Month: May 2021

A little-known reason for the commercial real estate sector’s struggles is that property taxes are based on dated valuations, and it has the potential to put a lot of operators out of business.

“With the way the tax system works, it’s based on market values and they’re generally not current and out of date,” said Tristan Bock, senior director of Altus Group. “The problem for the commercial sector to deal with is the impacts from COVID will negatively affect some property values severely, while others may not be as negatively affected, like distribution centres—they’re gold right now and they’ll be fine throughout this.

“If your taxes are based on values and you have certain property types that have gone up and others have down significantly and there’s no recognition, there’s inequity and operators are hurting.”

Some operators are essentially paying property taxes that reflect their values in 2016, not their present day, revenue-depleted circumstances. Consequently, Bock expects some operators will go out of business.

“We’re hoping that more provinces will act to update assessments on a more regular basis,” said Bock. “In Ontario, we’re five years behind—the valuation date is January 1, 2016 and here we are in 2021. Unfortunately, some will go out of business. Certain areas, like fitness clubs, will probably see a huge problem in that respect. A lot of concert theatres and venues are privately owned and they will have a tough time coming out of the pandemic.”

Casinos’ projected recovery time is two to three years after being hit particularly hard during the first wave of the pandemic. Although restricted openings have been permitted, they were limited to 50 patrons per floor and reservations were required.

“With casinos, a certain demographic of 50+ is their main client demographic, so there will be some hesitancy to go back until the pandemic is fully finished, as in there are no lingering cases,” said Bock.

Fitness centres don’t typically handle economic downturns well, and now with nascent workout alternatives like Peloton, there are questions about how well gyms will recover post-pandemic.

“There’s been a bit of change in the consumer, so that’s going to be difficult to measure,” said Bock. “Are they going to say, ‘Okay, we’ll ditch Peloton and go back?’”

Concert venues should take a couple of years to fully recover. New York City is slated to open Broadway shows in September, albeit at limited capacity, and until mass vaccination is complete, dense crowds of people will either be outright prohibited or the source of consternation for the patrons themselves.

“When movie theatres and concert theatres reopen, there are likely to be capacity restrictions, or it might just depend on the level of vaccination. They may even go the private vaccine passport route.”

Much has been made about low interest rates being solely responsible for rapidly rising home prices, but that’s not quite the case, says Scotiabank.

“The current situation in Canadian housing markets primarily reflects a chronic insufficiency of home supply that is temporarily exacerbated by pandemic-related impacts linked to record-low mortgage rates and a shift in preferences for housing by type and geography,” said the bank’s report, written by Jean-François Perrault. “Past and future macroprudential measures are ineffective band-aids that do not address the underlying insufficiency of supply.”

Canada has the lowest number of housing units per 1,000 people of all G7 nations, and according to Perrault’s report, that number has been in decline for five years because of the country’s booming population.

“An extra 100,000 dwellings would have been required to keep the ratio of housing units to population stable since 2016—leaving us well below the G7 average.”

According to Dustan Woodhouse, president of Mortgage Architects, in addition to undersupply, other factors are contributing to increased housing costs.

“How do you fix supply? That’s a really difficult question because of the amount of time it takes and the cost inputs. Labour is going up because of a labour shortage; raw materials are going up because of a shortage of material, so it’s not an easy situation to sort out—not by a long shot,” he said. “The bottom line is what’s driving the housing market is what’s been inconvenient of the government to acknowledge for years now, and that is the lack of supply.”

As the Scotia report noted, the COVID-19 pandemic intensified the rush for housing, namely by serving as a catalyst for people to reconsider the (in)sufficiency of space in the homes in which they lived. However, the pandemic also may have helped avert an even worse supply crunch.

“The reduction of immigration growth observed in 2020 withheld the further increase in demand that would have otherwise occurred,” said Perrault’s report. “So while it is clear that interest rates and a shift in preferences for housing by type and geography (facilitated by remote-work arrangements) contributed to the strength of the housing market, the fact remains that the principal challenge facing the housing market—and the underlying cause for rising prices and diminished affordability—is the substantial insufficiency of supply relative to demand.”

