Welcome to urbaneer’s 2013 Fall Forecast – Part One.
While we’re pleased that the condo market has overall shown stability this year, and the scorching demand for freehold housing suggests that values will keep escalating until buyers reach their own thresholds of affordability, Toronto’s condo market is a marionette hanging by the whims of the international investor (click HERE for an interesting article containing facts about the Toronto condo market). If any of the global economies that had been struggling stabilize and improve, we’re at risk of seeing capital that would otherwise be invested in Canada flow to other markets. If that stalls then the burden of Toronto’s real estate market lies in the arms of the local population who are already taxed to the max by precedent setting market values and closing costs.
In addition to these, there are a number of other factors to consider (read THIS enlightening article). These factors include the complexity of the condominium market that seems to wield more directional power than one segment should, a feverish buyer mentality, and a few key economic fundamentals that contribute to the overall affordability and longevity of the market. These factors can be used to gauge concern when looking ahead to this season’s real estate forecast. Do they balance each other out? Read on!
In part one, we look at the influence of interest rates and lending policy.
The Question of Interest Rates
The interest rate environment is a major contributor to the shape of the market, for it is the engine behind a potential chain reaction which, if left unguarded and unchecked, could potentially punch an economic hole in the base of the market, leading to an eventual decline in values. This is because several years back, at the foot of the global recession, the government intervened with monetary stimulus measures to kick start a sagging global economy. Here’s a past newsletter called From Boom To Balance that offers more insight America’s sub-prime mortgage crisis as it impacted Toronto.
Just last week, the Bank of Canada held its base rate unchanged again (read commentary on the BOC’s decision by clicking HERE) citing continued global economic uncertainty. What is important to point out is the false impression of the health of the market that low interest rates give; interest rates are held to lower levels when an economy is turbulent and needs an injection to stimulate it, but that doesn’t necessarily mean it is safe to borrow money. Low interest rates potentially create a confidence while may not be valid, while miring the marginal in deeper levels of debt.
At the end of August, several major banks hiked their lending rates, which gave homeowners a taste of what was to come when the BOC does eventually follow suit. While the mortgage interest rate rise was moderate, (20 basis points for the most part) what this underscores is the real-life impact of this variable vehicle. According to THIS ARTICLE published by the CBC, even a modest hike like this will increase mortgage payments by $60 to $100 a month, based on a mortgage of $500,000. The fear is, that as rates creep up, some homeowners will be pushed too far beyond their abilties to pay this extra income debt. Some also attribute the recent hike in bank rates as a program to revitalize the battered U.S. property market (you can read that article by clicking HERE).
The economic theory behind a prolonged low interest rate environment does make sense in stimulating the flow of capital (after all, cheap money leads to more borrowers), but our concern lay in the issues which arise when you consider the extended period of time these low rates persist. Interest rates are variable, yet borrowers become complacent and conditioned in their borrowing behaviour; while low interest rates are a time-limited offer, the extended period in which they have been offered seems to contravene that and suggest that it is “the “state of the market. It’s not.
Add in the specific dangers of elevated housing prices in a hot market like Toronto, where property values charge ahead like a freight train and borrowers are leveraging themselves against property values that are, at their base, potentially unstable. What happens is that the potential for collapse is becoming more prominent – and more possible. In our current housing market, we are dealing with the inertia of demand exceeding supply, as opposed to prudent economic fundamentals.
Also, although the BOC rate is still steady, many analysts feel that ultra-low rates posted by banks (mortgage rates are based on a spread, based on the BOC rate) and feverish discounts may be coming to an end as well, which suggests that home ownership is well on its way to becoming a more expensive proposition (check out THIS interesting read from the Globe and Mail on this point).
Vigilant credit terms?
While the government has introduced a series of more stringent lending policies intended to try to throw the anchor into an overheating market, in an escalating market like Toronto the question remains: Have the government done enough?
Earlier this year, banks dipped their rates to ridiculously low levels (one lender had a five-year mortgage at 2.89%; read the story HERE), raising the ire of Finance Minister Jim Flaherty. Rates did not stay at this precipitously low level for long though; Flaherty intervened and the rates were put back up again.
While Flaherty received some backlash about possibly intervening in free market enterprise, this underscores the sense that there are checks and balances in place to a certain degree. Additionally, there have been several rounds of mortgage restrictions and changes to types of mortgages directly tied to equity and home values, which suggest that there are efforts being made to avoid a U.S-style crash, a la sub-prime crisis.
Big brother is watching, and Canada is notorious globally for stringent lending practices. As mortgage credit inches back up, and these mortgage rules have been absorbed into the lending cycle, OFSI (Office of the Superintendent of Financial Institutions) is reportedly considering getting involved in regulating some underwriting practices as an additional safeguard (click HERE to read the story in the Globe and Mail).
However, in a city like Toronto, where affordability becomes an ever-present issue because of swelling property prices, these changes do throw the anchor into a hot market, but they also can make it hard for first timers to get into the market. This can begin to affect the natural flow of buyers upward on the property ladder, which is essential for a healthy housing economy.
The question is, when affordability remains a major shaper in this market, and buyers are willing to pull out the stops to leverage themselves to the hilt, how much is too much? Hopefully, the market will remain supportive, and the answer to that question will not have to be answered. The distinct possibility always looms though (especially with the existence of these other conditions) that the floor could peel away under this market, making leveraged homeowners uncomfortably vulnerable.
These elements, while telling, only paint a partial picture of what may be in store for the Toronto market. Stay tuned for Part Two of urbaneer’s 2013 Fall Forecast, in which we will look at the bubble potential in this market, as well as the role of investors.
At urbaneer.com, whether you’re purchasing a personal residence, or you’re investing in your financial future, we’re here to help! Serving liberated, progressive pro-urban Torontonians for over two decades, our friendly, fashionable boutique real estate service always has your interests at heart. Building clientele for life, consider letting us help build your real estate portfolio, one property at a time.
By the way, did you read our recent ‘Dear Urbaneer’ feature called “Should I Buy Real Estate”? Click HERE to link to it.
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~ Steven and the urbaneer team
Urbaneer’s Real Estate Forecasts