Or if you prefer a debate before the debate, let’s start with, “Does Toronto have a rental crisis?”
Friday’s blog about the compensation paid to tenants upon legal eviction from a landlord resulted in a few different conversations about the state of the rental market, so I’d like to continue on that theme today.
There has been a lot of press lately about the “crisis,” and I’d like to draw your attention to one group who is actively lobbying somebody to fix the problem…
There’s a bit of a “chicken and the egg” phenomenon when it comes to the intersection of rental prices in Toronto, and the increasing price of downtown condos.
Despite the constant talk in the media of an unstable Toronto real estate market, my investor clients are coming back in droves.
Specifically the clients who are looking to purchase 1-bed, 1-bath condos, and rent them out long-term.
You might think that with the recent legislation, much of which we discussed last Friday, that many investors would be turning the other way, or even downright scared of becoming a landlord. But there’s one thing that’s keeping them in the market, and making many want to become even more active: the increasing rents in Toronto.
I’m absolutely shocked at the rents out there right now. Just flabbergasted.
A 495 square foot, 1-bed, 1-bath, with a balcony, no parking, and a locker.
How much?
Any ideas?
How about $2,150 in King West.
It’s just shocking.
And thus my investor-clients see the increasing rents, which increases the capitalization rate and return on investment for any given property, and the investment becomes even more attractive.
So are the condo prices going up in response to the higher rents, as demand surges among investors?
Or are the rents increasing as prices go up, since investors need to cover their costs?
Because of the recent implementation of rent controls, I don’t think investors are able to increase rents, freely, to cover their costs.
Ironically, I think if I had to choose the chicken, or the egg, I’d say that more people are buying because the rents are so high, than charging higher rent because of the price they paid.
And if that’s the case, then why are rents going up?
Call me predictable.
Call me naive.
Call me simple.
But once again, the answer is, our good old friend, supply and demand.
The demand part, we know.
People want to live downtown, whether it’s because they’re working longer hours and have less time to travel, or they want to ditch the car and avoid the commute, or there’s a movement among millennials to get out of their parents’ homes sooner than the previous generation.
The city population is growing, especially downtown, and the demand has never been higher.
But the supply has also never been lower.
And it goes without saying that increasing demand, and decreasing supply, is a recipe for disaster in any market.
The unintended consequences from the Liberal government’s “Fair Housing Plan” announced in April were many, but interestingly enough, the one that was the least predictable, and seems to be having the most effect, is the decline in rental units coming onto the market.
Instituting rent controls, theoretically, at least, should massively increase the time that the average tenant stays in one place, meaning there are fewer units coming back onto the market.
But more importantly, the rent controls make developing purpose-built rentals far less attractive to developers.
I’ve been saving articles on the rental market in Toronto for the last few months, and I find the trend rather interesting.
*June 13th, 2017 – “Developers Call For Changes To Ontario Rent Control Measures”
This was when we first started to hear about developers maybe looking at their purpose-built rental projects, and wondering whether or not it would be worthwhile to convert them to condos.
Ironically, it was the CEO of the Federation of Rental-housing Providers of Ontario (FRPO), Jim Murphy, who spoke out against the rent controls.
You would think the FRPO would be in favour of rent controls, but they can actually see the fores through the trees. They know what can happen if the government institutes a cap on rent increases that makes it unattractive for long-term investments among REITs looking to build rentals.
Mr. Murphy actually suggested that the cap be somewhere in the 10% neighbourhood, rather than 2.5%.
–
*September 13th, 2017 – “Toronto To Get 2,000 Market-Rent And Affordable Units”
This was a Toronto Star article about the City of Toronto’s decision to sell four pieces of land – two in the West Don Lands, one on Grosvenor Street, and one on Grenville Street, and mandate that they must be used for market rent and affordable housing. The city seems to be patting themselves on the back, making it known that they would sell for more if there were no restrictions on the use of the lands.
600 of the 2,000 units will be “affordable,” and the other 1,400 would be market-rent.
1 in 10 of each unit will be “designed for large families.”
It’s important to note that there are 181,000 people on the wait list for affordable housing.
