Month: November 2021

Toronto council approved an inclusionary zoning policy that will force developers to set aside a percentage of units for affordable housing if they’re putting up condos near transit stations. However, the framework will drive up prices for buyers of market-priced units.

Council had two choices. Give builders a break on development charges to build up the stock of affordable housing in the city or arbitrarily impose regulations on them. They unwisely chose the latter.

Starting in September 2022, the city will force developers who put up condo developments near big public transit stations to designate five to 10 per cent of the units as affordable housing. By 2030, the figure is set to rise to between eight and 22 per cent.

The new framework will not solve the housing supply problem. It will only penalize those buying market-priced units, as costs will be passed on to them. In effect then, new home buyers will end up shouldering the added costs of providing affordable housing. The policy will end up hurting those on a limited budget or who are barely able to put together enough funds for a mortgage.

The irony here is that qualified buyers might ultimately have to move to the list of affordable home seekers.

The city, in effect, is placing the burden solely on the back of purchasers of new homes – at a time when housing supply is already under great pressure and affordability is more elusive than ever.

The policy is not going to materially add to the aggregate supply of housing overall. In fact, it could have a chilling effect on future projects and make some untenable, leading to fewer condos being built.

The policy affects new rental developments as well so, in the end, the cost of affordable rental units will be borne by other unit holders. Some think builders will absorb this but that’s not how markets work. So, it is effectively regressive. Those most affected will be those who can least afford it.

Buying land and constructing a building in Toronto doesn’t come cheap. Developers operate on tight budgets. If they can’t make money, they won’t build. Simple as that. In turn, that will lead to fewer housing units.

If the city wants to tackle the housing affordability crisis, it should instead remove barriers that strangle growth.

The city could have and should have taken a different approach. Instead of regulations, developers had asked for incentives. Waiving density limits so they could build higher, for example, would have been a more preferable option.

We have a serious housing supply crisis in the GTA. Reducing red tape, streamlining the approvals process, and giving developers a break on development charges would have been a better approach.

As part of its Official Plan review, the city could also opt to ease zoning restrictions to allow developers to build more mid-rise buildings, semi-detached homes, townhouses and multiplex buildings in neighbourhoods that presently allow only single-family homes. This would help speed-up the building timeline, as developers wouldn’t have to keep seeking site-specific rezoning.

Barring systemic change, the housing crunch will continue to get worse. The policy adopted by the city certainly won’t help. Rather, it will only complicate matters. Regrettably, market supply economics has been effectively ignored for the sake of political expediency.

Thankfully, the province has announced a Housing Affordability Task Force that will identify opportunities to get shovels in the ground faster, remove duplication and barriers, and make housing more affordable.

With more than 400,000 immigrants expected to enter Canada in each of the next two years, we need policies that will increase housing supply to meet anticipated demand – not penalize developers.

Instead of improving the situation, it would appear this particular inclusionary zoning approach is more ideological than practical.

Richard Lyall, president of RESCON, has represented the building industry in Ontario since 1991. Contact him at [email protected]

While researching all that there is to know about mortgages, you might have come across the concept of debt service ratio (DSR). Debt service ratio is one of those fun financial terms that gets thrown around often with no real explanation of what it means. Fear not, because debt service ratios are actually not too difficult to get your head around.

It’s important that you understand what your ratios are and how to calculate them because they are convenient indicators for your financial condition. They are also an important indicator that a lender will use to determine your mortgage loan terms and are an important factor in the mortgage stress test. For anyone looking to buy a home, this is a must-know.

What is a debt service ratio?

Debt service ratio is essentially the ratio between your income and your debt payments. This ratio is important because it’s a simple way to measure how effectively you can handle your debt payments based on your income. Your ratio is usually expressed as a percentage. For example, a ratio of 20% means that your annual debt payments make up 20% of your annual gross income.

It’s worth remembering that your debt ratios are calculated using your gross income, that is, income before deductions and taxes. That means that the percentage of your gross income that you want to put towards housing may be 20%, but in terms of actual disposable income, it will represent a larger percentage of your available funds.

What are the types of service ratios?

Your debt ratio is not actually a single figure. Rather, there are two major types of ratio, the gross debt service ratio(GDS) and the total debt service ratio(TDS). These measures are similar but have slight differences that make them useful in different situations.

Gross Debt Service Ratio (GDS)

Your Gross debt service ratio represents the ratio between your housing expenses and your gross income. Housing costs consist of your mortgage payments as well as monthly property tax payments, heating bills, half of your condo fee if applicable, and any other housing-related fees.

In order to calculate your gross debt service ratio for a house you don’t own yet, you will need to calculate estimates for the various figures. Once you have your estimates simply divide these by your monthly gross (before tax) income. You can also use this calculation in reverse by dividing your income by a target GDS percentage. This will give you an idea of what sort of debt payments you can afford with your income.

