Toronto Condo and Real Estate Blog

Another Record Set; Longer mortgage terms fuelling cost, industry warns

Garry Marr, Financial Post

Real estate prices hit another record high last month in the country’s top 25 markets, a move some commentators say reflects the growing dependency of Canadians on debt to finance purchases.

Real estate author Don Campbell says the latest statistics from the Canadian Real Estate Association are further proof that the newest trend in lending — long-term amortizations that have increased to 35 and 40 years from 25 years — is fuelling price increases.

“I would say one-third of the percentage point price increase is due to [longer amortizations],” Mr. Campbell said.

“Real estate is driven by monthly payments and you can afford more and pay less monthly when your amortization is moved from 25 years to 40 years.”

The Ottawa-based Canadian Real Estate Association said yesterday the average price of a home sold in the country’s largest cities rose to $325,881 last month, an 11.2% increase from a year ago.

With 10% down and a 7.19% interest rate on a five-year mortgage, a consumer with an average Canadian home would make monthly payments of $2,088.80 based on a 25-year amortization. Based on a 40-year amortization, the consumer would make monthly payments of $1,840.67.

The consumer with the longer amortization would pay interest costs of $589,786, compared with interest costs of $333,189 for the mortgage amortized over 25 years.

“I think this is having more of an effect on the low end of the market than the top end,” said Mr. Campbell, who thinks people are paying more for homes because with the new mortgage products they can afford more. “Instead of 11% price increases, they might be 6% to 8% without [longer amortization].”

A report from the Royal Bank of Canada this week suggested as much as 50% of new insured mortgages — those with less than 20% down payment — are going for amortizations of more than 25 years. The bank suggested as much as 25% of refinancings are for the longer amortizations.

Benjamin Tal, a senior economist with CIBC World Markets, said it’s probably too early to suggest the longer amortizations are fuelling an inflationary market for real estate. “It’s not a big enough piece of the market yet to matter,” he said. “Potentially, it could be big. Look at how much overall housing there is and this is not enough to influence markets yet.”

Elton Ash, regional executive vice-president of Re/Max for Western Canada, said the new products are helping consumers to buy. “It certainly has helped with the affordability, especially in markets like Vancouver and Victoria,” he said. “But I don’t believe the escalation in prices is because of the mortgage products. It is because of strong economic performance, strong consumer confidence and interest rates still being favourable.”

Bob Linney, a spokesman for the Canadian Real Estate Association, said there is no data to indicate new mortgage products are responsible for some of the rising prices in the markets. “I don’t have the stats to back that up,” he said.

It is starting to look like a surge in new listings could put some downward pressure on prices. Nationally, new listings were up 3.4% from a year ago.

Red-hot markets such as Saskatoon, where prices are up 56.4% from a year ago, saw listings surge by 65.9% from August, 2006. In Edmonton, prices are up 27.7% from a year ago, while listings are up 57.8%.

“I’m relieved to see the listing inventories coming up. It’s better for the consumer,” said Mr. Ash.

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CBC News

The current real estate boom is “unsustainable” because prices in 14 of 15 major Canadian markets are above their long-term trends, the Bank of Nova Scotia economics department said in a report Thursday.

With the exception of St. John’s, N.L., price levels have risen above the historic rate of increase over a nine-year boom, the longest since the end of the Second World War.

“There is growing evidence of overvaluation in real estate prices in some parts of the country,” the report said, and “the further domestic home prices climb above underlying economic fundamentals, the greater the risk of an eventual correction.”

In nine of the 15 markets, prices are within a few percentage points of the long-term trend. But in six western cities, the increases are in the double digits, ranging from 10% in Winnipeg to 25% in Edmonton.

The bank said the real estate market is still quite good, with little evidence of overbuilding or speculative buying. But the real price gain of 60% over the boom period is high by historic standards, and signs of a slowdown are building.

Housing starts through August are down nine per cent, compared to the same period in 2006, and price increases — 7.7% in July compared to July 2006 —are moderating.

“We continue to anticipate a gradual cooling in both housing demand and price appreciation in the months ahead. Affordability is becoming increasingly stretched for many would-be buyers after almost a decade of rising home prices,” the bank said.

It’s the second bank report in two days to suggest that the real estate boom could be faltering. On Wednesday, the Royal Bank said housing was becoming less affordable.

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By Donna Kay Kakonge, Dream Homes & Condos Magazine

From acquiring the land, to choosing  tradespeople, to the time it takes to build a home and all the good and bad stories about building – Townwood Homes and Baywood Homes share their knowledge on getting from A to B in new home building.

The first step in the building process is that the land needs to be acquired, explains Townwood Homes president Tony Guglietti.

