For those of you that tried to rent a condo or apartment in 2011, the following should come as no surprise!
Here’s a report from Canada Mortgage & Housing Corporation that’s chalk full of statistics you’d otherwise have a hard time finding with your Google-fu…
OTTAWA, December 13, 2011 — The average rental apartment vacancy rate in Canada’s 35 major centres decreased slightly to 2.2 per cent in October 2011, from 2.6 per cent in October 2010, according to the fall Rental Market Survey released today by Canada Mortgage and Housing Corporation (CMHC).
“Modestly higher levels of employment among persons aged 15 to 24 likely increased household formation among young adults, thereby increasing rental housing demand. This, combined with the supply of newly constructed rental apartments moving slightly lower, pushed Canada’s vacancy rate downward, said Mathieu Laberge, Deputy Chief Economist at CMHC’s Market Analysis Centre. “Demand for rental condominium apartments remained strong, with the vacancy rate for such units falling in most of Canada’s largest urban centres, including Toronto, Montreal and Vancouver.”
The results of CMHC’s fall survey reveal that, in October 2011, the major centres with the lowest vacancy rates were: Regina (0.6 per cent), Winnipeg, Kingston and Guelph (1.1 per cent), and St. John’s (1.3 per cent). At the provincial level, Manitoba had the lowest vacancy rate at 1.0 per cent. Newfoundland and Labrador (1.3 per cent) and Saskatchewan (1.9 per cent) were the other provinces with vacancy rates below 2.0 per cent.
The survey reveals that the major centres with the highest vacancy rates were: Windsor (8.1 per cent), Abbotsford (6.7 per cent) and Saint John (5.9 per cent). On a provincial basis, the highest vacancy rate was in New Brunswick (4.8 per cent).
The Canadian average two-bedroom rent in new and existing structures was $883 in October 2011, compared with $860 in October 2010. With respect to the Census Metropolitan Areas (CMAs), the highest average monthly rents for two-bedroom apartments in new and existing structures in Canada’s major centres were: Vancouver ($1,237), Toronto ($1,149), Ottawa ($1,086), Calgary ($1,084), Victoria ($1,045), Edmonton ($1,034) and Barrie ($1,001). These are the only major centres with average rents at or above $1,000 per month. Provincially, the highest average monthly rents were in British Columbia ($1,050), Alberta ($1,044) and Ontario ($1,002).
The lowest average monthly rents for two-bedroom apartments in new and existing structures were: Trois-Rivières ($547), Saguenay ($557) and Sherbrooke ($577). On a provincial basis, the lowest monthly rents were: Québec ($684), New Brunswick ($687) and Newfoundland and Labrador ($701).
Year-over-year comparisons of average rents can be slightly misleading because rents in newly built structures tend to be higher than in existing buildings. Excluding new structures and focussing on structures existing in both the October 2010 and October 2011 surveys provides a better indication of actual rent increases paid by tenants. Overall, the average rent for two-bedroom apartments in existing structures across Canada’s 35 major centres increased 2.2 per cent between October 2010 and October 2011, slightly lower than what was observed between October 2009 and October 2010 (2.4 per cent).
CMHC’s fall Rental Market Survey also found that the rental apartment availability rate in Canada’s 35 major centres was 3.2 per cent in October 2011, down from 3.8 per cent in October 2010. A rental unit is considered available if the unit is vacant (physically unoccupied and ready for immediate rental), or if the existing tenant has given or received notice to move and a new tenant has not signed a lease. Availability rates were highest in Windsor (9.2 per cent), Abbotsford (7.5 per cent), Saint John (6.7 per cent) and Hamilton (6.2 per cent). The lowest rates were in Regina (0.9 per cent), Winnipeg (1.6 per cent) and Saguenay (1.7 per cent).
As Canada’s national housing agency, CMHC draws on more than 65 years of experience to help Canadians access a variety of high quality, environmentally sustainable and affordable housing solutions. CMHC also provides reliable, impartial and up-to-date housing market reports, analysis and knowledge to support and assist consumers and the housing industry in making informed decisions.
Okay, for those of you that’ don’t like statistics and prefer when I just post stories from my day-to-day life as a Realtor, then this clearly isn’t the blog you’ve been looking forward to!
But just consider the numbers for a moment. Vacancy is at a staggeringly-low 2.2% in Canada’s major centres.
Where else on the planet can you compete with that?
The overall vacancy rate in the United States (at the start of 2011 – sorry, but my Google-fu is weak…) was 11.4%.
Miami’s vacancy rate was 22.8%.
And what of our city – Toronto?
Vacancy rates are an unthinkable 1.4%.
When it comes to explaining high vacancy rates, experts always say the same thing,”You can only live in ONE home.” That’s precisely the problem! Many urban centres where over-building was rampant in the last few years have seen vacancy rates skyrocket! There has to be somebody to live in the property once it’s bought, built, and handed over to the owner. Speculators all over the United Stats got burned, and there has always been talk of this happening in Canada.
