Month: June 2021

Despite rising home prices, more Canadians are determined to buy a home than last year, when prices weren’t as astronomical.

But according to Point2 Homes’ 2021 Homebuyer Survey, that doesn’t mean there isn’t growing consternation among prospective buyers. While 51% of respondents reported no worries buying, 44% said they’re unsure of when they would be able to purchase in light of dwindling inventory and surging prices. Thirty-eight percent of respondents said they’re determined to buy as soon as possible.

“By the time I save up enough for a down payment, the overall costs rise up beyond my reach,” said one survey respondent. “It’s a constant game of cat and mouse.”

However, there are ways to navigate the housing market and, specifically, skirt paying exorbitant costs. Using Toronto, Canada’s second most expensive city for housing, Bosley Real Estate broker Davelle Morrison says it would be instructive for buyers, first-timers or otherwise, to study the different segments of housing and submarkets. Condos, for example, are their best bet in Toronto, and depending on the neighbourhood, the price points can become even more affordable.

“I’d send them to the condominium market, absolutely,” Morrison told CREW. “People talk about the lack of affordability in the Toronto housing market because they look at the average price of a Toronto house, but a first-time buyer doesn’t buy a house right away; they start on the first step of the housing ladder with a condo, then it appreciates and you buy a small house, then a larger house. You don’t become CEO on your first day of work; you have to work for it, and it’s the same thing with the property ladder.”

Point2 Homes’ survey also determined 14% of buyers were planning on buying a home within the next six months, down from 31% in 2020, while the percentage of undecided buyers increased to 44% this year from 27% last year.

According to the Toronto Regional Real Estate Board’s data for May, the average price of a GTA condo sold for an average of $682,280, which is still not out of reach on a dual household income, even with the B-20 mortgage stress test amendment, which came into effect June 1, raising the qualifying rate from 4.79% to 5.25%.

Using a $600,000 mortgage at 5.25% or 200 basis points—whichever is higher—a borrowing couple would need to show a combined income of $125,000.

“The increase in OSFI’s [Office of the Superintendent of Financial Institutions] stress test from 4.79% to 5.25% is a margin of only 46 basis points compared to the original 2017 introduction of the stress test that required an additional 200 basis points to qualify—which will only have a marginal impact on borrower affordability or marketing cooling,” said Laura Martin, COO of Matrix Mortgage Global.

Home sales may have decelerated in most Canadian markets in May, but prices still rose on a monthly basis because there are fewer new listings on the market, says a new report from RBC Economics.

According to Robert Hogue’s report, the MLS Home Price Index (HPI) increased by 23% year-over-year in Fraser Valley, 19% in Toronto, and 14% in Vancouver.

“We expect intense upward price pressure to persist nationwide in the near term,” said Hogue’s report. “Further moderation in activity will not be sufficient to rebalance markets, especially if it’s caused by a dearth of homes for sale. We’ll also need more sellers to step in. And higher prices could well be the biggest catalyst for that.”

In the Greater Toronto Area, sales declined in May for a consecutive month falling by 9% from April, according to the Toronto Regional Real Estate Board, but they were still above pre-COVID-19 pandemic levels. Moreover, according to RBC figures, new listings declined by 17% month-over-month. Although bidding wars reportedly involve fewer prospective buyers, they remain commonplace in Canada’s largest metropolitan region, keeping sellers firmly planted in drivers’ seats.

“The region’s MLS HPI accelerated to 18.8% year-over-year, the strongest rate of increase since mid-2017. Single-family homes still attract most of the heat (the segment’s MLS HPI was up 25.1% year-over-year). Renewed demand for condo apartments, however, is increasingly driving up prices in that category as well (up 6.6% year-over-year),” said the report.

In Montreal, resales decreased by 7% in May from a month earlier, but new listings also declined, maintaining tight market conditions that favour sellers. Mirroring Toronto, home values increased in Montreal again last month, and compared to May 2020, they were up 30% in all segments of housing and regions of the city, save for condos on the Island of Montreal, which only rose by 14%.

“We expect the tightness in the market to persist in the near term,” said the RBC report.

