Wednesday, December 13, 2017

Why condos are more expensive than houses in the Greater Toronto Area

Ryerson’s City Building Institute published an interesting paper this month that concluded that builders are not building enough family-sized condo units to keep up with the future needs of GTA home buyers.

The report highlighted what they called an affordability gap between the average sale prices of detached homes and condominiums.

But when we control for the size difference between low-rise homes (detached, semi, row houses) vs condos we find a very interesting paradox in the GTA’s real estate market – it’s actually less expensive to buy a home compared to a condo.

To illustrate this point I’ll compare house and condo prices in two different neighbourhoods.

Condos vs Houses in Maple

Maple is a neighbourhood in Vaughan that has both low-rise houses and condominiums.

A young family can buy a 1,385 square foot rowhouse in Maple for approximately $685,000 (all numbers are based on an average of recent sales).

Maple does not have many recent sales of 3 bedroom condos that are similar in size but when we look at the larger two bedroom units in the area we find that they are selling for roughly $684 per square foot. This means that a 1,385 sqft condo would cost approximately $947,000 at the current market rate (1,385 sq ft at $684 psf.)

This theoretical family-sized 1,385 sq ft condo in Maple would cost buyers an additional $261,000 when compared to buying a rowhouse that is the same size. It’s also worth noting that this difference in price ignores the fact that the rowhouse has an additional 650 sq ft of living space in the finished basement (basements are usually not included in square footage calculations for houses) along with a yard and an extra parking spot.

Condos vs Houses in Leslieville

Leslieville is a neighbourhood in central Toronto that also has a mix of houses and condominiums.

A typical three-bedroom starter home in Leslieville costs approx. $1,150,000 for roughly 1,355 square feet of living space.

While there are not many condos in Leslieville that are similar in size, the average price per square foot for larger condos in Leslieville is $851 which means that a 1,355 sq ft condo at this market price per square foot would cost approximately $1,150,000 – exactly the same price as a house.

But even in Leslieville where we appear to have price parity – houses still offer more value for families. As I mentioned earlier, this price parity ignores the fact that the finished basements in houses makes the total living space in them 50% larger than condos and it ignores the access to a private back yard. Both tend to be very important features for young families.

If we factored this additional living space into our calculations – houses would be significantly less expensive on a price per square foot basis than condos in Leslieville.

Why are condos more expensive than houses?

The majority of new condominium construction is driven by investor demand – not demand from families – and investors are willing to pay much more (on a ppsf basis) than end users are. Investors also prefer smaller units because they are less expensive and typically have a better return on investment than larger units.  Because of this, the price that developers are paying for land is based on what investors are willing to pay for condos which explains why its hard for them to build affordable family-sized condos.

In the case where the demand is from end users, condos fill a price gap in the market. If we refer back to my Leslieville example – many of the larger two-bedroom condos in Leslieville are approximately 1,000 square feet and sell for roughly $850,000. If your budget is $800,000-$900,000 and you want to live in the heart of Leslieville – a condo is your only option.

The same of course applies to buyers who have a budget under $400,000 in the GTA. They don’t care that they’re paying more per square foot to live in a condo vs a house because buying a low-rise home on a $400K budget isn't possible.

But young families with a budget of $700,000 on the other hand do have options. They can choose to buy a 2 bedroom 1,000 sq ft condo in Maple for that price, or a 3 bedroom 1,385 sq ft row house with a finished basement and a back yard. For most, it’s a pretty simple choice.

Monday, December 11, 2017

New mortgage rules could disqualify 10% of buyers with big down payments: BoC

New rules coming in January could disqualify up to 10 per cent of prospective home buyers who have down payments of 20 per cent or more, the Bank of Canada says.

The new rules will likely cause those buyers to settle for smaller homes, put more money down or delay buying. Some may also take out riskier loans from alternative lenders that are not federally regulated, including credit unions and private mortgage lenders, the central bank said on Tuesday in its twice-yearly review of the financial system.

The change will require those applicants to prove they could still afford their mortgage payments if interest rates were raised two percentage points, a procedure called a stress test.

The restrictions would affect about $15-billion a year in new borrowing, particularly in Toronto and Vancouver – markets that have had the steepest run-up in prices in recent years. The tighter rules could disqualify as many as 12 per cent of borrowers in the two cities, which account for half the value of homes sold in Canada.

Stress tests are already mandatory for mortgages in which the down payment is less than 20 per cent. The federal Office of the Superintendent of Financial Institutions announced in October that it will extend the tests to mortgages that have down payments of 20 per cent or more of the purchase price – known as low-ratio mortgages – to make sure the borrowers can cope with higher interest rates.