But with vacancy rates in Toronto at 1.4%, how ‘bad’ could things truly get?
It seems to me that the net migration of individuals into Toronto outstrips the amount of new condos being built – even if those condos are complete garbage like the CityPlace crap that’s going up and spreading towards Queen West.
But 1.4%? Talk to me, please. Tell me how if this number DOUBLED, we could still say, “There are too many condos in downtown Toronto.”
Believe me – my intention was not to write a feel-good, happy-go-lucky “the market is great, now is a great time to buy” type blog post. But when I see numbers like this, I have to feel good about my current real estate holdings and the value of my principal residence.
Just ask anybody who spent 2011 trying to rent a condo or an apartment how difficult things are.
I friend of mine spent every weekend out with his girlfriend looking at rentals, and half the time he would show up and the place would be leased! The other half of the time, prospective tenants would be mulling about the property with file-folders containing their employment letters and pay-stubs.
It’s not a kind rental market, and perhaps that’s why so many people bought properties in 2011.
So does that mean that if the rental market softens, the resale market will as well?
Is that even possible – both, that is?
Changes to Canadian mortgage rules have intended to weed out “the buyers that shouldn’t be buying,” and yet Toronto is still ripe with investors who have to make a minimum 20% downpayment when they buy a second property in their names.
And this month’s report on decreasing vacancy rates just goes to show that there seems to always be a renter waiting in the wings, hoping to see a “FOR LEASE” sign pop up, whether it’s your 1st, 2nd, 3rd, or 10th property…
buk
at 8:57 am
Don’t you think Toronto’s overheated market had anything to do wiht it? I’m guessing that many people have decided to rent rather than buy due to record high prices.
George
at 10:27 am
Shouldn’t rent be increasing at a faster rate? Are the limits on rental increases for existing tenants the only reason why that isn’t happening? A landlord would make more money by renting at $1150 with a 5% vacancy rate than he or she would by renting at $1100 with a 2% vacancy rate.
Joe Q.
at 7:25 pm
Back in the summer one of the Canadian economics blogs posted a graph showing how Toronto average rents had changed over time (since the early 1980s). The rate of rent increase since the late 90s has been pretty low overall — below the rate that would be implied by rent-control limits, certainly below the rate of home price increases (average price to rent is going up). The data is of course subject to the same caveats, but it is interesting nonetheless.
Kyle
at 10:50 am
In previous decades, it used to be common for highly-educated ambitious graduates to cut their teeth in Toronto, then move on to the “big leagues” like New York, Hong Kong or London to work. In the last 5 years i’ve totally seen a reversal of this. A lot of the resumes i see now, are from people returning to Canada or people who held high level positions abroad. As these people get settled, they will typically rent for a few years then buy. Combine this with Toronto’s rising profile internationally, and it’s reputation for being a stable and safe place to live, invest and do business and it becomes pretty obvious that Toronto is not in a real estate bubble.
Joe Q.
at 7:12 pm
These highly-educated ambitious graduates and international investors make up only a small fraction of renters and buyers in Toronto. They may be driving house prices up, but at the end of the day, the overwhelming majority of Toronto residents are still paying their mortgages with money earned locally.
The ratio of average house price to after-tax income in Toronto barely changed from 1992-2003, but has since increased steadily and is now about 50% higher than the long-term average, even while the home-ownership ratio has increased. IMO the only factor that makes this possible is the availability of mortgage credit (low interest rates, larger LTV numbers, longer amortizations, changes in lending standards). Whether this constitutes a “bubble” or not is probably a semantic argument, but there are certainly lots of signs that the market here is overvalued.
Kyle
at 9:16 am
Looking at long term trends in Toronto has limited use, as Toronto is undergoing rapid change. The income distribution in this city is becoming bi-modal – FAST (number of rich are growing, number of poor are growing and the middle-class is shrinking), so year on year comparisons based on long term “average”, become less and less useful. If you want to do a real comparison, you have to strip out the incomes of those that have no hope or intention of buying a house (which is a very large and growing portion of Toronto’s population).
Joe Q.
at 4:15 pm
Everything I’ve read points to stagnating net average incomes, yet the home-ownership rate in Toronto has apparently increased over the last 10-odd years (so the census data indicates, at least).
Joe Q.
at 4:31 pm
I just re-read my earlier comment and realize it wasn’t clear. The ratio of average house price to average after-tax income in Toronto hovered around 9-10 from 1992-2003. This ratio has climbed steadily since 2003 and now sits around 15. This period also corresponds to extremely rapid growth in mortgage credit, which IMO is the major driver for house price appreciation (a critical mass of buyers buying houses with as much money as they are able to borrow).
