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Canada’s housing market frothy, but not a bubble
Tighter regulation, healthier banking sector insulate housing market
Ronald D. Orol – Wall Street Journal
Canada’s pricey housing market is frothing – driven by debt-ridden borrowers – but a dangerous U.S.-style housing crisis isn’t in the cards, experts say.
“We don’t expect the base Canadian housing market to experience the trauma of the U.S. market,” said Robert Hogue, senior economist at Royal Bank of Canada in Toronto.
Regulatory observers said they agree that a series of actions taken by the Canadian government starting in 2008 and culminating in a June 2012 package of reforms to limit access to credit for borrowers is having its intended effect of cooling the frothy Canadian housing market.
Responding to the financial crisis of 2008, the Canadian government set a minimum down payment of 5% for government-backed mortgages. It also began a gradual reduction in the maximum amount of time borrowers could take to pay down their mortgages. The limit was set at 35 years in 2008 and was last cut in June to 25 years. The moves were imposed to tighten up underwriting standards that had been loosened between 2004 and 2008.
The steps were necessary, observers say, in the face of rising home prices – Canadian house prices have roughly doubled in the past decade, according to credit rater Standard & Poor’s – that forced borrowers to take on high debt to buy a house.
“There are signs that the market has been slowing. The measures [to tighten mortgage underwriting standards] by public authorities are preventative as well as reactive and cautionary, and they are having an effect,” said Sheryl Kennedy, CEO of Promontory Canada and deputy governor at the Bank of Canada from 1994 to 2008.
Kennedy argued that the regulatory actions taken over the past four years to tighten mortgage insurance and underwriting standards along with public pronouncements by the Bank of Canada and Ministry of Finance to ensure that Canadians understand they should be working to cut debt levels, have contributed to the cooling of the housing market.
Tom Lewandowski, a Canadian bank analyst with Edward Jones in St. Louis, said the Canadian housing market could experience some form of slowdown, with more delinquent borrowers and a small hike in foreclosures, but nothing akin to the millions of foreclosures experienced in the U.S.
“There isn’t a US-style bubble to be burst,” said Lewandowski. “Given the structure of the Canadian mortgage market, I don’t think you are going to see a similar amount of foreclosures [as in the U.S.].”
Comment: Canadian mortgages default at around 0.4% – while some areas of the US have hit 30% or more. That is 75 times higher! And in absolute terms, with 10 times the population, that means their mortgage default rate is really 750 greater than here in Canada.
In fact, statistics show that Canada’s housing market continues to cool. The number of homes newly listed for sale dropped 3.3% in July, from June, according to an RBC report earlier this month.
According to statistics from the Canadian Real Estate Association, 461,000 homes sold in July on a seasonally adjusted basis – virtually the same as in June. The average price of homes sold in Canada through the Multiple Listing Service fell for the fourth time in the past five months in July, dropping 0.8% from June on a seasonally adjusted basis.
Resales in Vancouver, a particularly hot market for condos and single-family homes, fell for the eighth straight month in July, according to RBC. Toronto, another city in a condo–building boom, saw a small decline in activity for the third consecutive month in July, with resales falling by 1.4% for a cumulative drop of 11.7% since April.
Comment: Vancouver may be in free-fall, but Toronto is not. Small dips in sales volumes are one thing, but prices are still climbing. With 7,570 sales in July and 7,922 last year, it is only a drop of 4% – in total sales. Prices rose 4% in the same time frame. Not sure I would say it is dropping… some moderation would sure be nice, though.
Canada – land of borrower interest-rate risk
However, even with a cooling market, Canadian borrowers typically take on far more mortgage interest-rate risk than their U.S. counterparts, with roughly a third of homeowners taking floating-rate mortgages, according to data from a May 2011 Canadian Association of Accredited Mortgage Professionals report.
Comment: Our variable-rate mortgages are not the same as US floating rate mortgages.
Hogue noted that the largest chunk of fixed-rate mortgages are 5-year fixed-rate loans and that in recent months he has seen a shift in Canadian borrowers moving from floating to 5-year fixed-rate mortgages in response to bank promotions and in anticipation of higher interest rates down the road.
Nevertheless, borrower interest-rate risk is there. Craig Alexander, chief economist at Toronto-Dominion Bank in Toronto, noted that the percentage of mortgages in arrears is well below 1%, with significantly fewer foreclosures. However, he argued that if the Bank of Canada were to hike interest rates by two percentage points about 8% of Canadian households would have more than 40% of their income servicing debt.
