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Condos in Toronto

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Toronto Real Estate

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Tag Archives: huffington post

Canada Housing Slump

Flaherty’s New Mortgage Rules A Scapegoat For A Much Bigger Problem

Daniel Tencer – Huffington Post

This summer, Prime Minister Stephen Harper and Finance Minister Jim Flaherty took a regulatory hammer to Canada’s housing markets, causing condo sales to plummet in Toronto, and sinking Vancouver house prices by jaw-dropping margins.

Comment: No, Vancouver only dropped 0.8% according to Teranet. And that had nothing to do with mortgage rules, they have been dropping by almost a third over the past couple of years. And all Toronto real estate sales have slowed, by an average of 14% lower in each of the 4 months following the new mortgage rules. Exactly in the middle of the 11% to 17% of buyers who would not qualify under the new rules, according to CAAMP. Amazing how much those numbers mesh and how exact the timing of the sales drop was.

Or so the finance and real estate industries would have you believe.

Comment: Or the actual data, the facts. They get in the way of so many great arguments, I know…

To hear Canada’s banks, industry groups and even the Conference Board tell it, the slowdown that descended on many Canadian housing markets over the summer is the fault of the strict new mortgage rules Flaherty put into place this past June.

Comment: Actually the new rules came into effect in July… you didn’t even get the timing right. And yet we went from 1.5% fewer sales in July to 12.5% fewer in August to 21% fewer in September. May had 11% more sales than in 2011. What changed from May to September – oh right, new mortgage rules that disqualify up to 17% of home buyers. All numbers for Toronto, I am not commenting on national figures.

“To the surprise of no one, following the introduction of the most recent rule changes, sales activity ratcheted down,” said Gregory Klump, chief economist at the Canadian Real Estate Association, in announcing a 15.1% year-on-year decline in home sales for September.

Comment: And they were down 8.9% in August, after being up up 3.3% in July. So changed almost 20% and went from rising sales volume to negative sales volume with new mortgage changes right in the middle. Volume up 3.3% in the month of changes, down 8.9% in the month following. And we want to say that the new mortgage rules were not the cause?

The Toronto Real Estate Board chimed in: “Some households have put their home purchase plans on hold in response to the higher cost of home ownership brought about by the recent changes to mortgage lending guidelines.”

Comment: Of course they did. If they can’t buy now, most people wait and save up a larger down payment. Watch, spring is going to be crazy as all those who put their plans on hold come out and start buying again.

The industry has good reason to maintain this narrative. For one, it makes it seem like falling sales volumes and prices are all “part of the plan,” nothing to worry about. (Not true.) And it also deflects uncomfortable questions about the role of real estate developers, agents, banks and industry groups in creating the inflated house prices Canada has seen in recent years.

Comment: No one ever said it was part of any plan, only that the new mortgage rules had an effect on sales volume. And the only people who create prices are the 200,000 buyers and sellers involved in the 100,000 Toronto transactions in 2011. Buyers are the ones willing to pay the prices, sellers are the ones demanding them. Developers are responsible for maybe 15% of the market, so they certainly cannot push prices too high. And when they sell 90% of a project, obviously the 100s of buyers do not think the prices are inflated. They are buying the units, they are paying the prices. So who is to blame there? Who is to blame when 14 trendy families get in an all out bidding fist fight for a house near the latest Toronto Life “hot neighbourhood” and bid it from $599,000 to $843,000? Is it my fault, as a real estate agent, or the fault of the buyers who HAD TO HAVE that house? Do you blame the seller, knowing they have a valuable property, squeezing every last penny out of it? You would too, you all know you would.

The media are happy to go along with it, because it offers a neat and simple explanation for why Canada’s decade-long housing boom is coming to a halt. The only problem is, this isn’t what’s happening.

Comment: What? The media paints real estate agents as the devil, slightly below lawyers and used car salesmen. We are all in in for the money (isn’t that why we all go to work?), we are pushing prices up, etc. How about the banks and their low rates? Oh wait, that comes indirectly from the Bank of Canada – do we blame them? Oh wait, low rates mean slow economy, a result of the Euro woes – do we blame Greece or Spain? Wait, how about bashing all those terrible immigrants, all those horrible people who want to escape their home countries to come to Canada – they all need a place to live. Shall we blame them for wanting to live in our wonderful country? Let’s put the blame where it is due!

First the background: Flaherty tightened the rules for mortgages for the fourth time in as many years this past June, reducing the maximum length of a mortgage insured by the CMHC to 25 years from 30, effectively making that the maximum amortization period for most Canadians who take out mortgages. He also reduced the maximum amount you can borrow against the value of your house to 80% from 85%. These changes, like the previous ones, were aimed at ensuring that Canada’s rising home prices weren’t due to irresponsible lending and borrowing.