Kyle
at 9:29 am
JoeQ
You bring up some good points and present some good arguments, but let me share why i think you’re wrong. The “average” Toronto income hasn’t budged much because (as has been noted in studies like “Toronto Divided: A tale of 3 cities” and other census studies), the rich are getting richer, and the poor are getting poorer. These two groups offset each other when you look at the “average” income. But they do not offset each other when you look at who’s buying houses (i.e. the poor have no impact on home prices, because they aren’t part of the market). The question really should be what’s the average income of those people getting mortgages? One mortgage broker (CanEquity) does provide their stats: In Toronto, the average age of mortgage applicant is 37, the average household income is $125K, and the average loan amount of $231K. This is hardly red flag territory, in fact i think it pretty much debunks the bubblist myth that the market is being driven by 20-somethings, buying condos with 0% down.
Also if you think about it, mortgage rates dropped quite a while ago and have remained low. If a drop in rates was what caused house prices to rise, the market should have adjusted to this one time shock and reached an equilibrium, then prices should have leveled off (i.e. we wouldn’t see prices still rising the way we do). So there’s obviously more to it than just low rates. The part that you don’t see when you look at average incomes is that the number of households in this city who make above “average” incomes is growing rapidly and that’s what’s driving the demand. The other big factor is there really hasn’t been any supply of decent listings.
Joe Q.
at 11:53 pm
Kyle — I saw your comments about income distribution when you first made them, and I am familiar with the “Toronto Divided” report. Average Toronto income may be constant as the rich get richer and the poor get poorer, but ultimately one still has to account for the increasing home-ownership rate in this city, and I’m not sure how that fits into your argument. If the growing numbers of rich and poor (vs. middle-class) are keeping average incomes relatively constant, how do you explain this increase?
Related to this point, if you think average income data masks some interesting and important information about income distribution, don’t you think that average mortgage borrower profiles might do the same? CanEquity’s borrowers might have an excellent collective debt-to-income ratio, but that doesn’t mean there aren’t a huge number of people on the margins. Remember that last January, when the government put an end to CMHC-backed 5%-down, 35-year amortizations, several mortgage brokers were quoted in the media as saying that these terms had been the choice of 90% of their first-time-buyer clients. CMHC data corroborates this to a point, reporting that the average down-payment among first-time buyers last year was 7%. It’s these buyers, and not the statistical average CanEquity borrower, that concern me most — they have the least skin in the game and will be the first to head for the exits if things get bad.
As far as mortgage rates are concerned, I completely agree with you — it is more than a drop in rates, which is why I referred to growth in mortgage credit. The increase in house prices in Canada overall correlates pretty well to mortgage debt as a fraction of GDP, which was consistently in the 40-45% range from the early 1990s until 2003, when it started to climb — mortgage debt is now at about 65% of GDP and even in real terms has grown very quickly. It is this large and increasing household mortgage debt — facilitated by low rates, low down-payments, and long amortizations — that has really fuelled the market.
AndSoItIsWritten
at 8:20 pm
When the president of TD Bank all but begs the government to step in on runaway lending practices in Canada, it becomes painfully clear that the joyride is over and you best gracefully exit stage-left before the final act is over.
This blog entry reeks of real estate agent desperation in response to the growing realization that the emperor that is the Toronto housing market wears no clothes.
It’s been a wild ride…
But the writing is on the wall (and in the papers, and on television and in your parliament)
Thanks for the memories, David.
Sell your “investment” before it’s too late.
Godspeed.
dave
at 9:27 pm
Absolutely. Everyone I know in London and NY are chomping at the bit to move to the big leagues of Toronto. Of course, it stands to reason that once they sell their expensive NY/London homes, they will start out renting in Toronto. The reasons are too obvious to bother explaining. And as far as Toronto being in a bubble?? Man, that’s just crazy talk.
Kyle
at 8:58 am
Wonderful rhetoric, too bad it has about as much substance as a fart.
In the last couple of years there have been at least 3 brand new office towers built in the Financial District, that’s over 2.6 million sq ft. I suppose you think they built all this space for $hits and giggles. It couldn’t possibly have anything to do with needing space to house more workers in Toronto. Of course not that would be crazy talk.
Dave
at 11:52 am
“Wonderful rhetoric, too bad it has about as much substance as a fart.”
Woah there!
You’re being way too hard on yourself. I agreed with everything you said. I wouldn’t have agreed with you if your comments had as much substance as a fart.
Kyle
at 3:53 pm
@ Dave
You come off as the grown up version of one of those annoying little kids, who sticks his finger 1 inch away from his sibling’s nose, and then says, “I’m not touching you, I’m not touching you”.
As you sit back smugly patting yourself on the back at how clever and funny you think you are. You should realize that: A) you actually aren’t funny and B)even if you were funny, being funny without having anything to actually say does not make you look smart, it makes you look like a second rate Mr Bean.
AndSoItIsWritten
at 2:17 pm
@ Kyle
The only thing gassy is believing the hype.
