Report highlights next year’s real estate trends

Housing affordability continues to dominate the conversation in the Greater Toronto Area’s housing market. A new report released by the Urban Land Institute in conjunction with PwC, called Emerging Trends in Real Estate described governmental regulation as likely to exacerbate the affordability problem.

The laws of supply and demand lie at the heart of surging housing prices. Not only are single-family detached homes in high demand and low supply, but the condo market, too, is beginning to see signs of strain, as priced-out buyers realize they have no other choice to settle for skyward balconies over backyards.

The foreign buyer tax cooled the Vancouver and Toronto markets, where prices grew astronomically, but the report makes mention of suspicious players within the real estate industry, one of whom believes growth will continue with or without the tax because of natural growth. The report also noted that prices cooled temporally before rebounding and pushing condo prices upwards.

Those interviewed by the report parroted the need for government to stay out of the market, except to address the need for increased supply. It’s unanimously believed that the approvals process is one reason supply isn’t keeping up with demand.

Affordability will catalyze a growing trend: co-living. As the number of single people among the millennial cohort in expensive markets like, Toronto and Vancouver, continue rising, they’ll live with roommates out of necessity. While some may live alone, affordability will compel them forego ownership and rent. One in three young adults in Canada lives with at least one parent, and as others marry and look to start families during an inventory shortage, they’ll settle for living in condominiums. According to the most recent Census data, 6.3% of Canadians live in multigenerational households – a number that’s likely to rise.

The ’18-hour city’ is a burgeoning secondary market. Where NYC, London, Tokyo, and now Toronto, are 24-hour cities, the high cost has resulted in an exodus to smaller cities, like Austin, TX, Raleigh, N.C., Nashville, TN, which have grown in vibrancy. Montreal, Vancouver and Calgary are considered 18-hour cities and will continue staking their claim as emergent centres. Previous versions of Emerging Trends in Real Estate anointed Hamilton an emerging 18-hour city, and that’s likely to continue as affordability drives people further from the Toronto core.

Transit infrastructure is integral to attained 18-hour city status, and Hamilton is planning a downtown LRT.

The only condo growth associated with condos in recent years has been their popularity, but they have, in fact, been shrinking in square footage. The need for larger, family-sized condos will likely buck that trend.

Montreal’s rental market is as strong as ever, however, Ontario – already suffering from a shortage of rental units – has reintroduced rent control, much to the dismay of the report’s interviewees, who noted some planned purpose-built rentals rebranded as condos. Ontario’s rental vacancy rate is dangerously low, and it’s expected it could worsen.

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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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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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Community trust bullish on Kamloops

One community trust is establishing a neighbourhood in British Columbia it believes offers great value and the potential for major growth.

“We’re attracting the development community to partner with us on the build, but our pre-approved zoning for up to 7500-8000 residents, 3500 units, and just under 200,000 square feet of commercial,” Finlay Sinclair, president and CEO of TRU Community Trust, told Canadian Real Estate Wealth. “We’re attracting both developers to come and partner with us but also the community to come live here. We think there’s a good local, regional, and provincial opportunity for people to make this the place they want to live.”

TRU Community Trust is trying to establish Kamloops’ newest neighbourhood around Thompson Rivers University.
We asked Sinclair why investing in Kamloops is an attractive option for investors.

“It’s a stable economy, it’s a growing economy, and it’s an affordable real estate opportunity for anybody in this country at any income level,” he said. “We are right on the leading edge of all the service, commercialized land that anybody living in the future on the property is ever going to need.”

And the area is attracting investors from across the country. Many of whom have been priced out of province’s expensive lower mainland markets.

“Absolutely, we’re the affordable alternative. I think it’s pretty clear to people across the country that Vancouver has exceeded any normal, reasonable threshold of affordability for younger families that don’t have an equity position in the market already,” Sinclair said. “You can get in and have a wonderful lifestyle either in our development … but Kamloops as a whole has very affordable housing comparable to Vancouver, Victoria, Kelowna, Calgary. We have weather that unmatched in Canada. We have hot, hot dry summers and short, short winters.”

And the market is expected to experience continued growth.

“We see the real market opportunity is the fact that Kamloops is constantly increasingly land value and an increasing real estate market,” Sinclair said. “It doesn’t spike and go up and down irrationally in ways the larger market does. It’s constantly going up and is a stable environment.”

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Bank of Canada sees elevated housing-crash risks as debt climbs

Canada’s central bank said a housing crash remains the most serious risk to the financial system and warned some imbalances are worsening.

The risk of a sharp correction in home prices is “elevated,” Bank of Canada policy makers said Tuesday from Ottawa in their semi-annual Financial System Review, leaving the rating unchanged from the June report. The central bank uses five grades of risk ranging from low to very high, with elevated being in the middle.

High debt levels among younger families with fewer assets are increasing the danger of housing imbalances, the report said. The report reiterated Governor Stephen Poloz’s view the risk of a crash is low and should be avoidable short of a severe recession and major job losses.