The Bank of Canada expects the impact to be less severe than changes made in 2016 that raised the cost of high-ratio insured mortgages, for which borrowers put down less than 20 per cent. The bank's 10-per-cent figure represents the share of low-ratio mortgages issued in the 12 months ending in June, 2017, that would not have qualified under the stress test. The impact is higher in Toronto and Vancouver because such mortgages make up a larger share of those markets and prices are higher.

"The new rule will have some impact, but it is unlikely to derail the housing market on its own," Bank of Montreal economist Benjamin Reitzes said. "We'll need higher rates for that."

The stress test could eat into the buying power of the most-stretched borrowers by up to 15 per cent, Mr. Reitzes said in a research note.

Tim Hudak, CEO of the Ontario Real Estate Association, said the OSFI rule change and other recent housing-policy measures will be hard on buyers.

"The cumulative amount of government intervention in the housing market means that many people will no longer be able to buy their first home or upsize when the kids come along," Mr. Hudak said. "The piling on of federal, provincial and local government interference risks not only hurting aspiring homeowners, but damaging the broader economy when fewer homes are purchased, furnished and renovated."

Over all, the Bank of Canada said in its review that the main threats – rising household debt and overheated house prices – remain elevated. The threat level has been about the same since 2013.

But for the first time in a while, the bank sees "preliminary signs of improvement" in the quality of new lending triggered by the improving economy, higher interest rates and tighter mortgage rules announced in 2016.

"Our financial system continues to be resilient, and is being bolstered by stronger growth and job creation, but we need to continue to watch vulnerabilities closely," Governor Stephen Poloz said in a statement accompanying the bank's Financial System Review.

The Bank of Canada's cautiously optimistic tone comes amid evidence that higher rates and tighter lending standards are helping to cool the housing market and stem riskier borrowing. For example, fewer Canadians with extremely high debt levels are taking out mortgages with little money down.

The report suggests most borrowers could handle a "moderate increase" in mortgage rates, especially if their incomes also rise. Nearly half of outstanding mortgages in Canada face an interest rate reset within the next 12 months.

"The Bank of Canada sees things moving in the right direction," Toronto-Dominion Bank economist Brian DePratto said in a research note.

The rate of the increase in house prices across the country slowed to 10 per cent a year in October after a significant slowdown in Toronto. Prices are heating up again in Vancouver, particularly in the condominium market, the bank said.

The housing markets in both cities took a hit from the introduction of taxes on foreign buyers. Vancouver's started to recover early this year, with the average price of a detached house last month at about $3-million, virtually identical to the record high in April, 2016. In the Greater Toronto Area, detached houses sold for an average of about $1-million in October, down 16 per cent from April.

Mr. Poloz acknowledged that the threat from high household-debt levels and the run-up in home prices will take "a long time" to work off.

Part of the problem is that buyers find ways to deal with tighter mortgage rules. When Ottawa clamped down on high-ratio mortgages in 2016, some borrowers shifted to low-ratio mortgages, which now account for three quarters of new mortgages, up from two-thirds in 2014. Many are also using home-equity lines of credit, which do not require regular interest and principal payments.

The bank said it is closely monitoring developments in the private lending market, worth as much as $15-billion a year.

Many economists and real estate industry officials anticipated the OSFI rule change could curb home sales next year. The Canadian Home Builders' Association has forecast the rule changes combined with other recent housing-sector policy reforms could reduce total house transactions by 10 per cent to 15 per cent.

In a submission to the federal government in August, the association said that would translate into a decline in resale-home transactions of 50,000 to 75,000 units a year, while housing starts could drop by 20,000 to 30,000 units.

Wednesday, November 29, 2017

GTA REALTORS® Release October Resale Housing Market Figures

Toronto Real Estate Board President Tim Syrianos reported 7,118 residential sales through TREB’s MLS® System in October 2017. This result represented an above-average increase between September and October of almost 12 per cent, pointing to stronger fall market conditions.

On a year-over-year basis, October sales were down compared to 9,715 transactions in September 2016.  Total sales reported through the first 10 months of 2017 amounted to 80,198 – down from 99,233 for the same time period in 2016.

“Every year we generally see a jump in sales between September and October.  However, this year that increase was more pronounced than usual compared to the previous ten years.  So, while the number of transactions was still down relative to last year’s record pace, it certainly does appear that sales momentum is picking up,” said Mr. Syrianos.

The MLS® Home Price Index Composite benchmark price was up by 9.7 per cent on a year-over-year basis in October.  Annual rates of price growth were strongest for townhouses and condominium apartments.  The average selling price for October transactions was $780,104 – up by 2.3 per cent compared to the average of $762,691 in October 2016.