–
*September 25th, 2017 – “1,000 rental units cancelled because of Ontario rent control, new report finds”
Here’s where we started to see actual evidence of would-be, purpose-built rentals, changing course and becoming condominiums instead.
The “report” referenced gave us this headline about cancelled rental units, but perhaps an even more alarming stat, which the next story shows.
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*September 25th, 2017 – “New study finds Ontario’s rental housing supply is facing a shortfall of over 6,000 units per year to meet annual demand”
This story appeared everywhere, and was picked up by every online news outlet.
With a headline like that, who doesn’t want to read it?
The report, completed by Urbanation, was commissioned by the Federation of Rental-housing Providers of Ontario (FRPO), who I’ll tell you more about shortly.
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*October 9th, 2017 – “Rising Prices And Evictions: Toronto’s Housing Market Has ‘Gone Bonkers'”
This was a Globe & Mail piece with some “faces and names” to put to the stories we hear so often about just how expensive rents are getting.
One of the people profiled in the article is a “normal” 39-year-old woman, who spends 46% of her salary on rent.
Expect to see a lot more of these types of stories. Just as we saw this kind of angle when the housing market for sales was red-hot, this makes for a great read among a host of people who can relate to the topic.
–
*October 12th, 2017 – “Toronto’s Rental Market Is Downright Scary Right Now”
This isn’t really an “article” per se, but rather 150 words on BlogTO about a very important study released last week by Ryerson University.
The study is called “Getting to 8,000” with a subtitle of “Building a healthier rental market for the Toronto area.”
If you’re wondering why that 8,000 number is significant, it’s because you saw the number “6,000” per year a few articles ago.
Recall that the Urbanation study showed a housing shortfall of 6,000 units per year.
The Ryerson study is recommending that the city and province strive to see 8,000 new rental units built per year.
–
If you have time, read the Ryerson study, which you can find HERE.
It’s 40 pages long, but a really interesting read, with a lot of stats and figures you’d be quoting while in line at Tim Horton’s to get your coffee.
Let me give you the Coles Notes on this.
The report offers seven public policy recommendations:
Making better use of land and existing housing
1. Municipalities introduce vacant unit taxes throughout the Toronto Area
2. Municipalities regulate short-term rentals throughout the Toronto Area
3. Municipalities adopt land-use changes to permit more residential development
Incentivizing new purpose-built market rental units
4. Province of Ontario expands and increases the proposed development charge rebate program
5. Municipalities expand incentives to all rental developments
6. Province of Ontario or the Federal Government develops an agency to provide a “one-window” service to offer development incentives
7. Federal Government makes changes to HST policy including implementing a zero-rating system to claim HST credits and the CRA’s exclusive use of the “Lending Value” and “Cost” approaches to determining fair market value when calculating self-supply HST.
There’s a lot of other good nuggets in there, such as their “Barriers” section, which references the barriers to building rentals in the city, but I need to move on here…
–
I mentioned the Federation of Rental-housing Providers of Ontario (FRPO) a few moments ago, and I’d like to draw attention to their public policy ideas as well.
The FRPO launched a website last month: www.rent-on.ca
Be forewarned about the blinding, bright-pink background of the website that’s made my eyes sore for the last hour.
The FRPO launched this site in response to the Urbanation report (which they commissioned) back in September, but now that Ryerson has released their own report, I wonder if they’ll implement those findings as well.
Just as was contained in the Ryerson report, the FRPO’s “Rent-On” campaign offers several policy approaches to increase the supply of rental housing in Toronto:
1) Implement a new rolling exemption for purpose-built rental buildings from rent control, i.e. units after a designated date would not be subject to rent control to encourage new investment. The NDP government of the early 1990’s first introduced this concept.
2) Modify the rent increase guideline applicable to new purpose-built rental buildings (i.e. not condominium registered) to inflation plus a certain percentage. This formula, will provide the modest investment return necessary to ensure continued growth in the supply of new, purpose-built rental housing, while respecting the Ontario Government’s intent to assure tenants have reasonable, predictable rents they can afford. • Rental housing needs fairness in property taxation.