The be sure, this will have a cooling effect on the housing market. There are prospective home buyers who just can’t afford the extra $140 per month, on average, that the shorter mortgage periods represent. Some homebuyers have just been priced out of the market. But can that alone explain the 70-per-cent drop in condo sales in Toronto, or the nine-per-cent drop in house prices in Vancouver?

Comment: Actually, if we take the average semi-detached in Toronto priced at $583,117 the change with 5% down on a 3.09% mortgage is about $294, $374 on the average detached house. It is certainly not $140. And for those stretched to buy, an extra $100 a week is not chump change. Not if you have kids and could be spending $1,500/month on daycare. And that mortgage on the detached house is $3,817. Add in utilities, property tax, car payments and oh… food… and it is a lot of money per month. That extra can mean a lot. And it obviously did mean a lot, as sales volume fell as soon as the new rules came into effect.

Highly unlikely. TD Bank forecast the impact of the mortgage rule changes on the housing market and found it would amount to a three% decrease in house prices — far less than what Vancouver, for one, has already seen. Not to mention, we’ve had three previous rounds of mortgage rule tightening since 2008, and none of them tipped the market downward. Clearly, something else is happening here.

Comment: No, the three previous rule changes did not really affect people. This one did. Previous changes affect foreign investors and re-financers mainly. The amortization changes from 40 years to 35 to 30 did not do too much.

The housing market’s fundamentals aren’t looking good. Standing in the way is that pesky basic law of economics — supply and demand. In some Canadian markets, those two things have become entirely detached from one another.

Comment: Except Toronto where we have 100,000 people moving here every year with only 25,000 new housing units being created. Even conservative estimates of 30,000 new households being created (I think it is closer to 50,000) still have us shy by at 5,000 housing units. Add to that divorcees needing two homes now, children moving out of the parental home, university grads, etc. and there is a steady and pressing demand here in Toronto. That is why 170+ condo developments can sell 80-90% so easily.

As the CEOs of both BMO and RBC have attested, Canada’s real estate market is simply overbuilt — particularly in Toronto, where condo construction has grown so thoroughly out of hand that there are now twice as many high-rises going up there as there are in New York City.

Comment: And yet they are all being bought, with 20-25% cash down. The demand is there, that is why there is the supply. There are no new rental buildings being built, condos are the new rental market. And our vacancy rate is 1.4% which is incredibly low – which means bidding wars on rentals now. I have heard of 45 people showing up for a mass showing of a simple one-bedroom loft. That, my friend, is what we call demand.

And more, much more, construction is being planned.

In Vancouver, where residential construction has been somewhat more restrained than in Toronto in recent years, the supply-demand disconnect is reflected in prices, which have flown so high that Vancouver has nearly as many houses listed for sale over $1 million as sell in the entire United States in a month. The city’s housing costs ranked as the second least affordable in the world, after Hong Kong, in a recent survey.

Comment: In the US I can buy some entire towns for less than $1 million. Have you been there recently? The land is worthless… Check out Buffalo or Detroit or Rochester or Gary, Indiana. Whole swaths of the country are abandoned and derelict because it is not even worth tearing the buildings down.

Across the country, house prices are now 35% higher relative to income than has been the long-term trend through history, Bank of Canada Governor Mark Carney noted earlier this year.

Comment: But the carrying costs are way lower. The average price in Toronto last month was $485,000. At today’s best rate of 2.89% with 20% down the mortgage is $2,191. Back in November 1981 when mortgage rates were 18.8% and house prices were only $90,203 the mortgage payment with 20% down would have been $1,470 – in 1981 dollars. Adjust for inflation (using the Bank of Canada inflation calculator) and that mortgage payment is actually be $3,508 in 2012 dollars. So your price-to-income ratio is moot. It is the actual monthly cost that matters and monthly mortgage costs are at a historical low. Just look at the recent RBC report.

Simply put, prices are too high. Canadians aren’t earning enough to justify these price levels. And closely linked to this is the elephant in the room: debt.

Comment: But that fact alone does not mean anything. Prices are high for a lot of things: houses, diamonds and Porsches. It does not mean they have to come down. Real estate prices are higher in New York, even higher in London and even higher in Tokyo. So what?

It has never been cheaper to take on debt in Canada. With a global financial crisis busting out all around, the Bank of Canada dropped its base interest rate to one% in January, 2009, and it has stayed at or below that level for nearly four years now.

