Budget options for Canadian millennials in the age of soaring prices

With Canadian housing price growth having set new records this year, more and more millennials are branching out to other viable options aside from home ownership.

Among these alternatives, especially popular in red-hot Toronto, is cooperative purchases of homes between friends or relatives, The Canadian Press reported.

In its recent survey, RBC noted that co-ownership is a top choice among 24 per cent of millennials. HomeLife/Realty One Ltd. (Toronto) sales representative Alan Aronson said that a leading reason is that each of the buyers in a co-purchase can qualify for a larger mortgage, while sharing the remaining costs (such as land transfer taxes and insurance) among themselves.

However, Aronson warned that this route has its own share of risks, especially considering that relationships can and do become strained when it comes to money. For instance, if one party neglects their fiscal responsibilities, all the co-owners might be forced to sell the property early or might even lose it to the lenders.

Another option would be to rent, probably in perpetuity. Jason Heath of Objective Financial Partners said that this might indeed be the better choice in the most expensive markets, if one is willing to “ignore the practical and psychological benefits of home ownership.”

Instead of using one’s funds for down payment, one can instead invest it—and in the process avoid other, not initially obvious, expenses such as taxes and closing fees.

Earlier this month, Statistics Canada warned in its report that young workers nationwide are facing far worse conditions compared to professionals from older generations, with the youth unemployment rate over a period of 4 decades (from 1976 to 2015) being around 2.3 times higher than the rate among workers older than 25 years old.

This trend accompanied a severe decline in the take-home pay and the purchasing power of this demographic by the early 1980s, with young Canadian males (17 to 24 years old) experiencing a 15 per cent reduction in their real hourly wages, and young females suffering a 10 per cent drop.

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Major investor hotspot no longer seller’s market

Real estate association tries to find the positive in a downward trending market.

“BC home sales trend toward ten-year average,” the British Columbia Real Estate Association proclaimed in its latest sales report.

“Moderating consumer demand in the province’s largest population centres continues to trend home sales toward the ten-year average,” Cameron Muir, BCREA Chief Economist, said. “The seasonally adjusted annual rate of MLS® residential sales was approximately 89,000 units last month.
The ten-year average is 83,000 unit sales, while the 15-year average is 85,300 unit sales.”

But is that the big story?

For investors with interests in the province, not likely.

Sales were down 20.1% year-over-year in November, coming in at 6,419 total residential sales.

Prices also took a dip, falling 6.4% year-over-year to $625,871.

Vancouver, specifically, had a tough month. Unit sales fell 37.4% to 2,225 and the average price dropped 3.8% to $895,084.

According to the Canadian Real Estate Association, Vancouver is no longer a seller’s market

“A sales-to-new listings ratio between 40 and 60 percent is generally consistent with balanced housing market conditions, with readings below and above this range indicating buyers’ and sellers’ markets respectively,” CREA said in its monthly stats release. “The ratio was above 60 percent in almost half of all local housing markets in November, the vast majority of which are located in British Columbia, in and around the Greater Toronto Area and across Southwestern Ontario.

“In Greater Vancouver, the ratio has moved out of sellers’ market territory and into the mid-50 percent range.”

Still, it’s not all bad news.

“Year-to-date, BC residential sales dollar volume increased 22.8 per cent to $74.5 billion, when compared with the same period in 2015,” BCREA said, again focusing on the positive. “Residential unit sales climbed by 12.1 per cent to 107,488 units, while the average MLS residential price was up 9.6 per cent to $692,745.”

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Investment Hot Spots:
Lakeburn, Saint-Pascal-Baylon, Fairhaven, Pownal, Franktown

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Trends in three major markets

As real estate market data trickles in ahead of CREA’s official release, we have a good sense of how three major markets have performed.

Toronto
The country’s largest city continues to be its hottest one in terms of real estate.

Sales increased 16.5% year-over-year in November, according to the Toronto Real Estate Board.

This despite inventory challenges.

“Home buying activity remained strong across all market segments in November. However, many would-be home buyers continued to be frustrated by the lack of listings, as annual sales growth once again outstripped growth in new listings,” Toronto Real Estate Board President Larry Cerqua said. “Seller’s market conditions translated into robust rates of price growth.”

Edmonton
Prices increased in the Big E by an average of 3.95% for single-family homes and 6.39% for duplexes and rowhouses.

“There is continued strength and price stability in Edmonton’s real estate market. Most average selling prices increased this month, partially due to sales of the several high-priced listings,” Steve Sedgwick, chair of the Realtors Association of Edmonton, said. “The all residential median selling price is down 2% and condominiums median selling prices was down over 8%.”

Calgary
Following a solid October, Calgary’s market returned to previously weak performance.

Year-over-year sales fell 3% and were 17% below long-term averages.

