April 2008 eNewsletter

There has been a great deal of discussion lately regarding the state of the real estate market in Toronto. The media is desperately trying to tie the Canadian real estate market to the situation in the US real estate market. Obviously, the US and Canadian economies are related, but that certainly doesn’t mean our real estate market will follow the US real estate market.

To get some insight into the state of our market, the Broker/Ownership team at RE/MAX Hallmark met recently with Craig Alexander, the Deputy Chief Economist for TD Bank Financial Group. He pointed out a few major differences between the U.S. and Canadian markets (some of which I have mentioned in previous emails) and gave us some guidance for the future.

In the United States, the real estate plunge has been devastating, and may not have hit the bottom in some major markets. House prices in the States are down 9% (on average nationwide) from their peak. It is widely viewed that the decline in average house prices nationwide could reach a decline of 15%. What caused this meltdown? It can be largely attributed to the inappropriate lending practices of some mortgage institutions. In recent years, up to twenty-five per cent of all new mortgages in the States were sub-prime loans, often to borrowers who wouldn’t normally qualify. This speculative segment was caught off guard when the US Federal Reserve increased their prime rate from 1% to 5.25% in fewer than 24 months. That steep increase to interest rates made mortgage renewals too expensive for many borrowers, who were forced to either sell or walk away from their mortgages. That caused an over-supply of houses for sale and tipped off a decline in prices, leaving huge exposure for the speculators, lenders, and their backers. The ripples moved up the lending chain – and across the lending industry – resulting in the much talked-about ‘credit crunch’.

Also, the pain in the US real estate market has not been limited to re-sales, but has naturally hit the new home construction segment hard. House construction is a huge economic driver (think of the building materials, appliances, furniture, transportation and jobs), so the drop in new home construction has had wide ranging consequences for the US economy.

By contrast, here in Canada we have much more conservative lending practices, so we haven’t experienced those mortgage problems. We also have more conservative building practices. In the US, they typically build on speculation, while in Canada 80% – 90% of a development has to be pre-sold before the shovel breaks the ground – a lesson Canadians learned in the early 1990s.

Quite simply, when we look at the two big problems in US real estate and compare directly to the Canadian market, we see that we have neither the credit issues nor the high degree of speculation that have caused them so much misery. So, what is driving our Canadian (specifically Toronto) real estate market? Here are some statistics that help to explain the strength of our market:

– 5.8% national unemployment rate, a 33 year low
– 6% unemployment in Ontario (down from 7% at this time last year)
– 2% national inflation, near the record low
– 5.7% increase in wages and salaries (year-over-year)
– 3% increase in purchasing power
– 60 – 70% of first time buyers choosing 40 year amortization terms, which has created a whole new pool of (qualified) buyers
– Cheap entry points in our market, including condos and townhouses/row houses

We know that in the long term, household (or family) formation drives housing demand. Immigration will continue to be a big contributor to that. The big Canadian cities such as Toronto, Vancouver, Calgary and Edmonton will have the largest population growth because immigrants to Canada tend to flock to these big centers – particularly Toronto. (The City of Toronto web site states that Toronto received an average of 69,000 new residents per year from 2001 to 2005 – and everybody has to live somewhere!) Population growth will continue to drive the housing market in these centers.

Naturally, there are things to watch for that may negatively influence our market. Real estate could suffer if either of the following occurs:

– Steep increase in the Bank of Canada prime lending rate over a short period of time
– Sudden spike in house prices in Toronto over just a few months (above recent trend of 5% – 8% per year)

At this point, it is not likely that the Bank of Canada will push rates up any time soon. In fact, the expectation today is that interest rates will continue to go down, perhaps by as much as 150 basis points (1.5 percentage points) over the next few BoC meetings. With this decrease, variable interest rates for mortgages will come down, but 5 year fixed rate mortgages may remain constant. (Talk to your mortgage broker or lender about your options.) That’s good news for the economy as a whole, and real estate in particular.

The bottom line is that the Toronto real estate market is stable. There is no reason to expect a sudden price spike or price drop. This spring, activity and appreciation have moderated in some areas, which is good for longer-term growth. (Some of that may have been weather related, as much of the city was slowed down by the snow. Also, it’s not clear if the new Toronto Land Transfer Tax had – or will have – any impact on the local re-sale market.) Supply is still tight, but is currently increasing as the spring market picks up. All in all, we have high employment, low inflation, increasing purchasing power and low borrowing rates combining to keep homes affordable. Based on that, we expect the market to continue its healthy trend through this year into next. (By that time the US should be through the worst of its current problems, and we can put all of this behind us!)

As always, please contact me with your questions and/or comments, and feel free to forward this to anybody thinking of buying or selling real estate this year!