Will The Toronto Market Ever “Cool?”
As much as I would love to write yet another seemingly-innocuous blog post about a TV show that spawns an all-out war between readers, I think the “fun posts” have gotten so serious, that perhaps a “serious post” will get fun?
I want to mix several items together in today’s blog – the increase in minimum down-payment from 5% to 10%, the “issue” with international buyers in Canada, and the effect that interest-rate-neutral policies will have on markets, real estate and otherwise, across the world.
Let’s try to determine if any, or all, of these items will affect Toronto, and if associated policy changes could help “cool” the market…
Stop me if you’ve heard this story before.
I was getting into real estate in 2003, and a good friend of mine told me at the time, “You’ve chosen just about the worst moment to get into real estate! The market is about to crash!”
He told me that “every market has a cycle, usually 6-7 years,” and while that is often the case with many markets, it clearly wasn’t the case with Toronto real estate.
Since 2003, the average home price has increased every year, for twelve years, and it’s poised to continue that trend this year as well.
I’ve seen literally hundreds of articles, newscasts, magazine features, and magazine covers about the pending market correction and/or crash, but it hasn’t happened yet.
So what has to happen for our market to correct?
Maybe that’s the toughest question of all to answer.
Our government has taken many steps over the last few years in attempts to “cool” the market.
They might not come out and say they want to cool the market. They might suggest that it’s an effort to stop Canadians from taking on debt, or that it’s ensuring financial responsibility among both lenders and borrowers – especially in the wake of the 2008 financial crisis in the United States, but make no mistake, these changes had the expectation or intent of slowing or cooling the real estate market.
A quick refresher:
1) The maximum amortization was changed from 40 years, to 30 years, to 25 years.
2) The minimum down payment required was upped from 0% (or in some cases a negative percentage) to 5%.
3) The minimum down payment required over $1,000,000 was increased to 20%.
4) The minimum down payment for second properties was increased from 5% to 20%.
5) CMHC insurance premiums were increased.
6) Just recently, the minimum down payment for the amount of home price between $500,000 and $999,999 was increased from 5% to 10%.
Those are the major changes implemented by the CMHC and the Finance Minister, and all of them were aimed at either cooling the housing market, reducing debt, or both.
It’s the last change that I want to talk about today, in tandem with the idea that “international investment” is making it less affordable for Canadians to purchase real estate.
Let me say first that I do believe in free markets, I’m a capitalist, and I think that many markets regulate themselves.
But if somebody were to ask me, “Do you think the Canadian government needs to address the amount of international money flowing into Canada and swallowing up real estate?” my answer would be a fully-committed, maybe.
If, for argument’s sake, the Canadian government banned or restricted foreign ownership of Canadian properties, in any downward-market-cycle, people would be screaming, “What is the government thinking? They’ve killed the market by eliminating foreign ownership! There’s demand among international buyers that would help our market!”
But currently, every online article posted about foreign ownership spawns dozens of angry comments from readers, many who blame foreigners for driving up the price of real estate.
Whether those frustrations are warranted or not, there is merit to the claim that “foreign buying is driving up prices.”
Is there any mistaking that?
Excess demand with limited supply puts upward pressure on prices.
Whether that demand is foreign or domestic does not matter.
So let me revert back to my original question – should the Canadian government address the foreign buying?
Your answer all depends on who you are, and perhaps your political beliefs as well.
Consider that the recent policy change that requires the down payment on $500,000 – $999,000 to be increased from 5% to 10% has absolutely ZERO effect on buyers who pay cash.
Which buyers pay cash, for the most part? Foreign buyers.
So at the risk of sounding like a raging-politician here, it could be argued that hard-working, Canadian tax-payers, who dream of owning a home, have had that dream made harder, while foreign buyers with the proverbial suitcase full of cash, remain unaffected.
That’s likely a topic for another day – a good topic, but one that takes the emphasis off the idea of the “cooling market” up for discussion today.
But as for the idea of restricting foreign ownership to some degree, if the government really did want to cool the market, this is something they’d have to consider.