“The housing market in the GTA has been impacted by a number of policy changes at the provincial and federal levels.  Similar to the track followed in the Greater Vancouver Area, it appears that the psychological impact of the Fair Housing Plan, including the tax on foreign buyers, is starting to unwind,” said Jason Mercer, TREB’s Director of Market Analysis.

“TREB will be undertaking its annual consumer polling process over the last two months of 2017.  This polling will include research into the impact of recent and proposed government policy changes on consumer intentions to buy and sell homes in the GTA, including the impacts of the new OSFI guideline and a potential vacancy tax in the City of Toronto.  In addition, TREB continues to work with different levels of government on solutions to the long-term housing supply issues in the region,” added Mr. Syrianos.

Wednesday, November 8, 2017

It turns out Canada's house prices aren't too bad

While plenty of homeowners, potential homeowners, and experts will disagree, Canada’s homes are not as expensive as we may think.

While affordability remains a huge issue, when put into a global context Canada is far from the most expensive.
CENTURY 21 Canada has surveyed 75 cities in 27 countries and compared the average-price-per-square-foot (APPSF).

Most expensive is Hong Kong where the average single-family home in Kowloon costs C$3,570 per square foot; followed by Beijing at $1,005.31 and Shanghai at $955.39.

For condos, Hong Kong also leads at $2330.80 followed by Al Khobar (Saudi Arabia) at $1,479.92 and San Francisco at $1,454.57.

By comparison a single-family home in West Vancouver would cost $824.47 per square foot with a downtown condo at $1,172.80. In Toronto, a downtown condo costs $833.20 per square foot.
"Canada's housing market has attracted much attention over the past few years. These numbers show just how we rank on a global scale," says CENTURY 21 Canada Executive Vice-President Brian Rushton. "While prices are no doubt expensive, we really rank in the middle of the pack when compared to other global cities." 

Monday, October 30, 2017

GTA REALTORS® Release September Resale Housing Market Figures

Toronto Real Estate Board President Tim Syrianos announced that Greater Toronto Area REALTORS® reported 6,379 sales through TREB’s MLS® System in September 2017.  This result was down by 35 per cent compared to September 2016.

The number of new listings entered into TREB’s MLS® System amounted to 16,469 in September – up by 9.4 per cent year-over-year.

“The improvement in listings in September compared to a year earlier suggests that home owners are anticipating an uptick in sales activity as we move through the fall.  Consumer polling undertaken for TREB in the spring suggested that buying intentions over the next year remain strong.  As we move through the fourth quarter we could see some buyers moving off the sidelines, taking advantage of a better-supplied marketplace,” said Mr. Syrianos.

The average selling price in September 2017 was $775,546 – up 2.6 per cent compared to September 2016.  The MLS® Home Price Index (HPI) composite benchmark was up by 12.2 per cent on a year-over-year basis.  A key reason for the difference in annual growth rates between the average price and the MLS® HPI composite is the fact that detached homes – the most expensive market segment on average – accounted for a smaller share of overall transactions this year compared to last.

“With more balanced market conditions, the pace of year-over-year price growth was more moderate in September compared to a year ago.  However, the exception was the condominium apartment market segment, where average and benchmark sales prices were up by more than 20 per cent compared to last year.  Tighter market conditions for condominium apartments follows consumer polling results from the spring that pointed toward a shift to condos in terms of buyer intentions,” said Jason Mercer, TREB’s Director of Market Analysis.

Saturday, October 14, 2017

Why the GTA's detached houses remain a safe bet

In spite of recent scares regarding their values, detached houses remain the strongest real estate investment to be had in the GTA.

Government intervention contributed to the cooling effect experienced by the recently searing detached market segment, but by no means is the market headed for a crash, say industry insiders. While the market was unquestionably overheated, all indications are that it has stabilized.

According to Richard Lyall, President of the Residential Construction Council of Ontario (RESCON), conditions for buying real estate remain highly conducive.

“The economy is doing relatively well and interest rates have moved up a bit, but they’re still very, very low relative to years gone by,” said Lyall. “In 2008, there was a steep drop in the market, but things settled and the market recovered very quickly. Given the fact that the economy is okay and we’re not in a recession, and everybody needs a house, it’s a good time to buy.”

Lyall also says the recent scare impelled by the drop in home values is overblown, and that it’s obvious a market correction was long overdue. However, he warned about confusing a correction with a crash.

“I’m not terribly concerned with where we’re at right now,” he said. “When you have prices accelerate, you know there’s going to be some kind of correction because it’s not really sustainable.”

