Toronto Condo and Real Estate Blog

How Could the US Market Crunch Affect Canadian Real Estate in 2008?

The market crisis along the south border has many homebuyers wondering how it will affect the housing market in Canada, but Canadian market analysts feel the problems the U.S. is experiencing should have little impact on real estate in this country.

Canada is not expected to experience the same downturn as the U.S. market for many reasons. First, the Canadian economy is simpler and the investment environment is more conservative than the United States. Secondly, Canadian federal surpluses have given consumers more confidence which has led to increased spendings on homes, retail goods, and business expansion. Additionally, the Canadian housing market has not been artificially driven by bad lending practices. And, unlike the U.S., all mortgages in Canada are insured.

However, Canada’s booming real estate market could loose heat by the end of the year. The impact of the U.S. sub-prime crisis is expected to be felt by Canadians in three different ways:

First, a tightening of credit markets will occur as lenders move to correct their losses because of the investments in commercial papers. To borrowers, this may also mean smaller discounts off the posted mortgage rate.

Secondly, due to the overall economic impact and the soaring Canadian dollar, the impact will also be felt. There may be a slowdown in some business sectors related to real estate and that may impact Canadian consumer confidence.

Thirdly, the impact on our economy could come form the falling purchasing power of the U.S. consumers, which in turn impacts large ticket purchases that involves Canadian made products - the auto sector is a good example.

“The Canadian real estate market will slow down a bit in 2008, but that slowdown will be nothing compared to what happened in some U.S. markets in 2007. In Canada, the housing market has been setting records for volume and units sold for five consecutive years. We believe things are just moving back towards a more “normal” growth pace, but that still means the 2008 MLS home sales activity will be the second highest on record, second only to the overall record was set in 2007.”, says the Canadian Real Estate Association’s Chief Economist.

The the Canadian Real Estate Association’s market analysis for 2008 also does not show any dramatic adjustment in the average MLS residential price, again contrary to the conditions in some U.S. markets. The the Canadian Real Estate Association’s analysis shows prices setting new records in every province in 2007 and in 2008, but price increases will be smaller in 2008. In effect, price increases will become smaller as the real estate market becomes more balanced. Manitoba and Nova Scotia are expected to post an increase in average price of 7% or more in 2008, while New Brunswick and Newfoundland are expected to show the smallest increase in average price of 4% annually. The national average residential MLS price is expected to increase 5.5%.

“The housing market is expected to grow at a more moderate pace this year. However, this will be the result of decreasing affordability rather than the impact of U.S. sub-prime woes”, said Craig Alexander, deputy chief economist at Toronto-Dominion Bank.

To conclude, real estate markets will remain tightest in the western provinces in 2008. Even though Alberta and British Colombia are expected to pull back from the blistering pace they set earlier in 2007, housing there will remain in high demand. The days of 25 or 30% increases in average price are over, but prices are forecasted to go up in Alberta and British Colombia by 5.2% and 5.1%, respectively. Ontario’s market and other eastern provinces are expected to keep its momentum with a slight slow down.

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Toronto condo market is secure

Derek Raymaker - Globe and Mail

Predicting the future of the high-rise residential market can be risky.

Take the forecasts for 2002, for example. In the wake of the 9/11 terrorist attacks, a temporary economic slowdown in the United States and a three-year condo-building binge in downtown Toronto, a lot of economists and analysts predicted that the high-rise market was heading toward a glut of supply, and possibly shrinking prices.

So what happened? Total sales of new condos in Toronto rose 44%, to more than 15,000.

Last year provides another example. Nearly identical figures for new condo sales in 2005 and 2006 - 17,693 and 17,617, respectively - prompted even some of the industry’s boosters to predict that while there would still be a strong market in 2007, the earlier pace probably could not be sustained.

What happened? New condo sales in Toronto skyrocketed to 22,059 - and that’s only up to November, December data not having been released yet. Many of these sales came in the fourth-quarter as buyers tried to close deals before the Jan. 1 introduction of Toronto’s controversial land transfer tax.

Few market watchers have been willing to predict a downturn in demand for condominiums, a demand felt not just in downtown Toronto, but increasingly in North York, Mississauga, Markham, and, recently, Brampton.

As long as prices for detached and other low-rise housing remain largely in the $400,000 to $600,000 range - even for the most modest of dwellings - the relative affordability and wide variety of locations in Toronto’s condominium market will keep demand high.

This past year saw the introduction of innovative design elements and a greater emphasis on sustainable building features aimed at lessening the impact of housing on the environment. In both cases, buyers responded well, especially to buildings that pushed the design envelope with features such as soothing terracing and angular architecture.

