Welcome to the latest edition of urbaneer’s seasonal prognostication: Our Toronto real estate Spring Forecast for 2015!
In this first part of the forecast, we're going to synthesize the various analyst predictions which have dominated the headlines as of late, as well as discuss the role of affordability and debt in how it's shaping the Toronto property market. In Part Two, we’ll take a look at the interest rate drama (yes, drama!) and our concerns over the City's booming condominium market.
First, there's been no shortage of analyst predictions in the last few months, each varying slightly in their overall message and tone. Some are more alarmist, while some offer a casual warning. There are those who suggest the market is in for a soft landing, while others are shouting dire warnings for homeowners to brace themselves. The common thread of consensus is that home prices in many markets are overvalued. The question is how much? Is there a bubble brewing, or is this a case of water cooler chatter that is snowballing due to alarmists?
Part of what we do at urbaneer is to consistently connect into the real estate media while navigating the every day market dynamics from the 'real estate trenches'. After all, the residential real estate market oscillates near every waking moment, which requires us to be actively engaged every time a suitable property comes to market for one of our clients. As we operate on 'high alert', we're also charting the dynamics of the broader economy, along with the government's response to changing conditions, so we can use this knowledge to frame our client’s experience and expectation in the context of the current market. Essentially, by monitoring how government policy, economic trends, and the media each exert their influence on the housing industry allows us to better steer our clients through what is a highly-competitive, fast-oscillating, 24/7 marketplace.
So What's Coming Next?
It’s always interesting when you gather all the various commentaries and look at them side by side. The overall message tends to be slightly different when you focus on collective sentiment rather than a singular voice. Is the real estate glass half empty or half full? Is it going to overflow or crack? Well, that depends on who you ask.
For instance, a chat with RBC’s CEO David McKay might leave you brimming with optimism. In this article from the Globe and Mail entitled “RBC CEO David McKay Bullish On Canadian Housing”, he is quoted as saying “We feel good about the Canadian housing market.” He counters criticism from some analysts who say that the Toronto housing market is dangerously overheated by decidedly marking the single family housing type as the culprit for runaway prices. He goes on to explain that other factors (economic promise, strong immigration numbers) will continue to buoy the market.
This article called “Where Canada’s Resale Housing Market Is Headed In 2015 and 2016” says that signs are pointing up, citing data from CMHC. This article from the Huffington Post, called “Four Predictions For The 2015 Toronto Real Estate Market” is slightly more specific, suggesting that housing prices will peak and that the balance of power will switch over to the seller’s camp in higher end homes (for those with values exceeding $1,500,000)
Then there are those that are abundantly more cautionary in their advice.
In a report that looks at the potential threats to the Canadian economy, The Bank of Canada suggested back in December, that housing prices were overvalued by up to 30 percent in some markets (click here to read Housing Market Overvalued By As Much As 30%, BoC says, from the Globe and Mail), which exceeds their estimates in the past.
While the BoC has clearly indicated over the last several months that they feel that housing prices are most certainly inflated, BoC Governor Stephen Poloz is slightly more pragmatic in his position. Poloz feels that this overvaluation is a necessary evil of sorts, to give the economy the necessary boost it needs to steam ahead. In this recent article, “Canada Not Facing A Housing Bubble: Poloz“, Poloz concedes to the overvalution, but insists that these high prices do not place the Canadian housing market in bubble territory. He also feels that their rate cut earlier this year is having the impact that they had hoped for on the economy (we dive further in the interest rate effect in Part Two of our forecast). He alluded to evidence (which was described as “thin”) to support that the activity in the housing market, brought about by the reduction in interest rates is having a positive effect.
Really, It's All About Balance
And then on the other side of the coin, The Economist magazine recently issued a dire warning, suggesting that prices in Canada (mostly centring around super-hot Toronto and Vancouver) are overvalued by upwards of 25 percent. This article from the Globe and Mail entitled “Canadian Home Prices Inflated By More Than 25%, Economist Magazine Warns” explains in detail. They looked at a price-to-rent ratio (which many suggest is only one variable of many to assess a market) along with the gap between median income and housing prices. This gap is particularly telling and hones in fairly accurately on the potential vulnerability that encircles a hot market like that in Toronto, where it is all bidding wars and high fives when you secure the property you are after (likely after several kicks at the property can). It was determined that in Toronto, the ratio of home prices measured against estimated median family income showed that house prices were 7.7 greater than average household income.