“Statistically when more than 40% of income is going to personal debt that is when you have real problems, so about 8% of Canadians would find managing their debt level is extremely difficult, not insignificant, but not a U.S.-level problem,” Alexander said.
Many economists following the Canadian housing market agree that, barring external shocks such as a major U.S. recession or an uncontained European crisis, the Bank of Canada will raise interest rates gradually starting in 2013. Backing those assertions, Bank of Canada Gov. Mark Carney appeared upbeat earlier this month about the economy. He said, “We had been growing above trend, and to the extent to which we continue to grow above trend, we may withdraw some of that monetary-policy stimulus.”
However, some analysts note that Carney may delay rate hikes after unemployment rose to 7.3% from 7.2% in June.
Nevertheless, Hogue said he doesn’t see the jobs market as hindering the housing market. He added that the deterioration in affordability so far has been less during this housing boom than the period around the late 1980s and early 1990s in Canada (Canada had a recession in 1990–91) and that he believes it is unlikely that affordability will deteriorate so much more that it reaches a comparable position.
Comment: We forget that 1989–1991 was a unique period due to the real estate bubble and crash, coupled with the recession.
He said that RBC’s base economic forecast for Canada in the period ahead calls for sustained growth in economy, rising employment and a much more supportive environment for the housing market than in the early 1990s.
“It’s not that home prices are not high in Canada, but borrowing costs are still manageable,” he said.
Analysts also disputed notions that Canada’s condo market, particularly in Toronto, is in a dangerous bubble. Kennedy said Canada’s condo market has traditionally fluctuated more than the single-family market, but that restrictions limiting how many condos an investor can buy and requirements that a substantial segment of a condo complex be sold before financing can be provided for construction have contributed to reducing the likelihood of a dangerous condo bust.
“This helps prevent the kind of situation we have seen in Florida and California where whole developments that the banks financed are empty, without buyers,” Kennedy said
Nevertheless, credit rating agency Standard & Poor’s warned in July that five Canadian banks are vulnerable, dropping its outlook for them to “negative” from “stable.”
The warning hit three of the largest banks in Canada, Royal Bank of Canada, Toronto-Dominion Bank and Bank of Nova Scotia, as well as two smaller competitors – Laurentian Bank of Canada and National Bank of Canada. S&P noted hikes in consumer debt, elevated housing prices and a worsening outlook for the global economy as key risks and reasons for the outlook revision.
External shocks
External shocks could still change the analysis. Kennedy acknowledged that there are some low-probability events that could hurt Canada’s housing market and economy. Domestically, a recession or a dramatic rise in inflation that would require a hike in interest rates could trigger an increase in borrower defaults. However, she added that neither of these scenarios is in the base case scenario for economists following Canada’s economy.
Comment: And neither of these scenarios is in any way likely.
Paul Ferley, assistant chief economist at RBC, said a severe U.S. recession would cause Canadian unemployment to rise at the same time that it hits incomes.
“A major U.S. recession at a time when consumer debt levels are fairly high just becomes unbearable and you would get a correction in the housing market,” Ferley said. “Then interest rates would get cut.”
Externally, Kennedy said that a contained euro zone problem would not be a risk because Canada doesn’t depend directly on exports to Europe while Canadian financial institutions have said they don’t have a lot of exposure to Europe.
“But if there was contagion through the global economy and financial system, particularly affecting the U.S., that would be a concern,” she said.
Kennedy added that if there is a U.S. and Europe problem at the same time that also depresses demand from emerging economies, including China, for commodities, then there is a threat to Canada.
Comment: Again, that is a lot of “what-ifs”.
“If the U.S. is struggling because of fiscal problems but the emerging world is growing fast and doing fine because they are managing to tap into internal demand, Canada is fine,” she said.
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Contact the Jeffrey Team for more information – 416−388−1960
Laurin & Natalie Jeffrey are Toronto Realtors with Century 21 Regal Realty.
They did not write these articles, they just reproduce them here for people
who are interested in Toronto real estate. They do not work for any builders.
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Vertical development: A dense idea
It turns out cramming more people into cities won’t help the environment or our health, and may even hurt the economy
Tamsin McMahon – Macleans
Last month Toronto’s deputy mayor, Doug Holyday, uttered what has become a cultural taboo in Canada’s largest city. Downtown Toronto, he said, is no place to raise a family.
Holyday, who lives down the street from his grandchildren in the suburban Toronto neighbourhood of Etobicoke, was against a city plan to force condo developers to reserve 10% of their buildings for three-bedroom “family friendly” units.