“In the last 12 months, there has been a much greater emphasis on design than we’ve seen previously,” said Jane Renwick, executive vice-president and editor of Urbanation, a publication that tracks high-rise development.

Among the more bold high-rises launched last year - ones that set the bar higher for future such projects - were Bazis International’s One Bloor at Bloor and Yonge streets, and Pier 27, a project by Cityzen Group and Fernbrook Homes at the foot of Yonge.

“This year’s buying furor for some projects was largely driven by design,” Ms. Renwick added. “Builders are finally realizing that good design has some pull with buyers, but it also contributes a lot to the aesthetics of the city.”

For many years, one of the main criticisms aimed at some condo projects - especially those located outside of the subway corridors - was that they were largely isolated from other community amenities.

But now, there is a move afoot to bring more commercial, retail and community uses into the mix at projects, according to Barry Lyon of N. Barry Lyon Consultants, which advises condo developers across the country. “Well-educated, younger residents are bringing with them a lot of the complementary components that are needed for healthy communities,” he said.

In Toronto, it seems that big-box retailers such as Home Depot and Wal-Mart are keen to establish more of a presence in the city’s centre, especially along Eastern Avenue.

In the coming year, potential buyers could see three or four levels of residential condominiums built on top of central big-box stores. The concept has already been executed successfully in downtown Vancouver.

Ms. Renwick points to Lanterra Developments’ Maple Leaf Square, adjacent to the Air Canada Centre at the foot of Bay Street, as an example of how a condominium and commercial amenities can be combined successfully on a large scale prior to construction. Its two towers are nearly sold out.

Other trends to watch for in 2008, Mr. Lyon said, include a surge of building activity in the eastern part of downtown, and Waterfront Toronto’s West Donlands community taking shape, bolstered by the introduction of the Cherry Street streetcar line. “The waterfront is becoming real. All these years of planning will finally bear fruit.”

As long as prices remain low, relatively speaking, demand for condominiums will continue to be steady.

But Mr. Lyon noted that land and construction costs in downtown and midtown Toronto have been spiralling higher, to the point where developers feel they can charge more. It’s this spiral effect that can ultimately destroy the one thing - affordability - that sustains the market.

Another element that will likely have a greater impact on the Toronto condo market this year is the re-emergence of the investor-buyer, who rents out purchased suites for income. In the late 1980s, these buyers played a big role in creating the real estate bubble by flipping their suites. Since then, they’ve consistently made up 20% of the market.

This year, Ms. Renwick predicts investors will increase to 30% of the market, but they will concentrate on buying suites in downtown locations and along subway lines.

Mr. Lyon added that investors have shown a reluctance to flip their properties, holding on to them for an average of three to five years before reselling.

“Flipping is the last thing we want to see,” he said.

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

Housing purchases jump 21% in what is usually a slow fourth quarter, but slowdown expected after tax takes effect in February

Lori Mcleod - Globe and Mail

Buyers racing to beat Toronto’s incoming land transfer tax created an uncharacteristic spike in home sales over the holiday season, but a slowdown is on the horizon after the tax comes into effect.

“The fourth quarter of any calendar year tends to be very slow for the real estate market, but this was anything but slow,” said Phil Soper, president and chief executive of RLP. “It is painfully obvious that the new tax that’s being imposed on people in Toronto’s 416 area drove activity.”

As of Feb. 1, Toronto home buyers will pay a new fee to the city in addition to the existing provincial land transfer tax. It will nearly double the tax bill for home buyers, raising the tab on a $375,000 home to $7,575 from $4,100.

“The rate of activity in areas where the tax will not impact people was much lower than in neighbouring areas where the tax comes into effect,” Mr. Soper said.

Housing unit sales were up approximately 21% in the GTA in the fourth quarter, compared with 7% in surrounding areas, according to data from the Toronto Real Estate Board.

The strong fourth quarter helped the Toronto real estate market shatter previous sales records in 2007, according to data released by RLP. The average price of a two-storey detached home in the city hit $506,900, up 8% from last year. The price of a detached bungalow rose 8.9% to $413,375, and that of a condo unit rose 10.4% to $280,505.

Two years ago a two-storey home in the city averaged $461,282, while a bungalow went for $362,611 and a condo unit $242,202.

After the current wave of buyers subsides, both price gains and sales should start to decline, Mr. Soper said.

“We do expect real estate activity in Toronto this year to fall by about 4 to 5% versus 2007,” he said. “We don’t expect to see a year like 2007 in terms of raw activity for a few years to come.”

Things could start to cool down in popular areas such as Riverdale and the Beaches, Mr. Soper said. Markets that could be poised for better-than-average price gains this year include Parkdale and Corktown neighbourhoods along with Don Mills, which could get a boost after the ongoing renovation of the Don Mills shopping centre is completed.

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