Monthly Archives: January 2015

How Dependent is Canada’s Housing Market on Foreign Investment?

The question regarding Canada’s dependency on foreign investment in the housing market, is raised consistently by market analysts, but unfortunately, is not one that can be answered definitively. Interestingly enough, Canada, unlike countries such as the U.S. and Australia, does not collect data on foreign investment, leaving market observers and analysts to speculate on the amount of foreign investment the country’s housing market is experiencing. The majority evidence that exists is anecdotal, coming from real estate agents and brokers who can speak first-hand on the number of sales they’ve made to foreign buyers. A handful or privately funded reports also exist, some of which will be highlighted in this article.

Al Daimee, a real estate agent with Royal LePage who specializes in downtown Toronto condo sales, stated in an interview with Hopkins and French, “There is definitely a foreign investment component to the new condo industry – it makes up the vast majority of sales right now.” The evidence he uses to substantiate his claim is the presence of a power of attorney on condo documents, a practice typically used by foreign investors. According to Andrea Hopkins and Cameron French of The Globe and Mail. Canada (along with Australia, who are experiencing similar housing market conditions) is attractive to global real estate investors “seeking a safe and stable place to park their money,” given as how Canada was able to avoid a full on housing collapse during the global economic crisis.

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Just to get a sense of the amount of foreign investment Canada could be experiencing as a whole, a report released by the U.S. National Association of Realtors stated that, Chinese investors spent $22 billion on American real estate in 2013, and $17.2 billion on Australian real estate, with Canada likely being a close third. In April 2013, Sotheby’s released its Top Tier Trend Report, which found that foreign investment had a prominent foothold in the luxury market in particular. It suggests that half of Montreal’s luxury homes are foreign purchased, along with Vancouver’s 40%, and Toronto’s 25%.

Some, like Sunny Freeman of The Huffington Post, suggest that foreign investment from China is a result of Canada’s housing prices being inflated, which is discouraging to many domestic buyers, but appealing to wealthy foreign investors. News of Canada’s deteriorating home affordability coupled with low interest rates that spread internationally back in mid-2012, is believed, to have been the spark causing a rush of Chinese investment into the country. Is there a consequence to all this foreign investment? There is no clear consensus on this topics, but some suggest that it may drive up demand and inflate prices further. Freeman explores it well from both angles, arguing that, on the one hand, governments, realtors and developers should be welcoming of wealthy foreign investors because they provide a stable flow of money and competition that raises valuations. While on the other hand, economists, city planners and community activists do not necessarily view foreign owners as being invested in the community, and so, are most likely to pull out of the market quickly in the case of a downturn.

Oil

The Two Factors That Will Decide Toronto’s Housing Market in 2015

Every major financial institute and real estate brokerage in the country has something to say about what to expect in 2015 in terms of housing prices and sales figure. However, not everyone is in agreement as to what the near future will hold for Canadians looking to buy a home. Opinions differ as to whether the market is set to crash, or whether we’ll experience a “soft landing.”

TD Economics released a report last week that focused primarily on the “Big 3” markets: Toronto, Vancouver, and Calgary. Toronto and Vancouver alone account for 40% of the housing market activity nationally. Robert Hogue, a senior economist with RBC, suggests that a very clear line needs to be drawn between the Big 3, and all other Canadian cities, when discussing potential market growth or decline. The strong activity the Big 3 markets saw in 2014 is bound to see a decline in response to what Hogue believes will be incremental increases in mortgage rates beginning in the summer. All other markets are relatively “balanced” by comparison, and will experience small to moderate corrections in home prices throughout the year.

As reported on by Susan Pigg of The Toronto Star, the TD report suggests that house prices in Toronto and Vancouver specifically, are overvalued by 10-15%. National real estate brokerage ReMax, in their annual Housing Market Outlook report, doesn’t see this trend changing anytime soon, predicting that housing prices in Toronto will continue to rise, somewhere in the neighbourhood of 4%, and that by the end of 2015, GTA home prices could average $589,100, up from $566,400 in 2014.

According to these early forecasts, two factors will largely determine whether housing prices and sales will rise or fall: interest rates, and oil prices. Diana Petramala, an economist for TD, and Gurinder Sandhu, executive vice president of ReMax, each discuss the connection between national oil prices and interest rates in interviews with Susan Pigg, suggesting that, an increase in interest rates (which it historic lows last year) is largely expected by the Bank of Canada sometime this fall, but that this move could be delayed on account of slumping oil prices. Fortune Magazine provides a great summary of the correlation between oil and housing prices, suggesting that, big oil price drops have historically been associated with job losses and falling home prices in energy-producing regions. Cities that rely on crude oil processing for the bulk of their employment options will likely see home prices fall almost immediately.