It may be smart to ask how many of those taking jobs in the 3 brand new office towers are living in the 905. Judging by the painfully slow rush hour commute out of the city and the equally painful sardine-like packing of GO commuters, it’s fairly clear that the ability to create a new office tower has nothing to do with the current ridiculousness that is the pricing of the GTA housing market.
Even when the housing market explodes there’s no indication that commercial properties are headed the same way. The banks of all institutions will be the least likely to be hurt anyway; all of their risk has been absolved by the backing of tax-payer funded mortgage insurance.
Even when your Roncesvalles, Queen West, Cabbage Town, Yorkville condo/townhouse/duplex’s value recedes to pre-2000 levels, and you realise your house is worth much less than the balance of your mortgage, all the financial institutions will still be posting record profits… and quite possibly buying your property for half what you paid for it because they need to make room for a commuter parking lot.
Can’t say I didn’t warn you.
David Fleming
at 2:39 pm
@ AndSoItsWritten
You make some valid points, but your last post is full of hyperbole; unless, of course – you really believe it…
When you say, “half of what you paid for it,” please tell me that’s an exaggeration, right?
Do you foresee a time when today’s $800,000 Riverdale home is worth $400,000?
I don’t. I’d be my investment portfolio on it.
Will prices level off? Eventually. Will they decrease? At some point, yes. But to suggest that the market will drop HALF is immature. It reminds me of my childhood friend who told me in 2007, when we were selling the family home, “You should sell it today and then in five years – buy it back for half of what you sold it for.” Great idea! Boy – he knew it all! The house is worth substantially more today than it was when we sold it – although there was a short-term blip when the property value decreased after we sold it. For him to suggest that one day somebody could buy a double-lot in Leaside for HALF of what it sold for a few years earlier was utter nonsense. He’s still renting an apartment for $700/month, FYI…
Kyle
at 3:26 pm
Care to back up your prediction? You’ve presented 0 facts, 0 insight, 0 rationale and 100% hyperbole.
I am fairly certain whatever lame rationale you come up with i can punch a hole big enough to drive an Airbus A380 through.
AndSoItIsWritten
at 9:11 pm
@ David Fleming
I do, on one hand, have to hand it to you. I have noticed a couple of times you mentioning that when buying a property you have think of resale value. I recall specifically one video where you showed your readers a condo that overlooks a parking lot, and mentioned specifically the difficulty an owner would have selling such a property in a buyer’s market.
Clearly he or she who buys into the market now should be buying A) because he or she can afford the house at a rate of interest at or near 8% (our historical average over the last 20 years) and B) is looking for a long-term HOUSING solution, not a rental or capital investment. Like the stock market, the money has already been made in the housing market. Smart investors buy low, sell high. Most Canadians didn’t get the memo.
My comment about a drop in price of 50% was somewhat tongue in cheek, keeping in mind that if this were to happen we’d have a lot more to worry about than just house prices as our middle class and we would be thrust into one of the worst economic depressions in the history of Canada, and that the Riverdale Home Owner’s association would lay an egg if one were to consider creating a local parking lot.
Having said this, a 15% decline is probable and 25% is not entirely out of the question in the near future. (That $800,000 Riverdale home would lose over 100k in value at a 15% decline, 160k at 20%), while the property is still mortgaged at a value of 800k).
A new home buyer needs to ask him or herself: What happens when interest rates increase but property values fall and wages don’t match inflationary growth?
If we look at some U.S. neighbours to the South (California, Florida), and our friends in Europe (Spain, Ireland) we see that a 50% drop is not entirely out of the question, either.
Since the height of the real estate boom in 2007 house prices have since fallen nearly 50% in Dublin. (Source: rte.ie/news/2011/0513/house.pdf). I was living in Ireland until 2008. I left before the poop really hit the fan and I can tell you that the situation in Canada is 100% the same, if not more dangerous due to Canadians’ penchant for easy credit.
To claim that Canadians are somehow immune to such realities when emergency interest rates have been in effect for several years, Canadian banks and credit unions still “loan” clients down payments for homes they can’t afford, and the average Canadian owes $1.53 for every $1 he earns, is nothing more than a demonstration of how sheep-like we really are.
When Bank of Canada finally introduces much-needed maximum amortizations of 25 years, and raises interest rates to tame renegade inflation, a house price correction is guaranteed.
I just hope that it doesn’t all come too late, bringing us all to our knees.
Joe Q.
at 11:16 am
Interesting post, David, but I would be exceedingly careful about reading too much into CMHC vacancy statistics. They are probably useful as an indication of the longitudinal trends (how vacancy changes over time) but I think the absolute numbers under-report vacancy by a significant margin.
Here is a page outlining the CMHC’s methodology: http://www.cmhc-schl.gc.ca/en/hoficlincl/homain/stda/suretaanme/suretaanme_002.cfm?renderforprint=1
What stands out for me are the following aspects of CMHC’s methodology:
(1) They only consider buildings with three or more rental units. The massive stock of rental houses, duplexes with two rental units, and basement apartments are not surveyed in this report.
