Canada Mort­gage and Hous­ing Corporation

Mar­ket at a Glance

* New home con­struc­tion and resale activ­ity will slow into the first half of next year, set­ting the stage for an improve­ment dur­ing the sec­ond half of 2013.
* New home con­struc­tion starts will reach 37,600 units in 2013, includ­ing 10,100 sin­gles and 27,500 mul­ti­ples. New home sales will total 31,000 units.
* MLS sales will total 87,000 homes next year at an aver­age price of $498,500.
* Slower employ­ment growth in the com­ing months will keep the unem­ploy­ment rate above 8% in 2013 and net migra­tion below its 10-year average.

New Home Market

Slower sales will lead to fewer con­struc­tion starts

New home con­struc­tion is expected to slow next year but will stay close to the past five-year aver­age and in line with recent rates of house­hold for­ma­tion. Condo starts will mod­er­ate notice­ably into the first half of 2013 after reach­ing new highs ear­lier this year. Resource con­straints and slower pre-construction sales in 2012 will weigh on starts in the com­ing months. Activ­ity should pick up again dur­ing the sec­ond half of 2013 once the large vol­ume of projects that opened sales cen­tres in late 2011/early 2012 have achieved sales lev­els suf­fi­cient to obtain financ­ing and begin con­struc­tion. Low-rise hous­ing starts (sin­gles, semis and rows) are expected to expe­ri­ence a milder slow­down next year. While demand from repeat buy­ers will con­tinue to drive sales cen­tre traf­fic, a declin­ing num­ber of sites, higher prices and increased com­pe­ti­tion from a better-supplied resale mar­ket will pro­hibit growth for this sector.

The typ­i­cal five-quarter lag between new condo sales and starts will lead to a slower pace for con­struc­tion ahead. A peak in sales activ­ity iden­ti­fied dur­ing the sec­ond quar­ter of 2011 means starts should begin to mod­er­ate in the fourth quar­ter of 2012. The recent strength in starts will also impact the abil­ity of new projects to begin con­struc­tion due to increased strains on labour and cap­i­tal. With lower com­ple­tions this year (due to rel­a­tively low starts in 2010), the num­ber of  con­dos under con­struc­tion hit a record 47,500 units at the end of the third quar­ter — almost 50% higher than a year
ago.

Although apart­ment starts will be down con­sid­er­ably from 2012, they will stay at a fairly high level due to a siz­able num­ber of new condo project open­ings this year that will move to the con­struc­tion phase in 2013. Approx­i­mately 18,000 new con­dos are expected to sell in 2012 – most of which occurred at pre-construction sales cen­tres. The tim­ing of con­struc­tion for most of these projects will likely occur later in 2013 as a slower sales trend this year has pushed up unsold inven­to­ries. Accord­ing to data sup­plied by Urba­na­tion Inc., more than half of the units opened dur­ing the first six months of 2012 were still unsold by mid-year. Because buy­ers haven’t been as recep­tive to new open­ings this year — likely turned off by higher ask­ing prices and a slower out­look for resale appre­ci­a­tion — projects will face longer delays in meet­ing sales thresh­olds for financ­ing (typ­i­cally 70–80%).

How­ever, demand for new con­dos should sta­bi­lize and begin to reduce unsold inven­to­ries, so long as devel­op­ers con­tinue to respond to chang­ing mar­ket con­di­tions by pro­vid­ing the appro­pri­ate incen­tives on exist­ing units, adjust­ing prod­uct mixes where nec­es­sary, becom­ing more strate­gic in terms of the tim­ing of new open­ings and more price com­pet­i­tive with the resale mar­ket. In the end, the per­cep­tion of con­dos as a rel­a­tively sta­ble invest­ment and increas­ing oppor­tu­ni­ties in the rental mar­ket due to low vacancy rates and ris­ing rents will con­tinue to attract buy­ers and lead to roughly 16,000 sales in 2013.

Low-rise sales are expected remain steady next year at approx­i­mately 15,000 homes, which will keep con­struc­tion starts in 2013 close to 2012 lev­els. Starts will con­tinue to be sup­ported into the early part of 2013 due to an uptrend in sales activ­ity that occurred in the first half of 2012. How­ever, by the sec­ond quar­ter of next year, the slower sales trend emerg­ing over the past sum­mer will begin to weigh on con­struc­tion activ­ity. While low inven­tory con­tin­ues to impact sales, most of the slow­down head­ing into 2013 will come from the demand side.

