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Unique Toronto Homes

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Condos in Toronto

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Toronto Real Estate

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Tag Archives: first time home buyer

Will nervous first-time buyers make this spring housing market bloom?

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 18th 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 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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