In the Vancouver area in May, sales declined by 16% month-over-month while new listings dropped by 9% from April, and according to RBC, that moved the sales-to-new-listings ratio nearer to where prices have historically stabilized. However, like Canada’s two largest cities, sellers in Vancouver are calling the shots.

“And this translated into faster price increases,” said the report. The MLS HPI in the Vancouver region rose by 14% in May from a year prior, marking the strongest rise in three years. In the single-family segment, prices rose by 22.8% while condos only increased by 7.9%. Home prices in Calgary rose 10.6% year-over-year in May, the highest in more than six years, but home resales actually dropped by 18% from April. “Demand-supply conditions in fact tightened further due to an even larger drop in new listings and raised the heat on prices.”

Housing drove economic expansion in Q1

This morning’s Statistics Canada release showed that the economy grew at a 5.6% annualized rate in the first quarter, after a revised 9.3% pace in the final quarter of last year. That was somewhat below economists’ expectations. Housing investment grew at an annualized 43% pace, by far the biggest impetus of the expansion. Residential investment now makes up a record proportion of GDP (see chart below). Compared with the first quarter of 2020, housing investment was up 26.5% and led the recovery. Growth in housing was attributable to an improved job market, higher compensation of employees, and low mortgage rates. After adding $63.6 billion of residential mortgage debt in the last half of 2020, households added $29.6 billion more in the first quarter of 2021.

Residential investment is a component of the Gross Domestic Product accounts and is technically called “gross fixed capital formation in residential structures” by StatCan. Investment in residential structures is comprised of three components: 1) new construction 2) renovations 3) ownership transfer costs. The first two components are obvious.

The home-resale market’s contribution to economic activity is reflected in “ownership transfer costs.” These costs are as follows:

• real estate commissions—including realtors and mortgage brokerage fees;
• land transfer taxes;
• legal costs (fees paid to notaries, surveyors, experts etc.);
• file review costs (inspection and surveying).

The second chart below shows the quarterly percent change in the components of housing investment in inflation-adjusted terms. This chart illustrates the surge in existing home sales since the second quarter of last year (reflected in the red bar). Although the resale market has slowed since the third quarter of last year, it remains a driving force of economic expansion.

Growth in housing investment was broad-based. New construction rose 8.7% (quarter-over-quarter), largely driven by detached units in Ontario and Quebec. Ownership transfer costs increased 13.1%, with the rise in resale activities. Working from home and extra savings from reduced travel heightened the demand for, and scope of, home renovations, which grew 7.0% in the first quarter.

The increase in GDP in the first quarter of 2021 reflected the continued strength of the economy, influenced by favourable mortgage rates, continued government transfers to households and businesses, and an improved labour market. These factors boosted the demand for housing investment while rising input costs heightened construction costs.

The GDP implicit price index, which reflects the overall price of domestically produced goods and services, rose 2.9% in the first quarter, driven by higher prices for construction materials and energy used in Canada and exported. The sharp increase in prices boosted nominal GDP (+4.3%). Compensation of employees rose 2.1%, led by construction and information and cultural industries, and surpassed the pre-pandemic level recorded at the end of 2019.

Strength in oil and gas extraction, manufacturing of petroleum products, and construction industries led to a higher gross operating surplus for non-financial corporations (+11.5%). Higher earnings from commissions and fees bolstered the operating surplus of financial corporations (+3.9%), coinciding with the sizeable increases in the value and volume of stocks traded on the Toronto Stock Exchange (TSX).

Most aspects of final sales were solid in Q1, with consumers a bit stronger than expected (2.8% a.r.), government adding (5.8%), and net exports also contributing. In contrast, business investment was one real source of disappointment, with equipment spending surprisingly falling. But the biggest drag came from a drop in inventories, with this factor alone cutting growth 1.4 ppts in Q1, and versus expectations, it could add a touch. The good news is that this should reverse in Q2, supporting activity in the current quarter.

On the monthly figures, there were few big surprises. March’s initial flash estimate of +0.9% was nudged up in the official estimate to +1.1% as the economy began to reopen from the second wave. Tougher COVID public health rules slammed the brakes on Canada’s economy in April. Statistics Canada estimates gross domestic product shrank 0.8% in the month, representing the first contraction in a year and a weak handoff heading into the second quarter. April may well be followed by a soft May. Even so, we still expect a strong June will keep Q2 roughly flat overall and look for robust Q3 growth.