(2) There is a “Secondary Rental Market Survey” that the CMHC apparently conducts every September that does attempt to survey the rental situation for basement apartments, duplexes, and houses, but that is separate from this report, and the secondary survey only reports on rents, not on vacancy.
(3) CMHC appears to only consider units “which have been on the market for at least three months”. The wording is unclear, but it implies that an empty unit which has been on the market for two months is not actually considered “vacant” for the purposes of the report.
(4) The survey is done by voluntary response. Rental units that are in some way illegal or illicit would be under-reported. I’m not sure how big of an issue this would be.
In light of this methodology, it’s probably safe to say that any comparison of CMHC-reported vacancy rates with American statistics is likely to be an apples-to-oranges situation.
Of course, the demand for rentals in nice buildings and hot areas will always be strong, and the CMHC’s data is probably useful for looking at vacancy trends over time, but as an absolute measure of vacancy, it is probably flawed.
Jeremy
at 11:25 am
Interesting.
I rented a townhouse earlier this year (in May) and I looked at 5 or 6 places and didn’t get the feeling that there was much competition at all. (My only criteria for location was that I wanted to be within a 10 minute walk to the subway/ and a 30 minute total commute to the financial district.
I was able to negotiate below asking price on a few different places- and selected one that fit all of my criteria- including location. At the current real estate valuations it would be impossible for a landlord to be cash-flow positive on this place with a 20% down payment.
I would be interested in hearing anybody else’s experiences in the rental market in Toronto
sheeplessinseattle
at 1:06 pm
And once the 30k plus condos in pre-construction are finished…
Dave
at 1:06 pm
As it happens, new unit construction in Toronto has exceeded population growth over the past 10 years (I checked this in detail at Stats Cana recently).
So how can vacancy rates decrease?
My guess (admittedly just a guess) is there has been a reduction in space available for roommates/shared housing/etc due to mortgage affordability due to low rates. People who might otherwise rent out that extra room, or their basement/etc, are able to carry their mortgage without that extra renter
Kyle
at 9:10 pm
The reason is an increase in household formation.
jeff316
at 8:54 am
Yes, household growth has outpaced population growth since 2000. Plus, the loss of rental units from the mid 1990s on also suppressed vacancy rates.
Dave
at 1:30 pm
Table 1 at following US Census link shows, surprisingly, that vacancy rates in the USA have been consistently been between 9-10% for more than 10 years now. Even throughout the 90’s it was 7-8%.
http://www.census.gov/hhes/www/housing/hvs/historic/index.html
Perhaps there is a different method of defining vacancy US vs Canada?
jg
at 4:32 pm
I personally was in the hunt for a rental at the beginning of the year. i did find it to be quite competitive. the owners had their pick of the litter. the ball was always in their court. i felt if you requested a change not matter how small ie lease agreement language, rent, etc. they moved on to the next applicant.
Martin
at 4:49 pm
We have never had to wait ONE day to find a tenant for our basement appartment in the Beaches that I rent out at $850/month all inclusive. As soon as our ad hits Craigslist, we are swamped by inquiries. This tells me a lot about the rental market in Toronto, particularly for lower priced options, given that you can rent a very decent apartment in a trendy neighborhood in Montreal for the same price (albeit notjhing included). Toronto real estate is insane whether you’re buying or renting!!!
Joe Q.
at 7:33 pm
Another angle worth considering is cash-flow or profitability in the Toronto rental market. Vacancy (as defined by the CMHC) may be going down, but are landlords as a group making more money than they used to? There are a lot of stories out there about cash-flow-negative condo investors. Their units aren’t vacant, but they aren’t making any money either (unless they sell the units at a net gain).
Mike
at 9:22 am
People seem to forget the amount of people moving into the city every year. They just ignore it? Not only are the buyers and renters coming from over seas, but now many 905ers are purchasing or renting in the city to be close to work.
Dave
at 11:55 am
In the GTA new unit construction has consistently exceeded population growth over the past decade.
Potato
at 11:42 am
“But with vacancy rates in Toronto at 1.4%, how ‘bad’ could things truly get?”
Do vacancy rates mean much with respect to property values?
In Toronto, vacancy rates were persistently low (less than 1%) all through the late 80’s; yet prices crashed in 1989, and in 1990, the vacancy rate started increasing.
In Miami, the vacancy rate was persistently high, in the 8% range, but nonetheless flat all through the 2000’s until after 2007, when it started spiking up.
“So does that mean that if the rental market softens, the resale market will as well?”
Likely the other way around.
This is sometimes explained by speculators holding vacant units — why go to all the trouble of actually renting a place out if all the money you make is from appreciation? Then once the market finally turns, they become reluctant landlords. That’s by many measures a pretty nutty mindset, but it doesn’t take many of those to skew the numbers: a 1% vacancy rate is ~3000 units.
