Good morning everyone and hope you are having a great start to 2017.
This communication has a lot of interesting news and views of the year just past and the year ahead in terms of real estate.
The real estate market has not taken a break and 2017 is poised to be another frenzied year.
December 2016 – Average Price by Type in Toronto 416 Area
Detached…………………… – $1,252,069
Sem-Detached…………… – $862,000
Townhome……………….. – $628,000
Condo Apartment………. -$443,563
Market Watch Record Sales in 2016 – See full Report Attached
January 5, 2017 — Toronto Real Estate Board President Larry Cerqua announced that 2016 was a second consecutive record year for home sales. Greater Toronto Area REALTORS® reported 113,133 home sales through TREB’s MLS® System – up by 11.8 per cent compared to 2015. The calendar year 2016 result included 5,338 sales in December – an annual increase of 8.6 per cent.
The strongest annual rate of sales growth in 2016 was experienced for condominium apartments followed by detached homes.
“A relatively strong regional economy, low unemployment and very low borrowing costs kept the demand for ownership housing strong in the GTA, as the region’s population continued to grow in 2016,” said Mr. Cerqua.
The annual rate of growth for the MLS® Home Price Index (HPI) in the TREB market area accelerated throughout 2016 – from 10.7 per cent in January 2016 to 21 per cent in December 2016. The overall average selling price for calendar year 2016 was $729,922 – up 17.3 per cent compared to 2015. The pace of the annual rate of growth for the average selling price also picked up throughout the year, including a climb of 20 per cent in December.
“Price growth accelerated throughout 2016 as the supply of listings remained very constrained. Active listings at the end of December were at their lowest point in a decade-and-a-half. Total new listings for 2016 were down by almost four per cent. In 2016, we saw policy changes and policy debates pointed at the demand side of the market. If we want to see a sustained moderation in the pace of price growth, what we really need is more policy focus on issues impacting the lack of homes available for sale,” said Jason Mercer, TREB’s Director of Market Analysis.
Canadian real estate market outlook 2017
Even a 20% drop in house prices can’t eradicate built-up equity, but current buyers and sellers are in for some interesting times
by Romana King
January 6th, 2017
For homeowners the great, big, unanswered question is whether or not the Canadian real estate market will finally crash in 2017.
Turns out, all reports and analysis lean towards a flattening out of property prices in most Canadian markets, with some areas of the country experiencing a decline in both sales activity and prices, as other areas continue to experience price gains, albeit at a much slower pace than we’ve seen in recent years.
Keep in mind, housing markets are not as prone to bubbles, and to burst bubbles, when compared to other financial markets. This is, in part, due to the large transaction and carrying costs associated with owning real property. However, over the last few decades, the combination of very low interest rates and the regulations that allow easier access to mortgage financing has prompted more borrowers to enter the real estate market and this has put increased pressure on demand. For a crash to occur, there would need to a sudden drop in demand, such as a fairly quick rise in interest rates or significant a tightening of credit standards.
Expect sales activity in 2017 to decline, for the most part
According to the Canadian Real Estate Association (CREA), national sales are forecast to drop in 2017 by 3.3%, compared to the previous year. In its annual year-end report, CREA states: “Transactions in B.C. and Ontario are anticipated to remain strong but fall short of this year’s record levels due to deteriorating affordability, an ongoing shortage of affordably priced listings for single family homes and tightened mortgage regulations.”
As a result, CREA predicts:
→ Home sales to decline in B.C. by 12.2%
→ Home sales to decline in Ontario by 2.7%
→ Home sales to decline in Saskatchewan by 1.2%
→ Home sales to decline in Nova Scotia by 2.1%
→ Home sales to decline in PEI by 2.2%
→ Home sales to decline in Newfoundland & Labrador by 1.4%
However, not all areas will see price declines:
→ Home sales will rise in Alberta by 3.5%
→ Home sales will rise in Quebec by 1.2%
→ Home sales will rise in Manitoba by 0.8%
→ Home sales will rise in New Brunswick by 1.6%
A decline in sales activity should prompt a decline in prices as less activity is usually a result of less demand and less demand usually translates into lower house prices.
For instance, the reduction in home sales in PEI is due, primarily, to an unusually strong 2016 selling season, that “is not expected to reoccur in 2017,” CREA explains in its year-end report. Still, the province can still expect to reap the rewards of a weakened Canadian loonie.
But not all markets should expect price drops in 2017. According to CREA predicitions, home sales will rise in Alberta and Quebec primarily because both markets experienced a slowdown in 2016.