Total Debt Service Ratio (TDS)

Your total debt service ratio represents the ratio between all of your monthly debt payments, including housing, and your gross income. In addition to the housing costs from above, your total debt service ratio also accounts for any monthly debt payments you have such as credit card bills, car payments, line of credit payments, and more.

The calculation for the total debt service is essentially the same as for the gross debt service ratio once you include all additional debt payments.

Is rental income counted for debt service ratios?

If you already have rental income and are looking to buy another property, this net rental income will be included in your debt service ratios when applying for a new mortgage.

If you are applying for a mortgage on a rental property, you will only be allowed to include up to 50% of the potential gross rental income from the property as income for the purpose of calculating your debt service ratios. The one exception is if you plan to live in one of the units of a multi-unit rental as your primary residence. In which case, you may include 100% of the gross rental income towards your ratios.

Why do debt service ratios matter?

Debt service ratio is most important because it will play a role in determining your mortgage. Naturally, there is an upper limit on what monthly mortgage payments you can afford based on your monthly income. However, mortgage lenders will not let you spread your money too thin.

The Canada Mortgage and Housing Corporation (CMHC) sets limits on how high debt ratios can be in order to be eligible for a mortgage loan. Much like the mortgage stress test, the idea behind this choice is to prevent borrowers from taking on mortgages that they can not afford to maintain. The CMHC also puts a limit on debt ratio for borrowers looking to acquire mortgage default insurance.

If your debt ratio is too high, you will need to reduce it to a point below the maximums in order to be eligible for a mortgage. Otherwise, you will need to borrow from a private lender who does not observe the CMHC restrictions.

For GDS, the CMHC has a hard limit of 39%. Most banks try to keep their borrowers below 32% and will only offer loans at higher debt ratios in specific circumstances such as with a high down payment, good credit score, or valuable assets.

For TDS, the CMHC has a limit of 44%, though most banks will prefer a borrower to stay lower than 42% for mortgages.

How can I improve my debt service ratio?

If your debt ratios are too high to qualify for a mortgage, you will need to find a way to decrease them.

Because your GDS is often based on a hypothetical home you want to purchase, it’s the easiest to reduce. Essentially, you will need to alter the mortgage terms or find a different property. A longer amortization period or a lower-priced home can enable you to pay a lower monthly mortgage payment and free up space in your GDS.

Lowering your TDS is a bit harder because one main way to lower it would be to pay off debts. Naturally, everyone wants to pay off their debts as quickly as is reasonable, but there is not always a way to speed up this process. One thing you may be able to change is to increase your income through a job change or finding alternative sources of income. Again, this is not always in your control, but it is a good option if you can make it work.

One of my first ‘real’ jobs was at World Vision Canada, a not-for-profit humanitarian organization. During my time there, I established a love for giving back and helping others. That desire has become an important component of our real estate team’s business, and I think it should be of yours too!

When first starting our real estate team, a decade ago, my partner, Ariel Kormendy, and I wanted to ensure that philanthropy and charity were at the forefront of our business. Whether volunteering or donating, I believe that all companies should do what they can to give back and support the causes and people they care for.

There are many ways for Realtors to give back; from a completely unrelated cause you care about to a more directly related community-related cause, there are plenty of options.

We recently partnered with Tree Canada, the largest non-profit tree-planting organization in Canada. Their mission nicely aligns with our company and our industry. From the environmental perspective to giving back to the communities that support us by organizing an annual planting event, we were thrilled to partner with Tree Canada.

We’re excited to announce that our first event is in Milton, Ontario in the fall of 2022. In the meantime we’ll continue to search for more ways to give back.

Heading into the new year, perhaps philanthropy is among your New Years’ Resolutions?

The phrase ‘biding war’ may call to mind an intense military battle fought with bank accounts rather than firearms. It may not be that intense, but it can be a serious issue for Canadians who are eager to buy real estate and are facing steep competition. For them, the housing market really can feel like a battle with insurmountable odds.

Bidding wars are even more severe in today’s seller’s market where some buyers have been forced to tender offers far above the listing price in order to come out on top of high demand. In fact, due to recent conditions, the practice of bidding wars has come under fire for helping the market value of real estate to shoot up. However, bidding wars are not all-out chaos – there are some rules that should be observed.

What do bidding wars look like?

Bidding wars are not to be confused with multiple offers on the same property.

Multiple offers are simply just that: when multiple potential buyers put up competing offers to buy a property. The sale then usually goes to the buyer offering the highest amount. Bidding wars escalate from multiple offer situations when the seller or selling agent encourages the potential buyers to compete with one another in order to put in the highest bid.

In a bidding war, buyers are attempting to outbid each other incrementally in a sort of auction-house-like fervour. Often, this situation is brought on by the listing agent, who encourages other buyer agents to raise their offers after receiving the initial bids.

