Welcome to Part One of urbaneer’s bi-annual prognostication: the Winter 2016 Toronto Real Estate Forecast.
(Feeling reflective? Compare today's real estate climate to the same time last year: Winter 2015 Forecasts Part One and Part Two)
Torontonians – and our Canadian media – love real estate, so there's always a story to tell when it comes to the Toronto market (did you know we're one of the few cities in the world where the newspaper prints a weekly section dedicated strictly to real estate?).Sales records have been created and broken in short succession, over and over again, for years now. Which means there’s the unintended dramas of trying to purchase a home with stock dwindling, prices rising, amidst an omnipresent risk of key market vulnerabilities. For those of us working in the real estate trenches, there truly is never a dull moment – which is both invigorating and exhausting- especially when you serve multiple Buyers and Sellers.
In addition to the usual suspects that float these storylines, like escalating prices, eroding affordability and the growing gap between supply and demand, there have been a few new twists added to the mix: The recent U.S. Presidential election could have some significant implications for Canadian real estate, the growing disparity between housing types (freehold versus condos) and needs (families versus mingles) and the introduction of new federal housing-related policies, which are impacting every Canadian real estate market except Toronto, right now.
In this first installment of the Winter Forecast, I’m going to look at what a Trump Presidency might do to Toronto Real Estate, along with the state of affordability in the city. In the second part, I’ll look the emerging role of policy in shaping the market and how a growing gap between housing type (and an inability to fill consumer need) is pushing prices even higher. I’ll also take a peek at the condo market, which I consider the persistent Achilles Heel of Toronto Real Estate, because if the market is going to fracture, it will start with our condominium market.
Trump Presidency
When Trump defied the pollsters and stunned the media by winning the U.S. election, many of us north of the border were glued to the post-truth headlines, and the way it was subsequently dissected. For those whose lives hinge on the welfare of the housing economy, the Trump presidency is a necessary storyline to follow.
No doubt you saw the flurry of ads and stories during the election campaign of talk of a mass exodus to Canada in the event of a Trump win. Some do believe that may happen for a variety of reasons. They feel that Trump’s controversial economic propositions will damage the US economy (and others), impact currencies, elevate social unrest and, as a result, Americans may flock here to find safe haven.
These articles outline some of the scenarios that could push Americans to move north of the border as Trump settles in to his Presidency: “Donald Trump Victory Could Send Canadian House Prices Even Higher, Experts Say”,” “Trump Win Makes Canadian Real Estate Look Even More Attractive,” “Impact Of Trump Win On Canada’s Real Estate“ and “Will Trump’s Presidency Really Have An Impact On The Canadian Housing Market?”.
It is possible that there might be an influx of foreign buyers when Trump takes office, or that he may effectively damage the Canadian economy, keeping rates down, but that is speculative. And that isn’t really the real estate story here.
No – this real estate story has more definitive economic roots. Trump won the Presidency based on a platform that promised significant change from the status quo. Many of his campaign promises can likely be dismissed as rhetoric and campaign talk, but if does indeed bring about a number of the reforms that he has proposed, it’s going to cost money. A lot of money. And his other big campaign promise? He’s going to implement them without raising taxes.
So, what does a politician do to get money when they’re not going to raise taxes? They sell government bonds to raise the cash. That means there will be a flood of bonds on the market. The market is already starting to react to this possibility with a massive sell off. Less than a week after the election, the stock markets reacted positively, but the bond market ran collectively for the hills, with a sell off that totaled over $1 Trillion. Click here to read “Trump Dump: Bond Prices Lose $1T As Investors Fear Higher Debt And Inflation” .
In this Globe and Mail Story, “Uncertainty Over Canada’s Economic Outlook Sets Bar High For Rate Change, Poloz Says,” BOC head Stephen Poloz mulls over the direction of interest rates, in which he acknowledges that bond traders strongly believe that Trump intends to utilize government bonds to generate his stimulus.
