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Toronto housing market – update
I haven’t had much time to write since buying a house and selling my condo… if I can convince myself, I’m never going to move again, that means not buying another principal residence.
It has been over a month since the new mortgage rules took effect… is there any early effect on real-estate markets? Let’s look at the GTA housing numbers for March 2011…
- Year-over-year Prices up 5%
- Year-over-year Sales down 11%
- Month-over-Month Prices up 0.4% vs 5-year average of 0%
- Sales up 15% over 5-year average Sales
I don’t think there is anything to worry about yet but I think we need to keep an eye on Sales numbers… -11% sounds like a lot but 2008-2010 were outliers for Sales numbers
…and mid-April numbers are:
Greater Toronto REALTORS® reported 4,444 sales during the first two weeks of April 2011 – a three per cent decrease compared to the first two weeks of April 2010. The number of new listings was down by 21 per cent compared to the same period last year.
Again, nothing to worry about here either. 3%… however, average prices have shot up!
- Year-over-year Prices up 10.4% vs a range of -3 to +13 % over the last 5 years!! (with that kind of variation, averages become meaningless)
- Month-over-Month Prices up 6% vs 5-year average of 4% !
I have been saying for the last year that this kind of price increases is unsustainable and I reiterate it here.
Expect waterfall effect from new mortgage rules
New mortgage rules kicked in yesterday… the two major rule changes are:
- Maximum Amortization – 30 yrs (was 35yrs)
- Maximum Refinancing – 85% of home value (was 90%) (remember, this is not applicable for new mortgages, only for refinances)
I think the rules will have a cascading waterfall effect on all but the upper end of the housing market…
Let’s say John is a marginal first time home buyer and he qualifies for a maximum monthly mortgage payment of $1000 with a 35 year amortization on a $300k mortgage. With the new rule of 30 year amortization, the maximum amount John qualifies for drops by about 7% to $930 and so the maximum mortgage John can qualify for is about $279k (roughly speaking).
If John was buying a resale home, there are two things that can happen:
- John would now have to look at homes listed at approximately 7% less than what John was willing to purchase earlier OR
- The seller – Ram – of the house has to reduce the house price by 7%.
If John chooses to look at smaller houses, the seller has to attract new buyers but because John is a marginal buyer i.e. a buyer on the fringe, Ram cannot find new buyers willing to pay the original price of $300k. What does Ram do?
Ram drops the price… how does that affect Ram?
Presumably Ram wants to buy a bigger house from seller X but because Ram received less money than expected for his current house, Ram will have less money for down payment and because of the rule change will have to settle for a smaller or a less pricey house. How much less? A lot more than 7%… around 11% because of the double whammy! See table for calculation.
| Buyer | Seller | Before March 18 | After March 18 | Reduction in Affordability |
| John | Ram | $ 300,000 | $ 279,000 | 7.00% |
| Ram | X | $ 500,000 | $ 445,470* | 10.91% |
*445470 = (500000 – 21000) * 0.93 (because Ram received 21000 less, Ram has no choice but to buy a smaller house)
Now seller X wants to buy an even bigger house from seller Filthy Rich… you see where it’s going?
The cascading effect will continue all the way up to the housing market chain… except for maybe the high end/million dollar plus market… worry not, the recent stock market jitters might scare them away!
On the plus side though, banks reduced fixed rates by 10-20 bp recently, perhaps and coincidently in anticipation of slowing momentum in the housing market? (Note that bond rates have recently inched up, so not sure why rates have come down)
Going forward, I will be posting less about Canadian housing… I recently bought a house and I’m still bearish on Canadian housing.
Affordability, GDS, TDS, personal income – gross vs disposable
All financial institutions and creditors use Gross Debt Service & Total Debt Service (GDS & TDS) ratios when evaluating a potential borrower for a mortgage… and at least use the TDS for all other personal loans i.e. personal line of credit, credit card, an auto-loan, a mortgage, and the kitchen sink, etc (except student loans)
Here is a short definition of GDS & TDS:
Gross Debt Service (GDS): The percentage of the borrower’s gross monthly income that is needed to pay all required monthly housing costs (mortgage payments, property taxes, heat and 50% of condo fees).
Total Debt Service (TDS): The percentage of the borrower’s gross monthly income that is needed to cover housing costs (GDS) plus any other monthly obligations that an individual has, such as credit card payments and car payments.
According to personal finance rules of thumb, courtesy of CMHC:
- Max GDS = 32%
- Max TDS = 40%
What is my point?