Properties selling for far above the asking price

There are also situations where a bidding war arises organically without assistance from the agent. This is happening more often in today’s very tight market where desirable properties are seeing high competition for purchases. Whether incited or organic, bidding wars are largely responsible for houses that sell far above asking.

Are they legal?

There is no law in Canada that prohibits a bidding war from occurring. This doesn’t mean that they are a free-for-all, however, as there are guidelines on how they should be conducted as well as ethical concerns to keep in mind.

Ethics of bidding wars

For most people, buying real estate is not an everyday purchase and can have a lot of emotion and heavy financial concerns placed upon it. Because of the high importance, real estate purchases have for most people, there is a level of ethical obligation that real estate agents have to their clients.

The Canadian Real Estate Association (CREA) has its own official Code of Ethics that agents in the real estate business are subject to. Regional real estate associations may have their own codes as well.

Under the CREA code, realtors have a duty to protect and promote the interests of their clients. This is why if a client wants to incite a multiple offer situation or even a bidding war, it is the realtor’s obligation to do what is best for them. Conveniently, it is also in the realtor’s best interest to increase the selling price for higher commissions.

There is also an obligation to disclose if a realtor is representing multiple clients on one sale, and not use any private information to give anyone buyer a competitive edge.

Bid disclosure rules vary by province

There is also a legal obligation that a realtor can not disclose information on competing offers, though this rule will vary between provinces. In some areas, realtors are permitted to disclose the existence and number of competing bids, while others allow the disclosure of actual values with the consent of the seller.

However, that doesn’t stop these rules from being bent or broken, and there have been cases of realtors disclosing information, or even fabricating information on other offers in order to pump up offer amounts. In these situations, a real estate agent can face consequences, but only if they are reported and investigated.

As a seller, you may be interested in encouraging competition for your property. However, there are some rules a realtor needs to follow. These rules may vary by province so be sure to check with your region’s real estate association.

For example, under the rules of the Ontario Real Estate Association, an agent may not claim to have offers unless an official written offer has been received, and they must disclose the number of signed offers to a buyer when asked.

Bidding doesn’t need to be disorganized

If you are an agent facilitating a bidding war, it’s important that you clearly outline the bidding process that buyers must follow, and remain communicative about new or changing offers to all parties involved in the bidding. This is not only a courtesy to clients and buyers, but it also helps you stay organized in the rapidly changing bidding environment.

How to win a bidding war?

The question for some home buyers who are looking to buy a home now is how to come out on top in a competitive sale. Ideally, it is best to avoid a bidding frenzy altogether, as you will often end up paying more than you planned to.

Short of that, it essentially comes down to offering more than other buyers, but you can also help yourself in other ways. For example, conditional offers do not do as well in competitive sales, so unfortunately you will often have to forgo options like a home inspection to maximize your chance of closing a sale. You should also do your best to stay on top of the bids and put in your offer in a timely manner, to avoid falling out of the running.

Ultimately, despite your best efforts, you can still find yourself on the losing end of a bidding war. Many Canadians have faced the situation of putting up multiple offers without being able to close a sale. Overall, just temper your expectations, buckle your seatbelt, and be prepared to shop around.

Criticisms of the current bidding process

The practice of bidding wars, particularly blind bidding, has come under fire recently as Canadians grow frustrated with the home buying process. Critics in the real estate industry say that the blind bidding process allows for manipulation by realtors acting in bad faith, as well as out of control bidding situations that drive up prices. Ultimately, they say blind bidding does not benefit the consumer. These critics often call for a move to a more transparent open bidding system.

To counter these criticisms, proponents of the current system argue for the seller’s right to choose how their property is sold, as well as the fact that in countries that practice open bidding, the situation of out of control prices and bidding wars is not particularly more tame than in Canada.

Inflation in the Canadian economy has been on a steep increase since the start of 2021. Now as Canada begins to emerge from the COVID-19 pandemic, the hopes are for positive economic growth, however, it seems pandemic effects may stick around longer than most anticipated.

Pressure is now being put on the Bank of Canada to rein in rising inflation. The bank has held its position that high inflation is merely a “transitory” issue, though some are warning inflation may get worse before it gets much better.

What is the current inflation rate?

According to new figures from the CPI released this week, the current inflation rate in Canada reached a new high of 4.7% in October, in line with market expectations. While not the highest level in history, it’s the highest inflation rate Canada has seen since 2003 and is more than double the average pre-pandemic levels of about 2%.

This is up from about 1% at the start of the year and 4.1% in August. The U.S. has seen a similar spike in inflation, hitting above 6%. Central banks across the world are also reporting large growth in inflation.

What is the Consumer Price Index (CPI)?

The consumer price index is a means for measuring price increases in Canada and is the primary indicator used to determine inflation rates.

The CPI tracks the prices of eight major commodities in order to determine how the economy is inflating or deflating. Though various commodities may fluctuate in price, the broad selection of goods represents an average of Canadians’ household spending.

