The average price of a Canadian resale home has risen by more than 15 per cent in the year up to October, the Canadian Real Estate Association said Monday.
The Ontario real estate market has been surprisingly resilient during the coronavirus pandemic and has even been an engine of recovery for the overall Ontario economy. Yet, cases of the virus are on the rise in this province and open houses are off the table once again.
As homebuyers and sellers rely on technology to dip their feet into the market, activity continues despite fears and anxieties.
According to the Ontario Real Estate Association (OREA), Ontarians continue to see home-buying as a good investment. Just over one in two Ontarians (51%) in the real estate market report they are currently actively looking to buy a home. Meanwhile, the public is also lobbying for a Land Transfer Tax holiday in order to increase inventory and address some of the supply issues that the province of Ontario is experiencing.
Although the rental market has had some tough blows since many service-sector jobs were lost, home ownership continues to be a priority for many Canadians. This disproportionate demand has created upward pressure on house prices across the province. Below we explore some of the key trends in the Ontario housing market contributing to this persistent price growth.
House Prices in the Ontario Real Estate Market
Last spring, some of Canada’s top economists predicted a sharp decline in house prices up to 18 per cent, yet many weren’t convinced this would be the case. Months later, experts still believe the strength of the market will remain on its upward course, with prices continuing to rise in Q4 2020.
Ontario Submarket Differences
While the province is seeing overall gains in the real estate market, a disparity exists between urban and suburban regions. House prices are reflecting the shift in lifestyle preferences within these markets. Notably, some of the biggest price gains have been seen in suburban cities like Oshawa, Hamilton and Mississauga. Another small city seeing significant, unprecedented growth is Windsor. In fact, at 17 per cent, Windsor had the largest average price appreciation in the past three months.
Social distancing measures have left condo dwellers cooped up, which has contributed to the shift toward larger homes in suburban and rural locations. Over the past six months, “home” has transformed into a multi-use space for living, working, learning, staying fit, relaxing and more. Not surprisingly, homes with spacious multi-level floor plans and home offices are becoming more desirable.
In addition, common areas within condo buildings, such as lobbies and elevators, are turning some people off condo living. Personal space has become more important in light of the pandemic, which can be hard to find in a dense urban setting.
Ontario markets such as Durham and Peel are seeing booming sales activity. While some may have expected the biggest price gains to take place in popular cities such as Toronto, many homebuyers are gravitating towards the outskirts. The opportunity to secure larger homes with more square footage and access to green space are just a few factors luring buyers further from urban hubs.
Supply and Demand
Ontario experienced lingering demand after the traditional spring home-buying season was pushed into the summer and autumn months. As the economy opened back up across the province, people were eager to purchase homes again.
Yet, low housing inventory has led to upward pressure on prices as competition rises. At the local level, several Ontario markets are now into weeks of inventory rather than months. Highlighting supply issues, the majority of the province was close to or just under one month of inventory.
Low Interest Rates
Across the country low interest rates are attracting homebuyers and helping to keep the market afloat. The Bank of Canada has lowered the rate to 0.25 per cent, which is historically the lowest it’s ever been. Those who were previously sidelined can now borrow at a lower cost. This could be enticing for hopeful homebuyers, who can now potentially secure more financing to purchase the home they desire.
The Ontario housing market is continuing to experience soaring prices in various submarkets. COVID-19 has influenced some home purchasing trends as people expand their home search to suburban and rural areas.
CMT announced that it has concluded the sale of $250 million of senior medium term notes.
The volume of home sales in April touched a seven-year low for the month, the Canadian Real Estate Association said on Tuesday. And home prices in most markets are stagnating.
But if Canada no longer looks like a sellers’ market, buying a home hasn’t exactly become a cakewalk. Unless you’re shopping for a detached house in the country’s two priciest cities, you probably haven’t seen home prices decline.
Renting isn’t cheap either. Forty per cent of the 4.4-million Canadians who have a landlord rather than a mortgage spend over 30 per cent of their pre-tax income to keep a roof over their heads. And things could get worse if rising interest rates and tougher mortgage rules force more Canadians into the rental market.
So, what’s the least bad option in this era of stalling home values and sky-high rents: being a tenant or a homeowner?
Common wisdom has it both ways when it comes to the rent vs. buy question. Many people argue that renting is a waste of money: You’re not building equity in your home and your housing costs will never go down.
Others argue that since rent is usually much cheaper than the carrying costs of owning a comparable home, you can build wealth by investing what you’re saving by not having to pay for things like property taxes and home insurance.
Unfortunately, both arguments can be wrong, depending on your individual situation and the conditions of the market. Crunching some numbers will usually give you a better idea of what renting or buying entail in your specific case.