Tamsin McMahon of The Globe and Mail argues that a decline in oil prices will benefit some major Canadian cities, and become a detriment to others. Toronto, unfortunately, is expected to see continued price growth resulting from “pent-up demand” from last year (all those who lost out in the ‘bidding wars’ that took place throughout 2014). In addition, the realization on the part of the potential homebuyer that interest rates will inevitably increase, could incite a buying frenzy by those looking to lock in low rates while they still can.

Toronto Real Estate Market Update – Dec 2014

The 2014 real estate market has come to an end, with a total of 92,867 residential resale properties sold – making it the 2nd best year recorded.  The December market closed with an increase of 9.6% from last year with 4,448 sales.  The demand was strong; however inventory was insufficient to satisfy buyers.  This trend spoke volumes in the 416 semi-detached market, as the average semi-detached price dropped 4.4% due to there being no semi-detached properties on the market available to buy.  However, this inventory-demand balance reflect  the average sale price for the GTA increasing 7% to $556,602.

We look back at the last decade where the average home price in 2004 was only $315,231, to purchase the exact home now in 2014, it would go for $566,726.  The influx in price has been compromised with the retreat of interest rates.  Back in 2004, a 5 year rate was locked in at 4.25%.  Since 2012 the downward trend and stability of rates have gone down to below 3%.  These trends illustrate how important low interest rates have been to our markets.

High end property sales were robust in December, seeing an increase of 54% of sale prices over $1,000,000.  Toronto’s central districts remained strong housing the most expensive properties; with average sale prices for detach homes at $1,558,134 and semi-detached homes at $800,968.

With the big story in 2014 being the condo market, the worry of too many cranes in the sky slowly diminished as condominiums began to represent the largest housing sector by type.  Accounting for 30% of all reported sales in GTA and 52% of all sales in Toronto, condos are now a lifestyle.

With the beginning of a New Year and new market we can try to forecast what 2015 may bring us in real estate.  We began the year with 10,230 listings – a drop of 10.4% from the beginning of 2014, if we continue at this pace of low inventory the 2015 market may not be able to support this year’s inventory-demand balance.

Toronto’s Real Estate Market in 2014: A Year in Review – Part 2

Move Smartly points out that the Toronto housing market was particularly competitive during the first four months of 2014, which they attribute to two factors: A steep decline in inventory from Q4 2013 that lead to a shortage of homes available for sale, coupled with a strong demand for houses at the time, which Move Smartly believes, is also a carry-over from the year before. The review illustrates that the competition for homes was specific to semi-detached and attached row houses, which had begun to significantly decline in inventory since September, 2013.

Both average sale price, and overall sales records were broken during the month of May. The Toronto Real Estate reported that 11,070 existing homes were sold that month, representing an 11.4% hike in sales from a year before, with the average sale price increasing over that same year long period by 8.4%, to $585,204. Not to be outdone in the record-breaking department was Calgary, which continued its impressive growth with another 2,948 homes sold in May alone, a new record for the month. The median and average MLS sale price in Calgary also reached record highs of $435,000 and $486,531 respectively.

Toronto_CondosThe latter part of the year did not see the escalation of average sale prices for homes across Canada, or in Toronto in particular, slow down. A study published by Desjardins in early November stated the average price of a home in Canada had increased faster than income growth in Q3, with prices up 5.3% when compared to a year before. Desjardins’ “Affordability Index” is calculated by using the ratio between average household income and income needed to get a mortgage on an average-priced home. And according to their metric, the Canadian housing market is, on average, the least affordable it has been in the past 25 years. Toronto is not the least affordable housing market in the country, according to their study, with Vancouver taking the crown, boasting an average home price of $820,753. Windsor, Ontario, not surprisingly, is still the country’s most affordable city to buy a home, with the average price sitting at $568,384.

Housing affordability continued to decline right up until mid-December, with a published statement from the Bank of Canada, claiming that they believe the real estate market is overvalued by as much as 30%. The average price for a new construction low-rise home in the GTA, according to Bryan Tuckey of The Toronto Star  reached $700,779, another record high. Tuckey accounts by examining supply and demand factors linked to population growth, arguing that the increase in units under construction, as well as average sales price, are a direct result of the intensification objectives outlined in the provincial growth plan, Places to Grow, aimed at increasing population density in urban centres and along transit corridors.