“November was the first full month with CMHC’s new lending rules in effect,” said CREB® chief economist Ann-Marie Lurie. “As suspected, the gains in last month’s sales were temporary. Stringent conditions for borrowers are converging with the current economic climate and weighing on demand.”

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Investment Hot Spots:
Fox River, Beaver Dam, Ladysmith, Point La Haye, Lower New Cornwall

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Revitalizing a neighbourhood

Meet the investors that are currently creating Toronto’s next hot spot.

For the past 20 years, the intersection of Yonge and St. Clair has acted almost exclusively as a transit hub for the affluent neighbourhoods surrounding it, including Forest Hill and Rosedale.

That’s about to change.

“For the last 30 years it’s kind of gone sideways whereas surrounding neighbourhoods have improved. Our goal is to bring it back to some form of former glory,” Lucas Manuel, managing director of Slate Advisors, told Canadian Real Estate Wealth. “To do that first we bought everything there, which helps. We own all four corners and eight office buildings in total. Effectively that allows us … to make changes fast and not rely on our neighbours to come along for the ride.”

Slate, itself, currently has an occupancy rate of 95% within its buildings, and those that aren’t currently occupied are being kept vacant to allow for flexibility as the vision evolves, according to Manuel.

That vision is one that will transform the area into a go-to neighbourhood as opposed to a strict thoroughfare.

“They’re dying to have a good restaurant that they can go to, so that’s a huge focus of ours. On one of the corners, the northwest corner, we’re looking to put a big restaurant. Other locations as well,” Manuel said. “One doesn’t do it but once you get critical mass and give people a choice people will start coming back to Yonge and St. Clair.”

Slate has a master plan for the entire neighbourhood, and it is actively working with developers and other property owners to revitalize the area.

They are currently in talks to develop a business improvement area (BIA) to address some of the area’s needs.

The entire overhaul is being done in phases, with the northeast corner expected to be completed by Christmas. The rest has a target of 2018.

And once those are completed, and other developers hop on board, there is nothing stopping the area from experiencing a retail and, indeed, further residential development.

“Nothing has interfered with the upward mobility of pricing in Rosedale and Forest Hill. It would be nice to think all the things we do kind of support that,” Manuel said. “What we’ve heard from residents in those neighbourhoods is a lot of excitement.”

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Investment Hot Spots:
Pointe-du-Lac, Erieau, Rossway, Arcadia, St. Mary’s

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Investor payments delayed

Investors in Calgary’s Orchard project have been told of delays to interest payments.

“Funds raised to date have been appropriately utilized towards project costs keeping the development moving forward. Orchard has surpassed 60% in sales on the first tower, with discussions already in place to have tower 2 purpose built rental. This would reduce timelines, increase cash flow, and allow for a more flexible development plan,” Building & Development Mortgages Canada Inc., the broker offering the syndicated mortgages, said in a memo to investors. “This allocation has resulted in the payments due April 16th and July 16th to be delayed, as there have been a lack of funds closing into the project’s interest reserve (IR) as originally anticipated.

“Brokers are actively raising money for the project to bring the development budget up to date, and top up the IR for current and future payments.”
The memo, which was shared with CREW by a lawyer who represents one of the project’s investors, also states further delays could happen.

“Funds will continue to be used for project costs to ensure the current momentum is kept, until such funds can be moved towards soft costs such as interest payments,” the broker said.

Despite this, both developers of the project – Lamb Development Corp. and Fortress Real Capital – remain unconcerned about the health of the project.
“Orchard is an incredible project at a fantastic location. It is no secret that the housing market in Alberta has changed quite a bit over the past few years,” Brad Lamb said. “LDC and Fortress are completing and occupying one tower called 6th & Tenth in spring 2017, and plan to break ground on Orchard shortly afterwards.

“All lenders will be paid out on 6th & Tenth upon completion, and I anticipate the same for Orchard when it finishes also.”

A rep for fortress added: “Fortress is very pleased that 60% of the Orchard project is sold. Consultants and the development team are working on detailed design drawings and the project will be advancing to the construction financing stage next year.”

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Investment Hot Spots:
Cathcart, Downeyville, Central Tower Hill, Anse-Bleue, Happy Adventure

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What’s in store for Canadian investors in 2017?

We have the answers to all your investment questions in our Property Forecast Guide — the industry’s very own crystal ball, which will appear in the January issue of CREW.

Think of the guide, which spans dozens of pages, as your handbook for investing in real estate in 2017. Want to know what’s in store for the economy? How about hot, up-and-coming areas? This guide will help you get rich – or even richer – by giving you the best research, right in your lap. Click here to Subscribe today and ensure you don’t miss out.