Rent or buy? The case of a Toronto semi
Toronto is a great place to test the rent vs. buy math. When it comes to larger and more expensive homes, the real-estate craze of the past couple of years has dissipated. At the same time, rents are among the highest in the country.
Let’s look at the example of a three-bedroom, two-bathroom semidetached house, what many would call “a starter home.”
According to data provided to Global News by Toronto real estate website Bungol.ca, the average asking price for such a home in the Greater Toronto Area (GTA) is around $744,000. With a 20 per cent down payment of $148,800, and a five-year fixed rate mortgage of 3.49 per cent, the monthly mortgage payment would be $2,969, according to the online mortgage calculator provided by rate-comparison site RateHub. Add in property taxes, home insurance, utilities and home maintenance costs, and you’re looking at spending $3,800 a month at least.
On the other hand, the average rent for a comparable property is around $2,450 a month in the GTA, according to Bungol. That’s a difference of a whopping $1,350 in monthly costs compared to being a homeowner.
But what does that mean?
Global News run the numbers through the online “rent vs. buy calculator” provided by The Measure of a Plan, a Canadian financial planning site. If you assume that home prices will stay relatively flat for the next 25 years, it doesn’t make much of a difference whether you rent or buy that Toronto semi.
A tenant with an initial investment portfolio of $151,800, equivalent to what the buyer would likely spend on the down payment and purchase transaction costs, would end up with around $1.35 million 25 years down the line, assuming an annual return on investment of 5.5 per cent before inflation.
The homebuyer would end up with roughly that amount in home equity.
Rent or buy? The case of a Toronto condo
When you look at small condos in Toronto right now, those who can afford to buy still seem to have a clear advantage.
The average list price for a two-bed, one-bath apartment in the GTA is around $412,000, according to Bungol, which works out to roughly $2,000 in mortgage payments and $2,650 in carrying costs. Renting a comparable unit, on the other hand, will cost you around $2,330 a month. That’s a mere $320 difference in monthly carrying costs.
Even “a conservative 2 per cent annual property appreciation assumption results in almost $700 of gain per month, over time. That’s quite a bit more than [the] rental savings,” said Robert McLister, founder of rate-comparison site RateSpy.com and mortgage planner at intelliMortgage.com
“In most urban markets, it’s hard to beat buying long-term when your rent payment is higher than your mortgage payment for the same property,” he added in an email to Global News.
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But small towns where few homes are available for lease can also be a tough market for renters, said Jason Heath, a fee-for-service financial planner and managing director at Markham, Ont.-based Objective Financial Partners.
In communities where the supply of rental properties is limited, it’s not uncommon to see yearly rent payments equivalent to between 7 and 10 per cent of the market value of a comparable home.
Generally, if a year’s worth of rent adds up to less than 4 per cent of the market value of a similar house, you’re probably looking at a renters’ market. If yearly rent works out to 5 per cent or more, buying is more likely to be the better option financially, Heath said.
Still, there are all sorts of variables that can skew the calculation. For example, the faster home prices rise, the harder it is for renters’ investment returns to keep up.
On the other hand, you won’t be building much wealth as a homeowner if you keep tapping into your home equity to borrow, Heath noted.
And if you have a generous workplace pension with your employer matching contributions, renting and being able to make larger monthly deposits into your retirement savings account might make more sense, Heath added.
The 4-per cent rule of thumb is only a starting point, he said.
“It’s important just to know when to ask more questions.”
Bank of Montreal has raised rates on its posted mortgages, joining a number of other Canadian big banks as they respond to rising bond yields.
Effective Thursday, BMO raised the rate on its five-year fixed mortgage to 5.19 per cent from 5.14 per cent.
But rates on its entire slate of fixed-rate mortgages also rose. For example, the rate for a one-year mortgage rose to 3.44 per cent from 3.29 per cent – an increase of 15 basis points. The rate for a 10-year mortgage rose to 6.5 per cent from 6.3 per cent.
The changes were initially reported by RateSpy. BMO confirmed the moves.
While home buyers can usually negotiate rates that are lower than the banks’ posted rates, the changes nonetheless highlight the fact that borrowing costs are rising as markets respond to a confluence of changes: Global economic growth is picking up steam, inflationary pressures are building and central banks are raising interest rates.
Although both the Bank of Canada and the U.S. Federal Reserve held their respective rates unchanged at their latest monetary policy meetings, financial markets expect rate hikes later this year.
The changes from BMO follow similar changes at four of Canada’s biggest banks, after Toronto-Dominion Bank led the pack with rate increases last week, followed closely by Royal Bank of Canada, National Bank of Canada and Canadian Imperial Bank of Commerce.