Eight commodity prices tracked by the CPI

• Food
• Shelter
• Household operations, furnishing, and equipment
• Clothing and footwear
• Transportation
• Health and personal care
• Recreation, education, and reading
• Alcoholic beverages, tobacco products and recreational cannabis

Each of these commodities is weighted in terms of relative importance. The CPI measures costs and applies an index value, the rate at which the index changes is expressed as the inflation rate. Monthly increases are projected out to find a hypothetical yearly rate, however, the rate rarely stays the same for a whole year.

Canadian inflation history

The last time Canadian inflation ran wild was in the 1970s and 80s when inflation rose as high as 14%. At that time, inflation was caused by a perfect storm of global economic conditions and failed governmental economic stimulation. This period of inflation during a recessionary period was known as Stagflation. Eventually, inflation was brought under control due in part to increased interest rates, and it gradually reduced until hovering around 2% for many years.

At the start of the COVID-19 pandemic, inflation actually dipped low for a brief period. From about March to May 2020, the CPI saw very low or no increases as markets faltered in response to new restrictions. The price of gas along with rent prices decreased, and travel expenses fell sharply.

However, as it became clear that difficult times were here to stay for the near future, prices in food, gasoline, housing and more began to rise as the difficulties in production and supply chains increased. Since then inflation has continued to tick up steeply.

What inflation means for Canadians

There is some contention in the understanding of inflation and how it can affect Canadians. Some people actually see high inflation as possibly a good thing and a natural consequence of an unbalanced economy. They also point to positives such as the fact that inflated money makes paying off past debts even easier as the purchasing power of the dollar goes down.

On the other side of things are the arguments against inflation. These include the fact that as inflation goes up, uninvested savings actually decrease in value. This is of particular concern for the millions of Canadians approaching retirement age who are now seeing their funds dwindle.

There is also the fact that inflation is rising faster than wages. Prices are up all over and the labour force is starting to demand more compensation for their work, causing labour shortages in some areas. Overall, a less healthy and more unstable economy can lead to all sorts of turmoil both economically and socially.

What is the inflation forecast?

There is also much contention on how rising inflation will play out for Canada. Some forecast it as only a transitory adjustment that will subside, while others fear it’s a warning for things to come and a repeat of inflationary periods of the 1970s.

Recent inflation expectations predict that the CPI will rise above 5% by the end of the year, with multiple point increases still in the forecast in 2022. According to the Conference Board of Canada’s Index of Business Confidence, a majority of businesses polled feel inflation rates will rise 2% or more in the next six months. The central bank however hopes for average rates of 3.4 percent for 2022, up from a previous forecast of 2.4%. They aim to reach the target inflation rate of 2% by 2023.

What can the central bank of Canada do?

All eyes are now on the Bank of Canada as inflation rises. During the pandemic, the Bank of Canada cut their policy rate to record low levels in order to ensure the flow of money continued through the economy. They have committed to holding off until at least the second quarter of next year until they raise rates, and expect rising inflation to be a temporary issue.

Should they be wrong and inflation gets too out of control, they may be forced to announce an early interest rate hike, or a faster pace of increases, in order to combat inflation.

Bank ends Quantitative easing

Another means by which the bank has influenced the rate of inflation is through its quantitative easing program. Under this program, the bank bought up mass amounts of government bonds, causing their prices to surge and their yields to drop, thus lowering related rates such as fixed mortgage rates. Late last month, the bank opted to ease down this program, and many are saying this is a sign of increased interest rates to come.

The thing that is on all prospective home buyers’ minds before they start getting a mortgage is the down payment required to begin the process. According to Canadian regulations, you can not simply get a mortgage with no down payment amount towards the purchase price of the home.

This means you will need to save up at least some level of down payment before you are able to purchase real estate. Just how much you decide to, or are able to, save will depend on your own situation and the loan in question. This article will explain how minimum down payments work, how mortgage loan insurance affects how much you pay, and how much of a down payment is right for you.

Is a down payment a deposit?

A down payment should not be confused with a deposit. In terms of buying a home, a deposit is an amount of money that you have to provide to the seller along with your offer to buy a property. The purpose of this deposit is to prove that you are serious about buying and that you have the money to handle the related closing fees. Upon the sale of the home, you can put the deposit towards your down payment or towards the closing fees. Deposits are typically much smaller than down payments.

Your down payment is essentially the amount of the purchase price that you pay upfront. This means while it is not returned, it does get converted into an ownership stake in the property and its equity. Your down payment is important for your lender as they will have down payment requirements that determine your mortgage eligibility and rates.

Is there a minimum down payment?

There is a minimum amount of money you will be required to put down as a down payment. The amount of the minimum will depend on the purchase price of the property being acquired. Generally, the higher the purchase price, the higher the down payment percentage you will be required to pay.

Homes valued at $500,000 or less

For a home with a value of $500,000 or less, you will be required to put a minimum down payment of 5% of the purchase price.

