Toronto Loft Conversions

Toronto Loft Conversions

I know classic brick and beam lofts! From warehouses to factories to churches, Laurin will help you find your perfect new loft.

Modern Toronto Lofts

Modern Toronto Lofts

Not just converted lofts, I can help you find the latest cool and modern space. There are tons of new urban spaces across the city.

Unique Toronto Homes

Unique Toronto Homes

More than just lofts, I can also help you find that perfect house. From the latest architectural marvel to a piece of our Victorian past, the best and most creative spaces abound.

Condos in Toronto

Condos in Toronto

I started off selling mainly condos, helping first time buyers get a foothold in the Toronto real estate market. Now working with investors and helping empty nesters find that perfect luxury suite.

Toronto Real Estate

Toronto Real Estate

For all of your Toronto real estate needs, contact Laurin. I am dedicated to helping you find that perfect and unique new home to call your own.


Why the doomsayers are wrong about Canada’s housing market

Tara Perkins – The Globe and Mail

Canada’s housing market isn’t as frothy as some pessimists warn.

A Globe and Mail analysis has found that a key measure, used by economists, underestimates the degree to which rents have been rising in the market. That inflates what is known as the price-to-rent ratio, feeding into fears that the market is overheated.

A report to be released Wednesday by housing economist Will Dunning reaches a similar conclusion, going further and arguing that price growth likely has been overestimated.

Economists believe house prices are too high: Rock-bottom interest rates have spurred consumers to take on more mortgage debt than they otherwise might.

Real Estate Doomsayers
It’s a legitimate cause for concern, and is being closely watched by Finance Minister Jim Flaherty and the Bank of Canada. Both have expressed worries about some segments of the market in particular, including Toronto condos, that deserve special attention. House prices could very well decline, and the market will be tested when rates rise.

But the most bearish diagnoses of the market have been relying on flawed uses of data.

Comment: Which I have been saying for years.

A report by New York-based economists for Deutsche Bank declared in December that Canadian home prices were overvalued by 60% – the most in the world – with Belgium next at 56%. “Canada is in trouble,” it warned.

Comment: And how is that US-based economists working for a German bank are in any way qualified to talk about Canadian real estate?

It looked at a variety of indicators to assess Canada, including the debt-to-income ratio and record condo construction. But the conclusion that home prices topped the global list for overvaluation was based on two measures, price-to-rent and price-to-income. The report said that the price-to-rent ratio was 88% above its historical average, and the price-to-income ratio 32% above its historical average. The economists averaged those two numbers, and got 60.

Comment: But prices and rents are 2 completely different things. How does the monthly rent of a 1-bedroom in a 1960s apartment building have anything to do with the purchase price of a detached house? And as I always say about price-to-income, it is useless. People buy based on monthly costs. The only reasonable way to compare is monthly income to monthly mortgage cost. Which is how the banks decide on whether to lend.

They gathered rent data from the Organization for Economic Co-operation and Development, which in turn got the numbers from Statistics Canada, which compiles them for use in the consumer price index, a measure of inflation.

The data estimate price changes for a “constant quality” of rental units (comparing apples-to-apples units over time, or what economists call a “matched sample”). Statistics Canada says it is not meant to be a measure of change in prevailing market rents, and might not capture the shift away from apartments toward rented condos in cities such as Toronto.

The average rent for a two-bedroom apartment in the Toronto area last fall was $1,213 while the average rent for a two-bedroom condo was $1,752, according to Canada Mortgage and Housing Corp.

Comment: Try $2,400 or more for a 2-bedroom condo downtown. Heck, 1-bedroom condos rent for almost $1,800 now. Their numbers are flawed to begin with.

“Like the CPI in general, the rent index provides a measure of aggregate price change holding the quality of products constant (i.e., ‘pure price change’),” a Statistics Canada information officer said by e-mail. “Inferences concerning the change in the average prevailing market rents is not something that the rent index is designed to provide.”

Erwin Diewart, an economics professor at the University of British Columbia, says the federal agency should be taking depreciation into account since it is tracking a constant quality of product. (As the units age, their quality deteriorates and that should be factored in, or rent inflation is understated).

Even ignoring condos, the Statistics Canada rental index underestimates the market rise in rents, said economist Benjamin Tal of Canadian Imperial Bank of Commerce.

Mr. Tal calculated the price-to-rent ratio using apartment rents from CMHC. “Rent has risen twice as fast based on CMHC data than on CPI data,” he said. “The CPI numbers definitely understate the increase in rent … These numbers are widely used.”