We spoke to veteran investors, respected economists and profiled every market and every trend that investors need to know about.

Below is just a sample of what you can expect.

Dan Campbell on GTA and the surrounding area

Tech Triangle (KWC)
Strong and growing economy, stable and growing post-secondary institutions, airport, expanding highways, increase Go Train service and now a rapid transit system all point to a strong year for the KWC real estate market. Rental demand will continue to grow, especially around the new LRT and Go Train stations as well as the renewed downtown cores. This region is growing into Millennial Central and that bodes well for market demand for decades to come.

Hamilton
It is still a market where investors and homeowners need to have very localized knowledge in order to ensure they aren`t buying in neighbourhoods that will underperform the market. 2017 should begin a slowing of demand from investors and landlords, but increased Go Train service, a renewal of Hamilton`s reputation and the promise of LRT will keep interest high.

Barrie and Orillia
Although two very separate cities, they are economically co-joined. In one year Barrie will lead in growth and housing demand, and in the following Orillia will. Orillia looks to grab the lead in 2017 with the Hydro One purchase of the local utility and the development of a high-tech research center bringing in above average salaried employees. The demand in Barrie’s mid-range market should continue to be strong as new mortgage rules push people out of Vaughn and Toronto.

GTA
Anything ground-oriented (single family homes, semis, townhomes) are poised to outperform the rest of the market, especially given the Provincial Places to Grow act limiting the amount of new-land sprawl, thus driving up the price of developable land within these constrained boundaries. Condo demand will continue with a movement to larger and therefore further from the core units beginning to feel the upward demand pressures as young families begin to grow and require more room. Units located within 800 Meters of TTC subway stations or 500 meters of street car stops will feel the highest demand increases in both rental and purchase in 2017.

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CMHC raises its overall risk rating for national housing market to strong

Alexandra Posadzki

There is growing evidence of risk in the country’s real estate markets as home prices have climbed faster than income and population growth, a report by Canada’s federal housing agency says.

Canada Mortgage and Housing Corp. increased its risk rating for the national housing market on Wednesday to strong, from a moderate rating that it gave in July.

“We now see strong evidence of problematic conditions overall nationally,” CMHC’s chief economist Bob Dugan said in a news release.

“This is fuelled by overvaluation _ meaning house prices remain higher than the level of personal disposable income, population growth and other fundamentals would support. This overvaluation coupled with evidence of overbuilding in some centres means that growth in house prices will slow and housing starts are expected to moderate in 2017 and 2018.”

The agency also said it now sees moderate evidence of price acceleration. That occurs when home prices go up at a faster pace and is a possible sign of speculation.

Back in July, evidence of price acceleration was weak, the agency said.

CMHC is also predicting that home sales and the pace of new housing starts will decline next year before stabilizing in 2018.

CMHC CEO Evan Siddall said earlier this month that the housing agency would raise its risk rating to strong for the first time ever.

CMHC said there is strong evidence of problematic conditions in Vancouver, Calgary, Saskatoon, Regina, Toronto and Hamilton.
Edmonton, Winnipeg, Montreal and Quebec City show moderate evidence of such conditions, the agency said.

The housing market assessment is intended to be an early warning system to alert Canadians about problematic conditions developing in the country’s real estate markets. It covers 15 regional markets and the national housing market as a whole.

The Canadian Press

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CREA releases latest stats

The Canadian Real Estate Association says the number of home sales edged higher in September compared with August, ending a streak of month-over-month decreases.

Sales through the association’s Multiple Listing Service were up 0.8 per cent nationally last month compared with August.

Sales were up in the Toronto region were up, while they continued to fall in and around British Columbia’s Lower Mainland region, which includes Vancouver.

“The Finance Minister’s recent changes to regulations affecting mortgage lending has added to housing market uncertainty among buyers and sellers,” said CREA President Cliff Iverson. “For first-time home buyers, the stress test for those who need mortgage default insurance will cause them to rethink how much home they can afford to buy.”

CREA has concerns that first-time buyers will be priced out of certain markets.

“First-time home buyers, particularly in housing markets with a lack of affordable inventory of single family homes, may be priced out of the market by the new regulations that take effect on October 17th,” said Gregory Klump, CREA’s Chief Economist. “First-time home buyers support a cascade of other homes changing hands, making them the linchpin of the housing market. The federal government will no doubt want to monitor the effect of new regulations on the many varied housing markets across Canada and on the economy, particularly given the uncertain outlook for other private sector engines of economic growth.”

Compared with a year ago, the number of home sales was up 4.2 per cent from September 2015.

The national average price for a home sold in September was up 9.5 per cent compared with a year ago at $474,590.

Excluding the expensive Greater Vancouver and Greater Toronto regions, the average price was $358,884 last month.

With files from Canadian Press

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