“I could just see now: ‘Where’s little Ginny?’ ” he said. “She’s downstairs playing in the traffic on her way to the park.”
His comments were swiftly denounced by Adam Vaughan, the downtown councillor who had been pushing for the family-friendly condo units and once proudly told a reporter he had never visited the suburbs around Toronto. (“There’s Toronto and there’s the rest of Canada,” he said.)
Holyday’s view was hardly original, but was so shocking because of how it flew in the face of what has become accepted wisdom in cities across the country: we need to radically increase the number of people living in the downtown core if we’re going to accommodate population growth while ending urban sprawl.
The doctrine of urban intensification is already having a dramatic effect on the condo-lined skylines of cities like Toronto and Vancouver, but the debate has been playing out across the country with communities as disparate as Miramichi, N.B., Saskatoon and Calgary all wringing their hands about how to stop the relentless march to the suburbs.
In July, Revelstoke, B.C., passed a law requiring the city to cut greenhouse gas emissions by 15% by 2030, in part by encouraging high-density development.
Saskatoon is planning to turn a former dog park in a low-density neighbourhood of Second World War housing into nine apartment buildings. The city also has plans to redevelop 97 hectares of industrial land in the north downtown into a mixed-use development that could house 6,000 people and five million square feet of retail and commercial space. Some argued the city didn’t go far enough, with councillor Myles Heidt telling the Saskatoon Star-Phoenix the development should strive for “extra-high density” capable of housing up to 30,000 people, or nearly 13% of the city’s current population.
Miramichi’s new development plan calls for more multi-unit housing. Calgary, considered the epitome of the Canadian car-centric city, recently hired an urban planner whose personal motto is: “No place is worth visiting that doesn’t have a parking problem.”
After decades of watching North American cities gutted by residents fleeing to the leafy suburbs, urban enthusiasts are now declaring an end to low-density development.
In the eyes of many city planners and political leaders, the suburban ideal of the single-detached house on a quiet cul-de-sac, complete with a large yard and the requisite lengthy commute, is a relic of a bygone and largely unsustainable era. In its place, they are pushing for “smart growth” communities featuring high-density housing-usually in the form of apartment and condo complexes-in mixed-use neighbourhoods where everyone walks, bikes or takes the bus. It’s the only way, we’re told, to handle our rapid population growth without destroying the environment and clogging streets with traffic.
Urban planners have been hotly debating how to cope with sprawl-or whether we even need to cope with it at all-for decades. But the smart-growth movement has picked up steam over the past decade as environmentalists concerned about global warming pointed the finger squarely at the suburban commuter for contributing to climate change.
But a growing body of critics is arguing that far from raising our quality of living, greening our environment and making us all walk more and drive less, the kind of radical intensification plans now in vogue with urban planners are damaging our economies, raising our cost of living and failing to get people out of their cars and onto public transit. What we need, they say, is a much more thoughtful debate over how to live beyond the push to cram more people into ever-smaller spaces.
“The whole dialogue on density is too focused on numbers rather than being focused on what density can actually offer,” says Pierre Filion, an urban planner at the University of Waterloo. “What is important is, what kind of environment are you going to create? This is as much, if not even more important than growing density.”
The concept of smart growth, with its belief in densely populated mixed-use neighbourhoods, has long been linked to the ideas of Jane Jacobs, the American urban planner whose The Death and Life of Great American Cities called for a return to a liveable urban community. But Jacobs decried neighbourhoods full of high-rise buildings and worried that density, if left unchecked, could “begin to repress diversity instead of stimulate it.” Instead, urban planning historians point out that the modern-day smart-growth movement looks much more like the ideas of George Dantzig and Thomas Saaty, two American mathematicians who in 1973 developed a series of computer models for the ideal urban setting, which they termed the “compact city.”
“Effective use of the vertical dimension,” they argued, could solve a host of problems facing the growth city, among them: “smog, traffic, time lost in commuting, accidents, slums, noise, pollution, inaccessible nature, unsafe walks and play areas, endless chauffeuring of children and rising cost.”
“Our claim,” they wrote, “is that it is now cheaper to build land than to go out and rob nature.”
Dantzig and Saaty’s belief that drastically increasing the population density of our cities was the only way to solve a host of environmental problems has become a central tenet of the modern-day smart-growth movement. Supporters argue that building up our cities and suburbs will cut down on greenhouse gas emissions by shortening our commutes and encouraging more of us to take public transit to work or walk.