Bottom Line

In many respects, Q1 data is ancient history. We know with the resurgence in lockdowns, growth in Q3 will at best be flat. In the hopes that vaccinations will accelerate and COVID case numbers will continue to fall across the country, Q4 will likely see a strong resurgence in growth

Sales in the Greater Toronto Area moderated for a second straight month in May, indicating that a semblance of normalcy is beginning to return to the housing market. However, it could be short-lived.

There were 11,951 sales in the GTA last month, according to the latest data from the Toronto Regional Real Estate Board (TRREB), down from 13,650 in April and 15,646 in March, when activity peaked. The number of transactions last month was shy of the May record, which was 12,789 in 2016.

“There has been strong demand for ownership housing in all parts of the GTA for both ground-oriented home types and condominium apartments. This was fuelled by confidence in economic recovery and low borrowing costs. However, in the absence of a normal pace of population growth, we saw a pullback in sales over the past two months relative to the March peak,” said Lisa Patel, president of TRREB.

But despite buying activity decelerating in May, the average selling price still crept up by 1.1% month-over-month to reach a record $1,108,453, which TRREB’s analysis attributed to new listings decreasing to 18,586 from 20,825 in April.

There were 5,718 detached home sales in the GTA in May that averaged $1,415,698, while semi-detached sales totalled 1,233 and averaged $1,064,361. The GTA’s townhouse segment saw 2,182 transactions for which the average price was $866,349, and the condo segment of the market had 2,710 sales for an average price of $682,280.

The slight softening in purchasing activity might also suggest buyer fatigue, says mortgage broker Elan Weintraub, but he doesn’t expect that to last for long, thanks in large part to the rising rate of inoculated Torontonians.

“The COVID-19 vaccines are starting to really come out, and by fall and beyond, downtown businesses and most of Bay St. will start opening up, maybe not to the extent of before the pandemic, but bars and restaurants will start reopening and there will be more demand for real estate as people come back to the city,” said Weintraub, co-founder and director at Mortgageoutlet.ca. “Maybe not this year, but certainly early next year immigration will resume and a lot of people will want to come to Canada.”

Even with a slight reduction in transactions, prices still managed to rise and Weintraub doesn’t anticipate that stopping.

“Even though the market is still hot, the next three to 12 months are when the market will get hotter. Even though volume is down, I think that prices are going to remain strong. Those two things don’t work hand-in-hand; we will see prices continue increasing once immigration, universities, businesses and bars open up.”

To say COVID-19 has been bad for small businesses would be an understatement, but mixed-use properties that will invariably hit the market because of the economically calamitous nature of the pandemic could help boost housing supply.

“There’s a hidden gem: mixed-use commercial properties in downtown Hamilton that might be able to be converted into residential properties,” said Sandy MacKay, founder and CEO of MacKay Realty Network. “A lot of business owners own small mixed-use properties that aren’t excited about working from their offices or they’re shutting their businesses, or going fully remote, and those properties have potential for residential conversion.”

The only hurdle to overcome, in addition to actually finding such properties, is Hamilton’s slow rezoning approvals process—not out of character for the region. Still, MacKay says it would be a worthwhile endeavour.

MacKay Realty Network works with investors around the GTA, although it favours Hamilton, to find cash-flowing properties primarily in the multifamily residential sector. MacKay says that properties with at least two units carry easily, but the sweet spot is properties with five to 50 units.

“The last number of years, Hamilton’s downtown core has been booming and such a great area to be investing in, especially with a lot of renovation projects that are happening there,” he said. “There’s been a great commercial push there in the last five-plus years, although not so much in the last year because of the pandemic—but that’s not unique to Hamilton; it’s happened all around the world—and multifamily residential is our bread and butter because it’s the area in which we see the most potential. We see a lot of opportunities in the bigger buildings that have over five units, even up to a 100 units, which are harder to find. If you can navigate the difficult tenant situations that come with larger buildings, it’s a great payoff, and fortunately, our property management company, Executive Properties, can help with that.”

The rules governing Ontario rentals, including the Landlord and Tenant Board, favour renters, and the COVID-19 pandemic has been particularly arduous for investors stuck with problem tenants they’re legally prohibited from evicting. Moreover, when evictions are no longer proscribed, there will be a massive backlog to contend with.

