A Positive August For Real Estate

Numbers reveal a positive August for GTA real estate and welcome figures for an industry that had a relatively cool summer selling season.

In Toronto, sales increased by 8.5% and prices were up 4.7% from a year ago. The average price for a home is now roughly $764,000 dollars. Although nowhere near early 2017 highs, the market is showing its resilience and demand despite all the battering it received over the past year.

New listings increased by 6% and the overall number of active listings increased by 9%, showing many new sellers joining the market and feeling positive about their capacity to get good prices for their assets. General media sentiment on the figures was positive, with many remarking that the figures show a market that is rebounding, on positive footing, and in good overall shape.

On Interest Rates And The Bank Of Canada

The Bank of Canada maintained its existing rate of 1.50%. There was no increase, which some expected, largely due to uncertainty over a trade deal with the U.S. and the potential implications and affects on the economy of a bad deal.

As Tembo has noted there is a risk of the U.S. placing tariffs on the Ontario economy and Canada’s forced departure from NAFTA. Such an outcome would devastate Ontario’s economy, whose backbone is automobile assembly and its associated spin-off industries and supply chain. Core inflation exceeded the Bank’s target of 2% and is at 3%. 

The Latest Trade Negotiation News With The U.S.

The Prime Minister has stated that there will be no NAFTA deal with the U.S. unless Canada’s cultural industries (arts and broadcasting sectors) are protected. The PM is worried U.S. media conglomerates or companies could buy a Canadian newspaper or TV station. In addition the Prime Minister wants a dispute settlement clause included to to “ensure the rules are followed.” President Trump has tweeted that a deal with Canada is not a ‘necessity’ and he has repeatedly warned that he could easily exclude Canada from a deal if tariffs on Canadian dairy and eggs are not eliminated.

June Was Good to Toronto Real Estate

Sales had their best month in over 14 years as growth hit 18% from June 2017 figures.

Prices rose almost 3%, with the average home now exceeding $800,000. Listings also declined, tightening supply and beginning a trend which will benefit sellers in the long term. Overall, numbers in all respects were positive for both buyers and sellers.

Sellers Are Feeling The Pinch

The very strong data comes at an important time when market watchers and participants could use good news after a very tumultuous period. Real estate is under huge pressure from multiple fronts. New insurance rules, extreme conservatism among banks, a higher interest rate environment, and lack of supply hurt buyers. Sellers are feeling the pinch from government intervention which was designed to deflate sky high prices, and which worked. 

Toronto Condo Market Continues To Soar

The condo market continues to do very well, with prices up over 7.5% on average in the city of Toronto. In all, these positive numbers and the move to a healthier market overall is a strong signal which sheds a light on how resilient the GTA real estate market is. Many experts believe these numbers point to a broader, positive long term trend which will hold for the rest of year as long as macroeconomic indicators remain in decent shape. 
If

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

What Is The Greenbelt And How Does It Affect You

Ontario PC Party Leader Doug Ford was recently caught in the headlines in Ontario’s heated election campaign after a video was released showing him discussing Ontario’s Greenbelt. Ford said that he wanted to open up large tracts of the Greenbelt to additional housing development to increase the supply of homes and reduce their sky-high prices. Ford mentioned discussing the plan with developers and that he would still keep the Greenbelt largely intact. The video sparked a heated debate and saw Ford take heavy criticism which prompted him to eventually retract his position and clarify that the Greenbelt would remain as is.

What Is The Ontario Greenbelt And Why Is It’s Significance?

The Greenbelt is an area of over 7,000 square kilometers of protected land that is essentially closed off from development and construction that surrounds the GTA. It is 11 times the size of the City of Toronto and contains woodland, agricultural space, important wetlands, and open green space. The Greenbelt was established by the present Ontario Liberal government in 2005, fulfilling a 2003 election campaign commitment. The Greenbelt was created to protect vulnerable and ecologically important spaces and to set a clear limit on the extent of urban and suburban sprawl and construction. Large construction companies and developers and their lobbyists accept the Greenbelt and it is generally seen as a popular, positive, and strategically important legislative accomplishment.

Is Protecting The Greenbelt The Reason For High Price Of Homes In The Greater Toronto Area?

The Greenbelt, in limiting construction and development, is sometimes blamed by groups and certain politicians as a factor in the high price of real estate. Tembo Financial is eager to dispel these minority concerns and to provide more objective background information:

  • The legislation which created the Greenbelt was pragmatic. It set aside large tracts of land adjacent to the Greenbelt and closer to urban and suburban areas for construction.
  • Experts have stressed that very small amounts of land that was set aside for development has actually been used. The Greenbelt does not need to modified or changed.
  • Most developers accept these facts and do not want to antagonize environmental groups or voters by encroaching on protected spaces. Doug Ford’s proposal had little broad public support.
  • Only 4% of Canadian land is arable (can be farmed). While we are the second largest country in the world, some of the best quality farmland in the country is in southern Ontario and protected by the Greenbelt.

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.

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.

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.

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.

After the Rate Hikes

The Government of Canada is carefully examining the effects of two rapid Bank of Canada rate hikes on the economy, the real estate market, and consumers. The immediate impact of the hikes saw prime mortgage rates increase across the entire spectrum in Canada, with variable rate mortgage holders affected the most. The rate hikes will likely slow down economic momentum, cool the housing market, and encourage consumers to keep on eye on their borrowing and spending habits – which were the intentions of the rapid hikes to begin with.

The economic data to be released in the next few weeks will likely influence the Bank’s decision on rates in October. There is a strong expectation that the Bank will likely increase rates again, as its position has become very hawkish. If the economic and real estate data is exceedingly poor and falls flat of baseline expectations, the Bank is likely to send warmer signals to the market that it will take its time on rates and raise them in a more gradual way over the medium to long term.

Governments around the world are very sensitive to interest rates. Increases that are too fast and too significant can significantly dampen economic growth and can spawn considerable resentment and unpopularity amongst voters. One of the key indicators of a government losing an election is the trajectory of interest in the run up stages. Federal Finance Minister Bill Morneau did not appear to voice his intention or opinion to act further on cooling the housing market. Interest rates in Canada are set by the Bank of Canada, which is fully independent of the government and which has complete and total purview over monetary policy.

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