Jay Bryan, Post­media News

While Canada’s high-flying hous­ing mar­ket con­tin­ues to sta­bi­lize, it’s increas­ingly evi­dent that one city – Toronto – is a glar­ing exception.

Com­ment: What about Cal­gary? Or Mon­treal? Or the bid­ding wars in Hal­i­fax and Winnipeg?

In sharp con­trast to price mod­er­a­tion in most cities and a sig­nif­i­cant drop in Van­cou­ver, where buy­ers are being priced out of the country’s costli­est mar­ket, Toronto buy­ers are on a spend­ing spree – one that looks as if it won’t end well.

New fig­ures from the Cana­dian Real Estate Asso­ci­a­tion show prices up by 10.5% in Toronto over the past 12 months, the only major city with a double-digit gain. In con­trast, Mon­treal gained a mod­est 3.7% and Van­cou­ver is down by 3.1%.

Com­ment: That was in March, but April is shap­ing up to be more of a 7% increase. Which means the price increase is slow­ing, which is good news. I think we can safely assume that March was an abber­a­tion. With Feb­ru­ary in the 8% range and now April around 7%, one month was just stronger than oth­ers… a sta­tis­ti­cal anomaly.

On aver­age, national home prices in March – influ­enced by the big Van­cou­ver mar­ket – edged down half a per­cent­age point from an excep­tion­ally high level this time last year.

This is in line with the expected trend for a rel­a­tively flat mar­ket this year, said Sonya Gulati at the TD Bank. TD pre­dicts that national prices will increase 2.1% for all of 2011 as sales flatten.

Com­ment: Right, sales are soft­en­ing, slow­ing down. That is to be expected, not some bizarre col­lapse of the market.

The bank cal­cu­lates the aver­age national price is prob­a­bly 10 to 15% above a sus­tain­able level, but doesn’t fore­see any big drop, Gulati said.

Com­ment: What is the “sus­tain­able level”? Why is that level sus­tain­able? If prices remain flat for 5 years, does that level then become more sus­tain­able? I love terms like that, they mean absolutely nothing!

Instead, it expects prices to drift down grad­u­ally once inter­est rates begin ris­ing, prob­a­bly in mid-2013. Its fore­cast is for a decline of 3.6% in 2013 and 4.3% in 2014.

Com­ment: I am not sure we will see a decline, that means we need to turn around 6.4% in the next 24 months… I think that is unlikely. Unless Van­cou­ver totally craters. I think we will see some­thing more in the 0–1% range, almost flat. But remem­ber, that is a national aver­age and has lit­tle bear­ing on any one par­tic­u­lar local mar­ket. Toronto will con­tinue to rise, though we will likely slow, through 8% or so this year, 6–7% next year and set­tle in the 5–6% range we have seen long-term over the past 15+ years.

But this benign national pic­ture con­ceals grow­ing stresses in the country’s biggest city.

Toronto, which accounts for about one-fifth of the whole hous­ing mar­ket in Canada, has defied pre­dic­tions, with sales remain­ing strong in spite of surg­ing prices.

Com­ment: Defied pre­dic­tions of the “experts” who do not work in the actual real estate indus­try. Most of us who do this for liv­ing were not all that sur­prised. I did not think March would hit 10.5% over last year, but 8% would not have sur­prised me in the least.

It’s not clear exactly why hous­ing is “so out of con­trol” in Toronto, says John Andrew, a real estate pro­fes­sor at Queen’s University.

Com­ment: Yes it is. Sup­ply and demand. There are 10 buy­ers for ever seller, espe­cially in houses. And with low low low inter­est rates, peo­ple can afford to pay more. Cheap money and low sup­ply, basic economics.

But one fac­tor, he notes, is the severe squeeze on the sup­ply of single-family homes within easy com­mut­ing dis­tance of down­town, which is help­ing to super­charge their prices. And those who can’t pay up have flooded into the less-costly con­do­minium mar­ket, caus­ing a boom that Andrew and other ana­lysts now find worrisome.

Com­ment: Could not have said it bet­ter myself. Except that I am not worried.

Craig Alexan­der, chief econ­o­mist at the TD Bank, is so fas­ci­nated by the frenzy of con­do­minium con­struc­tion that he counts the num­ber of projects as he dri­ves through Toronto.

“I would feel a lot bet­ter if I were count­ing half as many cranes,” he says.

Com­ment: But they are being bought by first time buy­ers and investors plan­ning to rent them out. Never mind the empty nesters. There are 100–110,000 peo­ple mov­ing to Toronto every year, who need some­where to live. We have no rental mar­ket any more, no one is build­ing apart­ment build­ings. It is all con­dos. If it was not sus­tain­able, it would not be hap­pen­ing. And one day it will slow down. But right now, a crane does not go up until 70–80% of units are sold, with 20–25% down. That is a big invest­ment from a lot of peo­ple, a big vote of con­fi­dence in the project. And each one of those buy­ers has to show a mort­gage approval to make their pur­chase firm.