And from the other side: a building boom attracts a lot of people (largely construction workers). Once it’s over, those people filter away from the city, reducing demand and increasing supply.
Whatever the explanation, vacancy rate doesn’t appear to be a leading indicator.
Joe Q.
at 4:22 pm
I would again caution against comparing CMHC vacancy data to that calculated for any other jurisdiction. The methodology is just too “unique”.
Mike
at 12:58 pm
Again everyone talks about the 80’s bla bla bla. Miami???? Your comparing toronto market to florida???? The worst market in north amereica. To many google speculators here, how many people actually owned or own toronto properties on this blog. Id like to know. Forget what happened 20 years ago, different market now.
Joe Q.
at 4:21 pm
Miami and Toronto are very different markets now, but many of the foreign investment- and population-growth related arguments people are making about the Toronto market were also made about the Miami market in the early and mid-2000s.
AndSoItIsWritten
at 9:14 pm
All markets follow cycles, Mike.
As long as human beings are doing the buying a selling of these assets, the housing market, just like the stock market, will follow highs and lows dependent upon investor sentiment, economic outlook, and market conditions.
Remembering what’s happened 20 years ago provides us with perspective… something a lot of people seem to have lost in all investment markets around the world.
dunky
at 2:42 pm
Chock-full.
Kyle
at 1:41 pm
@AndSoItIsWritten
This is meant to be a reply to your repsonse to Dave F above, but the Reply button wasn’t available.
I 100% agree with your cautionary tone, i think you’ve suggested a great test no matter what kind of Real Estate market we are in, by stating, “A new home buyer needs to ask him or herself: What happens when interest rates increase but property values fall and wages don’t match inflationary growth?”. However i think it is way too simplsitic to imply that what happened in Ireland or US can and will happen here, without closely examining the underlying factors that caused those events.
In Canada the mortgage delinquency rate is 0.47% (about the same as it was in 2000 at the start of Canada’s bull market), in the US it is 5.3%. The big reason for this difference is Canada has way tougher lending standards. In Canada they aren’t giving minimum wage earners fraudulent mortgages for $500K en masse, the way aggressive sub-prime lenders were. In fact there really isn’t much of a sub-prime mortgage market in Canada. In the US, homeowners would often refinance their homes, to take out all of their equity. In Canada, those with mortgages have on average 50% of their home’s value in equity. So bottom line is, no i don’t think what happened down there is going to happen up here.
While i also don’t agree with using average of “everybody’s” incomes (because frankly not “everybody” is going to own a home) to make Real Estate projections, i’ll indulge it for the purpose of making a point. As far as owing $1.53 for every $1 goes, the max GDS ratio is $3.20 for every $1, which actually means on average we are no where near maxing out.
Joe Q.
at 3:07 pm
It is undeniably true that, at its worst, the US had far looser lending standards than anything we’ve seen here. However, my understanding is that the fraction of all mortgages in the US that were sub-prime was actually not all that large. Many (most?) of the people who were foreclosed on had more conventional mortgages but got in over their heads through re-financing, etc., as you mention.
We do not have the mortgage interest tax deductability trap that led to so much re-financing in the USA, but HELOC credit in Canada has been expanding very quickly, and we are also more exposed to changes in interest rates (standard mortgages in the US have rates locked-in for the entire amortization period — very different from what virtually all Canadian buyers experience).
Dave
at 6:14 pm
“As far as owing $1.53 for every $1 goes, the max GDS ratio is $3.20 for every $1, which actually means on average we are no where near maxing out.”
Completely apples to oranges.
The GDS ratio is “annual income per $ of annual housing cost” (mortgage, etc).
The $1.53 per $1 is “Debt per $ annual income”
But staying on the point you make, even if it was apples to apples, the comparison is not valid. It is impossible to reach the scenario you describe of a max average GDS ratio of $3.20 to 1. It could only happen if every single person had exactly the max ratio.
No worries. Math is hard.
Love 😉
A Second Rate Mr.Bean
Kyle
at 7:07 pm
“It is impossible to reach the scenario you describe of a max average GDS ratio of $3.20 to 1. It could only happen if every single person had exactly the max ratio.”
If “it could only happen if every single person had exactly the max ratio”, then it isn’t impossible, is it? That’s ok, real world concepts are hard for bubblists like you to grasp. I understand you’d prefer to live in a delusional world where miracles of mean reversion will one day bring the house, you think you “should” be able to afford within your reach. Enjoy your Christmas, as you continue living under your parent’s roof or in the retched basement apartment that you inhabit, waiting for the Real Estate “rapture” to happen.
Joe Q.
at 10:25 am
Why does every RE economics discussion have to devolve into slurs against renters? This ain’t Vancouver.
Potato
at 9:19 pm
Further to Dave’s point, the 153% debt ratio is a population measure. It’s pretty meaningless in isolation, since it averages out those who are 60 years old with their mortgage paid off, and those who are 25 and have debts 8X their income. But the important thing is to look at it over time: all else being equal, it should be stable. With the boomers skewing our population pyramid, we would expect it to be declining slightly (more old people = higher proportion of the population with their debts paid off = lower debt-to-income). Yet it’s risen over the past decade. A lot. That bears consideration.
