re planning on a full home renovation or a small project, Tembo Financial has various financing options to meet all of your home improvement and lifestyle needs. 

Tips on Finding Affordable Housing for Millennials

According to the Globe and Mail, housing sales in the Greater Toronto Area plummeted by 50 per cent for the first two weeks of June compared to the same period last year. It has been difficult for students and recent graduates to find affordable housing within the downtown core. Here are a few tips on searching for a new home in the city.

Research: Try to analyze the housing markets and the price range of specific neighborhoods. Consider the type of housing you’ll be able to afford whether it is an apartment, townhouse, or condo. Move-in fees, pet policy, and insurance are other costs to consider when moving in.

Budget: Make sure expectations match your financial reality. Find a housing unit you’ll be able to afford throughout the years by creating a budget plan. Creating a breakdown of every monthly costs will help you set an ideal price for your rent.

Negotiate: If you’ve found affordable rent, there’s a possibility that you’ll be able to bargain the costs with the landlord.

Find a roommate: Especially if you’re a post-secondary student, you’ll be able to save more money by having someone to support the cost of rent. Finding someone trustworthy will help you budget the costs throughout the year.

Seek Advice: Whether it’s from a close family or friend, ask for help to find when shopping around. They might have good advice to give on where to look, and advice on things to consider when searching.  

 

Moving towards a buyer’s market?

As Tembo outlined in our previous blog post, several trends were beginning to emerge in the GTA real estate market which benefits buyers. The first was that prices were beginning to plateau, with increases not nearly as large as the preceding few months. Secondly, listings of new properties were rapidly increasing, quickly improving the historically low stock of housing. And third, sales were beginning to slow down, and in some cases, decline.

With early June data now available, many of these trends are continuing. In Oakville, for example, prices have dropped by 9% in the month of May with sales also dropping a whopping 43%. In the GTA, listings continue to increase even as sales are declining and prices are leveling out, also new data shows that housing stock is returning to historical averages after years of extremely tight supply.

The sales to new listings ratio, a measurement of the new number of overall sales compared to the number of new listings have also dropped below 40% for the first time in many years. This shows that supply is increasing and demand is falling. A 40% sales to listings ratio means that for every 100 new houses listed, 40 have sold. 40% is considered balanced and usually implies that prices will increase, but modestly in the single digits. With a drop below 40% appearing to now be the case, the market appears to have begun to shift steadily from a seller’s market to a buyer’s market.

These trends are likely to continue. Supply will continue to increase and will most likely exceed historical trends soon. The huge demand for housing has incentivized builders and governments to stimulate housing construction. The Canada Mortgage and Housing Corporation recently released data showing single family detached home completions in the city of Toronto increasing by almost 5,000 units. Many new condos and townhouses are also nearing completion or under construction. Supply will continue to increase.

The key question is what will happen to sales and demand. If sales trends continue, demand will begin to fall. The result of increased supply and cooling demand will be downward pressure on prices. In the end, the market could end up providing two factors buyers love; plenty of supply and lower prices.