Homes under $1 million

For a home with a value above $500,000 and up to $999,999, you will be required to pay a minimum down payment of 5% on the first $500,000 of the purchase price and then 10% on any amount above that. For example, if your home was valued at $750,000 and you wanted to make the minimum down payment, you would first pay 5% of $500,000, or $25,000, then you would pay 10% of $250,000, another $25,000. Your total minimum down payment would be $50,000, or about 6.6% of the total value.

Homes above $1 million

For a home with an assessed value above $1 million, the minimum down payment is a much steeper 20% of the value.

Remember, these are the legal minimums. That means that based on your own situation, the bank may require a larger down payment from you, but they will never allow you to pay lower than the minimum.

When you need to purchase mortgage default insurance

In order to protect Canadian mortgages from default, it’s required that for mortgages paying a down payment below 20% that the borrower also purchases mortgage default insurance, also known as mortgage loan insurance. Mortgage loan insurance offers no protection to you as the borrower but pays out to the lender in the event of you failing to meet payments. You may even be required to cover the costs of the payment going to the lender. Your lender may also require you to buy default insurance as a part of their mortgage terms, even with a down payment of 20% or more.

The price of your mortgage default insurance will depend on your loan to value ratio. The smaller your down payment, the higher the mortgage insurance premium will be. This can complicate the idea of a minimum down payment because though your down payment may be low, the effective amount of money you are paying is higher than that.

Example

For example, with CMHC insurance, a 5% down payment is required to purchase mortgage loan insurance at a rate of 4% of the total home value. In some provinces, you will also pay provincial sales tax on your insurance. That means your 5% down payment will actually cost you about 9%.

Luckily, mortgage insurance does not need to be paid in a lump sum (though that is an option). Instead, you can add it to your mortgage principal and pay it through your monthly mortgage payments. However, you will now pay interest on the value of your insurance, meaning more interest paid overtime, and possibly a higher monthly payment.

Your mortgage loan insurance payment, along with your mortgage rates, is why it is not always the best idea to go for the lowest possible down payment, as you can end up paying a lot more in the long run.

Is there a maximum down payment?

There is technically no maximum down payment you can put on a mortgage, in fact, you can buy a home outright if you wanted to. You should actually aim to pay as high as is realistic for you, as it will reduce the amount of debt you hold.

The thing is that for most people saving a sizable down payment takes long enough, and saving more money than needed is not really in your interest. Consider the cost of living while you are saving for a down payment. If you spend decades saving for a large down payment, you could have used a smaller down payment to secure a mortgage and pay into your home’s value instead of paying rent.

There are some cases where a larger down payment is beneficial, however, such as if you have a poor credit history and the lender is wary of giving you a loan.

What is the normal amount to put down on a house?

The average down payment that Canadians pay varies a lot by region, as home prices, household incomes, and market conditions, can all affect the amount one chooses to pay. The Canada real estate and housing market report from lowestrates.ca presents their recent findings from mortgage data in 5 of Canada’s provinces. Here’s what they found.

Canadians generally opt for high down payments

Generally, though there are options for lower payments, Canadians prefer to pay larger amounts whenever possible. In British Columbia, people paid the highest average down payment amount at 22.45%. Based on the average home price, that means a payment of almost $160,000.

Ontarians paid the second-highest average down payments at 20.35%. People from Nova Scotia paid 18.54% on average, while Alberta and Quebec paid 15.15% and 14.68% respectively.

How much should I put down?

Generally, the more you can put down the better. A higher down payment can reduce or eliminate the burden of mortgage default insurance. In addition, it will allow you to get better mortgage rates from your lender, and pay less on your monthly mortgage payment. Overall, you will save a lot of money if you are able to put up a large down payment.

If you aren’t able to save up such a large amount, or you are eager to get into your home as soon as possible, there is nothing wrong with paying a lower down payment. It is just important that you inform yourself of the impacts it will have on your mortgage and make sure it is financially worth it for you.

Conclusion

Hopefully, we have helped you figure out what your down payment influences your mortgage, and how much of a down payment works for you. Now that you have the info it’s time to start saving your down payment fund. If you want to learn more about the nitty-gritty of mortgages, check out some of our other guides on mortgage interest, affordability, or our 2022 mortgage rate forecast.

For those looking to live in the city of Toronto, or those owning rental properties, the vacancy rate can be a very important figure to pay attention to. According to Urbanation, which releases regular reports on the GTA rental market, the vacancy rate in Toronto peaked in Q1 of 2021.

At that point, the vacancy rate of purpose-built rental apartments in the city reached 6.4%. This was a record high for the city since data on rental apartment markets began to be collected by the Canada Mortgage and Housing Corporation in 1971.

Since then, it seems that the rate of vacancies has begun to stabilize, though it’s still at a relatively elevated level compared to the pre-pandemic urban rental market. What exactly does a change in vacancies mean for renters and investors and where are trends pointing for 2022?