Demand is slated to surge even more—population growth will resume its torrid pace once the government realizes its immigration plan, while its planned national childcare system will bolster Canadian families’ incomes. These two things alone will drive housing demand even higher than it is right now.

“We need a truly collaborative, multi-stakeholder process to break through these political challenges to concretely identify the factors limiting the supply response of all forms of housing: owned, rental, affordable, singe-family, and multi-family… We propose that the federal government convene a national table bringing together federal, provincial, and municipal authorities along with builders, developers and civil society organizations to document the multiple challenges to raising supply and identify solutions to these obstacles. Given the lags inherent in the development process and the urgency of the supply challenge, this table should be convened expeditiously and report on potential solutions within the next six months with commitments by all parties to immediately act upon those.”

First-time homebuyers are feeling the heat in Canada’s white-hot housing market, says a new Royal LePage and Sagen joint survey, which found 62% of entry-level buyers are worried about saving enough for a down payment.

“Although COVID-19 has impacted first-time buyers across the country, many have been able to save and buy their home sooner than expected,” said Stuart Levings, president and CEO of Sagen, Canada’s largest private mortgage insurer. “The hurdle causing anxiety for first-time homebuyers is saving for a down payment in an environment of rising home prices in many parts of the country. While some have parents who can step in, many do not and they are struggling to get into the market.”

The survey found that 75% of first-time buyers in Toronto were anxious about saving for a down payment, up from 68% in 2019, while 69% of respondents in Vancouver felt similarly, increasing from 58% two years ago. In Montreal, Canada’s second-largest city, 63% of survey respondents were nervous about having enough money for a down payment, rising from 60% a couple of years ago.

Anna Depalma, a real estate broker with Century 21, frequently works with first-time homebuyers and says she has to constantly reassure them that not having a full 20% down payment isn’t the end of the world. Moreover, she says there are ways for buyers to work within whatever constraints they might have.

“First-time buyers have to look well below what they’re approved for because homes go for significantly over asking,” Depalma told CREW. “I try to explain to them that wants and needs are separate and that their first home isn’t going to be their forever home, so focus on getting into the market first and building equity. If there is minor work that need to be done to the home, it might be worth looking at that over a brand new home where you have more people competing for it.”

Despite their disquiet, first-time buyers have an advantage that wasn’t available to them before the COVID-19 pandemic began. Working remotely permits them to move further afield where the mortgage money they’re qualified for goes further.

“They can find more in their price range,” said Depalma. “The biggest issue I’m seeing is when people are locked into a certain area and they can’t go too far. Depending on location and prices, it can be tough to get into certain areas. But if you move 15-20 minutes further, you can probably get into that area because you have more options, so I try to get people to understand that they shouldn’t be tied to certain locations. Location is the one thing with first-time buyers that’s the biggest struggle.”

She added that they must accept making sacrifices to get on the housing ladder.

“Understand you’re building equity on this. What you need versus what you want are two separate things.”

The First-Time Home Buyer Incentive (FTHBI) has been modified to improve income qualification, but it’s being lampooned as a cynical ploy for the government to profit off of buyers who have the most trouble getting on the housing ladder.

The changes, first proposed five months ago, raise maximum household income qualification to $150,000 from $120,000, which raises the mortgage amount to $675,000 on a $722,000 property, but the government’s 5-10% contribution towards the buyer’s down payment must eventually be repaid at its appreciated rate.

“This mostly seems like the government profiting off homeowner appreciation than much else, primarily because of the restrictive requirement that it be paid in full as a lump sum without any partial payments,” said Laura Martin, COO of Matrix Mortgage Global in Toronto. “As has been pointed out before, under the CMHC Insured Mortgage Program they would actually be able to qualify for more without the government’s assistance of a 5-10% down payment, which actually eats into their equity appreciation because they have to pay it back in full within 25 years.”

Martin added that, while the Canadian government is trying in vain to make the country’s most expensive housing markets of Toronto, Vancouver and Victoria affordable to first-time buyers, the FTHBI could still be useful in the preconstruction condominium market.

“The best use case for prospective first-time homebuyers is with a preconstruction condo or townhouse purchase, where a 10-15% down payment is required,” she said. “In this case, the borrowed down payment may be necessary and the real estate asset will appreciate aggressively enough in a three- to five-year period that the borrowed funds could be repaid by refinancing shortly after closing. Preconstruction units have generally appreciated at 20-30% year-over-year for the last 10 years.”