The CMHC numbers are difficult to work with. The housing agency releases separate measures for apartment and condo rents. Mr. Tal used apartments, compiling data from various Canadian cities and then weighting them by population to arrive at what he believes is a reasonable national measure of rents.

Deutsche Bank’s analysis also relied on recent price data from the Teranet/National Bank house price index, and older data from the department of finance. Teranet seeks to go beyond averages by using a “matched” sample that tries to ensure a constant quality is being compared, only including homes that have sold twice.

It tries to factor out fluctuations that would occur in average prices from changes in the types and locations of homes that are selling. But Mr. Dunning argues that the price index is still exposed to bias because the actual quality of properties might have changed, for instance through renovations.

Comment: Which proves, yet again, that almost all of the numbers are flawed or skewed in some way. That is why I work with the simplest ones. Average price in a given month as compared to the same month in a previous year. Monthly costs, using average prices and common mortgage rates. Keep it general and the patterns emerge. Look too hard for numbers and you wind up cherry picking data and finding numbers that support your pre-conceived theories.

“The result might be that renovations of existing housing are causing the Teranet/National bank index to over-estimate the rate of house price growth in Canada,” writes Mr. Dunning, who has his own housing research business and is chief economist of the Canadian Association of Accredited Mortgage Professionals, which represents mortgage brokers.

Comment: Of course. If you track the same house over every sale in its history, it will constantly rise. But at some point, someone will renovate, and that next sale will jump higher than previous ones. Then again, the next sale will not be as high a difference, skewing the data the other way. You simply cannot come up with a completely accurate way to track real estate sales.

“The price-to-rent ratio in Canada is indeed at an historic high,” but not nearly as far above its historic average as the OECD data would suggest, he concludes.

Comment: But that is because prices have been able to rise faster than monthly costs, due to low mortgage rates. If the average condo in Toronto (all sizes) was $372,628 in February and the average rent in Q4 2013 was $1,882.50 (1-bed @ $1,600 & 2-bed @ $2,165). Best 5-year mortgage rate, not variable, these days is 3.09%. With 10% down, the average condo costs $1,600 for the mortgage, plus condo fees and taxes. Call it $2,150 or so. So owning is only about $270 a month more than renting, on average. So let’s take a own-to-rent ratio of 1.14 as our new measure of affordability. The closer that gets to 1, the cheaper it is to own as compared to rent. If you can find a 2-bedroom condo for that price, then it is cheaper to own than rent.

He also argues that measures of housing affordability have been distorted because economists are using posted mortgage rates (which have been about 5% recently) as opposed to market rates (which for five-year fixed-rate mortgages have been in the neighbourhood of 3.5%), making housing look less affordable.

Comment: Actually they are more like 3.09-3.19% these days. With variable rates as low as 2.4%. So using posted 4.99% rates is just purposefully skewing the math.

Mr. Dunning is at the bullish end of the spectrum. He goes on to suggest that house prices are “justified based on record low levels of interest rates,” and might even be under-valued.

Comment: There is simply no “over” value or “under” value. There is only market value. And that is what someone is willing to pay for a property. With 87,111 resales last year, never mind another 25,000 or so new sales, there were a good 400,000 people involved in buying and selling last year. Those people set the prices, they created the market value for each property. It is not over or under anything, it simply is. The value of my house is what I paid for it. Or, were I to sell it, what someone would pay for it. That is simply its value. It does not matter what you think, if you think it is too high or too low. Because once it sells, my neighbour will base his asking price on my sale price. And once that one sells, the next family will base their asking price on that sale. And so on and so on and so on. We, the people, set the values. Period.

Consumers need to be wary in the face of interest rates that are likely to rise and prices that, by any measure, have still shown remarkable growth. But the notion that Canada’s housing market isn’t quite as precarious as had been thought is becoming the dominant view.

Comment: FINALLY! I have been saying it is not precarious for years now. But did any of you listen to me? Well… hopefully a couple of you did.

“Housing crash fears are overdone,” a Bank of America Merrill Lynch report said Tuesday, estimating that rising interest rates in 2016 could cause house prices to gradually decline 5 to 10% over a couple of years.

Comment: Who is dumb enough to claim to know what mortgage rates will be in 2 years? If they can guarantee it, I will be happy to invest my life savings on it!

Contact Laurin Jeffrey for more information – 416-388-1960

Laurin Jeffrey is a Toronto real estate agent with Century 21 Regal Realty.
He did not write these articles, he just reproduces them here for people who
are interested in Toronto real estate. He does not work for any builders.