Grant
at 7:34 pm
While I’m sure this is troubling for those looking for places to rent in Canada, it’s great news for the country as a whole. If only some of this could rub off on their neighbors to the south!
Costa Rica Golf
at 6:09 am
The report from Canada Mortgage & Housing Corporation that’s chalk full of statistics,I quite amaze to read the report…
JC
at 10:11 am
– Go read through the GTA Rental Market Report. https://www03.cmhc-schl.gc.ca/catalog/productList.cfm?cat=79&lang=en&fr=1324565292805
– Look at figure 4.3.1, Condominium Universe, Rental Units, Percentage of Units in Rental and Vacancy Rate (this refers to private condos that are for rent)
– Toronto CMA (which includes Toronto, Peel, Halton, York and Durham) has, according to the survey, 59,854 rental units in October 2011 and a vacancy rate of 1.1%. This means approximately 600 rentals are vacant
– Go to MLS.ca, check rentals instead of sales, zoom to any reasonable level of the downtown core, you get 500+ rentals listed. Most of these are for condos.
Tell me how the two reconcile? The vacancy rate quoted by CMHC is a farce.
Joe Q.
at 9:14 am
Easy — see my post above. Unless a unit has been on the market for at least the three months prior to the CMHC’s survey call, it is not considered vacant. Basement apartments, duplexes, and full houses for rent are also never considered “vacant” for the CMHC’s survey.
Kyle
at 11:00 am
@JoeQ
“but ultimately one still has to account for the increasing home-ownership rate in this city, and I’m not sure how that fits into your argument. If the growing numbers of rich and poor (vs. middle-class) are keeping average incomes relatively constant, how do you explain this increase?”
You bring up another good point – average incomes include each individual. Housing prices are not necessarily driven by “inviduals”, they are driven by “households”. Again, this is yet another reason why looking at average incomes to predict housing prices is misleading. Of course anytime you look at a dataset, you are potentially masking other factors, but looking at CanEquity’s data, compared to looking at average incomes, brings you WAY closer to the granularity you need to actually see what’s happening in the market.
To answer your question, the growth in home ownership rates is due to an increase in household formation. In Canada household formation was about 155,000 units/yr through the 90’s, 174,000 units/yr through the early 00’s, and increased even further in the second half of the 00’s. The increase in household formation is due to many things, amongst which are:
– An increase in the number of above average income earners in the population, which leads to more above average earning households.
– Changes in lifestyle and demographics (e.g. people staying single and living alone longer, rising divorce rates, increasing number of foreign placements, etc)
– Increasing foreign buyers, who wouldn’t appear in average income.
– And yes as you pointed out, easier facilities to funding. Though i again maintain, just because something is rising relative to historic levels, does not automatically make a bubble.
“CanEquity’s borrowers might have an excellent collective debt-to-income ratio, but that doesn’t mean there aren’t a huge number of people on the margins. Remember that last January, when the government put an end to CMHC-backed 5%-down, 35-year amortizations, several mortgage brokers were quoted in the media as saying that these terms had been the choice of 90% of their first-time-buyer clients.”
The January rules served to eliminate people who have no business buying houses. If there was ever a “huge number of people on the margins” (i.e. huge number of households, who needed the more lax rules to be able to afford a home), then we would have seen demand being choked off. The fact that there wasn’t a collapse, let alone a continued rise in prices after the rules went into effect, actually goes to show that those buying have the ability to afford it. Just because someone chooses longer am’s, and lower down’s, doesn’t mean they did so because that was the only way they could afford it. Some people are actually taking advantage of the low borrowing rates by putting less down, so that they can do improvements, buy furnishings or make investments. Some people are taking advantage of the longest am’s by aggressively paying down their mortgage principals, which saves interest in the long run.
Dave
at 11:06 am
Agree 100%.
The principle of Ockhams’ Razor postulates that the simplest answer is usually the correct one. Isn’t it obvious that Canadians are carrying their highest debt levels in history clearly because they choose to do so, not because they need to do so?
Housing is a volatile market that responds very quickly to economic forces. If there was no market correction in the 12 months after last years changes, then that proves that no change is coming.
Average housing prices justifiably increase faster than the economy because owning a home and living in it is a sacrifice by the home owner which adds great value to our economy and is rewarded accordingly.
Why can’t these doom and gloomers just get out of their parent’s basements and stop critizing us for using our home equity lines to renovate our kitchens? Debt based consumption is good for the economony, and there is no reason why it cannot continue indefinately.