The incentive was first introduced in 2019, but it doesn’t appear to be very popular. Toronto mortgage firm Tribe Financial hasn’t even come across one file that relies on the FTHBI to date, and Frances Hinojosa, the company’s managing partner, isn’t so sure she’d advise clients to use it anyway.

“My understanding is when the government came out with this, it was to help consumers with affordability, to provide them a share of the property that would reduce monthly mortgage payments, because by not having to make payments on that 5% they have better monthly cash flow,” she said. “But when you get into shared ownership, you’re sharing the gain as well, so if the government gives them 5% of the mortgage amount they have to give them 5% of sale price.

“I wouldn’t blatantly advise my clients against this, but I would first say, “Let’s explore your long-term goals before you consider it.’”

Home renovations in Canada increased by 47% last quarter compared to Q1-2020, according to non-bank lender Simply Group, with a substantial amount funded by home equity lines of credit (HELOC).

“We’ve seen an almost 50% increase in home renovation projects during COVID,” said Lawrence Krimker, CEO of Simply Group and owner of SNAP Financial. “Property values have been increasing in the single-family detached segment and a lot of that is being driven by people looking for more space while working from home. As prices have been going up, people have more equity in their homes. There’s been a big increase in demand for HELOC products; customers have been pulling out equity if they’re not wanting to sell their homes.”

Canada’s housing market has been white-hot during the COVID-19 pandemic—there were a record number of new listings in March—and home renovation projects are often a way to augment the value of a home before it hits the market. Others, dissuaded by runaway housing prices, have decided to stay put and give their homes cosmetic upgrades.

“Certain people are looking to downsize and they’re making that decision sooner to capitalize on their increase in home equity,” said Krimker. “People are moving up north outside of city centres. Selling their homes, that triggers home renovation projects.”

Simply Group found that non-essential upgrades, like kitchen and bathroom renovations, as well as smaller projects involving windows, doors and flooring, rose substantially in the last year, which Krimker attributes to people, by virtue of spending more time in their homes, noticing imperfections.

“The non-essential stuff has been kicked into high gear and that’s because of the fact that people are at home and have more disposable income to go around, so they’re identifying issues in their homes that they may not have noticed before,” he said.

Simply Group noted there was a 30% year-over-year spike in Q1-2021 of generic consumer loans for the purpose of financing home renovations, which could be explained by rising material costs as a consequence of COVID-19 disrupting supply chains.

According to Charles Newton, owner of SmoothBrush Painters, there has been no shortage of work during the pandemic, however, he has had to diligently plan ahead, sometimes by weeks, to secure certain materials.

“Most paint stores are sold out of primer because of a work stoppage in Texas, so it’s harder to get primer and drywall mud,” said Newton, adding that most of the homes he’s painted in the last year were slated to hit the market. “As a painter, it’s only affected my pricing a little bit, but anything involving wood has become very expensive

“I often have to drive to different locations, upwards of five stores sometimes, to find material. I recently drove all the way from Toronto to Waterdown. A $60 pale is almost double in price and you have to wait a week, so if you don’t buy stuff like primer in advance and keep stock for yourself, you’re in trouble.”

Craig Proctor, the master realtor who revolutionized the team concept, hosts a Facebook Live event every Wednesday in which he breaks down burning topics for real estate agents and presents them solutions.

“The easiest way to prove to people you can help them is to just start helping them, no strings attached,” said Proctor. “Every Wednesday morning at 11 AM, I pick a topic for realtors and cover. There’s no selling; it’s just good content and a great opportunity to demonstrate to agents that I can help them.”

Proctor began his career in Newmarket, Ontario, where he pioneered a system that catapulted him to become RE/MAX’s No. 1 agent worldwide, year after year. After spending two decades atop RE/MAX’s heap of 100,000 global agents, Proctor switched gears to become the real estate industry’s most revered coach.

As such, he’ll be hosting the Craig Proctor Real Estate Super Conference virtually from June 11-13, where he’ll dispense some of the secrets that have made him and his countless students millionaires.