“Landlord problems can turn into a great opportunity for the right person,” said MacKay, adding that MacKay Realty Network leverages its vast contact list to help its clients find those properties.“It’s definitely harder to find right now, and not all that realistic to find, but if you get a duplex and triplex, or a building with even more units, you will definitely find properties that carry themselves and mortgages and other expenses associated with the properties.”

A survey of Ontarians revealed that three-quarters of respondents aged 18-34 don’t believe they will be able to afford a home in their city or town.

“Having worked in this industry for 35 years now, I have seen one group [among the aforementioned cohort] able to get into the market, and that’s thanks to assistance from parents who are able to do it, and certainly low-interest rates don’t hurt, but you do have to have a good job,” said John Lusink, president of Right at Home Realty, which conducted the survey with Maru/Blue. “It’s challenging all around. If it’s their first time purchasing, and with mortgage qualification rules tightening up yet again, it is discouraging and tough for young folks, so I empathize greatly with them.”

The anxiety isn’t just felt by buyers aged 18-34, says Erica Mary Smith, broker of record at Stomp Realty in Toronto.

“Every time I talk to my older clientele who have kids, the first thing they always say is, ‘I don’t know how my kids will ever afford a home,’” she said. “Now I’m seeing a lot of gift money from parents, and parents are transferring existing homes, namely condos into their kids’ names so that they’ll automatically be in the market at some point and they won’t have to deal with taxes. There’s a lot of parental help right now.”

Asked if easing mortgage qualification rules, including rescinding the 200 basis point stress altogether, for younger buyers might help them get a foothold in the housing market, Lusink noted that the rules exist for a reason, and as a parent himself he’s glad they do.

“As a parent, I’d be concerned about seeing my kids get into mortgages that are in the $600,000-800,000 range if they didn’t have the jobs and incomes to support that,” he said. “I am in favour of having stricter rules in place so these guys don’t get into trouble.”

Right at Home Realty and Maru/Blue’s survey also found that 47% of respondents aged 35-54, and 37% over 55, did not believe they could buy homes where they live.

Additionally, 42% said moving away from larger cities could hurt their career advancement while a majority working from home weren’t willing to move further away in case they’re called back to the office post-pandemic.

Eighteen percent of Ontarians would consider selling their homes to move to a smaller community, which Lusink says is evidence that the exodus from major cities in 2020 may have been media hype.

“While the pandemic necessitated working from home, what it has done is increase people’s desires for bigger space, some backyard space, but I think that because only 18% would move out of the city to smaller space means it’s not an exodus, as has been put forward in the media.”

This morning, Statistics Canada released the May 2021 Labour Force Survey showing another contraction in employment, albeit not as dramatic as in April. With the geographical broadening in lockdown restrictions in May, employment fell by 68,000 (-0.4%), but almost all of the decline was in part-time work.

The number of self-employed workers was virtually unchanged in May but remained 5% (-144,000) below its pre-pandemic level.

Among people working part-time in May, almost one-quarter (22.7%) wanted a full-time job, up from 18.5% in February 2020 (not seasonally adjusted).

The number of Canadians working from home held steady at 5.1 million. This is similar to the number of telecommuters in the spring of last year.

After falling in April, total hours worked were little changed in May.

Employment in the goods-producing sector dropped for the first time since April 2020, with decreases in both the manufacturing and construction industries. Ontario and Nova Scotia were the only provinces to register declines in total employment.

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

Unemployment little changed

The unemployment rate was little changed at 8.2% in May, as the number of people who searched for a job or who were on temporary layoff held steady. The unemployment rate remained lower than the recent peak of 9.4% seen in January 2021 and considerably lower than its peak of 13.7% in May 2020.

The unemployment rate among visible minority Canadians aged 15 to 69 rose 1.5 percentage points to 11.4% in May (not seasonally adjusted).

Long-term unemployment—the number of people unemployed for 27 weeks or more—held relatively steady at 478,000 in May.

Full-time employment was little changed in May, following a decline of 129,000 (-0.8%) in April. Before April, full-time employment had steadily trended upwards, following the low in April 2020. In May 2021, the number of full-time workers was down 1.9% (-303,000) from its pre-pandemic level.

