Author: Brad Lamb
There is no chance of Toronto suffering a US-style meltdown; however, there is no doubt that the pace of sales has slowed and price increases are slowing down. For the first time in a long while, there is an opportunity to buy new condominiums from floor plans at development sites for reasonable prices without a VIP queue. This represents the BEST opportunity for value and selection since 2005. Here are some interesting facts as stated by two of Canada’s leading economists, David Rosenberg and Benjamin Tal. Keep in mind that economists are not very positive guys.
David Rosenberg says:
1. The Canadian debt/income ratio isn’t as bad as it looks. Because Canadians pay for their health care through their taxes, their disposable income is distorted relative to the U.S. In terms of personal income, the ratio is actually closer to 118%, rather the scary 165%.
2. Canadian household debt relative to assets (19%) and net worth (24%) is below prior peaks of 20% and 25% respectively. Rosenberg estimates Canada would need to see a 20% drop in the housing market to get net worth/income ratio down to the U.S. level.
3. Canadians have more equity in their homes – 69% of the value compared with 43% in the U.S. “This equity gap is a prime reason why Canadian household net worth/income ratio (at over 500%) is some 35 percentage points above U.S. levels,” Rosenberg writes.
4. Canadians are better able to service their debts. Canadian wage growth at 4% a year is about double what it is in the U.S. – a rise that pretty much matches the average interest rate they are paying. Meanwhile, debt growth has slowed to its slowest in a decade – showing that balance sheets are improving “without the painful deleveraging that has occurred south of the border.”
5. The debt-servicing ratio in Canadian households is now just over 7% – a level it has only been below in the past 15% of the time. So even though Canadian interest rates are 75 basis points higher than in the U.S., it is not hampering our ability to handle debt.
Benjamin Tal says:
1. Less attention should be paid to the debt-to-income level and more to the speed at which it has been rising. Several countries have had higher ratios with a meltdown, he suggested, adding that in Canada in the last three years that measure has climbed at half the speed than that of the pre-crash era in the United States, making it appear less threatening.
2. He also stressed that the quality of mortgages in Canada, as determined in large part by the credit scores of borrowers, is much better.
3. One-third of U.S. mortgages taken out in the U.S. in 2005 and 2006 were in negative equity positions before house prices dropped, and at least half of the mortgages had less that 5 per cent equity, making them extremely vulnerable to even a small drop in prices. In Canada, only 15 to 20 per cent of new mortgages have less than 15 per cent equity, and the negative position is nil, he said.
4. In addition, Canadian borrowers have begun reducing their exposure to rising interest rates by choosing fixed-rate mortgages over variable. The opposite occurred in the U.S., where adjustable rate mortgages remained popular until the bitter end.
5. Mr. Tal does believe house prices in Canada will probably fall over the next two years, but there are factors to lessen the blow, leading to a soft landing. That’s what policy makers are hoping for. Those factors include a lower degree of speculation in the Canadian market, and higher quality mortgages.
Investors and home buyers need to wake up and realize the best time to buy is when condo showrooms are quiet, not when a line snakes down the street. When do you think a developer will give consumers better pricing – with a 500-person line up, or a zero-person line up? Regardless of a record 28,000 condo units being sold in 2011, the construction industry can only build 13,000 a year, and the industry works at a break-neck capacity to achieve that. It takes 5+ years to complete a development from start to finish. This allows for a maximum of 13,000 units per year added to the city. From 2009 to 2011, the rental apartment vacancy rate fell from 3.5% to 1.4%. This is primarily due to the fact that only 5000 condo rental units are completed and available in any year (current estimate of completed units that end up in rental market). There are 10,000 new renter households every year, leaving a shortfall of 5000 rental units. The number of non-condo rentals added per year is negligible. This is causing a severe shortage of rental accommodations.
From the Toronto Star:
The demand/supply imbalance in the condo rental area is playing out in bidding wars for rental condos and pre-screening for units that’s almost as vigorous as buying a home. “I’d never heard of ‘bidding’ for an apartment,” says a University of Toronto student, who spent six weeks looking for a place to rent before starting medical school. “The speed at which things went, I had no idea. They’d be (advertised) one day and gone the next.” Condo owners are routinely demanding credit checks, proof of salary, and job confirmation letters before they’ll even consider a possible tenant, says one realtor who helps clients buy and rent condos. “I get clients asking me all the time, how could we have all these new condos and I can’t find a place to rent? But we have a lot of people coming to the city; we have a shortage of places to rent. I tell them, have all your paperwork ready and be prepared to offer more than they are asking for rent.” There is no better time to buy investment condos than when the market for them has slowed down. Most developers are currently buyers of development sites and investment real estate, as are pension funds and real estate investment trusts. Successful, wealthy real estate pros buy at times when others don’t.