Proctor himself found the system works through a few simple steps. The first involves finding somebody who already successfully does what you aspire to do because, he says, everything you want to do in real estate has already been done by thousands of agents.

“If you want to climb Mount Everest, you get a guide,” he said.

Agents often make the error of advertising themselves, erroneously believing consumers are more interested in the agent than the home. Instead of advertising himself, Proctor offers lists of homes in a given area and within a certain price range because it’s easier to eliminate houses off the list one at a time.                 

“Realtors think they should advertise a house to get a buyer when the real truth is you should advertise to get a buyer,” said Proctor.

The next step involves setting up an efficient lead generation system because it will scale your business, added Proctor, at which point you can hire agents to help you continue growing without having to sacrifice your life closing additional deals.

“The technology available today allows us to scale our businesses and even run them in different countries or inside of your own country,” said Proctor. “An expansion team involves getting agents all over the country working for a single team. The main office might be in Toronto, but you can have an expansion team in Calgary and Vancouver.”

Facebook Live is just one of the tools Proctor uses to proffer lessons to about 2,500 agents, many of whom have turned his advice into millions of dollars, and some of whom will appear at the Craig Proctor Real Estate Super Conference next month, which will feature Proctor interviewing his acolytes so that they can share their secrets to becoming millionaire agents.

To register for the Craig Proctor Real Estate Super Conference—which costs $189 for three days—click here.

The confluence of exorbitant housing prices and the incoming mortgage stress test could encourage some Canadians to misrepresent their earnings on mortgage applications, warns a broker.

“I do foresee instances of fraud for shelter becoming more prevalent because the market has heated up so much that housing is out of grasp for a lot of people,” said Leah Zlatkin, principal broker at Brite Mortgage and an expert with LowestRates.ca. “A lot of first-time buyers are trying to size out of their condo and into a home, but that home might feel out of reach. They might have saved up 20% for a home, but with the Office of the Superintendent of Financial Institution’s new mortgage rule on June 1 and housing prices continuing to go up, some people might not be able to get their dream home or even just the house they want.”

In fact, according to a recent Equifax survey, 9% of respondents admitted they weren’t fully truthful on their mortgage applications, while 16% of millennials and 9% of the general population thought falsifying information was acceptable—although that declined from 23% and 12%, respectively, in 2019.

“Millennials are more comfortable with mortgage fraud and they think it’s not a big deal,” said Zlatkin. “When you look at people trying to buy homes, namely millennials, I do feel like we’ll have instances where people fudge the numbers. The mentality some people have is if they know they can afford the mortgage payments, they fudge the lines a bit so they can get the extra $20,000, $30,000 they need.”

She added that things could get hairy should interest rates rise or if unplanned expenses crop up, and especially in the case of job loss.

Nevertheless, lenders have stringent checks and balances in place to catch attempted shelter fraud, says mortgage broker Frances Hinojosa.

“I do understand through talking to our lender partners that they have seen an increase of income fraud for fraud for shelter,” said the managing partner of Tribe Financial. “It’s not that clients can’t pay the mortgages, but they’re trying to get into the market by fudging documents with inflated incomes. Lenders are all hyperaware of this, and now they’re getting closer and closer to requesting borrowers’ bank statements directly from their institutions to confirm income deposits to make sure the numbers line up. So if there is an increase in this type of fraud, it will just push lenders to snuff it out.”

Weak April Jobs Report Reflects Canadian Lockdown

Canada’s jobs recovery impaired by third-wave virus restrictions

This morning, Statistics Canada released the April 2021 Labour Force Survey showing a major deterioration in the jobs market following the third-wave COVID containment measures. Employment fell by 207,100 (-1.1%) in April, and the unemployment rate rose 0.6 percentage points to 8.1%.

Employment declined in both full-time (-129,000; -0.8%) and part-time (-78,000; -2.3%) work. The number of employed people working less than half their usual hours increased by 288,000 (+27.2%).

The number of Canadians working from home grew by 100,000 to 5.1 million.

Total hours worked fell 2.7% in April, driven by declines in educational services, accommodation and food services, and retail trade.

The labour underutilization rate, which captures the full range of available people who want to work, rose 2.3 percentage points to 17.0% in April.

