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Tag Archives: bond market

CMHC Housing Market Outlook – Toronto

Highlights

* Total starts will ease in 2014 with activity shifting to semis and rows from singles and apartments.
* Gradually rising mortgage rates will keep existing home sales growth modest.
* Rising home values will keep more people in rental but more condo rentals will keep supply in balance with demand.
* After lagging in 2013, income growth will match broadly based employment growth.

New Ownership Market

New home starts in 2013 will be down from the unusually high level of last year. Household formation in Toronto is slowing from an average annual rate of 37,000 in the inter-censal period between 2006 and 2011, and at 34,000, total housing starts in 2013 will roughly match household formation.

Comment: Which puts to rest the argument about over building. If housing creation matches household formation, then we are building exactly the right number of new homes.

The decline in starts will occur across all housing types. Most of the decline will occur among apartment starts.
Sales of new condos slowed in the second half of 2012 and continued to ease in 2013. The slowing meant that not only were there fewer condos to build, but also that it took longer for the projects to move from sales launch to the beginning of construction. A relatively large number of projects have sold a sufficiently high percentage of units to permit construction to begin, setting the potential for a high number of starts in the fourth quarter. However, condo starts will continue to be restrained by the high number already under construction. Looking to 2014, condo starts will ease somewhat from the 2013 level. The relatively high number of projects that began selling during 2011 but still have to lay foundations will limit the decline. Completions will exceed starts through most of the year implying the number of units under construction will decline as the year progresses, freeing up resources to allow new projects to start.

Although most units continue to be sold by the time projects reach completion, slower sales have led to a rise in the number of unsold units at all phases of development, according to Urbanation. As a result, asking prices for new units have flattened and prices at project launch have declined from a year ago. Given the price adjustment, sales are expected to pick up in the fourth quarter and into 2014.

Comment: It is a yo-yo, isn’t it? If there are too many projects, then sales fall, bringing prices with them. Then, builders pull back and there are fewer new projects. Demand increases as the supply dwindles and prices push back up again. And the resale condo market rides along and rises with the swell. That is why things will never collapse. As soon as supply pulls back, demand rises and prices rise. New and resale both, that is why we have the market we have.

After bottoming out at the turn of the year, sales of semi-detached and row homes have been trending up for most of 2013, according to Realnet. Starts of both will be up in the fourth quarter and further growth is expected in 2014. Despite the growth, neither will match the levels achieved in 2012. The stronger growth in demand for these dwelling types reflects some shift away from singles, where rising prices are curtailing demand. Price growth for new singles
slowed in the third quarter, coinciding with an acceleration of prices for singles in the existing home market. This will encourage some more buyers to consider a new home, however, starts will still be moving down from current levels.

Comment: New houses of any sort are always going to decline. There just isn’t the land for them.

The average price of a new single-detached home will be up nearly 9% in 2013, but the rate of increase has been slowing from the second quarter. Although land constraints will continue to put upward pressure on price, the strong price increase this year will likely limit demand growth in 2014 and both the median and average price will be
increasing at much slower rates. The median price will continue to lag the average price in 2013, indicating some
very expensive homes continue to pull up the average price. In 2014, the median will rise somewhat faster than
the average, with demand for homes in the highest price ranges slowing the most.

Existing Home Market

Existing home sales strengthened considerably in the third quarter of 2013 as an increase in mortgage rates convinced many potential homebuyers that it was the right time to purchase. Although the urgency subsequently diminished, the expectation that mortgage rates will be rising will be a factor supporting sales in the fourth quarter and into 2014. Sales will ease in the second half of 2014 as many potential buyers will have completed their purchases and an  expected modest increase in mortgage rate will dampen sales. Despite the easing in the second half, annual MLS sales
in 2014 will be up modestly from 2013, as stronger income growth will support demand.

Comment: The urgency has not really declined, with sales up 19-21% pretty much every month from July to October. If we have a mild winter, watch the numbers stay high. Bad weather will bring things arbitrarily down. But things do tend to slow through the winter, that is just seasonal. And we will have to see what happens with mortgage rates. Personally, I do not expect the bond market to continue on the same tear it has been on. If it slows, then mortgage rates will steady or drop a touch. But yes, back to normal. Sales in 2014 will be higher than 2013, which was higher than 2012. Sorry doomsday club…

New listings decreased in the third quarter, but the stronger price increase will draw out more listings in the fourth. Listings will continue to grow next year, particularly listings for condos. The number of condo completions could surpass the previous record of nearly 18,000 set in 2011. When completed condominiums are registered, owners have an opportunity to move in, rent out the unit or sell. In recent quarters, fewer have been selling and more have been renting through MLS which will limit the increase in listings. Nevertheless, condos will remain the coolest part of the existing home market with prices remaining nearly flat for most of the year.

Comment: Which puts to rest the whole flipper idea of new condo buyers. Most do not buy to sell at completion, as the numbers bear out. Most buy to rent out or to live in. And note, the highest number of completions ever was 18,000 – a far cry from some crazy predictions of 35,000 units “flooding” the market. Again, the negative views always spin things to an extreme that is simply not supported by any actual data.

Listings for other dwelling types will tend to move in tandem with sales. The sales-to-new-listings ratio will ease slightly and the market will remain in balance throughout 2014. In this environment, price growth will be slow over the course of 2014. Despite slowing price growth, the income required to purchase a home at the average MLS price will continue to rise faster than average incomes. First-time homebuyers were active in early 2013 and likely a part of the sales surge in the third quarter. However, making a purchase will become a greater challenge for them during 2014. A number of sub-markets, particularly in Durham Region, are more accessible for first-time buyers, but they are also among the tightest resale markets in the GTA.