That’s under­stand­able. Andrew cal­cu­lates that Toronto now has 143 high­rise condo projects under con­struc­tion, more than in any other North Amer­i­can city, with more on the draw­ing boards.

“Is there enough demand for all those con­dos? It’s hard to imag­ine,” he says.

Com­ment: But there is, the proof is in the cranes. If there are an aver­age of 300 units per build­ing and 70% need to sell to get fund­ing and thus start con­struc­tion, that means over 30,000 con­dos have been bought. With 20–25% down on the aver­age sale price of $360,000, that is an invest­ment of around $2.4–2.5 bil­lion from the buy­ers alone. Never mind the very stingy banks that fund the rest of the con­struc­tion costs. That is a huge foun­da­tion sup­port­ing the entire Toronto condo indus­try. And that is why it is solid and safe mov­ing forward.

Worse, many pur­chasers appear to be for­eign investors look­ing for rental prop­er­ties as a haven from uncer­tainty in finan­cial markets.

Com­ment: Why is that worse?

“When it’s an invest­ment prop­erty, peo­ple are pretty quick to dump it when things get ugly,” Andrew points out.

Com­ment: But they have been buy­ing and rent­ing units for 10 years now – when is it going to get ugly? I have done the math in enough posts, I am not doing it again. But a $300,000 condo with 35% (required for non-citizen new condo buy­ers) down means costs that can be cov­ered by $1,600 in rent, the going rate. So they put down $100,000 and 10 years later that same unit is worth $400,000 and ten­ants have paid down the mort­gage to $200,000. So they made $200,000 in 10 years… not bad at all. And if they have 5 of them, they just made $1 mil­lion. They have no rea­son to dump them, they want to hold them and have the ten­ants pay them off. When the mort­gage is 0 in 15–20 years, their $100,000 invest­ment is now a $500,000 condo. Now it is just pos­i­tive cash flow every month. Again, if they have 5 of them, they are pulling in $8–10,000 a month. The investor is mak­ing $100,000 a year – and assets worth $2–2.5 mil­lion. Why would they sell?

That could presage a hard land­ing once the pool of ten­ants thins out and ris­ing mort­gage inter­est rates squeeze invest­ment returns.

Com­ment: With 100–110,000 peo­ple mov­ing to Toronto every year, never mind those mov­ing out of the fam­ily home, there is no short­age of renters – or first time buyers.

Dou­glas Porter, deputy chief econ­o­mist at BMO Cap­i­tal Mar­kets, is sim­i­larly wor­ried. While the national hous­ing mar­ket looks increas­ingly sta­ble, “I do think Toronto could have a fairly seri­ous cor­rec­tion in the next cou­ple of years,” he says.

Com­ment: Could. Or could not.

In the rest of Canada, how­ever, con­di­tions look far health­ier. With sales and price gains flat­ten­ing out, it’s likely that the growth rate of Cana­dian mort­gage debt will soon dip sig­nif­i­cantly, Porter believes.

Com­ment: Except that higher mort­gage rates will neu­tral­ize any price drops.

Since mort­gages make up the biggest chunk of the wor­ri­somely heavy debt load car­ried by Cana­di­ans, this could ease the pres­sure for fed­eral offi­cials to hike inter­est rates early or squeeze the hous­ing mar­kets with tougher bor­row­ing rules.

Com­ment: But hik­ing the prime rate will not affect the fixed rates.

And behind the scenes, there’s an encour­ag­ing demo­graphic trend that’s likely to keep hous­ing demand from falling off a cliff, believes Ste­fane Mar­ion, chief econ­o­mist at the National Bank. He points out that the group aged 20 to 44, the prime source of new hous­ing demand, is grow­ing faster in Canada than any other large indus­tri­al­ized nation.

Com­ment: Which might have some­thing to do with all the con­dos being built… they do tend to be pop­u­lar with the younger folks and first time buyers.

Over the next five years, this cohort will grow by 3.7% in Canada, 42% faster than in the U.S., with immi­gra­tion and the matur­ing of baby boomers’ chil­dren pro­vid­ing a new bump in hous­ing demand. Even Que­bec, the slowest-growing of Canada’s big provinces, will show a gain of 2.3%.

By con­trast, most other big indus­tri­al­ized nations are suf­fer­ing losses in this age cohort as their pop­u­la­tions stag­nate. The hardest-hit, Italy, Japan, Ger­many and Spain, will see this group shrink by seven% or more.

Canada’s demo­graphic boost won’t immu­nize us against a severe shock, such as a new reces­sion, but short of that, it could keep the hous­ing mar­ket health­ier than some expect.

Com­ment: Come on, we never even had a reces­sion. We did not have 2 con­sec­u­tive quar­ters with neg­a­tive growth. We had one. And our econ­omy is boom­ing, quite the oppo­site of reces­sion. Even the US, which has sucked for years, is grow­ing. There is no reces­sion com­ing – and it is wrong and mis­lead­ing to sug­gest the possibility.

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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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