The number of Canadians unemployed for 27 weeks or more—the long-term unemployed–increased to 486,000. This group might well be the most scarred by the pandemic in terms of their job prospects and skill deterioration.

Hardest hit by industry sector

In April, employment fell in several industries directly impacted by public health restrictions, namely retail trade (-84,000); accommodation and food services (-59,000); and information, culture and recreation (-26,000).

Accommodation and food services accounted for more than two-thirds (70.9%) of the overall employment gap (-503,000) compared with February 2020.

Employment increased in public administration (+15,000); professional, scientific and technical services (+15,000); and finance, insurance and real estate (+15,000), three industries where many activities can be performed remotely.

Employment in goods-producing industries was little changed in April.

Fewer people working in Ontario and British Columbia

Following gains over the previous two months, employment in Ontario fell 153,000 (-2.1%) in April.

Employment in British Columbia declined by 43,000 (-1.6%)—the first decrease since substantial employment losses in March and April 2020.

Employment increased in Saskatchewan and New Brunswick, while there was little change in all other provinces.

Bottom line

The third wave restrictions cut heavily into Canadian employment in April, mostly in line with expectations. However, in contrast to the mild impact on growth from second-wave restrictions, the latest drop may leave more of a mark on the broader economy, with full-time positions also hit this time. On a less downbeat note, the employment-to-population rate remains a full point above January’s level (at 59.6%). The participation rate is also higher than in the second wave at 64.9% (albeit down a bit from the pre-pandemic trend of 65.5%).

Looking ahead, as in prior waves of virus spread, employment will rebound once the government can ease containment measures. And that light at the end of the tunnel is getting closer, with vaccination rates ramping up. In the meantime, government support programs for those losing work remain in place and help put a floor under household purchasing power.

Canada’s economy remains about half a million jobs shy of pre-pandemic levels. The Canadian dollar rose to 82.36 cents US after the report. The yield on Canada’s five-year bond yield dipped to 0.894%, down a few ticks from Thursday’s close.

The U.S. Labor Department also released soft jobs data Friday that were even more disappointing. U.S. payrolls increased by just 266,000, versus estimates for a 1 million gain.

Investing in a smaller unit like a studio condominium might seem counterintuitive, but, as it turns out, it’s the safest bet for investors in an expensive real estate market like Toronto’s.

According to a report from Benjamin Tal, CIBC Capital Markets’ deputy chief economist, and Urbanation president Shaun Hildebrand, there’s a negative correlation between the size of an investment condo and cash flow—larger units erode cash flow.

“In terms of unit type, there was a clear negative correlation between the size of the unit and the amount of cash flow, with studios performing best but still only representing 6% of the market,” said their report. “Only three-bedroom units had average negative cash flow, although these larger units comprised only 2% of rental investments.”

Studio units, according to Tal’s and Hildebrand’s analysis, produced $163 in cash flow, while one-bedroom units produced $86, two-bedrooms left $21, and three-bedroom units put investors $122 in the red.

Scott McLellan, senior vice president of Plaza Corp., agrees with the veracity of the study, noting that a decision was made to include a heavy contingent of studio condo units in Plaza’s 400 King St. W. project in downtown Toronto.

“There was a method behind the madness—we felt that the end price of the studio was probably the most affordable brand new housing product you can buy anywhere in the city, in terms of condos,” McLellan told CREW. “The end price is still somewhere in the low-$500,000s to low-$600,000s, with a one-bedroom coming in at around $75,000 more than that, but you’re basically getting the same rent. So the studios are the absolute best buy right now for an investor.”

The key, added McLellan, is that studio units have a lot of room for appreciation by virtue of their price points. In fact, end users have also figured out that their way up the property ladder is to start with studio units.

“There’s room for the studio to appreciate that much greater because you can get them for under $600,000, or at least around $600,000, and that alone makes them incredibly inviting for first-time buyers and investors alike,” he said. “We’re also seeing that people who aren’t full-time residents of Toronto—they might work full-time in Ottawa or Montreal and only come to Toronto for a few days a month—would rather live in our studio units than in a hotel. Studio units still come with a kitchen that have a fridge, microwave, stove and all regular appliances. Nothing changes from what they’d get in a 2,000 sq ft unit except for the size. We even include a Murphy bed, so the upside for studios right now, at this particular time in the market, is these unit types make the most sense for investors because of the appreciation potential and rents commanded.”