Current vacancy rates in the city of Toronto

Vacancies falling since the start of the year

Currently, the vacancy rate of purpose-built rental units in the city of Toronto is around 3%, according to the most recent Q3 report from Urbanation. That’s less than half of the high seen earlier in the year and a level that they consider to be “balanced”.

In the midst of the pandemic, many people moved away from the city to settle further in the GTA or surrounding areas. In addition, there was a major decrease in post-secondary students as well as newly settled immigrants which had a major effect on rentals. Now people are starting to return and the numbers reflect that.

Average monthly rents moving up

It has been observed that there is a relationship between average rents in Toronto and the rate of vacancies. As vacancy in the rental market rises, rents tend to go down. As vacancy peaked in the first quarter, rents fell almost 10% compared to a year earlier.

This can be explained by the idea that as more units remain vacant, property owners have more competition to find renters, so rent moves down as each property owner fights to stand out. This is also why rental incentives increase as vacancy does. Rental incentives also peaked along with vacancy rates early in 2021, but are now becoming less common.

According to Urbanation, rents have now increased by 1.8% year over year, the first annual increase observed since the start of the pandemic. As stated in their most recent statistic, the average rent in Toronto was $2,389 (or $3.30 on a per square foot basis). This seems to reflect the lowering of vacancy in the city of Toronto, however, they also cite relatively higher-priced new developments as driving this figure up. Adjust to remove these expensive new developments, rents were in fact down 1.8% since Q3 2020.

Condo rents up even more

The price of condo rentals saw an even larger increase than the general rent price. Rents in the condo market saw an 8.2% quarterly increase and a 3.8% increase since the same period last year. In addition, lease activity was up. The number of leases signed for condo units was up 6% from last year, and the quarterly condo leases to listings ratio were up to 82%, helped by lower total condo rental listings.

What is driving vacancy rates?

Vacancy rates are driven by two major elements. The first is the supply of available units and the other is the number of renters looking for a place to stay. The city of Toronto actually has a pretty tight supply in the rental segment, and in the months before the pandemic, vacancy rates were trending downward as a result.

However, during the pandemic, supply remained largely the same as rental construction activity slowed, and a great amount of demand was suppressed.

Migration out of cities during lockdown

One reason why demand was lowered was the fact that pandemic conditions made the city much less enjoyable to live in. While being forced to stay at home, the benefits of living in a large city were limited, and the health concerns of being around so many people were high. Toronto unsurprisingly had the highest COVID case numbers in the province. These factors caused many to move elsewhere.

Post-secondary students and immigrant population limited

In addition, work-from-home allowed many to consider relocating beyond the city. Also as mentioned above, the usual high amount of students and immigrants coming to the city every year was very much reduced, taking a large chunk out of the renting population.

Finally, there were simply many people who lost their jobs and were no longer able to afford their lives in the city.

Now, things are turning around. The population is largely vaccinated and restrictions are being lifted. People are returning to work in the city. In-class learning is beginning again, more immigrants are arriving, and unemployment is on the decline. In the coming years, the rental stock may very well struggle to keep up with demand.

What is the normal vacancy rate for Toronto?

The vacancy rate in Toronto is usually very low. According to CMHC data, the rate remained below 2% for almost ten years leading up to the COVID pandemic.

Will vacancies continue to go down?

Indications are that vacancy rates will continue to go down in Toronto. Based on the factors listed above, the population of the city is set to increase into 2022 and beyond, and the rental market should see pressure once again. Urbanation says that the stage is set for the Toronto rental market to return to its pre-COVID levels “in short order.”

What does this mean for renters and investors?

Renters

For renters, lower vacancy is a mixed bag. If you remained in the city all along, the time to negotiate a new lease will soon be gone. Lower rent, and rental incentives such as free rent, peaked along with vacancy at the start of the year, and things will now start getting more expensive.

If you are one of the renters who left the city and now want to return, things will seem pretty similar to how they were when you left. You may still be able to get a month of free rent – but not for long.

Investors

For investors, lower vacancy is a good thing as you can charge higher average rents as well as have an easier time finding tenants to fill your properties. This is particularly good news as Toronto is set to implement its vacancy tax, which could mean a high cost for you if you are unable to rent your units. This tax, in addition, may serve to lower vacancies even further if it has its intended effect.

Recently analysts have been indicating that residential home prices in the Canadian real estate market may be overvalued to a significant amount. While this doesn’t necessarily spell doom on the horizon, it is important to know for anyone buying or holding property. What could an overvalued housing market mean for Canadians and investors?

Moody’s finds overvaluation of up to 90% in some Canadian markets

A new report from Moody’s analytics indicates their findings of overvaluation across the country. Their report follows many other institutions such as the Canada Mortgage Housing Corporation (CMHC) and The Economist in drawing attention to overly high home prices in Canada’s housing market. Just what is going on?

