Tara Perkins – The Globe and Mail

With the spring sell­ing sea­son approach­ing, all eyes are on a cru­cial seg­ment of the real estate mar­ket – the first-time home buyer.

It’s a group that includes peo­ple such as Tyler Padley and his wife Jamie McGov­ern, who have been rent­ing in the west end of Toronto and are now look­ing to buy their first house and start a fam­ily. Like many prospec­tive home­own­ers, they are strug­gling to find what they want at a price they can afford – even though they’ve saved up a siz­able down pay­ment. With the aver­age home price hov­er­ing at around $510,000, they’re real­iz­ing they may have to set­tle for a place that’s smaller or fur­ther from the city’s core than they wanted – assum­ing they take the plunge at all.

Whether this cou­ple, or oth­ers like them, choose to wade into the mar­ket will deter­mine whether Canada’s hous­ing mar­ket begins to recu­per­ate or con­tin­ues to weaken this spring. New entrants are a crit­i­cal part of what makes the mar­ket tick: For every first-time buyer, there’s an owner who’s look­ing to sell and trade up, and for every upgrade, there’s a retiree look­ing to cash out. The “trickle-up” effect can make the dif­fer­ence between hot and cold in the market.

This year, the big ques­tion is: Will the first-timers come back? Many were dri­ven away last sum­mer by Ottawa’s new rules on home loans, which banned mort­gage insur­ers from cov­er­ing any mort­gage with an amor­ti­za­tion period of longer than 25 years. It was an effort to cool the mar­ket amid fears that house prices and con­sumer debt lev­els were grow­ing at alarm­ing rates, and it worked: Prop­erty sales have been sink­ing ever since.

Com­ment: And there was a hit on the low $1 mil­lion mar­ket as well. Sud­denly if you had $150,000 you could not buy a $1 mil­lion house because you could not get mort­gage insur­ance. Amaz­ing that a cou­ple mak­ing $200,000/year with $150,000 cash to put down would not be able to buy a house for $1,000,000. Cou­ple that with the dent in the bot­tom of the mar­ket and you had a prob­lem. Sorry, have a problem.

Data from seven large cities sug­gest that last month’s sales nation­ally are about 12% lower than a year ago, BMO Nes­bitt Burns econ­o­mist Dou­glas Porter said in a research note this week. “It still seems that the much greater risk is that sales weaken fur­ther, not that they sur­prise to the high side,” he wrote.

Com­ment: No, the mort­gage changes imme­di­ately changed things. The mar­ket can only rise from here, as peo­ple save more money. Things will sta­bi­lize, but sales will stay in the 80–85,000/year range, rather than push­ing 100,000. This is totally in line with the 10-year aver­age, so it is not a big deal. Wel­come to the new nor­mal, a lit­tle less crazy than before.

Prices remain stub­bornly high in most urban mar­kets. Fitch, a rat­ings agency, said this week that prices nation­ally are about 20% too high. Such head­lines add to the fear among first-time buy­ers that, even if they can afford to get into the mar­ket, now might not be the time.

Com­ment: They are nobody and one opin­ion car­ries no weight against 100,000 that are dif­fer­ent. Ignore it and carry on.

It’s tough to gauge exactly how many first timers are stay­ing away. “There’s no real hard sta­tis­tics on the num­ber of first-time buy­ers that are in the mar­ket,” says Shaun Hilde­brand, senior mar­ket ana­lyst in Ontario at Canada Mort­gage and Hous­ing Corp. But one of the ways the hous­ing agency attempts to track it in Toronto is to look at the share of sales that are below $400,000. That was 45% in 2012, down from 52% in 2011, “so that’s one of the indi­ca­tors that we use to sug­gest that first-time buy­ing has slowed down,” Mr. Hilde­brand says.

Com­ment: That is just dumb. Most invest­ment pur­chases are con­dos in the $250–350,000 range – and investors are cer­tainly not first time buy­ers. There are only 300 detached houses in the 416 for less than $500k – I would sug­gest that $500k is the new starter home price. That is what my first time buy­ers are spend­ing, gen­er­ally in the $450-600k range. They are using a com­pletely arbi­trary value that has no basis in reality.

Another is the rental mar­ket: Canada’s most pop­u­lous city saw more con­dos rented out over the Mul­ti­ple List­ing Ser­vice than sold over MLS dur­ing 2012, he notes. And the trickle-up effect is under way in that city.

Com­ment: This is where many of the under-$400k sales come from, investors buy­ing con­dos to rent them out.

“The first seg­ment of the mar­ket to begin to slow was the lower end of the mar­ket, where first-time buy­ers tend to be a bit more active,” he says. “It then started to slow in the $400,000-to-$600,000 price range, the next step up. That range has kind of flat­tened out in terms of sales, whereas it was one of the strongest areas of the mar­ket in recent years.”