Supply is still constrained, but the fundamentals of a strong market remain firmly in place. For one, high immigration levels will keep driving the need for housing.

“This is probably one of the most favoured spots to move to in the world,” continued Lyall. “There are a lot of places in the world that don’t have our water, land and resources, and our stable government, as well as rule of law, rights and freedoms.”

Tim Hudak, CEO of the Ontario Real Estate Association (OREA), agrees detached housing value will remain indomitable because of a few factors, including the provincial growth plan, which intentionally limits its supply. He also says that not much has changed in the last year, bespeaking a still-strong market.

“All of the economic factors that were driving demand remain, and many will actually get stronger,” said the former leader of the provincial Tories. “In the Greater Golden Horseshoe, we attract 200,000 immigrants a year and the economy is stronger than in the rest of Canada to help people find jobs.”

Despite recent interest rate increases – with more to follow – they’re still historical lows. He attributes the recent downturn in sales to sellers kicking tires as a response to government intervention, but says housing prices in parts of the Greater Golden Horseshoe, including the GTA, rose as much as 30%.

For perspective, Hudak pointed to decade long trends: In March 2007, there were 11,802 detached houses available for purchase, and exactly 10 years later there were only 233.

OREA put forth a list of proposals to the Wynne government, which Hudak credits for listening intently, but he still says they must be heeded for the real estate market to remain healthy.

“The most important issue for government to address for the province of Ontario and its large cities is increasing the housing supply to keep up with the growth and demand we’re going to see.”

Tuesday, August 1, 2017

TREB July Market Report, Forecast Update & Consumer Survey

Toronto Real Estate Board President Tim Syrianos, in his first release as TREB President, announced TREB residential MLS® sales, listings and price statistics for June, a mid-year forecast update and related Ipsos consumer survey results summarizing home buying and selling intentions.

June 2017 Results

Greater Toronto Area REALTORS® reported 7,974 sales through TREB’s MLS® System in June 2017 – down by 37.3 per cent in comparison to June 2016.

The number of new residential listings entered into TREB’s MLS® System, at 19,614, was up by 15.9 per cent compared to June 2016.  While this annual rate of growth was sizeable, it represented a more moderate annual rate of growth compared to May 2017, when new listings were up by 48.9 per cent year-over-year.

“We are in a period of flux that often follows major government policy announcements pointed at the housing market.  On one hand, consumer survey results tell us many households are very interested in purchasing a home in the near future, but some of these would-be buyers seem to be temporarily on the sidelines waiting to see the real impact of the Ontario Fair Housing Plan.  On the other hand, we have existing home owners who are listing their home because they feel price growth may have peaked.  The end result has been a better supplied market and a moderating annual pace of price growth,” said Mr. Syrianos.

June’s average selling price for all home types combined for the TREB market area was $793,915, representing a 6.3 per cent increase compared to June 2016.  Year-to-date through the first six months of 2017, the average selling price was up by 20.9 per cent to $870,016.  A better supplied market has certainly been a key factor influencing the moderation in price growth.  However, the average selling price has also been impacted by the fact that the greatest home sales declines were for more expensive home types, most notably detached houses.  This means the change in the mix of homes sold this past June compared to a year earlier has also had a substantial impact on the overall average selling price.

Annual growth rates for MLS® HPI benchmark prices have moderated over the past two months, but remain strong.  The MLS® HPI composite benchmark price was up by 25.3 per cent on a year-over-year basis in June.  However, on a month-over-month basis, we have seen diverging trends.  Benchmark prices were down on a month-over-month basis for detached houses (-1.3 per cent), attached houses (-1.4 per cent) and townhouses (-0.04 per cent).  In contrast, benchmark prices continued to climb on a monthly basis for apartments (+1.0 per cent).

Ipsos Spring Consumer Survey Results

Following the announcement of the Ontario Fair Housing Plan, TREB commissioned Ipsos Public Affairs to undertake two consumer surveys: one focused on home buyers; the other focused on home sellers.