The report points to severe overvaluation in numerous housing markets across the country, with a general overvaluation of 22% in metro areas nationwide. Overall, Ontario shows the largest amount of overvaluation with none of the analyzed markets being within the range for what is considered correct valuation. In Toronto, home prices sat almost 40% above trend for Q2 of 2021 while Hamilton was up to 73% overvalued. Provincially, British Columbia was not overvalued, however, Vancouver was 23% overvalued, much closer to the national average than Toronto but still not great. The most overvalued housing market in Canada according to the report is the Niagara region, with home prices at 90% above trend. Overall, overvaluation was worst in Ontario and Quebec and the issue was equally prevalent in major cities as well as smaller cities.

A comparatively smaller number of housing markets in the country are doing well and fell within the plus or minus 10% indicating correctly valued homes. A few housing markets are actually displaying a significant overvaluation in home prices. Calgary, for example, saw prices more than 30.92% below trend with Edmonton not far behind at 29.87% below trend.

Despite the rampant overvaluation, the report goes on to say that following a period of massive upward price growth, things are now “showing signs of returning to earth.” They cite a contraction in sales activity, a drop in housing starts, and a decrease in the price of raw building materials as signs that things are returning to more stable conditions. Moody predicts that price growth will “slow considerably” through 2022 and 2023.

CMHC’s Housing Market Assessment finds moderate risk of overvaluation

The CMHC releases a bi-yearly housing assessment in which they rank Canadian markets on overvaluation among other factors. They have pointed to overvaluation as an issue contributing to market vulnerability in Canada. However, their report takes a lighter view on things, with a majority of the analyzed markets being ranked for low overvaluation. Overall, they rank the Canadian housing market as being at moderate and but persistent levels of overvaluation. The CMHC claims that demographic and economic fundamentals can not fully account for price acceleration in home values.

Why are Canadian real estate prices so high?

It’s definitely no secret that prices are high in the Canadian housing market and have been for many years. But the past two years have each seen double-digit growth in home prices, spurred on by conditions surrounding the COVID-19 pandemic such as low-interest rates and a mass amount of Canadians looking to relocate. According to the most recent report from the Canadian Real Estate Association, the average home price rose to $686,650 in September 2021.

Despite what many see as unreasonable prices, the demand for new homes is simply so high that there are still plenty willing to pay for what they can get. Most areas of Canada have major housing supply issues and the ongoing seller’s market has continued to push prices up. For now, it seems the average sale price for Canadian homes will continue to rise into the next few years, though market conditions are beginning to cool off and stabilize. The same CREA report explains that though the market is stabilizing near its current levels, the “demand/supply conditions are stabilizing in a place that very few people are happy about.”

Is Canada seeing a bubble in house prices?

The biggest fear for Canadians invested in real estate is the looming threat of a housing crash or a bubble. It seems the longer a trend continues in real estate, the more people start to warn of an inevitable reversal. In Canada, people have been calling for a housing bubble for almost a decade now as prices rose, and still, it has yet to pop.

However, perhaps recent global events have forced people to confront the possibility of unprecedented changes becoming reality. Either that or some are hoping for a price downturn to ease their entry into the market.

For now, there is no apparent imminent threat of a sudden and massive downturn. If prices continue up, there will be some easing of demand as more Canadians are priced out. In addition, a likely interest rate increase has been predicted for 2022 that will further affect how much Canadians are able to afford. Currently, analysts are predicting the most likely scenario is a continued, albeit much more gradual, increase in home prices. There is also the possibility for the stagnation of prices or a small price correction, but nothing to the extent that could be called a bubble.

In discussions around real estate, it can seem like cities are where all the action is. Areas like Toronto have no shortage of people clamouring to live in the hustle and bustle and these markets get a lot of attention as a result. However, in recent years more and more people are turning to rural properties for their lifestyle and investment opportunities. In a work-from-home era, and in a country with an abundance of open land, the decision to move rural is looking better all the time.

We spoke to Adam DeGroote, a top local realtor from the Brantford area who, among other things, specializes in rural and agricultural properties. His praise for rural Ontario isn’t from a point of salesmanship either. He grew up on a farm and still lives rural life to this day. His passion for the topic of rural real estate clearly comes from a very personal place.

More than just farms in rural areas

For anyone thinking about making the move from the city, DeGroote wants you to know that rural life is not just for farmers and it is “fundamentally not that much different than city life, except you have far less people around you and much more personal space.”

“In fact, with each passing year, there are fewer and fewer farmers as farm operations get larger and weed out the smaller guys. Most rural properties are owned by non-farmers who want to enjoy the peace and quiet, more space and less people around.”

Though, you could farm out there if you wanted to. In fact, more than anywhere else, a rural plot gives you immense options for what you can do on your property. From a simple bush lot, a home, or a hobby farm, all the way up to a fully operational farm. Many people are attracted to these areas for the freedom they provide for leisure, recreation, and hobbies.