Kyle
at 12:38 pm
@ Dave
Yet again you’ve added nothing original to the discussion, none of your own reasoning, rationale, insight or evidence. You are clearly incapable of supporting your own beliefs, so instead of coming up with actual arguments, you keep repeating what i say in a mocking tone, like a 5 year. I actually can’t be bothered to argue with someone who thinks they’re smart for coming up with, what amounts to an “I know you are, but what am I?” response.
Like i said before enjoy living in your delusional make-belief world where home prices respond to “what Dave needs in order to afford the house he wants” dynamics. Enjoy making your landlord wealthy while you wait for the “big one” that never comes. Enjoy watching the home that you think you “should” be able to afford keep moving further and further out of your reach each year – cause owning and building wealth is obviously for suckas. Anyhow, I can see how living in your make-belief world can be tough, so if it helps for you to cry bubble every now and then to keep your hope in the mean-reversion miracle alive, by all means feel free.
dave
at 11:34 pm
My dear Kyle,
You may not care for my sarcasm towards your myopic hubris, however I would suggest that the sarcasm stings because it highlights the increasingly strained logic you present to support the unsupportable.
Your own doubts in the integrity your reasoning are exposed as you resort to personal slanders of the proponent of the opposing argument built upon nothing more than extrapolated supposition and the creation of a suitable straw man to ridicule.
I must admit that your perceptive assessment of my character and lifestyle has hit quite close to the mark. Just the other day, as I emerged from my parents basement, my mother said to me “Dave, honey, you are into your 40’s, you studied pure math at Oxford and you are an actuary and insurance executive making $200k a year! Maybe it’s time to move our of our basement?”. Good read!
As for my assessment of your personality? I know nothing about you or your lifestyle and would never be so naive nor so arrogant as to presume otherwise based solely upon a few anonymous internet posts. But I will simply say that if your financial situation would suffer in the face of a 25% decrease in residential real estate prices, than you would be well served to learn a little bit about proper diversification and put that knowledge into practice.
ps @ Scott…while I appreciate the intent behind your argument, strictly speaking you are entirely wrong. I can 100% guarantee of many predictions of the future. We will all die for example. A grain of rice doubled each day will soon outweigh the earth. And so on.
Joe Q.
at 8:32 pm
Kyle,
I have a graph of annual household formation rate open in another browser window, and I can’t see the trends you’re citing. The rate went down through most of the 1990s, then up in the early 2000s, and then down (it is now back at 2006 levels). In any case, the only way this explains rising home ownership rates is if the majority of the new households become home-owners rather than renters. This requires either easier borrowing (my contention) or greater formation of wealthier households than of poorer households (your contention, as far as I understand it).
I agree with you that household income is more useful than average income. Average incomes are more easily found, which is why many analyses use them. The thing is that the trends are the same no matter which you use. Average house price vs. average household income is also far, far higher in Toronto today than it was even 7-8 years ago.
I deliberately avoid the words “bubble” and “crash” for a reason. I don’t have a crystal ball and don’t care to make sensational value predictions about the RE market. And I actually believe that home-ownership is a good long-term strategy for most people. At the end of the day, though, anyone can look at a graph of house prices in Toronto over the last 30 years and see how the stagnation of 1992-2002 was replaced by very rapid growth since about 2003. My main interest is in trying to find the best explanation for this rapid growth, and for me, the increase in mortgage debt (brought about by an increased ability and willingness to borrow) is the simplest and most satisfying one.
Kyle
at 10:51 am
@ JoeQ
I was looking at actual household formation levels (i.e. how many new households formed per year), while i’m guessing you’re looking at household formation rate (i.e. rate of change of new households formed per year). If you’re seeing the rate decline, i think that would indicate a deceleration in household formation not a decline in household formation.
You and Scott are right, no one can predict with 100% certainty where the market will go. I certainly am not expecting continued growth as we’ve seen over the last few years, though i wouldn’t rule it out either. My interpretation of the data i’ve seen is that the RE market in Toronto is largely healthy, and the case for a negative 20-30% (as been quoted by bubblists) correction is VERY remote, unless a huge external shock like a Euro collapse or a war drastically changes our fortunes.
Scott
at 3:11 pm
I see a lot of confidence, as well as some sound reasoning, coming from both sides of the argument here.
Thing is, one side is going to be wrong.
No one can read the future. We can make calculated guesses based on sound principles and knowledge gleaned from lessons learned, but the fact is that no one really knows whether housing prices are set to rise or fall. Both arguments make a lot of sense, but only one side can be “right”.
No matter which side you’re on, if you’re 100% sure that your argument is 100% correct, then you have too much confidence in your abilities. This applies to anyone who reads tea leaves for a living or for a hobby, no matter who they are or how much they think they know. No one is immune to the uncertainty that comes with foretelling the future.
Andy
at 7:04 pm
Great post – the CMHC vacancy statistics tell a lot. We are trying to provide this kind of information for our users over at Rooof.com, our new landlord/tenant site (still in beta, but active). Thanks for the posts and if you have an opportunity, take look at Rooof. I would love to hear your professional opinion. – Andy