Affordability And The House Hunter
The problem right now is that, unless you are a super model, CEO, software guru or Hollywood starlet, chances are that your income is not ramping up in tandem with the escalation in property prices. Most of us creep up gradually in the income department which means, as value skyrocket, the gap between affordability and the price of housing widens. This results in one of two things: people get sidelined in the market and are unable to get in (which sets off a chain reaction of demographic shifts, including major lifestyle changes); or that weak spot of vulnerability sparked by household debt balloons as these two values travel in opposite directions to each other. Without question, these high prices are pushing homeowners to take on more and more debt.
The Bank of Canada echoed this concern over this gap as well saying that “elevated house prices and debt levels relative to income continue to leave households vulnerable.”
Cheap money (we’ll touch on the interest rate drama shortly. Yes, we are using interest rates and drama in the same sentence) goes far to help stimulate the economy, because it encourages people to borrow. It also, however, removes that barrier built by pragmatism between wise finance and risky finance. That barrier gets worn even more thin in a market like Toronto, where emotions carry even more weight, especially because not just of the strength of the momentum, but the length of the momentum.
Look at it this way. You set out in your property hunt with a budget (probably not at the absolute top end, so as not become house poor). After months or years or looking (and losing out in deals) sheer fatigue will propel you to the top end of that budget. It quickly shifts from prudence to “pay any price” because the head gets completely shut out by the heart. And understandably so. House hunting in this market requires an emotional constitution made of steel in order to weather the major highs and major lows. (Click here to read our latest ‘Dear urbaneer post: Dear Urbaneer: Why Is The Market So Hot?)
Enough Governmental Control?
Earlier this spring, the International Monetary Fund re-rung the housing alarm, suggesting that more needs to be done to rein in Canadian debt loads (particularly mortgage debt).They concur with several analysts who say that the housing market, while due for a correction, will experience a soft landing. What is interesting about the IMF’s warning is that they suggest proactivity is a key component to economic health. In short, while there have been governmental measures put in place over the last few years in an attempt to avert the big bubble, the IMF suggests that more needs to be done. Read more about it in this article, entitled, “IMF Sounds Fresh Alarm Over Canadian Housing Market”
To be fair, there have been additional measures taken recently. CMHC has raised its premiums for what they deem high risk borrowers (i.e. borrowers who have less than 10 percent down) as of June 1, 2015. This change is part of their longer term strategy which will see CMHC top up their coffers to as a safeguard. While adding an extra cost might seem like a strain individually (especially when property prices are so high), it is a good thing collectively. It will make borrowers think twice about taking on more debt; it may incentify borrowers to put off their home purchase to top up savings in advance so that they avoid the larger premiums.
The overall material effect of these changes will be minimal (click here to read an article called “CMHC To Boost Premiums For High-Risk Home Buyers”), but they do make a bit of a statement. Clearly, there was a feeling that there wasn’t enough being done to be vigilant over higher-risk lending. It also sends a subtle message to the borrowing public, reminding them that the benevolent Big Brother that is the Canadian lending system is watching (as in, you may not like this, but it is for your own good). Canada is famous for its comparatively stringent lending policies, which is the main reason that we’ve managed to avoid much of the turmoil that other countries have suffered economically over the last decade or so, much of which took several property markets out at their knees.
The risk? Clearly, anyone who has bought property with a down payment of ten percent or less is vulnerable – particularly if the purchase is or was in one of the increasingly ubiquitous one bedroom or one bedroom and den high-rise point tower condos (note the further from the downtown core the higher the risk). Should prices correct a modest ten percent there will be a very large group in a negative-equity position who may elect to walk away from their highly-leveraged lives should our economy change.
The same goes for other economies where international investors hold Toronto real estate. If an over-supply of condominiums (which we will discuss in greater detail in Part Two of our forecast-coming soon!) lead to a drop in rents as other economies fail, then investors may – in turn – extract whatever capital they have tied up in high-rise point-tower Toronto investments to mitigate their own financial wherewithall. It's a potential calamity that could make the rest of our market – which relies on the filtering of housing stock up and down the property ladder – into an uncomfortable territory. Caution – and your own comfort with debt (and job security) is essential if you're going to be a real estate player. That said, if you own a condo and want a freehold house, now is the time to make the move before the gap between these two property types widens.
Real estate is a dynamic entity that is fluid and fast-moving, which presents certain risks if you don’t know what to expect. At urbaneer, we're committed to source and deliver real estate data and news we consider relevant for your real estate dealings. Stay tuned for Part Two, where we discuss the influence of interest rates, commentary from the Bank of Canada on Toronto real estate and more on the ebbs and flows of the condominium market.
And please remember, we are always here to help.
~ Steven and the urbaneer team
We're here to earn your trust, then your business.
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