Still, a decline in sales activity will prompt a modest decline in home prices in a few provinces, including: B.C., Saskatchewan, Nova Scotia, PEI and Newfoundland & Labrador.
As a result, CREA predicts that the national average price will actually decline in 2017 by 2.85%, to $475,900.
Average prices in 2017: Toronto and Golden Horseshoe
Despite a predicted decline in sales activity for 2017, most of Ontario’s housing markets won’t experience price declines this year. This is particularly true for homes located in the Greater Toronto Area and in the larger Ontario region known as the Golden Horseshoe. This is due, primarily, to a pronounced lack of supply of housing stock, particularly for low-density, single-family detached homes.
This lack of supply means that seller’s are sitting pretty in a very heated seller’s market, which is measured by the months of inventory (ROI) ratio. The basic rule of thumb is that an ROI that’s below four months (120 days) is solidly in seller’s territory; by the end of 2016, the GTA had 36 days of inventory.
This obvious lack of inventory certainly had an impact on housing prices. Between November 2015 and November 2016, the average selling price of a GTA home rose to $776,684—up 22.7% on a year-over-year basis.
As a result, anyone in the market to sell a home in the GTA or in the surrounding areas, including Niagara, Hamilton, Halton, Peel, York and Durham, can continue to expect strong demand. This should translate into higher sale prices and fewer days on the market.
Average prices in 2017: British Columbia
Probably the largest regional drop in both sales activity and prices will be in British Columbia. Given how 2016 played out, with significant drops in both the number of transactions and sale prices, CREA anticipates double-digit drop in transactions (12.2%) in 2017, which translates into an average price drop of 7.8% in 2017.
“This largely reflects an anticipated decline in single family home sales activity at the higher end of the market—particularly in the Lower Mainland,” explains CREA’s Chief Economist, Gregory Klump.
Vancouver Royal LePage Realtor, Adil Dinani confirms that the second half of 2016 saw relatively consistent declines in Lower Mainland activity and prices. “Sales in this region dropped by almost 40%, year-over-year,” explains Dinani. “But the real takeaway is that inventory levels are very, very low.” According to Dinani new listings were down by 58% from November to December 2016, and down 35% from November 2015 to November 2016.
“We’ll see more of the same in 2017, unless there’s an influx of supply that comes on the market.”
Average prices in 2017: Rest of Canada
Meanwhile, an ample supply of listings relative to demand is anticipated to keep price gains in check in other provinces, although sales have begun to draw down inventories in provinces where supply had been elevated in recent years.
The biggest factor in the predicted 2017 slowdown are the tighter mortgage regulations that were introduced in 2016. “Tightened regulations are expected to reduce the number of first-time buyers who qualify for mortgage financing, particularly in pricier markets, where there is a severe shortage of lower-priced listings.”
Another factor is that mortgage rates are expected to rise in 2017. While the increase is expected to be slow to moderate, this increase—due to increased capital cost requirements for lenders and the possibility of inflationary economic policy under President Donald Trump—will also reduce the number of home buyers in the Canadian marketplace.
Watching the bubble burst isn’t a sure bet
Yet, nobody can say with absolute certainty that there is a bubble and that 2017 is the year it will burst. Just consider the real estate slowdown in Calgary. We all expected massive price drops when oil prices plummeted, but, in the end, Calgary real estate didn’t suffer all that much. Yes, there were price drops, but most neighbourhoods saw price reductions that were less than 5%. And now, many economists are predicting that the worst is behind this oil-driven city. So nothing is certain when it comes to Canada’s real estate markets.
Those expecting a housing price bubble burst are probably only anticipating price collapses in Toronto and Vancouver. Why? Because if you were to strip out Toronto and Vancouver from the Canadian real estate market, the average price of a home would be closer to $361,000 (compared to the national average, as of November 2016, of $489,590). This isn’t too bad, considering the median household income was just under $79,000, as of 2014, according to StatsCan data. This puts house prices at 4.6 times family incomes—a little higher than the average over the last 40 years, which is closer to 3.5 times income. (And these days, homeowners have the benefit of historically low 2% to 3% mortgage rates.)
Impact on net worth of Canada’s homeowner
For those already in the marketplace, the real threat is whether or not changing conditions will result in price declines and whether or not that will erode overall household net worth.
A report in December 2016 by DBRS, a Canadian-based ratings agency, suggested that rising home values pushed Canadians to a record level of net worth, relative to their disposable income. But, here’s the interesting part: DBRS believes that even if the Canadian housing market did crash, current homeowners could easily weather the storm.