Why do creditors use gross personal income and not your after tax income or your take home pay? After all, the cost of borrowed money i.e. interest is not tax deductible in Canada (with a few exceptions)… which means that you service your debt payments from your after tax salary i.e. your take home pay and not your gross salary!
Perhaps there is a simple answer…?
Why does it matter? Because…
Using gross income in any affordability measure overstates the affordability by the tax rate… and gives the false perception that that debt is affordable when it reality it is not. The government is not going to reduce your tax so you can pay your debt (unless you are a bank)!
After every new housing affordability report in the last year, CREA has been quick to announce that housing in Canada is more affordable than ever? Really? If you believe you the horn tooting dimwits at CREA, I don’t know who can help you!…I have talked about housing affordability measure before
On to greener pastures…
A recent household debt report from TD squarely puts things into perspective… I have put together a chart of Debt-to-Income & House Price-to-Income ratio vs Bank of Canada rate using the TD data…
Source: Bank of Canada, TD Bank
Note that TD uses personal disposable income in both the ratios above…
See the trend… inverse correlation between Debt-to-income/House Price-to-Income and Interest Rates? Here is the correlation matrix:
| BOC Rate (left) | Debt-to-Income (right) | Home Price-to-Income Ratio (left) | |
| BOC Rate (left) | 1 | ||
| Debt-to-Income (right) | -0.57808 | 1 | |
| Home Price-to-Income Ratio (left) | -0.49056 | 0.809653 | 1 |
As debt becomes cheaper (lower interest rates), demand for debt increases (green line)… isn’t that econ 101? Not sure how ugly it will be when it debt becomes expensive… relatively
As it becomes easier to get debt, debt financed assets i.e. homes increase in demand & price (purple line)
Resale house prices gone parabolic in York Region – view from G0
I have seen 3 houses in the last 2 weeks and every single one went over asking… this is in Markham/Richmond Hill area.
| # | List | Sale Price |
| 1 | 699900 | 705000 |
| 2 | 699900 | 725000 |
| 3 | 745000 | 758000 |
Couple Observations:
1. Similar houses in the area sold for under 635k just 6 months ago… that is more than 10% increase in less than 6 months!… If the trend continues, resale house prices will be up more than 20% in 2011!
2. Every single house had more than 3 offers clean offers – no financing, no inspection!
3. And all of them sold in less than 3 days of listing…
3 houses is nowhere near a constituent sample even if they are all in a small city block BUT this is the trend… I have spoken to a few realtors over the last month and that is what they say…
In contrast New Home prices have increased close to the inflation rate… around 2-3%
If you are in real-estate… or not… what are you seeing on ground zero?
Hysteria…Mania? Herding like donkeys? Sensible investors? Speculators? Pent-up demand? No Supply?…
Pouring cold water on ‘improved’ housing activity
Canadian real-estate has received more than its fair share of coverage in main stream media lately…
The quacks at CREA say housing activity “improved” …
Seasonally adjusted national home sales activity rose 4.5 per cent in January 2011 compared to the previous month, reaching the highest level since April 2010. Led by Vancouver and Toronto…
…
Actual (not seasonally adjusted) national sales activity via the Multiple Listing Service® (MLS®) Systems of Canadian real estate Boards came in 6.6 per cent below levels in January 2010. This was the smallest year-over-year decline since May 2010.
…
Now if it hadn’t been for Flaherty’s tinkering with mortgage rules and pulling demand forward and creating a buying panic, sales activity would be lower…agree? I will explain why…Lets look at GTA since it accounts for the biggest share of Canadian housing activity and it led the “improvement”…
The Toronto Real Estate Board publishes mid-month & monthly sales figures;
Mid-month figures for January 2011
January 19, 2011 — Greater Toronto REALTORS® reported 1,563 sales during the first two weeks of January 2011 – an 11 per cent decrease compared to the first two weeks of January 2010. See details.
Until 15-Jan-2011, sales in GTA were 11% lower than Jan 2010… then on 17-Jan-2011… The federal government acts prudently (in my opinion) and announces new mortgage lending rules… How did those changes affect sales for the rest of Jan 2011?
Monthly figures for January 2011
February 4, 2011 — Greater Toronto REALTORS® reported 4,337 transactions through the TorontoMLS® system in January 2011. This result was 13 per cent lower than the record result reported in January 2010. See details.
So even after taking some heat of the housing market and creating an apparent demand pull, January 2011 sales were 13% lower than Jan 2010… Perhaps 2010 was a record so maybe not a good year to compare?… Sales were 3.5% lower compared to the average sales from 2006-2010… even when including the paltry 2670 units in 2009!! (it is a clear outlier)
Moving on to Feb…
February 17, 2011 — Greater Toronto REALTORS® reported 3,084 sales during the first two weeks of February 2011 – a 13 per cent decrease compared to the first two weeks of February 2010. See details.
