CMHC Market Warning

CMHC reported last week House price growth remains elevated in key housing markets in Canada notably the GTA and Hamilton in Ontario. There is not doubt that the current real estate home market has become heated.

TREB Market Stats

TREB Average Price Change 1980-2016

TREB stats showing the sales trend since 1980 support the view that the market may be moving into a bubble but is it? We can look at the late eighties where demand, cheaper money, market speculation in particular in the condo market, price inflation and excessive government debt created conditions for a market correction. Canada entered into a free trade agreement with America which started the closing of many branch plant operations in Ontario along with commodity price correction. The recession that started by 1990 resulted in house price collapse lasting for half the decade. Today we have a market that is low inflation, low interest rate, modest economic growth and growing demand  as well as some speculation. Is the precursor to the popping of a market bubble?

Markets run on supply and demand. Current supply is low and demand is high. If supply to the market changes via a economic slow down, much high cost of money, or an market changing event then prices will go down. In the GTA we continue to experience organic demand as noted by  Gary Marr Financial Post August 4 2106  Millennials are not giving up on there dream for a detached home with 51% hoping to own within the next two years.  Millennials also see home ownership as solid investment.  The Federal Finance Minister has changed mortgage rules to make it more difficult to get a high ratio  mortgage but in fact they are only attacking a part of the problem.pricing-trend

The CBC in a piece on Foreign Ownership (Sep. 23 2016) TREB President Larry Cerqua and OREA president Ray Ferris wrote that a foreign buyers tax will do “little to address the growing affordability challenges facing many Ontarians and may have negative consequences for our broader economy.”    CIBC economist Benjamin Tal said Ontario will have little choice but to implement a tax similar to that of British Columbia. Tal said the main reason behind higher prices around Toronto is a policy-driven lack of land supply, leaving a tax as one of the only levers available to influence the market.

So is it foreign buyers,  domestic demand or cheap money?   As I have mentioned before a big part of the problem is the Ontario government policies on land use, environmental and planning policies have added cost, restricted usage and greatly increased the time to market for new product.  In end there is a supply problem and I do not see how taxing or money restrictions will fix the product issue.   How it will get corrected will impact demand and real estate prices.

The anti-scientific climate model (National Post – (Latest Edition), Jan 20 2017, PageA9)

In real estate there is ongoing pressure to build energy efficient homes with much thought to living in a warmer climate.  What if we are on the verge of a great cooling period (2060) as suggested recently by a Russian think tank.  John Robson article reminds us that the earth heats and cools.  In real estate we need to consider the impact of such change.

The anti-scientific climate model
John Robson
National Post – (Latest Edition)
Jan 20 2017

To say it’s unpleasantly cold might be dismissed as banal small talk. Of course it’s cold. It’s a Canadian winter. And we all saw it coming. Except we didn’t. For decades alarmists have said man- made global warming is about to end winter as we know…read more…

Supply shortage driving Toronto housing prices (National Post – (Latest Edition), Dec 23 2016, PageFP4)

Just a confirmation from the builders association with regard to the GTA housing shortage. Not enough low density homes were built in 2016 to meet market needs. This is a problem that will not go away until the Ontario Government does a major change in land use policies. Even then it will take years to bring balance back to the market.

Supply shortage driving Toronto housing prices
Garry Marr Financial Post Twitter. com/dustywallet
National Post – (Latest Edition)
Dec 23 2016

TORONTOâ€� There hasn’t been such ad earth of housing in November in the Greater Toronto Area in almost 16 years, and it’s pushing prices to new highs. The Building and Land Development Association said Thursday that a critical shortage of supply is…read more…

No sign of December lull in Toronto housing (National Post – (Latest Edition), Dec 22 2016, PageFP3)

Another example of failed Liberal land use policies. A made in Ontario housing shortage by the Wynn government.  if you artificially restrict product the consumer wants prices go up.  the government needs to take economics 101 again.

No sign of December lull in Toronto housing
Garry Marr Financial Post gmarr@ nationalpost. com Twitter. com/dustywallet
National Post – (Latest Edition)
Dec 22 2016

â€� It won’t exactly fit under the tree but holiday shopping this year appears to include real estate in Canada’s largest housing market. Sotheby’s International Realty Canada says the first couple of weeks of December have not seen any type of slowdown…read more…

Hot San Francisco Market

Costar News reported that China-based company has agreed to sell 123 Mission Street to another Chinese investor for $255 million in cash, more than 30% higher than it paid for the 28-story office building in late 2013. As interest rates continue to stay low  CAP rates will continue to be compressed.   The San Francisco market is similar to Toronto and Vancouver with the influx of investment funds seeking real estate assets.