Comment: Debt is a whole other issue, I give you that. It is the debt used to finance vacations and TVs, the kind of debt with nothing to show for it, that is dangerous. Housing debt is good debt, you have a large and tangible and valuable asset. A TV is worthless the day after you buy it and a vacation is just burning money. And that kind of reckless spending could certainly get us all in a lot of trouble.

Some economists argue this is an excessively expansionary policy that has overheated Canada’s housing market. (Plenty of others would say that, given the damage taking place in other parts of the economy, those low rates were necessary.)

All this has had an alarming effect on household balance sheets. StatsCan recently revised its measurement of household debt to make it more in line with international norms, and found the debt-to-income ratio hovering at a record 163.4%, higher than the level the U.S. had when its housing market began a years-long decline half a decade ago.

Comment: But we cannot compare the new numbers with the old numbers since we are using different methods of measurement. When we used the same measuring stick, our current debt was around the same level as the US. Not that it matters, their situation was so far different from ours that we might as well be comparing real estate on Mars.

That offers more of a clue to why Canada’s housing market has peaked and appears to be on a downward trajectory. It’s basic mathematics writ small in the finances of households across the country — there’s just no more breathing room to borrow more money.

Comment: Huh? Your made-up downward trend is because we have too much debt and can’t borrow more, even though you argue that money is too easy to borrow? What?

Add to that the phenomenon of foreign investors bailing on condos, at least in Toronto, and you have a pretty perfect storm for a housing slowdown.

Comment: WHAT? Foreign investors are not bailing on Toronto condos, there is NO evidence for that at all! That is pure speculation, I could call it a fabrication or worse. There is no data on foreign investors, none. About all we have is Tridel saying 5% of their buyers are not Canadian citizens and a mortgage group saying they have 4% foreign buyers on their books. Even if they all stop buying tomorrow, which they won’t, it does not impact 95% of the condo market. So take your fake stats and… never mind, better to be polite.

And, if anything, the adjustments to the mortgage rules were too little, too late.

What should happen in a market like this is a re-balancing — or a correction, if you prefer. Whatever the terminology, house prices have to come down relative to incomes. Then and only then can they return to healthy, stable levels of growth.

Comment: No, they don’t. What about NYC where rents average $3,400 a month? And real estate approaches $1,000/sf to start. Do New Yorkers make twice as much as Torontonians? Nope… If interest rates rise, then we might see prices flattening or dropping. A jump from 3% to 5% would push monthly costs up around $510 on the Toronto average $485,000 property. That would certainly hurt. Especially when added to the $300 extra the amortization drop caused. Add $800/month to the average property over the course of a few years and you can certainly see where some downward pressure would come from. Or, prices would simply stabilize while volume fell to more historic values in the 50-70,000 annual transactions range. Heck, for most of the  20 years before the 2000s we had around 30-60,000 transactions a year. And prices rose in all but 4 of those years, regardless of whether there were more or less sales than the year before. Prices have risen in 43 of the past 47 years (including 2012) even with mortgage rates pushing 20%, even when rates doubled from from 1978 to 1981 (10.67% to 21.46% in 48 months), prices still rose ($67,333 to $90,203). Prices rise, it is called inflation. Remember Grampa telling you about movies for a nickel? Try explaining that to Cineplex when they ask $19.95 to see Batman – I don’t think that logic will work on them. When I was a kid, chocolate bars were $0.43 with tax – now they are 2 for $2.22 + HST. Listen to old Bill Cosby standup, back when he talks about is $19,000 Rolls Royce – which he bought new. Housing prices may experience some minor ups and downs, but they will always rise over time.

Our finance minister agrees with this.

“It’s better to have some softening in the market rather than have sudden movement,” Flaherty said this summer, talking about the new mortgage rules.

But can “softening” be achieved at this point? Or has the housing market become so out of balance that there’s simply no way to avoid a hard landing? That, of course, is the big question these days.

Comment: Only amongst the media, the pundits and the wags. Anyone who looks at the available information knows what is going on. None of us can predict the future, but with enough data we can form an intelligent opinion. Or, we can shout bad news from the rooftops, a lot of people prefer that option.

Yet however you slice it, this is one phenomenon that you can’t pin on last-minute regulatory changes. So blame it on excessive debt. Blame it on over-enthusiastic realtors, or homebuyers who have finally drawn a line in the sand on house prices.

Comment: Yes, you can. I have proven it over and over throughout this piece.

Just don’t blame it on Harper and Flaherty. All they did was close the barn doors after the horses had fled, and help the chickens come home to roost.

Comment: It is not a matter of blame, it is a matter of cause and effect. We can all see the effect and the cause is no less obvious.

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.