The delta between a one-bedroom unit, which in Toronto runs in the neighbourhood of $700,000, and a studio, which can still be had for below $600,000, buttresses the argument for appreciation, and given that Toronto’s condos barely carry anymore, and therein is a sound investor strategy, says McLellan.

“As the entry-level price point in Toronto continues to climb, price point is what’s going to drive studio condo units, and when price point drives something, historically speaking, it has the most opportunity for appreciation.”

It would take 25 years to save for a down payment of a low-rise Toronto home, says a new report from National Bank.

At a savings rate of 10% on a $183,594 salary, it would take 297 months to achieve the down payment needed for the region’s $1,069,111 house. In fact, 59.7% of the homeowner’s income would go towards mortgage payments. Conversely, to afford the down payment on a $620,291 condo in Toronto, it would take 51 months at a savings rate of 10% on a $125,202 annual salary, and only 34.6% of income would go towards mortgage payments.

Housing prices in Toronto rose by 2.6% on a quarterly basis in Q1-2021, and 11.8% year-over-year, while median household incomes only increased by 1.2%. Moreover, even the Bank of Canada’s decision to plunge interest rates could not offset the surge in housing prices in Canada’s largest metropolitan area.

Montreal

Housing in Canada’s second-largest city is vastly more affordable than it is in Toronto. To afford the down payment on a low-rise home in the city, which averaged $464,684 in the first quarter of the year, it would require 40 months of saving at 10% rate on a salary of $94,760, and mortgage payments would comprise 32.2% of income. To afford a Montreal condo, which averaged $340,610 last quarter, 29 months of saving would be required for a down payment on a salary of $69,459, and mortgage payments would only eat up 23.6% of income.

Aggregate home prices in the city rose by 3.9% in Q1-2021, with condo and non-condo prices increasing by 2.5% and 4.1%, respectively. However, year-over-year, Montreal housing prices surged by 16.3%, but median household income only climbed by 1.3%.

Vancouver

It would take 32 years to save for a down payment at a rate of 10% on a salary of $237,201, considering that the city’s low-rise homes averaged $1,381,274 last quarter. Mortgage payments would also comprise a whopping 78.3% of income.

It would still require 55 months of saving at a salary of $128,364 for a down payment on a condo, which averaged $636,662 in Q1, and the share of income eaten by mortgage payments would be 36.1%.

Calgary

Thirty-three months of saving for a down payment on a $489,195 home would be required at a $99,759 salary. Moreover, mortgage payments as a share of income would be 26.3%. However, only 16 months would be needed at a $50,113 salary to afford a Calgary condo, which averaged $245,744 in the first quarter of the year, and mortgage payments would be 13.2% of income.

Condo prices rose by 1% in Q1, while non-condo prices were nearly twice as high at 1.9%. National Bank noted that Calgary actually became more affordable on a yearly basis.

Edmonton

To afford a $422,555 low-rise home in Alberta’s capital city, 29 months of saving at a rate of 10% on an $86,169 salary is required for a down payment, and mortgage payments would comprise 23.4% of income. On the other hand, only 15 months of saving at a salary of $44,661 is required for a down payment on a $219,009 condo, with mortgage payments not exceeding 12.1% of income.

Home prices in Edmonton only increased by 0.9% because, while low-rise home prices climbed 1.1%, condo prices actually dipped by 0.4%.

Ottawa-Gatineau

To afford the down payment on a low-rise home in the Ottawa-Gatineau area, which averaged $567,313 in Q1, a salary of $114,967 is needed, and it would take 45 months of saving at a rate of 10%. Mortgage payments would comprise 32% of income. To afford a $345,392 condominium would require a 24 months of saving for a down payment at a salary of $70,434, with mortgage payments of 19.5% as a share of income.

National Bank rated Ottawa-Gatineau as third among cities with the biggest prices increases over a quarterly basis and the top city in terms of annual increases. Condos and non-condos in the region increased by 2.2% and 4.3%, respectively, which eroded affordability, especially since median household income only increased by 1%.