Comment: It depends on the market segment. I think you may get a buyers’ market for condos, but a sellers’ market for detached houses. It is so hard to average it out, with so many different neighbourhoods and different housing types in each of them.

Rental Market

The vacancy rate for purpose-built rental units will finish 2013 unchanged from last year. The average rent for a purpose-built two-bedroom apartment will increase to $1,215.

The strong growth in employment in 2013 will keep overall rental demand relatively strong. In general, the vacancy rate declines along with a declining unemployment rate. Rising employment encourages some renters to become home-owners, which lessens rental demand, but it encourages even more people to enter the rental market. Modest wage growth and relatively stronger growth in part-time employment compared to full-time employment will also support rental demand. While demand is growing, the supply of purpose-built rental units is not. In 2013, only about 600 new units were added to the purpose-built rental universe. Investor-owned condominium apartments have become the major source of new rental accommodation. Rents for units rented through the MLS system have been increasing faster than inflation, indicating that this market remains relatively tight. With the market for rented condos tight, rents in the purpose-built rental market will increase by close to the 2.5% allowed by the provincial guideline.

In 2014, immigration will increase and more renters will stay in their current apartments rather than moving into homeownership, leading to more rental demand. With only 500 rental starts expected in 2013 and a similar amount in 2014, growth in the supply of purpose-built rental accommodation will continue to be minimal. However, the number of
investor-owned condos entering the market will increase in 2014. The vacancy rate will continue to remain low — 1.8% in the purpose-built market — but rent increases will likely be smaller than in 2013. In the purpose-built market, with more renters staying in their current apartments and a low provincial guideline increase, the average two-bedroom rent will increase marginally.

Comment: And this is why investors are buying condos.

Economic Trends

Throughout 2013, the economy in Toronto has seen a steady decrease in unemployment as a result of strong employment growth. Although the 4% employment growth of the first three quarters of 2013 will not be sustained for the full year and through 2014, the average unemployment rate will fall to 7.7% 2014, the lowest unemployment rate since the economic downturn in 2008. Employment gains in 2013 were concentrated in construction and business services. Business services will continue to grow in 2014 but residential construction employment may ease in 2014 as the number of homes under construction diminishes. However, non-residential construction will continue to be strong, while strengthening recovery in the US will benefit employment in manufacturing and trade. Finance, insurance and real estate will perform well, but employment growth in areas related to government such as health, education and public administration will lag other sectors. Part-time employment outpaced full-time employment in 2013. In 2014, the Toronto labour market is expected to see a shift to full time positions in favour of part time ones as employers seek to capitalize on the economy’s positive momentum. This will mean that the modest growth in weekly earnings of 2013 will strengthen through 2014.

Comment: Note to all the doomsayers, unemployment is down down down. Yet another reason for real estate to stay strong.

Migration accounts for close to two-thirds of population growth and household formation in Toronto. In the last few years, the number of people moving to Toronto from other provinces roughly matched the number moving to other provinces, but in the year ending June 2013, the balance shifted in favour of western Canada. At the same time, net
gains from international migration diminished. The strengthening US recovery, notwithstanding pauses as debt and budgetary issues are sorted out, will be of relatively greater benefit to Ontario than western Canada as Ontario employment is more strongly correlated to cyclical movements in the US economy. As Ontario becomes more attractive to job-seekers, both international and interprovincial migration will return to their usual patterns in Toronto.

Mortgage Rate Outlook

Mortgage rates to see modest and gradual increases late in the forecast horizon but will remain low by historical standards.

Comment: And another reason for real estate to stay strong. Mortgage rates may rise a touch, but they will remain low.

Following the June meeting of the Federal Open Market Committee (FOMC) of the U.S. Federal Reserve Board, interest rates rose modestly and then remained steady in both the U.S. and Canada. According to the Federal Reserve Bank of New York, this reflected a change in the risk assessment of investors and not a change in the expected future path of interest rates.

CMHC’s interest rate forecast mirrors this view. Hence, mortgage rates have been slightly revised up in the third quarter of 2013 but, thereafter, follow the same interest rate path as before. Nevertheless, this interest rate outlook will continue to be supportive of housing market activity over the forecast horizon, as mortgage rates will remain low by historical standards.

Mortgage rates are expected to increase gradually and steadily over the forecast horizon. By the end of 2014, mortgage rates are forecast to be somewhat higher than in the third quarter of 2013. According to CMHC’s base case scenario for 2013, the average for the one-year posted mortgage rate is forecast to be within 3.00% to 3.50%, while the average for the five-year posted mortgage rate is anticipated to be within 5.00% to 5.50%. For 2014, the average for the one-year posted mortgage rate is expected to rise and be in the 3.25% to 3.75% range, while the average for the five-year posted mortgage rate is forecast to be within 5.25% to 6.00%.

Comment: Yet brokers can find lower-than-posted rates, which tend to be 2% lower than bank rates. For instance, TD has a posted 5-year rate of 5.34% (with a special offer of 3.79%) while Mortgage Alliance offers rates as low as 3.45%. So take the forecasts with a grain of salt. Even 5 years ago, the best rates were only 5.39% (November 2008, RateHub.ca). Rates have been below 4% since July of 2010 and are unlikely to rise much beyond that in the foreseeable future.

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

Laurin Jeffrey is a Toronto Realtor 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.

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