3) Rental buildings can be assessed at up to 3 times a single-family home. The government of Ontario has introduced property tax fairness for new purpose-built rentals, but all multi-res rental units need to be assessed at the same rate as single family homes province wide. By legislation, savings would be passed along to tenants.
4) Some municipalities have introduced municipal licensing fees for rental units. There should be no new taxes on industry that could act as a disincentive to build new supply. Further, Ontario municipalities should implement programs that waive development charges and building permit fees for new purpose-built rental. Vancouver has a similar program already in place.
•Rental housing providers should be given the option to sub meter electrically heated units like they already can for other forms of hydro so that high energy users bear the increased cost of usage, while energy-efficient tenants would be rewarded with lower bills.
5) Maintain vacancy decontrol. Since 2012 in Ontario over $5.2 billion in renovations of rental units have taken place as a result of this measure to improve living quality and maintain our purpose-built rental housing stock much of which is 35 years or older.
–
Some of the same ideas, and some new.
But I think you’re getting the picture here: put enough people in a room, and you can come up with a list of ideas on how to increase the supply of rentals in the city.
So my obvious question at this point: what do you think?
And before we get to the conversation about how to increase the supply of rental units, feel free to take a step backwards and offer an opinion on whether or not this is even an initiative that needs undertaking.
Appraiser
at 8:52 am
Like I said last week. The main issue is supply. Streamline it – get it done.
But the supply side is time-consuming, expensive and messy what with zoning changes, various permits & approvals, NIMBY’s to overcome, city council and ultimately the OMB in some cases…
Jack
at 9:20 am
There are two markets, each with its own demand — the demand from those who buy a home to live, and the demand from those who rent a home to live. Individual investors who buy and rent condominium units are able to take on more risk than large investors who build and operate rental buildings; that’s because individual investors/landlords operate in both markets.
I wouldn’t be surprised to see large investors such as pension funds buying whole condominium buildings and operating them as rentals, still keeping the option of selling individual units if the market changes in twenty or forty years.
DR
at 10:00 am
6000 unit shortfall?
Maybe if thousands of units were converted back to traditional rentals from AirBnBs, the market would shift back to somewhat affordable overnight.
Jeff
at 11:01 am
The #3 from Rent on doesn’t make any sense.
3) Rental buildings can be assessed at up to 3 times a single-family home. The government of Ontario has introduced property tax fairness for new purpose-built rentals, but all multi-res rental units need to be assessed at the same rate as single family homes province wide. By legislation, savings would be passed along to tenants.
For last 20 years that isn’t true, everyone pays the same rate. So tenants of old buildings – the owner is taxed more. But the tenants are also under rent control and paying under market since it is capped increases. So if you lower the taxes, they fall even further below market and no one will move from those buildings and really you don’t increase supply.
Daniel
at 12:32 pm
that’s true in toronto and ottawa but not the rest of the province…
Jeff
at 11:02 am
Every time you put up a large condo project (for example City place, or the redevelopment on Yonge where the star GQ is) make sure at leat one of the tower is 100% rentals or something to that affect.
Kyle
at 2:24 pm
There’s definitely an under supply of rental units. I’ve walked past bidding wars for apartments in my neighbourhood, where the crowds lined up to present their lease terms have numbered in the 20’s. This leads to all sorts of issues and abuse (e.g. profiling of tenants, accepting up to 1 year upfront in rent, etc).
What can be done to increase the supply of rental? This is the easiest part – allow the market to work. When prices are high Supply naturally will rise to absorb excess returns. BUT that can only happen if Governments got the hell out of the way. If you want more units then:
– Get rid off rent control on all buildings, but keep the 1 month mandatory rent compensation, heck make it 2 months (there should be some compensation given to tenants for the hassle), but the whole $25K penalty is beyond stupid.
– Change the rules so they aren’t entirely one sided against land lords. Both parties should be held financially accountable for breaches, and both parties should be able to get speedy resolutions. Nothing should take more than 1 month to resolve, if it does then the system is broken.
– Get rid of all the over-the-top extra building codes required for rental units. Things like smoke detectors, egress and a reasonable amount of sound and fireproofing makes sense, but the rest of it is pure nonsense.
– Make the rules simpler, so Landlords and Tenants know what they are and it doesn’t need to have a Lawyer or Paralegal on retainer.