According to DBRS, the average Canadian household had a net worth of $726,000—including 74% of home equity, thanks to a decade of steady property appreciation (DBRS numbers were based on data up to Sept. 30, 2016).
So, even if the Canadian housing market were to crash by 20% to 40%, Canadian household equity ratios would remain strong—decreasing to a low of 56.7% and a high of 67.5%. In relative terms, that’s like owning a home valued at $900,000 one day, but still paying off a $234,000 mortgage, only to see the home’s value drop to $744,300 (while your mortgage debt remains the same). Obviously, nobody likes to lose money, but even this worst case scenario, doesn’t mean the complete destruction of your nest egg.
Check your mortgage terms
Still, as a homeowner, you need to make sure you’re well positioned to weather the uncertainty of the next few years. If you have stable household income, 2017 will probably let you ride out continued low variable-mortgage rates. However, if you’re in the market to renew, consider locking in. As of mid-December the spread between five-year fixed and five-year variable rates was negligible, at best. For example, VanCity was offering a five-year variable at 2.59%, while its five-year fixed was 10 basis higher at 2.69%. That’s a small premium to pay for peace of mind.
Still, with mortgage rates poised to rise, this might be the year to tackle your biggest debt. For tips on how to pay off your mortgage faster, read Crush your mortgage (although, there are some valid arguments against paying down your mortgage sooner whiles rates are still low).
Impact on home buyers
The biggest factor in the predicted 2017 slowdown are the tighter mortgage regulations that were introduced in 2016. “Tightened regulations are expected to reduce the number of first-time buyers who qualify for mortgage financing, particularly in pricier markets, where there is a severe shortage of lower-priced listings,” explained Gregory Klump, chief economist for the Canadian Real Estate Association (CREA).
Another possible factor is the potential for mortgage rates to rise in 2017. While the increase is expected to be slow to moderate, this increase—due to increased capital cost requirements for lenders and the possibility of inflationary economic policy under President Donald Trump—will also reduce the number of home buyers in the Canadian marketplace. This combined with a nation-wide rebalancing of housing markets means that buyers will have more opportunity in most markets across Canada. Even in Ontario and B.C., where CREA has predicted that national sales will remain strong, sales will fall short of the record levels set in 2015 and 2016, due to deteriorating affordability, an ongoing shortage of single family home listings and tightened mortgage regulations.
Spring-time buying rush
Still, no one should be surprised if there’s a spike in sales come the spring. “Historically, the spring market is the busiest house buying season and prices can spike as much as 10%,” explained Laurin Jeffrey, real estate agent with Century 21 Regal Realty.
(Source: CREA, BetterDwelling.com)
While a spring rush, combined with continued low inventory, could push prices up there are other factors that may remove demand pressures. For instance, qualifying for a mortgage based on higher, posted rates may knock a portion of buyers out of the market, or shift them to areas or housing types that aren’t in such high demand. According to Genworth Canada, the largest private mortgage insurance provider, approximately one-third of first-time homebuyers would no longer qualify for their current homes if they were forced to re-qualify under these new mortgage rules.
Then there’s the proposed changes on precisely who covers the losses of a mortgage default. Since the mid-1960s, when mortgage insurance was first introduced, any defaulted mortgage was covered by the insurance provider, such as Genworth Canada or the Canadian Mortgage and Housing Corporation. Problem is, over the years, lenders haven’t always used mortgage loan insurance to cover high loan-t0-value mortgages (mortgages on homes with less than 20% down from the buyer). Lenders have also purchased this insurance to cover mortgages on homes worth more than $1-million (by law you’re required to put down more than 20% on homes valued at $1-million or more) or for mortgages where the buyer’s equity is greater than 20%. The lenders do this in order to remove the danger of a defaulted loan; in other words, they pass on the risk of these mortgages to the insurance provider, who is ultimately funded by the government (who gets much of their money from us, the taxpayers). Now, there’s a 20+ page proposal to place at least a portion of the default risk and responsibility back on to the lenders’ shoulders. If this proposal goes through, it would prompt even tighter mortgage qualifications by lenders, which would further erode the number of qualified buyers in the housing market.
As a result, those looking to get a mortgage can expect more due diligence from your lender, which could take more time and require you to submit more paperwork.
Impact on home sellers
All these mortgage regulation changes could mean a lot less demand in the housing market. In most markets in Canada, sellers may have to adjust to a slower market where multiple offers are no longer the norm. That means expecting your home to stay on the market for a little longer as buyers take time to shop around.