Private sector employees in sales and services most affected by restrictions

The number of private-sector employees declined by 60,000 in May (-0.5%), adding to losses observed in April (-204,000; -1.7%). This followed employment gains totalling 427,000 in February and March 2021—demonstrating the extent to which employment for this group of workers has been affected by the easing and tightening public health measures introduced to contain the COVID-19 pandemic.

Compared with February 2020, the number of private-sector employees was down 564,000 (-4.6%), with the gap driven mostly by declines in the number of people working in the accommodation and food services industry, particularly those working in sales and services occupations (not seasonally adjusted).

Employment in construction falls with tightening of public health restrictions in ON

Employment in construction fell by 16,000 (-1.1%) in May, driven by declines in Ontario, where public health restrictions affecting non-essential construction were implemented on April 17. The decrease brought the number of workers in construction down to 3.7% (-55,000) below pre-COVID levels.

Bottom Line

With the easing of COVID-19 restrictions beginning this month, we expect a sharp rebound in job creation starting in the next employment report. The potential for a sharp rebound and a faster-than-expected full recovery has already prompted the Bank of Canada to start tapering its stimulus with reduced bond buying. Markets are expecting rate hikes by the Bank to begin next year.

Canada’s economy remains 571,100 jobs shy of pre-pandemic levels. The unemployment rate was below 6% before the pandemic.

The Canadian jobs report coincided with the release of U.S. payroll numbers, which increased by 559,000 last month — short of an expected 675,000–but well above the surprisingly weak job growth in April.

Landlords typically rely on credit checks to scrutinize prospective tenants, but it’s a method replete with blind spots. Fortunately, a potentially better way of determining renter suitability has come to market.

“We offer credit check but our primary verification method for applications, which we provide to landlords, is a turnkey pre-screening with our bank check, and what it does is instantly verify the income and expense profile of our tenant applicant today and in the past year, so we can prove to the landlord what their payroll transactions are and what their payroll amount is every month,” Craig Schoen, CTO and co-founder of Rentify, a platform that launched in September, told CREW.

“We show their average bank balance every month, and those are critical numbers because landlords have never had access to this. Even if someone gave their paper bank statements, it would take time to verify and now we do it all in minutes, so landlords understand where applicants stand in the process.”

In addition to credit checks, landlords usually collect documents like paystubs and T4s manually, and a lot of back and forth emailing occurs throughout the process. But even that isn’t enough, according to Jamie Troke, president of Ekort Property Management in Belleville, ON, who says credit checks don’t provide real time analysis of spending habits and financial responsibility.

“It doesn’t verify that you work at Tim Hortons or that you have $1,200 in your bank account,” he said. “It just validates that you may pay your phone bill on time. What you get through a credit check is so minimal that it isn’t a reliable reflection of a tenant’s ability to pay their rent and of their habits.”

Perhaps the biggest reason credit checks aren’t reliable for landlords is that they’re not designed for them.

“What we found is credit checks are built for the lending industry to identify credit risk, but there’s a large departure. What landlords, small, medium or property managers, actually need to know comes from the bank account,” he said. “We focus on facts and look at where the prospect is today and where they’ve been in the past. If they say they’ve paid rent before but nothing in our analysis of bank accounts shows that, we highlight it to the landlord, which allows them to ask the right questions and gives them a stronger foundation than using unverifiable discussions with other landlords.”

An Oxford Economics report recently bestowed upon Vancouver the dubious honour of being North America’s least affordable city, and according to a local real estate professional, that won’t change unless wholesale investment is made to increase the city’s housing supply.

Vancouver’s population grew by 0.98% to 2,581,000 last year, an increase of about 25,294 people, but the city intends to add 1 million new residents by 2050, or 34,482 annually over the next 29 years. Resultantly, says Jacky Chan, president of BakerWest, a real estate sales and marketing firm, housing supply needs to catch up, and fast, although he doesn’t see how it will.

“We’re expecting something in the neighbourhood of 200,000 people over the next five years, but we’re only completing 11,000 homes a year,” Chan told CREW. “That would be the equivalent of fitting around 18 people into every new home that’s built to offset the population influx, so obviously if supply doesn’t catch up to demand, there’s no way for prices to go but up.”