The increase in minimum down-payment from 5% to 10% hasn’t had a massive effect, at least not yet.
Of course, one change that could have the biggest “cooling effect” on the Toronto real estate market is one that I don’t think we’ll see for quite some time: a raise in interest rates.
There was an awesome story this week on BNN about near-zero interest rates, and how they could remain for a decade!
Here’s the story: “Markets Betting On Near Zero Interest Rates For Another Decade.”
And here’s the most important excerpt:
The world is entering a peculiarly prolonged period in which structurally low inflation and wage growth – hampered by aging populations and slowing productivity growth – means the inflation-adjusted interest rate needed to stimulate economic demand may be far below zero.
As there’s likely a lower limit to nominal interest rates just below zero – because it’s cheaper to hold physical cash and bank profitability starts to ebb – then even these zero rates do not gain traction on demand.
For all the debate about the accuracy of that view, it’s already playing out in world markets, with long-term projections from the interest rate swaps market showing developed world interest rates stuck near zero for several years.
Take overnight interest rate swaps. They imply European Central Bank policy rates won’t get back above 0.5 percent for around 13 years and aren’t even expected to be much above 1 percent for at least 60 years.
Japan’s main interest rate won’t reach 0.5 percent for at least 30 years, they suggest, and even U.S. and UK rates are set to remain low for years. It will be six years before U.S. rates return to 1 percent, and a decade until UK rates reach that level.
“Although interest rates are low, they’re not accommodative,” said Harvinder Sian, global rates strategist at Citi in London. “The era of zero rates will be with us for years and years, it wouldn’t surprise me if we’re looking at another five to 10 years.”
While the article speaks to the world as a whole, I think it’s safe to assume that rates in Canada are not going up any time soon.
This past Wednesday, the Bank of Canada kept the overnight lending rate at 0.5%, and you’ll be hard-pressed to find any article, economist, or so-called expert who is predicting a rise in rates in 2016.
So let’s review the three items that could, conceivably, cool the Toronto real estate market:
1) CMHC policy
2) Restrictions on foreign ownership
3) Interest rate hikes
With the Canadian economy where it is, the Bank of Canada can’t increase interest rates or risk a recession. So they can’t use interest rates as a tool to cool the real estate market, as the unintended consequences would be dire.
I can’t imagine the government restricting foreign ownership, because to be perfectly blunt, I don’t think they’re capable of such a massive undertaking.
Whether or not that needs to be done, is another point entirely.
Australia made huge changes to their foreign-ownership policy in 2015.
Check out this link: https://firb.gov.au/real-estate/established/
It’s right there at the top:
Non-resident foreign persons are generally prohibited from purchasing established dwellings in Australia.
You can’t be any more direct than that!
Maybe there’s a happy medium somewhere. Maybe an outright “ban” on foreign ownership isn’t the way to go, but the open floodgate system isn’t either.
Or maybe this isn’t even on the policy-makers’ radar, and “cooling the market” all has to do with policy coming from the CMHC.
Surely a change in the overall minimum down-payment, from $0 to $999,999, to 10%, would have a massive effect, and thus the “cooling” of the market would be a success.
Interest rates aren’t going up.
Foreign ownership will not be curtailed.
So either the government makes more sweeping changes to minimum down-payment and/or mortgage qualification requirements, or the market continues on its merry way.
And where is that merry way?
Just as an aside – did you see the February TREB numbers? They’re shocking!
Forget about the 14.9% increase in home price from February 2015 to February 2016.
I’m looking at the sales going up 21.1%, and the active listings going down 14.8%.
How can sales be up 21.1% and active listings are down 14.8%? That’s insane. And it’s probably why prices are up 14.9%.
The ratio of sales to active listings in February of 2016 was 69.9%. That’s 7,621 sales and 10,902 active listings.
In February of 2015, the ratio was 49.5%. That was 6,338 sales and 12,793 active listings.
In February of 2014, the ratio was 40.9%.
The 2016 market is just crazy.
Demand is at an all time high.
Supply is shrinking.
Just how the hell is this market ever going to “cool”?
Source. Toronto Realty Blog.