It would be nice to think that simply having more people live close together downtown would make people, particularly children, healthier. Less time spent in cars, the thinking goes, means more time walking to nearby grocery stores, playgrounds and schools. But when researchers from the University of Southern California, Northeastern University, and Berkeley tracked the physical activity of children aged nine to 11 who had moved to smart-growth communities and compared them with children in traditional suburbs, they found little evidence of a great shift. Children in smart-growth communities tended to play more outdoors, usually in their neighbourhood, while children in the suburbs played more indoors, the study found. But it concluded that “increases in daily moderate-to-vigorous physical activity did not significantly differ by group.” In other words, children who moved to smart-growth communities changed where they played, but not how much.
Another study out of the University of Southern California examined the core principles of smart growth to see whether any of them actually had any influence on rates of physical activity. The only ones that did, they found, were policies promoting more open space and those that advocated for “distinctive communities with a strong sense of place,” neither of which are particularly linked to density.
Aside from failing to make us any healthier, there’s mounting evidence that smart growth doesn’t live up to the hype when it comes to improving the physical state of the environment, either.
A 2009 study from the Georgia Institute of Technology and the University of Wisconsin-Madison modelled what smart-growth development would do to greenhouse gas emissions by 2050 and found that “aggressive” smart growth that included radical intensification could reduce carbon emissions by eight%. On the other hand, forcing everyone to drive hybrid vehicles, even if on lengthy commutes to the burbs, could cut emissions by 18%.
Researchers found increasing population density has not been successful at getting people out of their cars and onto public transit. That’s because population density has little to do with how people choose to get to work and almost no association with levels of public transit ridership.
By the simple measure of residents per hectare, Los Angeles is North America’s most densely populated metropolitan region, with 27.3 people per hectare, thanks to its compact suburbs all connected by a network of freeways. Yet more than 90% of its population mainly travels by car and less than five% by public transit. That compares to Edmonton, which houses just 10.1 people per hectare, but has nearly double the proportion of residents who take transit. Even in Portland, Ore., a city frequently touted by Canadian urban planners as the gold standard for smart growth because of its massive investments in light-rail transit and downtown redevelopment, 89.4% of residents still prefer to drive to work. In Calgary, it’s 76.6%.
“I don’t think density has very much to do with the success of public transit,” says Paul Mees, a transportation planning professor at Royal Melbourne Institute of Technology in Australia. “I think that’s the urban myth that is really holding back progress.”
That idea, that cities need to be jam-packed with people in order for transit to be viable, first emerged in the 1950s as a way to advocate for more spending on roads and highways, says Mees. A Chicago transportation study at that time determined the region would need 96.5 residents per hectare (more than three times the population density of present-day Toronto) to support public transit to its suburbs, a calculation that continues to hold sway over city planners today. Instead, Mees argues the actual density needed to provide sustainable public transit is probably closer to one where most people live on lots of 647 sq. m with a well-defined urban boundary to keep houses from sprawling randomly into the countryside. In other words, traditional suburbia. “That seems to be almost all of Canada,” he says.
While Toronto’s city council was engulfed in a debate over the need for more family-friendly, three-bedroom condos in the city’s downtown, the Toronto Real Estate Board released a report that said just 19 three-bedroom condos were sold in the downtown core in the second quarter of the year. The condos averaged around $800,000, hardly a family-friendly price tag.
Real estate prices inevitably rise in tandem with population density-one of the main reasons, smart-growth critics say, that policies to stop sprawl by increasing density in our cities and suburbs are destined to fail. The more people you try to cram into a city, the more expensive real estate gets, and the more people are inclined to flee to the suburbs for more affordable housing. In fact, a study released in May from Cambridge University in the U.K. found that dramatically increasing urban density might reduce car use by a mere five%, but the environmental gains from that reduction would be dwarfed by the economic consequences of making cities more expensive places to live and do business. “Any economist will know when you restrict the supply of a good that is in demand, you drive up the cost,” says Wendell Cox of the U.S. urban policy consultancy Demographia and a vocal critic of the push for urban intensification. “If we can figure out a way to do smart growth without rationing land, it might be a good idea.”
It’s not only families who have been fleeing to the suburbs as land prices in the city skyrocket, jobs have also migrated, leading to what’s been dubbed “job sprawl.”