A strong spring mar­ket com­bined with quickly ris­ing build­ing mate­r­ial and land costs accel­er­ated price growth for new homes this year. Aver­age new sin­gle detached prices have moved up to $670,000 in the GTA, which is begin­ning to turn some buy­ers away. The most expen­sive forms of hous­ing typ­i­cally expe­ri­ence a more pro­nounced decline as the mar­ket ini­tially begins to slow. Buy­ers become wary of pay­ing high prices as the poten­tial for prices to come down appears more real­is­tic. The new mar­ket also has to com­pete with resale alter­na­tives, which have become more avail­able as list­ings have trended higher. The chang­ing mar­ket land­scape is expected to encour­age devel­op­ers to ramp up mar­ket­ing, offer incen­tives and price dis­counts where pos­si­ble and focus on higher-growth mar­kets in need of sup­ply, such as the Hal­ton Region. These efforts should help to sta­bi­lize new homes sales along­side the rest of the mar­ket in the com­ing months and set the stage for an improve­ment in the sec­ond half of 2013.

Resale Mar­ket

Activ­ity expected to improve later in 2013

Mar­ket con­di­tions in the Greater Toronto Area (GTA) exist­ing home mar­ket are expected to mod­er­ate over the next six to nine months before regain­ing some momen­tum in the sec­ond half of 2013. Sales have recently begun to adjust down in response to tighter mort­gage qual­i­fy­ing cri­te­ria, higher prices, pre­vi­ous weak­ness in employ­ment and reduced immi­gra­tion. Prices are expected to expe­ri­ence a very mild down­ward adjust­ment into the first part of 2013 as mar­ket con­di­tions become more bal­anced. How­ever, improve­ments to own­er­ship afford­abil­ity will accrue with slower price growth and recent employ­ment and income gains. This will help to ensure the slow­down for sales and prices is tem­po­rary and growth resumes later next year — albeit at a slower pace than in 2011 and the first half of 2012.

MLS® sales in the sec­ond half of 2012 will decline by approx­i­mately 15% com­pared to lev­els in the first half of the year, largely due to the lagged effect of past eco­nomic and market-related devel­op­ments. A slower pro­file for eco­nomic growth and increased uncer­tainty reflected in finan­cial mar­ket con­di­tions caused the GTA labour mar­ket to lose jobs through­out the sec­ond half of 2011. The typ­i­cal nine-to-twelve month delayed impact on hous­ing sales began to mate­ri­al­ize notice­ably by the third quar­ter of this year, as the job losses were cen­tred on full-time posi­tions for younger work­ers in higher-paying sectors.

The slow­down to employ­ment last year will con­tinue to weigh on hous­ing sales through to at least the first quar­ter of 2013, as will the reduc­tion in first-time buy­ing activ­ity fol­low­ing a decline in own­er­ship afford­abil­ity accu­mu­lated in early 2012. Strong com­pe­ti­tion for list­ings caused aver­age sell­ing prices to rise by six% dur­ing the first half of the year (seasonally-adjusted). This was fol­lowed by tight­ened mort­gage insur­ance pol­icy guide­lines, which will ensure  sta­bil­ity in hous­ing and mort­gage mar­kets over the longer term, but act as a head­wind in the near-term. Higher home prices com­bined with new mort­gage rules resulted in a 15% rise in the mort­gage pay­ment required to buy the average-priced home com­pared to the begin­ning of the year — even though fixed mort­gage rates moved lower dur­ing that time. While some will sub­sti­tute into less expen­sive homes, the result will be a greater num­ber of buy­ers delay­ing their entry into the own­er­ship market.

By the sec­ond half of 2013, first-time buy­ing and exist­ing home sales should begin to improve. The slow­down to sales over the next few quar­ters will be accom­pa­nied by a higher level of new list­ings com­pared to the past few years, cre­at­ing much more bal­anced mar­ket con­di­tions. This will mod­er­ate sell­ing prices at a time that fol­lows a notice­able improve­ment in labour mar­ket con­di­tions. Employ­ment lev­els recov­ered quickly dur­ing the sec­ond and third quar­ters of 2012, with momen­tum that has brought the work­ing pop­u­la­tion in Toronto to a new high. The high qual­ity of posi­tions added has ele­vated income growth, which will improve afford­abil­ity in con­junc­tion with slower price growth and help to bring more buy­ers into the mar­ket. How­ever, the boost to sales will be restrained by muted employ­ment gains going for­ward and rel­a­tively low lev­els of migration.