Supply and demand disequilibrium invariably, and consequently, puts upward pressure on the cost of housing. Historically low-interest rates have catalyzed a flurry of purchasing activity in the Vancouver real estate market and that, too, is pushing up the price of homes. RE/MAX data showed that the average sales price of a Vancouver home in 2020 increased by 11.4% to $1,270,000 from $1,140,000 in 2019, and an additional increase of 4% to $1,320,800 is expected this year.

“Vancouver’s new home construction has been softer over the course of 2020, with it being stronger over the past four months, benefitting from the seller’s market,” said a RE/MAX report released in December 2020. “New-construction homes in Vancouver are on the high end in terms of prices. The new-construction market in Vancouver has been firming up over the past couple of months, so overall the housing market has been stronger. This is expected to continue into 2021.”

Canada Mortgage and Housing Corporation figures showed 21,141 housing starts in Vancouver in 2019 and 22,371 last year, however, according to statistics from B.C. Housing, there were only 950 new homes registered in Vancouver in April. Given the city’s growth ambitions, that would require over 2,000 new home registrations a month.

Demand is already underserviced by supply, says Chan, and the discrepancy will become wider.

“We’re only servicing 10-20% of demand at the rate we’re going at now. For the government to service this, there needs to be a dramatic increase in development, and the density of the developments needs to be increased as well,” said Chan. “The lack of supply and the slow approval process have created a slower supply pipeline, particularly in Vancouver where it’s not easy to be a real estate developer and get your application approved by the city. That has been the major issue.”

The rate at which Canadians are saving money has never been higher, according to a new TransUnion Canada report, noting that surplus funds are being used to reduce personal debt and buy real estate.

Mortgage originations grew by 25.8% year-over-year in the first quarter of the year as a result of interest rates falling to record lows and, by extension, a substantial rise in refinancing. That also caused home prices to increase by 31.6% in March, with home sales surging by 76.2%.

“We’ve seen that other credit products had a very slow take-up coming out of COVID, but there are new record highs with national home sales, and the hot market is fuelling mortgage growth,” Matt Fabian, director of research and consulting at TransUnion Canada, told CREW. “There was a 26% year-over-year increase in new mortgage originations in the first quarter, and the number keeps accelerating.”

TransUnion anticipates more growth in Q2 before moderating in the latter half of 2021.

Nevertheless, save for mortgages, Canadians are deleveraging their credit debt in tandem with the increasingly buoyant economy. Fabian surmises that such sudden change in consumer behaviour can potentially create problems, namely growth in risky balances, for lenders that don’t adjust accordingly. Lenders should begin replenishing their portfolios with new balances and originations, he added, to ensure a controllable delinquency rate.

Excluding mortgage debt, consumers’ liquidity declined by 2.9% year-over-year in Q1 to $28,900 in large part because their savings rate rose to 28% of disposable income, an all-time high, according to TransUnion’s Industry Insights Report for the quarter.

Although most deferral programs, which were spurred by the COVID-19 pandemic, have concluded, delinquencies fell by 0.63% year-over-year to 1.4% in the first quarter of 2021—non-mortgage delinquencies were even lower, decreasing by 62 basis points to 1.39%.

During the fourth quarter of 2020, Canada’s credit market experienced declining originations, suggesting that consumers were paying off debt rather than securing more.

But as Fabian noted, mortgage originations have grown consistently, and he cited a host of reasons ranging from evolving needs to excess cash in Canadian households. And although mortgage originations are up, the risk of default doesn’t appear to have grown commensurately.

“There’s been a shift in buyer preferences, and there are a whole lot of options for people who have decided to move because they work from home, and they’re making different choices and redirecting their cash and assets towards a different home. People are redirecting their spending because they aren’t travelling, so they’re upgrading and improving their homes,” he said

“We haven’t seen mortgage delinquencies increase and part of that is the nature of mortgages. With the qualifying rules put in place a few years ago, we’ve seen most new mortgages are going to better consumers, so there’s lower risk for defaults. So even though we’ve seen an increase in mortgage originations, we haven’t seen an increase in risk.”

However, there is concern about housing affordability.

“The concern is how long this will continue.”