Continue to see appreciating real estate prices this year in the GTA.

Land Prices

I was recently involved in a bid for a parcel of land in Oakville which we priced at $1.66 million per acre of developable vacant land.  The zoning provided for 50 units per hectare or in lay terms allowed for town houses.   The bid we calculated to reflect the value of the homes in the neighbourhood and what can be built without changes to the official plan.   The winning bid I understand to be 60% higher.  So how is that possible that two parties come up with a different valuation for a property.

How much risk is the buyer prepared to take is always a good question.  There is a direct correlation between the value of the end product and what a buyer is willing to pay for the land.  Current zoning will allow 20 town homes per acre which gives a unit land price of $130,000.   This means that homes will need to list for $650,000 plus for the buyer to make a profit. Although towns can sell for more does this neighbourhood support such a price?

If buyer is an investor or new entry into the building game they may be willing to pay more if they believe that they can sell a higher priced product or get a higher density.  They may calculate that they can get the planning department, the council and the neighbourhood to agree to an official plan  amendment for a multi story product. The factors to consider when requesting an increase in density such as traffic, noise, shadowing of existing properties and does existing services for water, sewer, roads support the proposed development.

With less green field land in the GTA, infill land is becoming more expensive.  As people are prepared to pay more for a home the value of changing the current use of a land becomes greater, however at the end of the day the math needs to work or the developer will not be able to get financing to complete the project or a reasonable profit.  Getting land for the right price for the seller and buyer is important to the success of a project.


Toll HOV Lanes

The Ontario government is going to run an experiment on toll roads this year on stretch of the QEW between Oakville and Burlington.  The goal as reported by Oliver Moore of the Globe and Mail and of the Toronto Star is to get traffic moving.  These new Hot lanes will bring basic economics to commuting and has been successfully used in other justifications, although the Ontario Minister has few details.  I applaud any goal that get things moving on the 400 series of highways in Ontario.  I first experienced these toll roads in Seattle and was merrily drive along them without understanding the toll system.  Ontario will start with a monthly fee sticker while the more sophisticated 407 ETR uses a transponder.

If successful the implications for development if successful means that people will be able to live outside the core GTA and still commute in a reasonable amount of time to their destination – of course with a price.  In combination with new GO services this may make Hamilton and area attractive for more sophisticated redevelopment.   Land is becoming more expensive and Toll HOV may create develop opportunities in the west end.

Changing Mortgage Rules

The Canadian government changed the rules for CMHC insured mortgages in Canada.  For mortgages over $500,000 the buyer will be required to deposit 10% of the value of the home over this number.   Prior rules implemented by the government  and the banks have encouraged larger down payments and so for most buyers this should not be a problem.  the question is whether this will help slow the heated markets in Toronto and Vancouver while the rest of the country is cooling.   So why is real estate so expensive in the GTA?

Part of the answer can be found in Provincial Government Policy. The Green belt along with Lake Ontario has created a restriction on new home development.   For a family looking for a detached home there is less options because there is less development land.  You need to go further afield to find product.   Governments have also greatly increased the cost to build over the last ten years with complex and expensive approval processes and very high development fees to name a few.

Within traditional neighbourhoods in Toronto there is simply too many people wanting to buy the same product.   Some Buyers who take a long term view are willing to pay more and this new 10% rule will not change this.   Parents using there savings to help their children and investment money from overseas is also bidding up the price of property.  Many immigrants and investors see homes as a good long term investment and will pay accordingly.

So who gets hurt when the government starts to put restrictions on borrowing?  It is the family of average income who wishes to own a home.  Many towers being built today do not lend themselves to family life, lacking room for children, green space and schools.  So will this policy slow the growth in home prices, we will wait and see.  Will it end the demand for detached homes and bidding wars, I do not think so.  Will it hurt those that would like to own a home with modest means, I would say yes.

Impact to Go Service Change

Personal Finance Editor, Published on Mon May 11 2015

Adam published a article on the impact of 15 minute go service for the GTA and its impact on Real Estate Pricing.  The suggests that the ability to get to Vaughan by the new subway will be the same using the Lakeshore Go.   I agree with his analysis and the future impact it will have on low and mid density housing and commercial properties.  To read more of the article for the link to the Star.