Com­ment: That is the range I would be con­cerned with, the $400–600,000 range. That is the meat of the Toronto real estate market.

But “even though we’ve seen first-time buy­ing reduced, it doesn’t mean that first-time buy­ers have been inac­tive,” Mr. Hilde­brand says. Yes, many poten­tial buy­ers are instead rent­ing. But some are choos­ing to read­just their expec­ta­tions and live in cheaper loca­tions or smaller houses. For instance, more afford­able areas in and around Toronto, such as Scar­bor­ough and Ajax, are attract­ing a larger share of buyers.

Com­ment: The 905 did see a bump in sales. For $500,000 you can get a 3,500sf 4-bedroom palace in Ajax. Or, a run down semi with 1 wash­room and a damp base­ment – no park­ing – in Leslieville.

And with inter­est rates remain­ing low for a long period of time, it’s quite pos­si­ble the hous­ing mar­ket could regain strength once again. Experts such as CIBC World Mar­kets econ­o­mist Ben­jamin Tal are argu­ing that the spring sea­son is likely to be stronger than expected.

“Mar­ket activ­ity over the past two or three weeks seems to have been pick­ing up quite nicely,” says Andrew Charles, CEO of Canada Guar­anty Mort­gage Insur­ance Co. “It hasn’t shown up in the Feb­ru­ary num­bers, but I think you’re going to see it in the March numbers.”

Com­ment: I sure hope so! I have been pre­dict­ing it and I hate to be wrong. Prob­a­bly on the 18^th we will have mid-March num­bers… I am actu­ally anx­ious about the data, which never hap­pens. This is a turn­ing point, up or down from here.

Large mar­ket­ing cam­paigns and incen­tives on the part of mort­gage lenders are likely to play a sig­nif­i­cant role in dri­ving the mar­ket this spring. “PEOPLE BUY PAYMENTS, THEY DON’T BUY HOUSE PRICES,” says Toronto-based mort­gage plan­ner Calum Ross. “There is a huge psy­cho­log­i­cal impact of five-year mort­gage rates drop­ping below 3%.” Mr. Ross adds that he’s now see­ing “mas­sive” amounts of mar­ket­ing by mort­gage lenders.

Mr. Charles at Canada Guar­anty says he is now see­ing more appli­ca­tions for mort­gage insur­ance from buy­ers with a down pay­ment of less than 20%, sug­gest­ing the start of an uptick among first-time buyers.

David Resnick, who deals with finan­cial insti­tu­tions for Google Canada, said the num­ber of searches for the word “mort­gage” jumped by 50% after Bank of Mon­treal cut the adver­tised price of its five-year fixed-rate mort­gage from 3.09% to 2.99%. “That’s huge,” he said. “And home insur­ance searches spiked more than 80% in the 24 hours fol­low­ing the announce­ment, sug­gest­ing that peo­ple are look­ing at actual purchases.”

Phil Soper, CEO of real estate agency Royal LeP­age, said the slow­down is a good thing, because the mar­ket was too hot, but he thinks that the changes that Mr. Fla­herty made in July went too far. “It pushed things for young peo­ple, for first-time buy­ers, to a place it didn’t need to be,” he said.

Now, he says, the impact of the change has largely been felt. “Young peo­ple have had eight months to either save up a larger down pay­ment or look far­ther afield for a home,” he says. “As long as the cost of mort­gage financ­ing remains very low, we’re going to attract finan­cially sta­ble young peo­ple, first-time buy­ers, into the hous­ing mar­ket. The desire to own one’s home hasn’t changed one bit.”

Com­ment: We really have to wait until 12 months have passed since the rule changes. That will really tell the tale. In the end, things have slowed down – which is good. They are unlikely to drop furter. Sales will sta­bi­lize, prices will slow to increases in the 1–3% range. Mort­gage rates will stay in the 3% range. Nor­mal, basi­cally, less crazy.

TORONTO: EXPENSIVE, WITH EVEN RENTAL PRICES MOVING UP

Prospec­tive Toronto first-time buy­ers Mr. Padley and Ms. McGov­ern are com­ing to terms with the fact that the house they want prob­a­bly isn’t the house they can afford.

Com­ment: No, buy­ers will never come to grips with what they want ver­sus what they can afford.

“A semi-detached would be ideal, but for our price range it’s going to have to be a town­home and it’s going to have to be out­side of the area that we want to live in,” says Mr. Padley, 31.

Mr. Padley works in soft­ware devel­op­ment and his wife in pen­sion admin­is­tra­tion, and the cou­ple has man­aged to save up a 20% down pay­ment. They want to spend no more than $350,000 to $400,000, but their bank preap­proved them for a mort­gage of about $900,000. “It’s ridiculous.”