“When the market was hot, buyers were competing against everyone: investors, speculators, and foreign buyers,” says Dinani. “But what we’re seeing now is that the end-user buyer doesn’t have that same competition. The investors and non-resident buyers have pulled out—waiting for more certainty in the market—and that’s meant fewer buyers in the market and fewer sales.”
Still, those selling a single family detached, semi-detached or row home in the Greater Toronto, Vancouver, Victoria or Montreal areas, don’t need to worry. Even if prices have or do drop 10% or 15%, many of these homeowners are sitting on substantial equity,” says Dinani. “When you communicate the reality of this, even with a market drop, you realize the impact of the substantial run-up that’s taken place over the last few years.”
Still, home sellers may need to adjust their pricing expectations, says Dinani. “The spring selling market will really set the tone for the next year,” he says, “and a continued decline in transactions will mean sellers will have to either settle for a lower sale price or pull out of the market.”
Top tips for real estate investors in 2017
Despite all the advice about not buying a residential property for income purposes, many still do. Rental markets are still tight in the hottest real estate markets, with vacancy rates still hovering in the mid-1% range. As such, buying property to rent out makes sense, as long as you have a large enough down payment to ensure that rent covers expenses.
For the best value, consider multi-unit rental properties—like duplexes, triplexes, and beyond. This type of rental stock is still far more favourable than single-unit rentals, such as condos, as you can spread out the risk of rental loss across multiple units. But it also means paying a premium on this type of income property. Not only do you compete against other investors, but also against families and first-time buyers who are trying to find a way into hot property markets.
Also, consider markets that are located near university or hospital hubs but away from larger city centres. Quite often, these smaller college towns offer steady tenant stock, but not much long-term price appreciation. Areas in Ontario include Guelph, Hamilton (although, this city may have peaked already), and Kingston are still good bets, while Abbotsford, Port Moody and Langley, in B.C. are good options. Just remember, as an investor, cash-flow must come first.
As in the past, anyone thinking of buying an investment property should first start with a financial plan and a budget. Then work the numbers. If you can’t withstand a loss—say the roof collapses or you need to hire a lawyer to legally evict a tenant—then you shouldn’t be buying an investment property.
Why the real estate market is slowing down in 2017
While real estate might be a product of local markets, probably the single biggest reason for the potential nation-wide real estate slowdown in 2017 are macroprudential measures introduced in late 2015 and throughout 2016 (and possibly stretching into this year, should banks be required to cover a portion of mortgage default losses).
What are macroprudential measures?
Macroprudential is a term used to describe financial policies that are aimed at minimizing or eliminating risks to the financial system as a whole — think of it like a blanket, nation-wide policy that’s used to eliminate or reduce systemic risk within our country’s economy.
In Canada, these macroprudential measures included the increase to minimum down payments required for home purchases over $500,000 and the requirement of all high loan-to-value borrowers (and those who chose amortizations over 25 years) to qualify based on posted mortgage rates, rather than discounted mortgage rates.
In the U.S. these measures included stricter underwriting standards for mortgages (implemented after the 2007/2008 credit crunch and housing crash), and increased margin and capital requirements for banks and lenders.
Impact of these measures
The impact of these measures, both in Canada and in the U.S., has been significant.
According to analysis by Genworth Canada, the largest private mortgage insurance provider, over a third of home buyers would not have qualified for a mortgage on their current home had they applied after the new mortgage rules were introduced in 2016. Additional analysis suggests that another 8 per cent to 10 per cent of current homeowners would be unable to absorb even a $200 increase in monthly expenses — the equivalent of a 0.75 per cent increase above currently low rates.
Then there’s the impact tighter mortgage regulations had on lending institutions in 2016. Higher capital requirements — this is the money banks and lenders must keep within their coffers in order to cover worst-case scenario losses — and the threat of having to shoulder the responsibility of defaulted loans has meant small, incremental increases in both fixed and variable mortgage rates. Not enough to establish rising rates, but just enough to knock out those buyers struggling the most to get into the real estate market.
And now rates are poised to rise in 2017. (Rate stays the same as of today’s announcement. See article below)
Don’t discount Trumpflation
But attempts to keep our nation’s economy strong and stable aren’t the only factors that will impact Canada’s varied real estate markets in 2017. This year must also contend with the very real possibility of inflationary economic policy under the newly elected President Donald Trump.
Trump campaigned on a plan to stimulate the slowly-but-steadily-growing U.S. economy by spending big on infrastructure. This deficit-style spending still worries global financial markets (albeit with a lot less impact than when his presidency was first announced). Still any movement towards massive infrastructure spending and tax cuts will lead to inflationary pressures on the U.S. economy and this could mean additional rate increases by Federal Reserve Chair, Janet Yellen.