“Housing activity should stabilize in line with economic growth, as the driver of growth in the economy switches from household spending to non-resource exports,” Poloz said in a press release, which will be followed by a press conference at 11:45 a.m.

“Certain vulnerabilities are still edging higher, but recent changes by Canadian authorities to the rules for mortgage financing will help to mitigate these risks as we move into 2016,” Poloz said. The rule changes refer to Finance Minister Bill Morneau’s move on Friday to raise mortgage down payment requirements on homes worth between $500,000 and $1 million.

The central bank removed a previous estimate of 10 percent to 30 percent overvaluation in housing prices.

The other elevated risk remains disruptions from a slump in China and other emerging markets. Policy makers also said there is a moderate risk of a jump in the yields demanded by global bond investors.

There are signs that Canada’s total household debt burden may also be dangerous. The share of indebted households with obligations exceeding 350 percent of gross income has climbed to 8 percent from 4 percent before the global crisis, the Bank said. Debt at that level raises the risk of a failure to pay the lender back.

Apart from risks, the Financial System Review lays out “vulnerabilities” and said there’s a high and rising level of household indebtedness.

Poloz last week outlined rules that could allow him offer more stimulus if the economy faces another shock, saying he doesn’t expect to need them. Those tools include the ability to take his policy interest rate to negative 0.5 percent, major asset purchases known as quantitative easing, or so-called forward guidance on future interest rates. Poloz said his main aim in making that announcement was to update policies that were first laid out during the global financial crisis and never used.

Such changes in the bond market since the global financial crisis add one other vulnerability for Canada the bank said today: the risk of a freezing up of fixed-income markets with more debt being perceived as harder to trade.

The risks in housing and the global economy underscore the tension behind Governor Stephen Poloz’s two interest-rate cuts to 0.5 percent this year, aimed at reviving the world’s 11th largest economy from a drop in oil prices.

Most of the housing-market risk appears to be concentrated in Toronto and Vancouver, where single-family detached dwelling prices have surged beyond $1 million. Home prices have fallen this year in the Alberta cities of Calgary and Edmonton being hit by the drop in crude oil prices, and gains have been more modest in most other parts of Canada.

Canadian household debt ascended to another record in the third quarter, underscoring why policy makers are stepping up efforts to limit the risks of a collapse in the nation’s real estate market. Credit-market debt including mortgages was 163.7 percent of after-tax income, up by 1 percentage point from the second quarter, Statistics Canada said Monday in Ottawa.

The divide between a hot housing market and weakness elsewhere may continue, with crude oil falling to $35 a barrel this week and Canada’s last trade deficit of $2.76 billion in October wider than any economist had forecast. Encana Corp. on Monday cut its dividend by 79 percent and reduced spending and production plans for 2016.

©2015 Bloomberg News

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Domestic investors beat out by foreigners?

Real estate services giant CBRE has warned that commercial real estate investments moving through Canada’s markets would drop to $23.6 billion next year, down from $26.1 billion in 2014 and $24.4 billion (forecast) in 2015. The projection marks the 4th straight year of decline in the sector.

The CBRE report also estimated 2016 national vacancy rates to rise to 11.1 per cent, up from 8.5 per cent in 2014 and 10.1 per cent this year. In particular, the Calgary office market is expected to suffer from a central core vacancy rate of 18.4 per cent next year.

These developments come in the wake of the increasing presence and influence of Chinese investors in the market, which analysts said was a part of a crystallizing global trend of Oriental investment.

“We saw it in New York, we saw it in London. What was interesting to me is Chinese capital is highly selective. It’s only going to maybe four or five countries. You look at the ties between the countries, you’ve got a large Chinese population in Vancouver and Toronto, so they go with what they know,” CBRE Canada director of research Ross Moore told Financial Post.

The CBRE isn’t all doom and gloom, though: REITs in the publicly traded real estate investment sector are now trading at around 8.5 per cent, way below their net asset value. Also, majority of Calgary apartments remain relatively occupied, and multi-family residential investments remain a hot option.

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A reminder to not take shortcuts

Hefty fines to landlords are a sobering reminder to investors that buildings should be up to code, or they could face the same sort of financial repercussions.

Two landlords in two separate cities are facing substantial fines for building code violations, proving shortcuts can be costly.

A property owner in St. Cathering, Ont., was ordered to pay $8,000 for fire code violations and will also face probation.

“When the court issues a probation order it’s a reflection of the seriousness of the violations,” Fire Chief Dave Wood told local publication, Niagara this Week. “Property owners are responsible for making sure their tenants are safe at home and we have zero tolerance for those who continually neglect their responsibilities. Fire alarms and extinguishers have to work when lives are at risk.”

In a separate case, an Alberta landlord – who had previously been warned about building violations – was fined over $20,000.

In that instance, the owner ignored warnings to address improperly-sized basement windows as well as fire alarm installations.