Com­ment: No, it is sim­ply what you can afford if you spent every penny on hous­ing. They must make around $150,000 com­bined with some $100,000 to put down. They are exactly what the banks want. If they spent $900,000 they would be on the hook for a pay­ment of around $3,800 a month – 30% of their gross monthly income if I am right about their pay. Com­pletely and totally within all pru­dent guide­lines for mort­gage lend­ing. But I under­stand want­ing to keep pay­ments at $1,500 as they would be with a $400,000 pur­chase. Trust me, I spent a lot less than the bank would have given me. And I am quite happy not eat­ing Kraft Din­ner every night!

The cou­ple cur­rently expect that they will remain renters for much or all of the year. They looked into rent­ing a larger place, one big enough to start a fam­ily in, but balked at the costs of those as well.

Com­ment: Well there isn’t much you can do if you are just cheap. Hous­ing costs are high, sim­ple as that. Rent or buy, both are expen­sive. I am show­ing lit­tle shoe­box con­dos in the 550sf range for $1,650 a month. If you get into a 2-bedroom, you really are bet­ter off buying.

Such are the chal­lenges of many young prospec­tive first-time buy­ers in the country’s most pop­u­lated city. Home prices in the Greater Toronto Area (GTA) rose by 6% in just the first six months of 2012, reduc­ing afford­abil­ity, said Shaun Hilde­brand, senior mar­ket ana­lyst in Ontario at Canada Mort­gage and Hous­ing Corp. They then nudged down about 2% dur­ing the fall, and have since essen­tially stabilized.

Com­ment: Prices always rise in the spring, then drop in the sum­mer, rise again in fall and drop again in win­ter. Hap­pens. Every. Year.

Given the high prices, many peo­ple are choos­ing to rent. Rental vacan­cies are at one of the low­est lev­els of the past decade and rent lev­els are rising.

Com­ment: Vacancy rates are now under 1%. Crazy… bid­ding wars for shoe­box condo rentals…

“What’s been com­mon is that an owner will list their prop­erty for both sale and rent at the same time, and then what­ever is most appeal­ing, they’ll go with that,” Mr. Hilde­brand says.

Sales over the Mul­ti­ple List­ing Ser­vice in Feb­ru­ary fell 15% in the GTA. Sales of con­dos in the down­town region cov­ered by the 416 area code dropped 20%, with prices falling 4.7% from a year ago to $352,614 on aver­age. Sales of detached homes in that same down­town area fell 17%, while the aver­age price held roughly flat, ris­ing 0.1% to $823,329.

Com­ment: Sure, but the over­all aver­age price rose 2%, which you fail to mention.

But the Toronto Real Estate Board is still fore­cast­ing that the aver­age price for all types of homes in the GTA will rise from its cur­rent $510,580 to $515,000 dur­ing the year. That’s a phe­nom­e­non that’s helped in part, the home-building indus­try says, by the restric­tion of the sup­ply of detached homes cre­ated by reg­u­la­tions and land con­straints includ­ing the greenbelt.

Com­ment: That is less than 1%, I think that is low. I think we will see some­thing closer to 2%, to $520,000. Not that that is a very big dif­fer­ence, I know.

And a num­ber of observers spec­u­late that the mar­ket is already begin­ning to bounce back from the softening.

“We’ve seen sales lev­els slow down since the sum­mer, but since Jan­u­ary, Feb­ru­ary, we’ve actu­ally seen the monthly trend begin to sta­bi­lize,” Mr. Hilde­brand says. “When you look at things on a monthly basis, you start to see a bit of momen­tum actu­ally being added back into the market.”

Condo devel­op­ers are lur­ing buy­ers into build­ings that are about to undergo con­struc­tion with incen­tives such as lower down pay­ment require­ments, free ini­tial main­te­nance fees, or even guar­an­tee­ing that they’ll find a ten­ant to rent the unit – or else pay the rental costs – for the first two years.

Despite that, Oliver Baumeis­ter von Bret­ten, a bro­ker with Re/Max who spe­cial­izes in Toronto con­dos, has yet to see a sig­nif­i­cant resur­gence among first-time buy­ers in the lower end of the mar­ket. “They’re com­ing back, but very cau­tiously,” he says. “I had a guy ready to buy in Queen West and then he said, ‘with the condo bub­ble com­ing I think I’ve got to rent for another year,’ ” adding that this seg­ment of the mar­ket appears to be more highly influ­enced by com­ments from pol­icy mak­ers and economists.

Com­ment: Condo bub­ble? Seri­ously… And once the year passes, he will say the same thing. Prices will be no lower a year from now. And he will keep doing that, putting off buy­ing because of his per­ceived “bub­ble”. Five years from now, the $300,000 condo he had his eye on will now be $330,000 and mort­gage rates will have risen to 4.09%. He will not be able to buy that condo any­more, as it will cost too much. That is with mort­gage rates ris­ing only 0.33% per year and prices ris­ing only 2% per year. Hardly a bub­ble… but cer­tainly the enemy of waiting.

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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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