Chris
at 7:48 pm
Kyle,
You say that govetnment should “get the hell out of the way”.
However, we know that government of all levels is heavily involed in real estate, both in trying to cool the market as well as heating it up ( RRSP FTHB Plan, CMHC Insurance, First Time Buyer Loans in BC, etc.).
Do you believe that government should remove themselves from all of these forms of interference? Meaning no more CMHC, no more RRSP FTHB Plan, in tandem with no more Foreign Buyer’s Tax and no more rent control?
Kyle
at 9:32 pm
My answers would be yes, yes and yes. I think the RRSP FTHB plan is dumb, especially now that TFSAs exist. There are other mortgage insurance providers like Genworth, no need for the Govt to be in that business (that said we would all miss that CMHC has contributed billions of dollars to the tax coffers, which otherwise would have come from tax payers wallets). Similarly there are plenty of other lenders that first time home buyers can get financing from, again no need for the Govt to be in that business.
Chris
at 9:41 pm
Fair enough! It’s good that you’re consistent on your opinion.
I’ve heard many decry government intervention when it serves to cool the market, but God forbid the government were to withdraw stimulative interventions like the CMHC or RRSP FTHB Plan.
Mr. Late
at 8:25 pm
good recommendations here ….
Ralph Cramdown
at 10:34 am
“Get rid off rent control on all buildings…”
You’re a political genius. Poof! 100,000 apartments’ worth of seniors paying below market rents are turfed, to be replaced by 20 and 30 somethings willing to pay more (equilibrium would be less than today’s market rates). Where would the seniors go? The lawn at Queen’s Park.
Kyle
at 1:43 pm
Who said it had to be implemented like a light switch? There’s this thing that Governments sometimes do, called “phasing-in”.
What you’re raising is nothing more than an implementation concern, not an issue with the fundamental concept.
Condodweller
at 8:33 pm
I posted a fairly lengthy post yet It does not show up after clicking “post comment” I had this happen before. If I try to click post again I get a duplicate post error.
I just have a question for those who say we have a 6000 unit shortage. Where is the refugee camp in Toronto with all these people who can’t find a place to rent?
Geoff
at 8:42 pm
Oshawa but no one can tell the difference….
Kyle
at 9:34 pm
Go ask a boomer if you can have a look in their basement.
Ralph Cramdown
at 10:24 am
“And thus my investor-clients see the increasing rents, which increases the capitalization rate and return on investment for any given property, and the investment becomes even more attractive.”
Increasing rents relative to prices is what improves cap rates. David has joked about “rare zero cap rate” properties here, and not-joked about investor clients seeking lofts even if they didn’t cash flow. So whatever was attractive about buying these properties before rents (AND prices) went up, it wasn’t the cap rates or cash flow, and still isn’t.
The Ryerson report was full of interesting facts, but boils down to: Nothing in the ‘affordable’ range is going to get built, by anyone. TCHC can’t maintain its current stock, pension funds would rather buy toll highways in Australia, and Queen’s Park won’t announce anything before its date with destiny next year. Ottawa wants to spend $3B a year across the country, left as an exercise for the reader as to how many units in Toronto THAT can be leveraged into. But as long as investors are willing and able to buy 1/1 condos, builders will build them.
Is the end of NAFTA like BREXIT? Are Toronto investors paying up for condos because they’re high on the profits from their weed and blockchain equity? Will the scariest things in the front yards of Toronto detached houses on Hallowe’en be lawn signs? Stay tuned.
Condodweller
at 1:07 pm
I hope the answer is no to your last question. I do recall during the crash of 89 just about every other house had a for sale sign on the lawn which turned into for rent signs shortly after they realized they are not getting their money back with current prices.
Chris
at 12:59 pm
http://www.bnn.ca/osfi-sets-new-rules-for-mortgage-lending-1.887025
OSFI out with new rules this morning. Pretty much as expected with regards to stress testing and circumventing LTV ratios.
So if this does cut purchasing power by the predicted ~18%, should we not expect prices to decline?
Kramer
at 1:55 pm
Honest question: Has any country in history ever taken such a string of aggressive steps to purposely slow/stop/destroy their housing market?