What does all of this bond market activity have to do with Toronto Real Estate? Stay with me, we’re almost there.
When a flood of bonds hits the market, the yields (the return that you generate from a bond) go down. And when bond yields go down, interest rates go up, because there is an inverse relationship between bond yields and interest rates. It is almost a certainty that yields are going way down, which means that rate increases won't be far behind in the U.S. And while we operate our own economy here in Canada, we are interconnected. It’s not long before our rates go up as well.
After years upon years of ultra-low interest rates and conjecture about when they will go up (and they will go up, we’ve heard many times) could this be the proverbial straw? While the U.S. Federal Reserve and the Bank of Canada have yet to raise interest rates officially, all the major banks did indeed raise their own rates, which may be temporary – or a sign of things to come.
There has been speculation as to whether or not a Trump Presidency will negatively impact affordability in Canadian real estate; it may very well, but not for the reason that some think (i.e. more buyers in centres where buyers are already numerous and stock is scarce) – but he will most likely impact affordability for the reasons that we’ve just discussed- a hike in interest rates, which will have serious impact on house hunters desperately vying for properties.
First Timer Struggles
A rate hike will make it even harder for first time homebuyers to gain access to the market. And in reality, the combination of rising prices, lack of listings and more stringent lending criteria may leave a growing segment out of homeownership altogether. In this story from BNN “It’s Simply Not Possible': Why Home Ownership Is Out Of Reach For Millennials In Toronto,” talks about how first time homebuyers are going to need to shift their expectations, as does “Get Used To Renting, CIBC Tells Torontonians”.
Because there is a perception of status around homeownership (click here to read about some of motivations to purchase in my post called “Maslow’s Hierarchy Of Needs And Toronto Real Estate For Sellers”) Toronto’s social fabric will be impacted as well, as the community begins to divide between the haves and the have nots, pushed apart by the rising prices. The Huffington Post just published a piece called Toronto's Middle Class Is About To Be Priced Out Of The Condo Market.
In an effort to cool the Canadian real estate market (and by that I mean Vancouver and Toronto), the federal government enacted a series of rules, including the introduction of a 'mortgage stress test', which took effect this past fall. High ratio borrowers need to qualify under the posted five-year rate, rather than the discounted rate which had been common industry practice (click here for recent urbaneer post “A New Mortgage Rule For Canadians And How It Will Impact Borrowers”). Basically, Buyers are losing 25% of their purchasing power. While this may be discouraging to some Buyers pulling out the stops just to get in the market, given the potential of a rate hike, these changes are probably wise act of financial prudence though Will Dunning, the Chief Economist for Mortgage Professionals Canada, recently offered his point of view on our indebtedness in A housing-affordability crisis? Not so fast which downplays the risk that our housing market might tumble. However, as outlined in this article in Canadian Business, Tighter Rules Are Pushing Homebuyers Toward Riskier Mortgages. CMHC is even discussing the possibility of increasing the required down payment for homes as an additional stopgap for growing household debt. Read about this in “Higher Down Payments Could Be On Horizon As Danger Of Canadians’ Debt Grows, CMHC Warns.”
There is no question a new dynamic when it comes to financing has emerged, with the additional qualification criteria, along with lenders tailoring interest rates both to the Buyer and the property they're buying, hinging on things like amount of down payment; type, use and size of dwelling; credit score; employment stability and more. These criteria simply used to be the basis for your loan qualification – but they're now a yardstick for risk and for your interest rate, even if you're just refinancing. For highly leveraged Buyers, the options are shrinking, as new funding rules for lenders have resulted in the exit or near-exit of a number of providers from the mortgage business, like National Bank which just shuttered its broker division, putting 75 people out of work.
I’ll dive a little deeper into the role of policy in the market in Part Two, but it's worth noting that the policy isn’t just about trying to keep the lid on a heated market and mounting household debt. Debt-weary first time home buyers will be pleased to get an increase in their First Time Homebuyer Rebate, to $4000, which sadly takes just a slight prick out of the wicked sting Torontonians face with our hefty double Land Transfer Taxes (here's my post on What Are The Closing Costs For A Property Purchase?).
