Tamsin McMahon – The Globe and Mail

One fifth of Toronto-area homeowners could be struggling to afford their mortgage payments if interest rates rise just two percentage points, a new report from Toronto-Dominion Bank warns.

Comment: Depends what their current rate is and what the amortization would be. If they are currently paying 2.99% and their amortization would be 15 years, they could push their amortization to 20 or 25 years to offset the 4.99% mortgage rate. If they had $400,000 of mortgage to renew, 15 years at 2.99% would be $2,756.86/month whereas $400,000 at 4.99% for 20 years would be $2,626.34/month. Problem solved.

The rally in home prices in the Greater Toronto Area has been among the strongest in the world. Average prices have doubled since 2002. Middle-class homeowners have watched as their modest bungalows turned into highly coveted, million-dollar properties. Nearly a quarter of new jobs in Toronto created over the past decade have been tied, directly and indirectly, to the housing boom.

Yet the housing rally has also come at a steep cost, with rising home prices masking serious and growing economic problems in the region, including a sharp drop in affordability and a lack of new investment in other types of housing beyond high-rise condos stuffed with tiny one-bedroom units, the bank’s economists warn.

Comment: But affordability has NOT really dropped. RBC says the opposite – housing affordability predominantly improved across Canada in the third quarter of 2014. And the math shows affordability is not dropping the way it is portrayed. In July of 1984, mortgage rates peaked at 14.96%, and the average housing price was $102,318. With 10% down the monthly mortgage cost would have been $1,172 in 1984 dollars, which is $2,376.45 today. July 2014 saw housing prices average $550,700 with mortgage rates around 2.99% – which gives a monthly payment of $2,399. Had you found a lower rate, like a variable for 2.30%, for instance, your monthly payment would be $2,223. So the math bears out the fact that affordability has in fact NOT really gone down over the past 30 years.

Nearly one quarter of GTA residents spend roughly one third of their income on shelter costs. Many of those are low-income renters, however about 16% of homeowners are spending 30% or more of their incomes just servicing their mortgages, a figure that could rise to 20% if the Bank of Canada hikes its overnight lending rate by two percentage points. The average Toronto-area household carries $409,000 in mortgage and consumer debt, among the highest in Canada, TD Economics says. At the same time, first-time buyers are increasingly struggling to get a foothold in the market. The average age of a first-time home buyer in the region hit a new high of 37 last year.

Comment: That is a false assumption. Those with mortgages currently are not affected by a rate hike – they already have a mortgage. They will be affected when it comes time to renew, only if rates are still high. The Bank of Canada just dropped the overnight rate by 25 basis points, so variable rate mortgages just went down. They are 2.25% right now. And fixed rate mortgages could follow. Since everyone lost their minds about the first 2.99% mortgage a couple of years ago, we are now seeing 2.79% regularly and 2.69% at some boutique lenders. Now, even if rates rose, as I showed above, adding a few years to the amortization eliminates the effects of any rise in rates. IF there is ever a rise in rates of 2%. Lastly, general lending guidelines give 32% as a limit for housing costs as a portion of gross income. That is the CMHC (i.e. the government) lending limit. So a person paying 30% of their income toward housing costs is actually permitted under current lending guidelines. And they are forgetting to point out that it means that 84% of home owners are NOT at their limit. And that only 4% of home owners would be adversely affected by a 2% rise in interest rates. Without changing amortization periods. That is the good news of this, that is what they should be talking about.

While some of the trends toward skyrocketing land values and rising household debt can be chalked up to Toronto’s evolution into a world-class city that has attracted an influx of new residents and driven up land prices, many of the problems come down to government policy, the bank says.

Comment: Government policy does not dictate that Toronto is popular. The government did not make people want to live downtown instead of in the suburbs. There are a lot of things happening all at once, from gentrifying neighbourhoods to housing prices, commutes and transit to changing demographics, housing preferences and marrying ages, families with children, mortgage rates, etc. There are so many things behind the past 15 years of change that to simply blame the government is naive and disingenuous.

Densification policies that have encouraged developers to build along existing transit corridors have pushed up land prices in those neighbourhoods. Other policies, such as development charges that rise steeply on two-and three-bedroom units and city requirements that buildings have a set amount of parking – even in neighbourhoods where residents prefer to walk and take transit rather than drive – have driven up costs, encouraging developers to build larger projects filled with small, one-bedroom apartments. Investors’ appetites for low-cost rental properties have helped to shrink the size of the average condo unit, which has dropped from more than 900 square feet a decade ago to 800 square feet today, even as the average cost has nearly doubled from $300 a square foot to $600.