Rural areas seeing a massive push from migrating city-dwellers

DeGroote cites recent trends in remote work and the woes of cities in lockdown as a big driver pushing people out of the cities. According to Statistics Canada, Toronto lost over 50,000 residents to other areas of the province in 2020 while rural areas saw an increase of 10,000 new residents.

“The past two years I have seen a significant increase in buyers looking to relocate to rural areas from the cities,” said DeGroote. “Buyers quickly realized that when most of their leisure activities are no longer permitted, when children are home from school, and when distancing is encouraged, there really is no better place to be than in a rural setting. “

“I feel like there are far more advantages than disadvantages, especially in today’s technologically driven society,” continues DeGroote. “As long as you have good and reliable internet service, you can literally work from anywhere. You no longer need to live in the city where you work. You can be a few minutes drive to all amenities but come home to your own peace and quiet. I do not need to visit a cottage because my home is literally my cottage and anyone I know that lives in the country says the same thing. It’s a way of life that is a little slower paced and I think COVID has opened a lot of people’s eyes to the tremendous lifestyle that can be enjoyed with rural living. And, you can sell your home in Toronto for big bucks and those dollars can go a lot further in the more rural areas.”

One thing that doesn’t change when you leave the cities is the difficult market conditions that have been seen across the country. According to DeGroote, rural properties are often subject to competition among buyers with multiple offers and sales above asking becoming “the new normal”.

Rural real estate investments

Another thing that rural property has in common with its urban counterpart is its high viability as an investment. DeGroote uses Bill Gates as an example of why the average investor should pay attention to rural real estate. The high-profile investor has bought almost 300,000 acres of farmland in the US, making him one of the country’s largest holders of farmland.

“Farmland is a commodity and not only a commodity, but it is also a commodity that is needed to feed every person on Earth. Investing in a product that will never be out of demand is never a bad idea. Yes, the cost of buying plots of farmland is higher than your average single-family detached home, and financing is not as easy, but if an investor is able to purchase farmland, you will never ever be without a tenant and there are virtually no maintenance costs involved to the owner. It is a great hedge against inflation and requires very little management.”

The construction industry has always relied on immigration to fill labour gaps. For decades, we have counted on trades from other countries to bring their skills and expertise to help build our homes and infrastructure.

The situation has not changed. We still need immigrants with skills to work in construction. Many older workers are retiring and, if the projections are correct, there’s an urgent need to get 100,000 new people into the skilled trades over the next decade in Ontario just to keep pace with demand.

The labour shortage has been intensified by the impact of the COVID-19 pandemic. About 21,000 jobs in construction were unfilled in the second quarter of this year, so it is critical that we find a way to fill the void. Otherwise, we could find ourselves in dire straits, resulting in a delay of much-needed housing.

The Ontario Immigrant Nominee Program (OINP) is the primary mechanism used by the province to attract the skilled workers it needs. The province nominates people who have the skills and experience needed in Ontario, but the federal government makes the final decision on approvals as it is responsible for the border and assigning citizenship and residency.

Under the present system, Ontario can only nominate about 9,000 potential immigrants a year. However, provincial Labour Minister Monte McNaughton has called on the federal government to double the number of skilled workers allowed into Ontario under the program as quickly as possible.

With the federal-provincial immigration agreement set to expire in 2023, the time is ripe to come up with a new deal that gives Ontario more say in selecting immigrants that come to the province. Ontario – like Quebec – must have more autonomy to bring in immigrants and fill in the demand for specialized careers.

Between the 1950s and 1980s, there was massive immigration of skilled trades immigrants to Canada which allowed us to build the housing that we needed. Many of these immigrants are still working and have contributed hugely to our economy.

The carpentry-related trades, low- and high-rise forming, concrete and drain, sewer and watermain, and bricklaying are all dependent on skilled immigrants. We must ensure that pipeline continues. The provincial government has significantly enhanced skilled trades funding over the last four years, and these investments are both noticed and greatly appreciated. However, more remains to be done.

We need to go back to what worked in the past and welcome immigrants interested in specialized careers in the residential construction sector. We also need to embrace those who are willing to learn the specialized skill sets needed to have a fulfilling and lucrative career in residential construction.

Increasing the number of immigrants under OINP will give the province flexibility to recruit more skilled trades, and especially those with specialized skill sets who work in residential construction.

A report by RBC indicates that the workforce will see a 10,000-worker deficit in 56 nationally recognized Red Seal trades over the next five years, a scarcity that could be widened tenfold when 144 provincially regulated trades are added into the mix. We are already under-producing housing, especially in the Greater Toronto Area, and a trade shortage will only make matters worse.

Hopefully, the federal government will act sooner rather than later.

Richard Lyall, president of RESCON, has represented the building industry in Ontario since 1991. Contact him at [email protected]