Household Debt Building A House of Cards?
A rate hike isn’t just going to potentially shut the door on those who are trying to get into the market; there could be challenges for homeowners that are leveraged already to the max. There has been a significant amount of press lately addressing the dangers that are inherent in the Toronto market with these maxed out mortgages, but also with the amount of other credit that homeowners are routinely taking on, seemingly as a means to an end.
Buyers are routinely purchasing a home at the very top of their budget, with an eye to evolving the property through renovations to suit their needs over time. As prices continue to climb, very often the price point of the homes that so many Buyers now are able to afford require significant renovations – which cost more money, so Buyers are taking out more debt. And so the debt cycle continues to churn.
For those homeowners who have hefty mortgage payments and have accumulated more debt during their tenure of homeownership because of ultra-thin cash flow, an increase in mortgage rates could spell trouble. This story from the Globe and Mail called “Canadian Borrowers Could Face Payment Shock If Interest Rates Rise,” discusses the implications of a rate hike on households. I wrote about this earlier in the fall as well in “Some Cautionary Advice Around Rising Toronto Real Estate Prices”. Think you've owned your property long enough to be ahead of any market downturn? Here's my piece called How Much Profit Should I Expect Climbing The Property Ladder? which offers a financial synopsis of how much money you're really making after deducting all the real costs of buying and selling Toronto real estate.
What we do know is that as the market keeps redefining the height of its ceiling, Buyers are redefining what is considered reasonable in terms of holding debt, which could create a dangerous situation not just limited to the real estate market. Despite all the major changes that have been introduced into the market in the last few months, which should in fact cool the market, in Toronto it just keeps on going. It's interesting to note that, while many of these mortgage lending changes took root in October, the full impact on the market remains to be seen. October still closed out at record levels for the country as whole, according to CREA. This story from the Financial Post, “Real Estate Market Has A Record October But Headwinds Coming From Higher Rates” comments how the Federal Government will be watching closely to monitor the impact of the tighter mortgage rules and have identified “signs that political uncertainty, along with tighter rules, are sending rates higher”.
If the headlines are accurate, Toronto appears to be the last stronghold for a hot market. Yesterday The Globe and Mail published “Vancouver’s New Tax Pushes Chinese Buyers To Seattle, Toronto“. Certainly, in November, the Toronto real estate market showed no signs of stopping, where the Toronto Real Estate Board Stats showed 67% of freehold properties sold over-their-asking-price in downtown Toronto, with the City increasing by 23% on average since November 2015 (that’s $144,000 more!). Townhouses went up 24% year-over-year, while condominiums have shot up 15% year-over-year. Bidding wars are common for every type of dwelling in the city core (I'm seeing 5 to 20 offers on houses and 3 to 8 offers for condos at the time of this post), while the suburbs are just as hot as first time buyers search farther afield for affordable homes. My 'Tales From The Real Estate Trenches' rant – which I posted yesterday – is about a downtown shack which just sold for $1.2million –> This Toronto Real Estate Sale May Leave You Speechless!
Stay tuned for Part Two, where I’m going to look at the growing gap in housing type, both in terms of availability and in terms of consumer appetite, the Condominium market and how policy is potentially fueling home prices.
Overwhelmed? If you're considering buying or selling Toronto Real Estate, your best weapon in the property market is information; a well-informed consumer is a well-armed Buyer or Seller. Do your homework – by letting us help you. With decades of experience navigating the highs and lows of our market, and our commitment to remain acutely aware of shifts and trends, we're here to support, guide and educate you, all without pressure or hassle.
~ Steven and the urbaneer team
Steven Fudge, Sales Representative
and The Urbaneer Team
Bosley Real Estate Ltd., Brokerage • (416) 322-8000
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