“In acquiring raw land for development, the process of taking it from its original state to a finished community can take anywhere from three years to 20 years, depending on the status of the raw land and where it falls within the development process of the official plan of a municipality,” he says.

Natascha Pieper is director of marketing and sales with Baywood Homes. Her job involves market research, product positioning and managing the sales for both low- and high-rise residential developments.

“Our land acquisitions are selected by sourcing keylocations, up-and-coming neighbourhoods, foreseeing where the market will go and getting in there sooner,” says Pieper. “Hard work on the front end ensures our acquisitions are based on comprehensive studies, giving us the information necessary to make sound business decisions.”

Baywood Homes is currently working on the Bohemian Embassy project on Queen Street West in Toronto. They have entered into a community that is definitely artistic in nature and have to be sensitive to the artistic culture.

“We had to create a building that would blend with the architectural integrity of the Queen West neighbourhood,” Pieper says. “Landscape planning and architectural detailing are extremely important. Our developments need to be extensions of existing communities.”

Pieper also says that government initiatives such as the greenbelt legislation and Smart Growth are important factors to acquisition, as they are designed to manage urbanization and promote building in areas that have, or will  have, the infrastructure in place to accommodate population increases.  With initiatives such as these, many low-rise builders are also becoming high-rise builders. Smart Growth and related programs are encouraging builders to manage sprawl by building up more than out, which is an important factor in the location and usage of the lands they acquire.

Guglietti of Townwood Homes says location is a prime consideration in acquiring land.

“The estimated length of time the development process will take, the yield the land will produce and the type of community the municipality envisions within their planning process,” Guglietti says are all things to consider.

Pieper says the selection of tradespeople to build the home is also important.

“Builders are creating a brand, and the trades play a significant role in that,” Pieper says. “Quality work, home readiness, open communication, definitive timelines and regular trade council meetings help us to ensure we maximize efficiencies on-site. These elements help our projects move forward, which is key to maintaining our reputation as a quality builder.” Guglietti agrees.

“Reliability, reputation, workmanship, past projects they have completed as well as their competitiveness to acquire the contract,” he says. “The most expensive trade or the least expensive trade is not necessarily a deciding factor. It’s how they perform and their ability to complete the job on a timely basis and to our specified standards.”

Once the key players are set, it can take months to build a home. Guglietti says it takes five months on average from the time a building permit is obtained. Pieper agrees and adds that the building schedule sometimes needs to allow for more time to accommodate customized changes.

“A longer closing can come from people making customized changes to their plan which, as a custom builder, we’re willing to accommodate,” Pieper says. “With these issues however, consumers are accepting of the closings because they’re getting the home that they want.”

“How well you are organized is critical to completing a home on time,” Guglietti adds. “Many factors, though, can be beyond your control through work stoppages caused by labour shortage, material shortage, strikes and inclement weather.”

Both Pieper and Guglietti say Baywood Homes and Townwood Homes respectively build all-year round, although the winter is a difficult time to build.

Guglietti shares some of his success stories of building with Townwood Homes.

“Many years ago, we were one of the first builders to re-introduce the bungalow to the Toronto real estate market, we were taken back by the response to this ‘new’ plan,” he recalls. “During this process, we were able to assist with the needs of many families seeking easier access to their homes for disabled family members.”

Pieper notes environmental reasons as one of the successes Baywood Homes has had in building.

“We’re building Energy Star homes now to get involved with the green initiative,” she says. “We’re building our first four Energy Star homes at Napa Valley in Bowmanville and the Ravines of Greenhill in North Oshawa. It’s where the industry is going right now and we’re excited about it. Production quality of the home has improved, which makes the industry as a whole better. Homeowners are ecstatic. People are genuinely interested in having Energy Star homes. They’re interested in the energy cost-savings.”

Pieper says Baywood Homes finished seventh in overall customer satisfaction this past year with J.D. Power and Associates. This has been J.D. Power’s second year surveying homebuyers in the GTA.

“We have customer care centres right on-site, to respond quicker to the needs of our customers,” she adds.

Although these are success stories, there are some things to watch out for in home building too.

“Fire is a fear of all new home builders,” says Guglietti. “In one instance, as an occurrence of a fire that spread from an adjacent builder, we were able to rebuild a purchaser’s home, and much to their relief, move them in on their original closing date.”

Pieper says it is mother nature that is sometimes the biggest obstacle.

“As an all-season builder, we sometimes encounter inclement weather conditions such as heavy rains or severe snow storms,” she says. “These can be difficult to deal with. However, with over 20 years as a builder, Baywood has experience with these types of situations.”

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Contact the Jeffrey Team for more information - 416-388-1960