One month since the announcement and sales are lower than last year… if there was no government intervention, logic dictates that sales would be even higher because people (first time home buyers) would rush to buy a home on more favourable terms.
Admittedly though, compared to average Feb sales between 2006-2010, mid-month Feb 2011 sales were 6.2% higher.
Will Canadian real-estate slow down after March 18?
I have spoken to a couple mortgage brokers and agents in the last week and:
Mortgage brokers are expecting reduced liquidity after March 18 which will affect first-time home buyers and pull demand forward…like last year’s implementation of HST.
There has been little in mainstream media regarding the proportion of mortgages with 35 year amortization…
30% of new mortgages were 35 year amortizations last year vs 8% of existing mortgages.
via CMT
As of November, 42% of new purchase financing over the prior 12 months had amortizations over 25 years. Two years ago it was 47%.
The bulk of those were 35-year amz but I don’t have the exact ratio or the breakdown by home price.
From a real-estate agent who works with 2 mortgage brokers
“90% of our deals were high ratio, and approximately 70% were both high ratio and 35yr amortization.”
Via another broker I spoke to on Saturday
95% of her first-time home buyers have chosen 35-yr amoritzations
Will this round of tightening be enough to slow down the real-estate market in Canada? Or is something radical like prohibiting real-estate agents from fostering false confidence (prices always go up), using scare tactics (not many homes in the market), creating bidding wars (this is the worst, because there is no transparency, i would like to dedicate a post to this at some point)
open discussion… your thoughts?
GTA housing market largely followed its seasonal pattern in 2010
Here is the final update for 2010
Monthly Prices followed the seasonal pattern rather religiously!
Source: Toronto Real-Estate Board
Sales was not different, although the overall level of sales (~86k) was less than 2009 & 2007.
Source: Toronto Real-Estate Board
I will admit that through 2010, my housing related posts had an inherent negative bias… I will end the 2010 housing post on a more positive note at least by one measure.
Look at the long-term chart of house price trends in GTA… the 5-year compound average growth rate (CAGR) in GTA house prices is 5.22%… in the long term, this rate should equal the growth rate in the GTA economy, personal income and all other products and services.
Source: Toronto Real-Estate Board
Now I don’t have hard data for GTA economic indicators and I doubt the GTA economy grew by >5% annually in the last 5 years…. BUT consider this: Canada’s economy grew 3.55% annually from 2005-2009 and for the same period, GTA house prices rose 4.16% annually…
Do I still think GTA house prices are over the top, perhaps not so much given that GTA’s economy most likely outpaces the rest of Canada (likely due to increasing immigrants)… yes, there are other factors that affect house prices but in the long run… all growth rates should converge!
Let’s hope 2011 is slower so I can buy a house 😉 !
Possible Black Holes to Canadian Outlook
Housing related highlights from BMO’s North American outlook. BMO expects Bank of Canada to increase rates starting in spring and end the year at 2% from the current 1%
The Good
Canada’s housing market has stabilized.
After slowing from record highs to more normal levels in the summer, existing home sales picked up in the fall, and prices have reclaimed their peaks. Low mortgage rates and rising personal incomes have kept housing reasonably affordable (at least at current rates) for the typical buyer. As long as prices do not outrun incomes in coming years, housing should remain within reach of buyers, reducing the risk of a correction when rates normalize. Still, higher interest rates and possibly stricter mortgage rules in the federal budget should restrain home sales in 2011.
Not so good
Canadian house prices rise sharply.
Witnessing the bust in other housing markets, Canadians should understand that house prices can’t outrun incomes forever. Thus, it would be irrational for buyers to bid prices sharply higher in coming years, especially since prices have already climbed twice as fast as personal income in the past decade. But irrational doesn’t mean impossible.
Definitely not impossible primarily because:
- Mortgage rates are still affordable
- Realtors continue talking up the housing market (Less than 10% of agents I have met think housing will soften)
Canadian household debt mounts.
Canada’s household debt-to-income ratio, though above the current U.S. ratio, is still meaningfully below the peak U.S. ratio in 2007. Still, Canadians could hit a similar debt wall if they can’t resist the lure of cheap money.
Housing Update
I have been meaning to post an update on the Toronto housing market but waiting for TREB to release the December numbers (and annual by extension)… which I think should be out any day now.
Canada is not the only developed country in a real estate bubble
Look at Australia and City-State Singapore…astronomical rise in the southern hemisphere…are we in for a second round of housing bubble?
simple financial analysis 