“All of these things are about minimizing safety risk so someone can escape in case of fire,” Judge Mike Dinkel said during sentencing, according to the Calgary Herald. “The interconnected alarm is so people upstairs can get out. These are pretty crucial things. You don’t want to follow them just to fulfill them, but because they save lives.”

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Investor forecast for 2016

The Canadian Real Estate Association has updated its forecast for 2016, with two provinces expected to lead the way.

“Since CREA’s last forecast published in September, housing markets in British Columbia and Ontario have strengthened further,” CREA said in its updated housing forecast. “As a result, CREA has raised sales and average price forecasts for these provinces.”

National sales for the rest of the year have also been revised higher.

Home sales in Ontario are expected to rise by 9.3%, which would be higher if prices in the GTA were more affordable, CREA said.

“British Columbia is projected to post the largest annual increase in sales activity in 2015 (+21.4 per cent), while Alberta (-21.4 per cent), Saskatchewan (-10.8 per cent), and Nova Scotia (-5.1 per cent) will record annual sales declines,” CREA said. “Activity in Manitoba is forecast to rise by 2.3 per cent this year.”

One bit of bad news, however, is that the recently announced mortgage rule changes – which will impact homes costing more than $500,000 – will have a larger reach than intended.

“Recently announced changes to mortgage regulations that take effect early next year risk cooling housing markets beyond Greater Vancouver and the GTA, their intended targets,” CREA said. “In particular, the regulatory changes are also likely to reduce sales activity in Calgary once they take effect in early 2016.”

Despite this, home sales are expected to reach 498,600 next year.

“The national average price is forecast to edge higher by 1.4 per cent to $448,700 in 2016,” CREA said. “Price gains in 2016 are forecast to be strongest in Ontario (+2.9 per cent) due to an ongoing shortage of listings for single family homes coupled with strong demand for them in and around the GTA.”

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Canadians still bullish on real estate

The good times will continue to roll on for investors in Toronto and Vancouver – whether you’re a landlord or a flipper.

“High demand and low supply continued to characterize Vancouver’s and Toronto’s housing markets throughout 2015 as competition from buyers over the limited inventory of single-family homes pushed prices higher,” RE/MAX said in its housing outlook for 2016. “The average residential sale price increased 17 per cent in Greater Vancouver and 10 per cent in the Greater Toronto Area, to approximately $947,350 and $622,150, respectively.”

Price appreciation is expected to continue into 2016, according to RE/MAX, with prices expected to increase 7% in Greater Vancouver and 5% in the Greater Toronto Area.

That’s good news for investors of all colours; those looking to cash out in 2016 will surely make a profit. As for landlords, continued upward trajectory for home prices will price many out of purchasing and force them into the rental market.

Investors in other areas may have more cause for concern, however.

“Based on the projections for Canada’s key housing markets, RE/MAX expects the average home price in Canada to increase 2.5% in 2016,” said Gurinder Sandhu, Executive Vice President, RE/MAX INTEGRA Ontario-Atlantic Canada Region. “While we expect to see some price decreases, particularly in regions that rely on the oil and natural resource sectors, strong demand in Canada’s urban centres is expected to continue throughout next year.”

As for oil country – all is not bleak.

“In Alberta, a year after the sudden drop in oil prices, the housing markets have shown resilience,” said Elton Ash, Regional Executive Vice President, RE/MAX of Western Canada. “With oil price volatility continuing to make buyers feel uncertain, we do expect the average sale price to decrease next year, by 3.5 per cent in Edmonton and four per cent in Calgary.”

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Good news for investors

A recently released study points to an increased need for rental properties for Canadians, as home prices continue their upward trajectory.

According to a Manulife Bank of Canada’s Debt Survey, published Thursday, 38% of Canadian homeowners feel that housing in their area is unaffordable. And two thirds of those expect housing prices to continue to increase in 2016.

The survey found that 28% of respondents found their local housing market “somewhat unaffordable.” 11%, meanwhile, believe their local market is “not affordable at all.”

A mere 10% believe their local market is “very affordable” and 51% say their market is “somewhat affordable.”

These results point to a large portion of the population who may have to rely on rentals in certain areas.

“The survey also revealed that those in Canada’s largest urban areas (Vancouver, Calgary, Edmonton, Toronto, and Montreal) are much less likely to describe their housing market as affordable (46%) than those elsewhere in Canada (68%),” Manulife said in a release. “Perceived lack of housing affordability was most acute in Vancouver, where just one in three (33%) indicated housing was affordable.”

Investors in specific regions will likely be impacted differently, however.

“In Alberta, Manitoba and Saskatchewan, almost one in five (19%) expect prices to decline in the next 12 months, while just 3% of homeowners in Ontario, 4% in British Columbia and 4% in Quebec expect price declines in the next year,” Manulife said.

Nationally, 63% of homeowners expect housing prices to increase; while a mere 7% expect to see them decrease.

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