Rising posted rates come at a time when Canada’s housing market is adapting to regulatory changes designed to slow home-price appreciation in particularly hot markets – notably Toronto and Vancouver. Among these changes are stress tests, designed to ensure that home buyers can handle payments if mortgage rates rise by 2 percentage points, potentially making it more difficult for cash-strapped or indebted Canadians to buy homes.
The changes may be showing up in home-buying activity. Sales data from the Toronto Real Estate Board (TREB) showed home prices in the Greater Toronto Area in April were relatively unchanged from March, but are down 12 per cent from last year. In Vancouver, residential sales last month fell to their lowest level in 17 years.
Canadians typically consider mortgages as a burden, to be paid down as quickly as possible, or at least before retirement.
It may seem counter-intuitive, but for the wealthy, mortgages are a tool to make more money.
Carrying a mortgage when you don’t need one might seem like a head-scratcher. Why borrow when you’ve already got plenty of funds at hand?
But as F. Scott Fitzgerald purportedly once said, “The rich are different from you and me.”
It sometimes makes sense for high-net-worth people to take on new debt, says James Robinson, mortgage agent at Dominion Lending Centres in Toronto.
“Using your real estate holdings to borrow money for investment purposes – either your principal residence or any other investment or personal-use property – falls under the ‘wealthy people become wealthy by using other people’s money’ category,’” Mr. Robinson says.
“If you can invest at a higher rate of return than you can borrow, you will increase your wealth and, therefore, your net worth.”
There are also tax advantages, though Mr. Robinson advises investors to seek professional advice about tax implications. In Canada, mortgage interest is not tax deductible; however, the interest paid on funds borrowed for investment is, so borrowing has to be structured carefully to avoid running afoul of the Canada Revenue Agency.
Remortgaging or taking a line of credit secured against property can also be advantageous for investors who are affluent but don’t quite reach the high-net-worth (HNW) category.
Financial institutions generally consider HNWs to be people with $1-million in liquid assets, while those with $100,000 to $1-million are considered “affluent” or “sub-HNW.”
One reason that HNW clients can consider taking on a mortgage is that “normally, they’re the ones who have access to assets for security [their houses and other properties] as well as the income required to service the debt,” says Paul Shelestowsky, senior wealth advisor at Meridian Credit Union in Niagara-on-the-Lake, Ont.
For those who are barely at the HNW threshold but want to boost their investable assets, “unless you can obtain a preferred rate from your lender, using secured debt is the only advisable way to borrow to invest,” Mr. Shelestowsky says.
Mr. Robinson cites several good ways to borrow to invest.
“The most common strategy used is to simply refinance your principal residence to access some of the equity you have built up over the years, and use the additional funds to purchase an investment property,” he says.
Wealthy borrowers who refinance in this way increase their asset base through leveraging, but this also is contingent on the value of real estate going up, Mr. Robinson adds.
“If you own $600,000 worth of real estate and prices rise by 5 per cent, you have increased your worth by $30,000. If you leverage and now own $1.2 million worth of real estate and prices rise by 5 per cent, you have increased your worth by $60,000.”
What could possibly go wrong? A few big things, the experts say.
For one, it’s never certain that the value of real estate will rise. There’s always the risk that you will be paying off a mortgage on a property whose value is drifting sideways, or even dropping. This could be happening, too, as your market investments are nosediving.
“Remember that when you leverage and asset values fall, the same multiplying effect occurs in the opposite direction. Don’t get caught in a get-poor-quick scheme,” Mr. Robinson says.
Real estate values do tend to go up over time, but it is not a straight line, he adds. In Ontario and other parts of Canada, the years from 1989 to 1996 were brutal for real estate values.
Debt-holders must be patient, says Andrea Thompson, senior financial planner with Coleman Wealth, part of Raymond James Ltd. in Toronto. “Investors must be able and willing to sit with a paper loss and continue to collect the monthly income, rather than panic and sell at a loss.”
Investors considering taking a mortgage should also be mindful of rising interest rates. The Bank of Canada is holding the line on rates for now, but it has hiked its key lending rate three times since last July, Ms. Thompson says.
High-net-worth borrowers also should consider the type of mortgage. “Looking at a variable rate or open mortgage might be preferable to some who want more flexibility, if they want to collapse or modify their strategy if and when interest rates rise,” Ms. Thompson says.
A different way to go, Mr. Robinson says, is to take what some lenders now offer as an “all in one” borrowing product, secured by real estate.
“This combines a mortgage with a home equity line of credit to allow you excellent flexibility in your borrowing as well as the ability to keep your borrowing segmented for interest calculation and tax deductability,” he explains.
Even the wealthy should be cautious in this volatile investment climate, Mr. Shelestowsky says.
“An overarching theme from the investment world is ‘lowered return expectations’ going forward,” he says. “Target expectations have been drastically reduced across all investor profiles.”