Aver­age sell­ing prices in the GTA will see lit­tle growth over the next year but will con­tinue to be sup­ported by sup­ply lev­els that remain in check. Although exist­ing home­own­ers will be most active in the mar­ket, less first-time buy­ing demand  will impact their abil­ity to sell, which will help to slow growth in new list­ings and limit any down­ward adjust­ments to sell­ing prices. The same should be true for the condo mar­ket as sup­ply from newly reg­is­tered projects should see lit­tle, if any, growth next year. Com­ple­tions in 2012 and 2013 will be low by recent stan­dards (12-14K com­pared to almost 18K in 2011) and the share of units that become listed for sale after reg­is­tra­tion is not likely to rise. A grow­ing share of new units are being listed for rent – a trend that should con­tinue into next year as mar­ket con­di­tions for condo rentals remain stronger than condo own­er­ship. Most of the units that will be com­pleted were pre-purchased sev­eral years ago at lower prices, mean­ing car­ry­ing costs will largely be cov­ered by rent levels.

Local Econ­omy

A slower hous­ing mar­ket impacts job growth

Employ­ment lev­els in Toronto are expected to show mod­est gains next year, keep­ing the rate of unem­ploy­ment above eight per cent for the fifth con­sec­u­tive year. A gen­eral slow­down in the growth of con­sumer spend­ing — largely impacted by hous­ing mar­ket activ­ity — will lead to less hir­ing in the ser­vice sec­tor. Weaker job mar­ket con­di­tions in rela­tion to other parts of the coun­try and province will con­tinue to weigh on pop­u­la­tion growth in Toronto. After reach­ing a decade low of 56,000 in 2012, net migra­tion will rise to 58,500 (still below the 10-year aver­age of 65,000).

The Con­fer­ence Board of Canada’s Help Wanted Index for Toronto, which mea­sures growth in online adver­tised job post­ings and can be an effec­tive lead­ing indi­ca­tor for job growth, has started to trend lower in recent months. It appears service-sector busi­nesses are becom­ing hes­i­tant to hire as not only fewer homes trade hands, but a gen­eral slow­down in spend­ing emerges. The most recent read­ings on retail sales in Toronto were at their low­est in almost two years.

As the hous­ing mar­ket slows, it impacts spend­ing on a range of items asso­ci­ated with mov­ing into a new home. It can also have a broader affect on con­sump­tion as weaker price growth influ­ences home­owner per­cep­tions of wealth. So in addi­tion to slow­ing growth in employ­ment within the real estate, finan­cial and pro­fes­sional ser­vices sec­tors, slower hous­ing mar­ket activ­ity over the next sev­eral months will also lead to less hir­ing in the retail trade sec­tor, which is one of the largest sources of jobs for the Toronto econ­omy. By the same token, how­ever, improv­ing hous­ing mar­ket con­di­tions later in 2013 will
help brighten the prospects for the local labour mar­ket down the road.

Mort­gage Rate Outlook

Mort­gage rates to remain low

Although there is sig­nif­i­cant uncer­tainty, mort­gage rates are not expected to change in 2012. Slight increases are expected in 2013, but rates will remain low by his­tor­i­cal standards.

Accord­ing to CMHC’s base case sce­nario, for 2012, the one-year mort­gage rate is fore­casted to be within 2.75% to 3.50%. For 2013, the one-year posted mort­gage rate is expected to rise and be in the 3.00% to 4.00% range, while the five-year posted mort­gage rate is fore­casted to be within 5.00% to 5.75%, con­sis­tent with higher employ­ment and eco­nomic growth prospects in 2013.

Fore­cast Summary

MLS® Sales
2009: 89,255
2010: 88,214
2011: 91,760
2012: 89,000 (fore­cast)
Chng: –3.0%

MLS® New List­ings
2009: 136,096
2010: 154,167
2011: 148,048
2012: 157,500 (fore­cast)
Chng: +6.4%

MLS® Aver­age Price
2009: $396,154
2010: $432,264
2011: $466,352
2012: $500,000 (fore­cast)
Chng: +7.2%

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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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