For instance, downtown Toronto is no longer the region’s largest employer, says Cox. More than 350,000 people work in the sprawling area around Pearson airport, compared to 325,000 in downtown Toronto. Between 2001 and 2006, 94% of new jobs in the Toronto area were outside of the central municipality, he says, with rates of 70% in Montreal and 75% in Vancouver. And as jobs have moved out of cities, downtown residents have followed them, leading to the increasingly common phenomenon of the “reverse commute,” where residents leave their homes in the city to drive to work in the suburbs. Nearly a third of the commuter traffic in and out of Toronto as of 2006 involved city residents heading to jobs in the suburbs. Almost as many Torontonians commuted to Vaughan, a suburb north of the city, as commuted from Vaughan into the city. In Vancouver in 2006, more than 40% of commuter traffic was doing a reverse commute; in Montreal it was 23%.
Lisa Anttila is one of those reverse commuters. She lives in downtown Toronto, where she bikes to the grocery store and the doctor’s office. But she gets in the car to go to work at her family’s business manufacturing stainless steel products in Markham, a suburb north of the city. Most days her work schedule is flexible enough that she can time the commute to avoid traffic, but that has become more difficult in the six years she’s been doing the drive. “It used to be, ‘Don’t get on the road between 7:30 a.m. and 9:30 a.m.’ Now it’s like if you haven’t left by 7:30 then you’re pretty much waiting until after 10,” she says. “Ironically it seems like half the people who live [in Markham] come to Toronto to work and so they fill the jobs with people from Toronto.”
At its worst, Anttila’s 18-km reverse commute can now take nearly 90 minutes by car. Public transit, she says, is not an option. “It takes me longer on public transit than it does by bicycle,” she says.
Smart-growth development is unlikely to reverse that trend. Researchers from East Carolina University studied what happened to jobs in 350 U.S. metropolitan regions between 2001 and 2006, comparing those that had restrictions on sprawl with those that didn’t.
Eight of the 11 cities with anti-sprawl laws had “job sprawl” rates that were worse than the average. Bend, Ore., a city that underwent massive mixed-use redevelopment before being slammed by the financial meltdown, fared four times worse than the national average. Meanwhile, some low-density cities in Texas, Tennessee and South Carolina had actually managed to attract more jobs than they lost to the suburbs.
The fact that more density can’t deliver a better commute to work and can even make congestion worse, is one of the biggest economic arguments against urban intensification, Cox says. “The only reason people move to cities is to do better because the opportunities in cities are better,” he says. “If people don’t begin to realize what they’re doing to really nice cities, you could very well in the long run see growth pushed out of them.”
Those municipalities that do embrace smart growth have been doing it at the expense of industrial development, preferring to convert factory zones into areas for housing. And that is doing lasting damage to the ability of cities to create enough jobs for their fast-growing populations, says Nancey Green Leigh, a brownfield redevelopment expert with Georgia Tech University. She studied the industrial development policies of 14 major U.S. cities and 10 smart-growth regions and found smart-growth planning either ignored the needs of industry or saw it as a blight on the urban landscape. Manufacturing jobs were vanishing from North American cities long before the advent of smart growth. But Green Leigh says the push for urban intensification has aggravated that trend. Once old industrial land gets converted to condominiums, it’s never long before new condo dwellers begin to demand that any remaining manufacturers and factories be given the boot.
The loss of industrial land to condos, offices and retail complexes has become a problem in B.C.’s Lower Mainland, where the port authority has run up against stiff opposition to its plans to buy properties for future industrial uses. Port Metro Vancouver has recently purchased 142 hectares of land in the Lower Mainland to safeguard for industrial use. But, CEO Robin Silvester says, provincial estimates point to the need for as many as 809 hectares of industrial land if the region is to stay economically competitive and avoid becoming a residential oasis for the wealthy and retired. And that has put the port on a collision course with those who believe the areas should be reserved for more urban living. “We need to have a better quality of discussion around the problem that’s emerging,” Silvester says. “Otherwise we run the risk of becoming like communities in parts of Florida where a lot of people go to live, but where there’s no economic activity taking place.”
Vancouver is perhaps Canada’s starkest example of what happens to real estate when a city becomes a place where everyone wants to live. But urban planners across the country are singularly focused on ending sprawl. The irony is that the current obsession with smart growth may just become one more thing that pushes us, our families and our jobs, even farther into the burbs.
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Contact the Jeffrey Team for more information – 416−388−1960
Laurin & Natalie Jeffrey are Toronto Realtors with Century 21 Regal Realty.
They did not write these articles, they just reproduce them here for people
who are interested in Toronto real estate. They do not work for any builders.
—————————————————————————————————–
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