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.
Among 35 ranked cities in Ontario, Zoocasa reports Toronto is actually the least competitive market.
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.
WATCH: Here’s what millennials couples can afford under the new mortgage rules
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.”
GTA home sales grew 30 per cent from April 1-15 to May 1-15, according to data from a report.
Condo sales are particularly high, rising 48 per cent month-over-month for the first two weeks of the month. In comparison, detached homes saw a 21 per cent month-over-month increase.
The GTA housing market has remained relatively cool so far this spring, activity could be starting to heat up in May.
The market continues to be a cool relative to last year, as both sales and new listings are down from 2017’s record heights.
“In the [GTA], the sales-to-new-listings ratio increased from 35 per cent last month to 39, reflecting continued, though slightly tighter, buyers market conditions,” reads the report. “However, in the city proper, the ratio rose from 38 per cent to 45, making the move from a buyers’ market to balanced.”
A ratio of between 40 to 60 per cent is considered balanced, with readings above and below indicating buyers and sellers markets, respectively.
The report uncovered a more subtle sign that the market could be warning — early indications that bidding wars could be starting across Toronto.
“As spring sales start to increase, terminology found in MLS listings reveals that bidding wars in the 416 region have returned,” reads the report. “A query for common terms which usually indicated bidding wars are expected, reveals 197 active Toronto house listings including the wording ‘acting offers’ and 209 with ‘register by.’”
Earlier this month, Toronto Real Estate Board president Tim Syrianos predicted that the market would begin to see an uptick in activity heading into the summer months.
“A strong and diverse labour market and continued population growth based on immigration should continue to underpin long-term home price appreciation,” he wrote, in a statement.
After decades of slow or almost no growth in new purpose-built rental construction, the Greater Toronto Area may be in the middle of a mini-surge as a range different players are finding creative ways to keep some of the region’s land from turning into another new condominium.
With one of the tightest rental markets in the country, one of the most expensive home ownership markets and a booming population, it should be no surprise that the Toronto region has pent-up demand for rentals. What’s new is that the math for builders is finally starting to make sense to build new rental – particularly in the luxury and premium rental market – which is leading to an uptick in supply in levels not seen since the mid-1990s.
According to data from real estate analysts Urbanation Inc., six projects and 1,723 units began occupying in 2017, but it projects that in 2018 nine projects equalling 2,669 units will be delivered.
There are also 162 proposed rental projects across the GTA, which could add up to 34,054 units. Of that, approximately 27,000 are in city of Toronto, and almost 17,000 are even more centrally located in the boundaries of the old city of Toronto.
The region never stopped building rental housing, but as a 2017 Ryerson City Building Institute report noted, its only in the past two years that the market has seen more than 2,000 rental construction starts per annum since 1994.
“New market rental is badly needed in the downtown,” said Cary Green, chairman of Greenwin Inc., which just announced that it won a request-for-proposal to build 700 units of rental as part of the Provincial Affordable Housing Lands Program in exchange for keeping 30 per cent of the building affordable for 40 years. The site, near Bay and College, is the kind of downtown land the company could only dream of acquiring in the open market. “It’s very challenging today – we’re competing with the condo market. They can pay more money for the land than the rental market has been able to in the past,” Mr. Green said.
The competition between condos and renters for land is why some of Canada’s biggest pension funds and insurers are teaming up with the the region’s biggest landlords to squeeze new rental buildings onto their existing properties.
“Up until the mid-2000s, a lot of the landlords or owners would grow by purchasing existing rental assets,” said Drew Sinclair, Principal at SvN Architects and Planners. “Now, the cost of building is less than the cost of buying. That’s a really dramatic transition.”
Earlier this year, Minto Capital, a part of the builder and landlord Minto Group, announced one its first new-build rental buildings in years was nearing completion in Oakville: 1235 Marlborough is a 14-storey tower on the grounds of its existing Marlborough complex in the College Park neighbourhood at Trafalgar and Upper Middle Road.
“We’re catering to two markets: students with a roommate or downsizers that are coming from larger homes and can’t envision their lives shrinking into a one bedroom,” said Ben Mullen, vice-president of asset management, who said the building has 144 units, 97 of which are two-bedroom (starting at $1,675 a month) and 46 are three-bedrooms (starting at closer to $2,000).
Mr. Mullen said that major landlords such as Minto have two options to increase the value of their portfolios: “reorientation,” which means renovating old buildings with more attractive modern amenities to enable charging higher rents; or intensification, which means squeezing a new building onto the existing land, which also lets it charge higher rents. “We are seeking rents that are greater than our existing building,” he said. “ This is the only one that would fit at Marlborough. We have a couple other we’re working on in the GTA that are very similar.”
Mr. Sinclair, whose firm has consulted on planning and design for many of these landlord companies, said there are 2,700 high-rise apartment buildings in the city of Toronto alone, the majority of which are “tower in the park” configurations ripe for intensification. “There’s a huge amount of potential for a significant amount of rental housing to come online,” he said.
But the ability to charge premium rents in the GTA is also what’s drawing in new players, such as condominium builders Camrost Felcorp Inc., which added a luxury rental building – 101 St. Clair – to its redevelopment of the Imperial Oil headquarters.
The market they are after is “that Forest Hill homeowner who doesn’t quite want to make the full commitment. 101 St. Clair is the toe in the water to see if this lifestyle is right for them,” said Joseph Feldman, director of development at Camrost. He said 101 St. Clair is about 50-per-cent leased, but while one-bedroom suites start at $2,295 a month, some of the larger 1,500 or 2,000 square foot units hit $5,500, or even $20,000 a month for its highest-end pads.
“We are hot on the market, we believe, in the product that we build. We’re on the verge of pulling the trigger on another purpose-built [in the company’s new community in Leaside], “ he said. “The joke in our office is that in the past 41 years we’ve built 11,000 units – imagine if we kept all of those as rentals.”
While it might not seem like high-end units perform a useful role in solving the affordability issues that rental usually addresses, Altus Group chief economist Peter Norman suggests a different way to think about it. “The city itself is 650,000 units strong. That’s the size of the rental stock in the GTA. If you don’t provide at the high end, it’s a cork in the bottle; nobody can move up.”
That said, the luxury market might not be able to address the growing region’s needs.
“If we’re starting to build more housing, more rental, there is a bigger opportunity there than if we’re just focusing on the luxury market,” said Graham Haines, research and policy manager for the Ryerson City Building Institute, one of the authors of a report that suggested the GTA needs to add 8,000 new purpose-built rental units a year until 2041 to keep up with population demand. If the majority of new rental units go for premium rates, “Obviously, our lowest income people are pushed further and further down the property ladder,” Mr. Haines said.
The most sought after condos under construction in Canada’s priciest real estate market are being snapped up in private deals involving developers, select realtors and speculators.
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.”