Chris
at 2:05 pm
Do you view this as a bad move? Personally, I think it’s quite smart on the part of regulators.
Effectively increases the qualifying interest rate on mortgages, without forcing the Bank of Canada to raise rates, which impacts the entire economy.
Kyle
at 2:22 pm
This is the part i find ironic. The bears have been cheering for B20 since the rules were first proposed, but IMO it is them (at least the ones who harbour any hopes of one day buying) who have far more to lose than most home owners.
These rules, basically raise the ownership bar. If a bear couldn’t afford a house before, potentially qualifying for less isn’t helping his cause. And if buyers lose 18% of their purchasing power, then that just forces more people into the already ridiculously cut throat rental market.
Rent control only protects you as long as you stay put. The minute an apartment becomes vacant you can expect to see the rent sky rocket. Keep watching the numbers coming out of padmapper. Meanwhile as new rents rise, there will reach a point where those that can qualify under the new rules, will be happy to buy places to rent out to those locked out of buying. Basically creating a society of wealthy people who own, and toiling people who rent…just like New York
Kramer
at 2:53 pm
I also see foreign buyers with huge stacks looking to park money going on shopping sprees at a huge advantage over local buyers once this gets absorbed into price. 15% tax be damned.
Kyle
at 3:01 pm
I totally agree if there is any softening of prices, lets be honest about who will best be poised to take advantage of any buying opportunities: Wealthy investors, wealthy home owners, wealthy foreigners or home aspiring bears?
Chris
at 9:12 pm
Kyle,
Your argument regarding B20 not helping potential buyers is predicated on an 18% drop in purchasing power resulting in an 18% drop in prices. If, however, purchasing power falls 18% across the board, and prices fall 19%, a potential home buyer is now further ahead. Given how emotional real estate tends to be, I don’t think it is unreasonable that price declines can and may overshoot what would be expected in a perfectly rational market.
I also feel the need to point out that bears and bulls are not teams, to which we are permanently assigned a side. I am presently bearish on Toronto real estate at it’s current valuation, as it stands in relation to fundamentals such as local incomes, rents, population levels, etc. At lower prices, I will become less bearish, and indeed could become bullish. It is not a permanent dichotomy, but rather an assessment of outlook based on current valuation and future prospects. Just as I can be bearish on a stock at one price, and bullish on the same stock at another (usually lower) price.
Kramer,
I don’t think there are that many foreigners with wads of cash ready to buy homes outright. China’s capital controls have staunched the flow of money out of that nation, and many popular destinations for Chinese real estate investors (Australia, UK, California, etc.) are seeing noticeable declines.
Not to mention, I don’t think your typical foreign investor is that much different from any other investor; they are seeking a return on capital. Hence, many would likely be hesitant to buy into a depreciating asset.
While there may be some who are just looking for a safe place to park their money, out of the reach of the Chinese government, the money they would use to buy Toronto real estate is already out of their home country, and thus they can direct it to any number of other safe assets.
Kyle
at 9:04 am
@ Chris
2 things. First when i speak of the bears, i’m not referring to you. I’m referring to the same crowd that David talks about when he describes angry non owning bears. And to this crowd, being bearish is beyond being on a team, it’s more akin to being in a cult.
Second, I think you’ve misinterpreted my argument. I wasn’t making a call based on an18% purchasing power drop. To be clear, IMO i don’t expect an 18% reduction in purchasing power nor do i expect an 18% price drop. Could there be some price softening? Sure, but my point was simply regardless of the direction and magnitudes, there is a buyer pecking order and these non owner bears are at the back of the line, meaning any negative impacts will be felt disproportionately by them and any spoils will disproportionately go to those at the front of the lines.
Chris
at 9:16 am
Kyle,
Haha well hopefully the non-owning angry bears can be rational one day. It’s odd to me that they would be so steadfast in their assessment, even as valuations change. After all, to be bearish, in my mind, means you believe that an asset is overvalued (and thus likely to decline in price); if it does then decline in price, at some point, does it not become fairly or even undervalued? At which point, should you not shift from a bearish outlook to a neutral or even bullish outlook?