While Federal Finance Minister Bill Morneau and the Bank of Canada have stood their ground — committing to the 2 per cent inflation target, as opposed to following the U.S. Federal Reserve’s lead — it’s only a matter of time before the Canadian economy is forced to respond to U.S. economic pressures.
As a result, we could see additional increases in both fixed and variable rate mortgages in 2017 — and any rate hike will impact demand side of the real estate equation, and translate into further market slowdowns and eventual price cuts.
Then there are the foreign buyers
Finally, there’s the elephant in the room: Foreign buyers.
While the impact of foreign buyers is not uniform across the country, the hottest markets — Vancouver, Victoria, Toronto and Montreal — certainly benefitted from non-resident foreign money.
One of the biggest influencers, particularly on the west coast, has been the influx of Chinese money. In an effort to capture their new-found wealth, many Chinese home buyers sought out foreign jurisdictions to park their coin. The result was increased demand on residential and commercial real estate in sought after cities, such as Sydney, Australia and Vancouver, Canada.
A few national and provincial governments, including Canada, responded to this influx of foreign cash. In October 2016, the federal Liberals opted to close a loophole that helped foreign buyers, as well as real estate speculators. Starting in 2017, the sale of all real property must be reported on each person’s annual income tax returns. (This means any property sold in 2016 must be reported on the T1 General tax form for 2016, which is due in April 2017.) While the rules can get complex, the general gist is that anyone who has purchased and sold a property must report it; if the property doesn’t qualify for the principal residence exemption, the seller must pay capital gains tax. Now, in order to qualify for the principal residence tax exemption, the homeowner or the spouse of the homeowner must “ordinarily reside” in the property. Now, no one is foolish enough to assume that this will eliminate all the foreign buyers from the Canadian market, but those who want to avoid paying tax on the sale of the property that they do not live in, may end up looking elsewhere to park their money.
Then there was the B.C. foreign buyers’ tax — a 15 per cent surtax introduced in August 2016. “This tax only exacerbated a market slowdown that had just begun after six months of robust activity,” explains Adil Dinani, real estate agent with Royal LePage.
Yet, while it can’t be denied that B.C.’s new tax had a big part to play in slowing down sales activity in B.C.’s Lower Mainland markets, credit must also be given to the Chinese government.
Due to increasing pressure on the renminbi (China’s currency) Beijing took steps to stop money flowing out of the country. As a result, by mid-2016 Chinese banks started to apply stricter rules on international money transfers and one Chinese bank want as far as obtaining a B.C. court order to freeze the assets of a businessman that they accused of “fleeing China and buying ‘luxury’ Lower Mainland homes [using] a defaulted $10 million loan.” To put this in perspective, the court order was issued in June 2016 — the same month sales dramatically slowed in B.C.’s Lower Mainland.
Right now, many buyers, sellers and those who work in real estate are watching and waiting to see how the spring selling market unfolds. If there are no other regulation changes and if supply continues to be constrained, there will be little movement in prices in the hotter Canadian property markets. However, unless there are dramatic changes, most Canadian markets can expect a shift towards a more balanced real estate market — and this will mean a slight drop in prices for most markets.
Bank of Canada announces rate
HomeNews by The Canadian Press 18 Jan 2017
Bank of Canada holds interest rate, begins to bake some Trump risks into outlook.
The Bank of Canada is holding its benchmark interest rate at 0.5 per cent and providing a deeper assessment of the risks associated with the big economic unknowns of a Trump presidency.
The central bank is keeping its key interest rate in place with the Canadian economy showing signs of improvement _ but it also warns of the significant uncertainty tied to potential policy changes by the United States, its largest trading partner.
This is the bank’s first release of its updated forecasts and broad economic assessment since Donald Trump won the U.S. presidential election in November. Trump is to be inaugurated as President on Friday.
For now, however, the bank is offering an optimistic outlook by largely sticking with the growth expectations that it released in October, by predicting the economy to expand by 2.1 per cent in 2017 and 2018.
It says its base-case outlook only factors in the impact of the expected U.S. fiscal boost, which would help Canada through increased demand, and the effects of Trump’s vow to cut corporate taxes, which it notes would hurt Canadian competitiveness.
The bank did not account for the full range of Trump’s promised policy changes _ including his protectionist pledge that it says would have material consequences for Canadian investment and exports.
Have a great weekend, Anthony