Highlights from these two surveys, conducted from May 23-29, are as follows:

Home Sellers
  • 30 per cent of GTA households are very likely (12 per cent) or somewhat likely (18 per cent) to list their house over the next year.
  • 15 per cent of households said that the Fair Housing Plan was the primary reason why they would list their home for sale over the next year.
  • Close to 80 per cent of households who said they were likely to list their home said they would be purchasing another home.
Home Buyers
  • 35 per cent of households surveyed indicated that they were very likely (13 per cent) or likely (22 per cent) to purchase a home over the next year – similar to what was reported from the Ipsos survey conducted for TREB in the fall of 2016.
  • 40 per cent of likely buyers indicated they would be first-time buyers – a marked decline from 53 per cent in Ipsos’ fall survey.
  • 10 per cent of households who said they would NOT purchase a home over the next year said the Fair Housing Plan was the key factor in this decision (one per cent) or a contributing factor (nine per cent).
“The recent Ipsos survey results suggest that home buying activity in the GTA will remain strong moving forward.  The year-over-year dip in home sales we have experienced over the last two months seem to be the result of would-be buyers putting their decision to purchase temporarily on hold while they monitor the impact of the Fair Housing Plan.  On the supply side of the market, it certainly looks as though buyers will benefit from more choice in the second half of 2017 compared to the same period in 2016,”said Jason Mercer, TREB’s Director of Market Analysis and Service Channels.

Forecast Update

The Ontario Fair Housing Plan has prompted some households to put their decision to purchase a home on hold, at least in the short-term.  This includes would-be first-time buyers, who have more flexibility, allowing them to take a wait and see approach.  However, the recent Ipsos survey results dealing with likely home buyers suggest that many households who have moved to the sidelines will return to the market over the next year, possibly after reassessing the type and/or location of home they plan to purchase.

“The Ontario government recently released their first wave of foreign buyer statistics, which confirmed earlier TREB research that showed foreign buyers, even in the pre-Fair Housing Plan era, represented a very small proportion of overall home purchases – slightly less than five per cent. This, taken along with the strong buyer intentions reported by Ipsos, suggests that we will see many households moving back into the home ownership market over the next 12 months,” said TREB CEO John DiMichele.

“It remains to be seen whether the level of inventory will hold up to accommodate the eventual resurgence in demand.  The Fair Housing Plan was less precise as it related to long term housing supply issues.  Moving forward, TREB looks forward to working with the Ontario government in the development of effective, evidence-based policies pointed at the housing market,” continued DiMichele.

While the impact of the Fair Housing Plan may be temporary as it relates to home sales, it is important to note that the probability of higher borrowing costs over the next 12 months has increased.  The consensus view is that the Bank of Canada will raise its Target for the Overnight Rate at least once in the second half of 2017 and perhaps more than once.  Prospective Bank of Canada increases have already been priced reflected in Government of Canada bond yields and posted mortgage rates, at least to some degree.  Advertised discounted mortgage rates, however, remain at or near historic lows.

Taking into account both the temporary impact of the Fair Housing Plan and the further impact of higher borrowing costs, TREB’s forecast range for home sales through its MLS® System in 2017 has been revised downward to between 89,000 to 100,000 transactions.

While home sales for calendar year 2017 will be down, listing activity will be up.  As home owners react to strong equity gains over the past year, plus feelings that price growth will moderate in the future, new listings entered into TREB’s MLS® System are expected to increase year-over-year. Look for the total number of new residential listings to range between 175,000 and 190,000 this year.

More balanced market conditions, with sales accounting for a smaller percentage of listings in the second half of 2017 compared to the first half, and particularly the first quarter.  The overall growth rate for the average selling price in 2017 will be between 13 per cent and 18 per cent.  While an annual rate of growth in this range will still be very strong from a historic perspective, it is important to note that it will also represent a moderation in year-over-year average price growth in the second half of the year.  This moderation will be due to both more balanced market conditions and a change in the mix of homes purchased, with a greater share of purchases accounted for by townhouses and condominium apartments.

Release Highlights
  • TREB MLS® sales were down by 37.3 per cent year-over-year in June.  Over the same period, the number of new listings was up by 15.9 per cent – a deceleration in the annual growth rate compared to May.
  • The MLS® Home Price Index (HPI) composite benchmark price was up by 25.3 per cent on a year-over-year basis in June, but on a month-over-month basis the composite benchmark price was down.
  • The average selling price for all home types combined was 793,915 up 6.3 per cent compared to June 2016.
  • Looking forward, calendar-year TREB MLS® sales are expected to range between 89,000 and 100,000 – down from the record level recorded in 2016.
  • A recent consumer survey conducted by Ipsos following the announcement of the Ontario Fair Housing Plan suggests that home buying intentions for the next 12 months remain strong and in line with past survey results from the fall of 2015 and 2016.
  • The results from a recent Ipsos survey of intending home sellers supports recent trends in TREB MLS® data pointing to elevated levels of listings compared to 2016.
  • An increased supply of listings coupled with a dip in home sales will result in a more moderate year-over-year pace of price growth in the second half of 2017, but the calendar year growth rate for 2017 will remain in the double-digits.

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