Comment: But builders want to build along transit lines, it makes their projects more popular. That has nothing to do with municipal policies. Development charges are a rather small percentage of a condo’s cost that it doesn’t matter. Even if they doubled them, it only adds around $10,000 to the average condo. Parking is becoming less of an issue, as we now have buildings with NO PARKING, so that is not a blame issue. Investors don’t buy enough new condos to have as much of an effect on the overall market as people give them credit for. Units have shrunk to keep costs down, simple as that. Here is a government effect – the $400,000 cap for land transfer tax and HST rebates has certainly encouraged builders to keep a lot of units under that price to make them more affordable for buyers. And as PSF costs have risen, they have had to shave square feet off to keep the total price in the right range. But rising land costs occur because land gets more scarce – there just aren’t as many parking lots to build on any more. Rising material and labour costs also push up unit costs. That is why buildings are getting larger as well. The developers need more units on a given piece of land to make the project profitable. There are no more 20-30 storey condos being built, downtown they are all 50-70 stories and up.

“Some of the policies have been contributing to rising land costs and that does suggest that [government policy] is driving up prices even beyond what would be reflected by rapid growth in the economy,” said the report’s co-author, TD deputy chief economist Derek Burleton, in an interview. “Our concerns relating to some of these issues aren’t going to be resolved by just a moderate cool down in the home ownership market.”

Comment: None of it is going to change. Eventually, there will be no more empty lots downtown. Eventually all the buildable land from Oakville to Bowmanville will have houses on it. One day there will more subways and better transit, increasing the value of housing nearby. More and more people will come to the GTA – and as it grows and improves, even more will come. There isn’t anything the government can do to change that. They could eliminate the land transfer tax, but that would only increase buying. Build more transit? That would make land around the new lines more appealing and thus more expensive. Eliminate the greenbelt? That would just allow for more building closer to the city, pushing up the price of those new houses. What can the government do to prevent housing costs from rising?

In particular, the trend of developers flocking to downtown Toronto to build massive high-rise condominiums stuffed with tiny one-bedroom units could cause problems as the housing market cools. With nearly a fifth of renters saying their homes are too small for their needs, double the national average, and half of households planning to move within five years to find larger, more family-friendly housing, Mr. Burleton questions whether the trend toward small one-bedroom units will be a sustainable one.

Comment: But the housing market isn’t going to cool. Everyone is missing that point. Even if rates rise, it will only shift some of the buying to lower priced housing stock – like the small condos everyone is afraid of. Or people will sell and rent – catering to the investors everyone is afraid of. Never mind the massive backlog of buyers that cannot buy because supply is too low. If supply increases, there are enough buyers to keep up. If prices fall, more buyers buy the houses they once could not afford. Or compete for them and push the prices up. Not only is there no mechanism to pull prices down, there are any number of situations that will prevent it from happening or reverse it if it starts.

“To the extent that we don’t have the type of housing stock that meets the needs of residents in the future that’s going to not only negatively impact on the economic performance of the region, but the broader quality of life,” he said.

Comment: We don’t have the housing stock to meet the needs of residents right now! This is why people are starting to raise children in condos, they are going to be the new family home as people are priced out of the freehold house market. And it is doing the exact opposite. It is putting more people downtown, encouraging the building of offices, schools, libraries, parks and more. Putting families in condos is going to change the city – for the better.

The glut of small one-bedroom units has also helped widen the gulf between condos and other types of housing, such as townhouses and detached homes. As the housing market cools, it will disproportionately affect such units, making it even harder for young buyers to afford to trade their one-bedroom condos for a larger home when they start having families.

Comment: But the tide is turning as more people want 2-bedroom condos. We are now seeing another change, and can watch it happen. We saw people’s preferences change from suburbs to downtown, now that shift is almost complete. Now, condos will change from first time buyers, singles and investors to couples and families. You cannot force builders to build larger condos, it won’t work. But if the consumer starts to demand it, as I think they are beginning to do, then you will see more larger units being built for the people who buy them, not for the legislators.

The slowdown in the housing market may come with some hidden benefits, however, if governments choose to use them. New tax credits could help encourage developers to offload a glut of unsold one-bedroom condos to housing non-profits, helping to open up a supply of affordable housing in the city core. Governments could also use tax incentives to encourage non-profits to create social housing real estate investment trusts, the bank said.

Comment: There is no slowdown, stop saying it. There is no glut of unsold units. That is misleading and deceitful, close to outright lying. Condos are 70-80% sold by the time construction starts. They are 80-90% sold by the time construction ends. And when they are registered and people take title, they are 98.5% sold on average. There is no glut of unsold units. But the government needs to partner with builders, like what they did with Daniels in Regent Park, to incorporate affordable housing into new condo projects. Do it with every new building and the affordable housing problem is solved very quickly.

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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.
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