Ah, yes, fair, there is always a pecking order with regards to any asset. A high-income potential buyer who has been sitting on the sidelines will be better placed to benefit from price declines than a low-income potential buyer. But, such is life and capitalism!
Kyle
at 9:40 am
“hopefully the non-owning angry bears can be rational one day”
Judging from the comments in today’s Garth Turner blog and comments from has fans who frequent this site, I would say that is a very lost cause.
Kramer
at 10:16 am
Chris… re: wealthy foreign buyers that were the biggest issue for our unfortunate local buyers only 6 months ago…
They don’t have to buy outright… they could put 30% or 40% or 50% down and finance the rest… the point is that these stress tests won’t impact them AT ALL, but rather it will only impact the average local buyer trying to get into the market. Net, after putting a 15% hurt on the foreign buyers, this turns around and puts wealthy foreign buyers (and anyone else wealthy) at an advantage. Maybe this is why they put the 15% tax in when they did and why they did so in a hurry – because they knew that potential mortgage stress test increases would hurt local buyers (and not foreign buyers), so they had to even the playing field in advance.
And even if your 18%/19% theory applied, that would still just make everything more affordable for everyone… including the foreign buyers, wealthy local buyers and other investors… it doesn’t put them at any advantage vs. “the market”… and when that’s the case, the fattest stack always wins, so nothing has changed.
And honestly, in a market where the government has to purposely and aggressively beat the crap out of the market from all angles in order to slow it down… if I were a wealthy investor (foreign or domestic)… I WOULD BE BUYING ON THE DIP!!! If only I could post a video from Total Recall where 5 people are holding Arnold down and one of them is repeatedly shooting him with tranquilizers to finally get him to pass out. That is what I think of every time the gov’t talks about some new housing measure.
You said it yourself, at a certain valuation a rationale bear will turn into a bull. Investment in real assets has exploded over the last 5 years – real estate, infrastructure, etc. I don’t only think that FORCING (key word) the market down with such measures will hurt the common home buyer, I think this is going to pave the way for investors to massively increase their ownership stakes in real assets. Investors with plenty of capital are the ones who pounce on opportunity… average joes are at a disadvantage.
Like I have said before, I sold my lone rental unit in September 2016… For 8 months I was kicking myself… then for 4 months I was like “damn, I probably should have held on to it, but you can’t nail the bullseye on these things and it was the right thing for my portfolio”… As of this week, I’m now planning out how to buy 2 rental units over the next 5 years if the market finally “passes out”… Great, now I’m picturing the Toronto housing market saying looking at the camera and saying “I’LL BE BACK”. This is getting out of hand.
Chris
at 10:40 am
Kramer,
But if they are financing the purchase (aka using a mortgage), they would be subject to the same stress test, would they not? I think this would make the situation even more difficult for the foreign buyer; for example, that high profile example of the student in Vancouver who owns a ~$3M mansion, they would not have been approved under this new stress test even if they had a massive downpayment, due to their low/non-existant income. So, unless the foreign buyer is purchasing outright in cash, I imagine the stress test will impact them too (unless they’re going through non-bank lenders, which has it’s own issues, such as low relative capitalization and sometimes higher interest rates).
Yes, as I said to Kyle, the wealthier will always have a leg up in competing for assets. But if reducing purchasing power leads to lower prices, which leads to less demand (speculators fleeing a depreciating market) perhaps this, in the end, results in a more affordable market. At very least, it forces people of all income levels to be more prudent with their borrowing decisions, which, in my mind, helps protect our economy, our households, and our financial institutions from crisis.
To your final point, I suppose I would propose the following hypothetical scenario to you. You sold your unit last year; let’s assume that after climbing earlier this year, the unit declined to the price you sold it for, and then continued to decline beyond that. Outlook and sentiment was negative. Do you re-buy your unit today? Do you wait to see if prices decline further or bottom out? Do you wait for prices to start re-rising? Many people want to buy low/sell high, however the realities of catching a falling knife (and the mental fortitude required to purchase a depreciating asset with negative outlook) are an entirely different story. We cannot understate the impact that emotion plays, particularly when it comes to real estate.
Kramer
at 2:21 pm
If you’re financing, you don’t need a big income to qualify for a mortgage if you have a bajillion dollars in other assets. If you have liquid assets of $5 million, the bank will happily lend you $2 million to buy a home in Toronto even if you don’t have a $500K job downtown. As you know, even the wealthy will finance their home because they can make a bigger return than the 3% they are paying on their mortgage.
This once again raises something crucial in the whole affordability of Toronto real estate discussion and why average income is such a stupid “fundamental”: No one tracks/has data on the NET WORTH of the GTA population. This little datapoint might be THE MOST important reason for real estate prices going up faster than average incomes. No one has any concept of how much wealth is out there. Even speaking of the recent past, do we think that the population that was already here and in homes 10 years ago has not benefitted from the 85% return in the S&P 500 (and that’s 85% since BEFORE the financial crisis)? Furthermore, as I always preach, when population increases and average income merely stays the same, then there are MORE (in number) people in the higher income brackets (just as there are the lower brackets) who can afford higher prices. Average income is so misleading it makes me sick. Total Income, or Number of People above the Average Income would be way more useful.
So, re: Total Income and Net Worth of the GTA… We have spoken of being a bear or a bull based on valuation… what if you have always valued real estate based on Average Income, decided you are bearish… but then realized that Total Income and the underlying balance sheet (i.e. Net Worth) has grown immensely? Would you change your view or keep your bias?
Re: hypothetical scenario. It’s personal and situational to everyone… Because of my personal choices and my portfolio I do not re-buy my unit today… but that’s just me and my age and situation… but as an investor (not just RE investor) I will continue to watch and see if our government has accomplished their goal of tranquilizing the market, and if I start seeing the words “panic” and “under water on mortgage” and “worst real estate crash since USA 2008”, then I start moving chips around to see if I can swoop in and buy an asset at an obvious discount that is worth the effort of being a landlord again.
If I was 26 again (no dependents, longer time horizon), I would absolutely buy in the next year while the government stinker tinkers the system, and I wouldn’t wait to see the words above (i.e “panic”), I would only need to see the words “Buyers Market” and then from there patiently shop until I got a great deal on something. With a long time horizon available and the future prospects for Toronto, I would absolutely buy in a small correction and soak up these massive rents while I wait for the big pay day.
You could pose the question differently… would I sell my personal (non-investment) home right now, out of some sort of fear of a massive crash? Absolutely no intention to. I need the home, and I have a long enough time horizon that I don’t care about a correction short term.
Kramer
at 3:01 pm
I agree with that… from the standpoint of making housing affordable… if this is meant to lower real estate prices, then who cares, houses will still be relatively unaffordable except for people with massive downpayments… i.e. people who could have afforded a house anyways.
Kramer
at 3:03 pm
Huge tailwind for the condo market.
Jack
at 2:53 pm
Not sure about countries in history, but OSFI’s role is, among other things, to ensure that federally regulated financial institutions don’t take on excessive risk. So OSFI is doing its job. Chartered banks and other institutions regulated by OSFI are given some unique powers in the financial system, and in return they are subject to rules. If other parties are willing to make mortgage loans to risky customers, they are free to do so; we’ll see what the real “free market” mortgage rates are, with all the risks priced in.
MY
at 5:42 pm
Couldn’t we also argue that the government’s policies have also helped to create this insane housing market?
What the government giveth, the government taketh away….
Condodweller
at 4:59 pm
Most likely. Prices declined in May because many decided now would be a good time to lock in their gains. I maintain that prices should decline once we run out of people who can afford to buy at current prices forcing sellers to accept lower prices. Add to that OSFI reducing purchasing power and we should see prices level off.
All the baby steps that have been taken over the years are slowly starting to have their intended effect. I know it’s not a popular move for all the free market proponents on this board. IMHO we will all be better off if it will help avoid a major crash.
Kyle
at 4:12 pm
Off topic, but Googleville in East end Toronto is a go:
https://www.thestar.com/news/city_hall/2017/10/17/google-firm-wins-competition-to-build-high-tech-quayside-neighbourhood-in-toronto.html
Permabug
at 10:07 pm
Buy gold! It’s going to $2,000 I tell ya! Oops, thought this was Garth Turner’s blog.
Chris
at 3:36 pm
But isn’t that one of the impacts of this stress test? Even if you have a very large amount of liquid assets, this stress test compares loan to income. So if your income is small or nonexistant, even with $5M in assets, you would run afoul of it’s criteria, would you not?
I believe Stats Canada has figures on Net Worth? And to your point about average income, I would prefer median household income broken down by type of household (so we can strip out households of students, retirees, etc.) I do think there is value in this number.
Personally, I value real estate based on price ratio to median income, ratio to rent, recent price growth, forecasts for future growth, construction starts/completions, population changes/growth, etc. In most of these, Toronto real estate looks unattractive at current valuations.
I would agree with you regarding your hypothetical scenario, it is usually wiser (though difficult) to jump into real estate (and really, any asset) when it is down. However, as Robert Shiller has found in his extensive research of American real estate, as an asset class, it tends to underperform equities in the long run (we’re talking on the scale of 100+ years, as real estate cycles can move at glacial paces). That combined with the onerous regulations around being a landlord in Ontario would probably keep me away from real estate investments, beyond my principal residence, or through a REIT.
Your final point is definitely valid to. Anyone who views their home as a place to live, rather than a pot of cash, is rational in staying there through ups and downs in the market. For those with other properties though, the discussion becomes more interesting.
Chris
at 3:37 pm
Sorry Kramer, this was meant as a reply to your post below.
Kramer
at 11:02 pm
So at what valuation does it start to look attractive again? And what metric do you use for that and why? We have seen how sales composition can sway ‘average price’.
I will look for the Net Worth stats… but I have never seen them… I hope they are there.
As for the stress tests and mortgages and income… you might be right, and ‘normal’ mortgage information only say “your assets and liabilities are also considered”, but they say income in the most important… but like I said, that’s a normal mortgage information page for “normal” people… Maybe private bankers deal with the high net worth clients directly and do custom real estate loans/mortgages… i wouldn’t know as I am not a high net worth client!
Kramer
at 11:05 pm
… but to me it only makes sense because I don’t know why a bank turn down loaning money for a house to a very rich individual with no job… and I suppose investment income would be considered as well.
Chris
at 1:49 pm
Kramer,
I don’t so much rely on an exact price for valuation of real estate, because as you said, it can be pulled by sales composition. Rather, I place more weight on ratios and their divergence from long run trends. For example, Toronto’s median home price to rent ratio is far above its historical trend, indicating that at current prices and rents demanded, one is likely better off to rent than to buy. Similarly, median home price to median household income ratio shows that Toronto is very unaffordable, both compared to our long run trend and when compared to other large cities.
For me, signs of fair or undervaluation would be some of these metrics shifting, whether through dropping prices, increasing rents, climbing household income, etc. The ratios can be impacted by a number of inputs, beyond just home prices.
A high net worth individual with a low income would possibly be able to find financing for a home purchase, but I believe the stress test makes it hard, if not impossible, to do so through a federally regulated lender. Thus they are left with smaller lenders who lack the capitalization to really make a dent on the market as a whole.
Plus, as I said earlier, I suspect the flow of money from China has decreased dramatically. Capital controls are biting, and their foreign exchange reserves have climbed for 8 consecutive months. There may still be some wealthy foreigners seeking to park money in real estate, but it is now both harder for them to get money out of China, and presumably harder for them to finance their purchase.
ruqueene@hotmail.com
at 8:43 pm
I think rent control is crazy when taxes and condo fees keep going up, the price of repairs keeps going up and affordable housing is down. Make the BIG Corporations like TD CANADA TRUST etc pay their FAIR SHARE OF TAXES, instead of giving constant construction loop holes for big buildings and the city would be if far better shape and taxes wouldn’t keep being passed off to the small landlords, and middle class tax payers so that they are forced to raise rents. Rent control of 1 percent is NOT KEEPING UP with the TRUE COST OF LIVING IN TORONTO. IF the big buildings paid their fair share, they wouldn’t have to keep pawning it off on these small stakeholders
Milford Pagels
at 3:50 pm
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