From the Globe and Mail:
RioCan, Allied Properties eye deal for the Globe and Mail office site — Two of Toronto’s most successful real estate companies have bought the former Globe and Mail headquarters at Front and Spadina. The price tag is a whopping $136,000,000 for 6.5 acres. This would represent their second joint venture Toronto. RioCan handles the retail and Allied Properties handles the commercial. There would also be an element of residential condominiums. The whole project would likely exceed a value of $1.5 billion. Why would two of this country’s most savvy real estate corporations make such a big investment now? The answer is obvious. Toronto is a terrific city to invest in real estate.
From the Globe and Mail:
Companies are increasingly sucking up higher rents for more central locations, where they can draw from the pool of young, highly educated workers moving into newly built condos that are sprouting up in the city centre. The demographic is expected to grow as Toronto’s downtown intensifies and planners concentrate on creating “live, play, work” communities. The offer of a
centralized life is a huge draw for some employees. “I sold my car after I got this job,” says one downtown employee. “I decided to walk. I lost weight, I felt my lifestyle got better. I’m saving money and can spend my disposable income in other areas.”
The condo boom that has characterized the city for the last decade, and has really been going full throttle for about six years, slightly preceded the movement of offices to the core that has been occurring in the last few years. Companies that have been taking up more office space downtown of late range from Coca-Cola to Google to Deloitte. SNC Lavalin had an office in Etobicoke but needed a space to house employees who were working on projects for the mining industry. It surveyed its employees and found that 73 per cent lived either in the downtown core or within 5 kilometers of a GO station. SNC Lavalin transferred 280 employees downtown in late 2011, and has hired 120. “The reason you see corporations going downtown is because they need the talent and they want the best talent. These young, well-educated professionals, that talent is a dangling carrot for employers.
The workforce that these employers want live down here and aren’t interested in the commute,” says one downtown employer. One employee who used to live car-less in New York and now see the send rising in Toronto says, “As a New Yorker, I experienced that lifestyle and coming here, a lot of people I talk to have gotten rid of their car within the past five years.” Deloitte will be moving up to 1000 of its employees from the suburbs to new office premises it will be taking up at the Bay Adelaide centre East, which is under construction in the financial district.
But the province’s decision to create a buffer zone around urban sprawl caused planners and developers to turn their sights back towards downtown intensification. That strategy is now really taking off with the growth of mixed-use projects that combine some elements of retail, office, and residential space, as well as the new projects that are pushing into reas such as the southern pocket of the core. The city’s now becoming a real live-work paradigm.
Google will be officially unveiling its new office at Richmond and York next week, and employees have been working there for the past couple of weeks. The company already had a downtown location but decided to move its roughly 150 employees to the new larger premises so it can do more hiring.
Another employee, who works in the TV and film content space at Google, has been relishing the downtown lifestyle that he’s had since taking the role in March. Previous jobs and homes had him commuting from Mississauga to Scarborough, and from Toronto to Waterloo. “Now, whether I’m on my bike or on the streetcar, I’m able to see people on the way home and stop in and run errands on my way home,” he says. “You’re getting things done on your way home as opposed to having an hour and a half of captivity before you can actually start your life again.” He says that companies like Bixi, which offers bicycle sharing, and AutoShare, which offers cars for short-term use, are making it easier to adopt the urban lifestyle. But for now, he still owns a car, although he only uses it about once a month. “I think I’ll get rid of it in the very near future,” he says.
Are you getting the picture?
This is not the end of the incredible repopulation of the city by condominiums, it is the start.
The city is going to get bigger and better; it will continue to develop in every way. As a result, it will get much more expensive. Invest in Toronto, invest in Toronto now!
All the fundamentals for Toronto remain incredibly positive: huge population growth of 100,000 persons per year, historically low interest rates at 2.8% for a 5-year fixed mortgage, excellent selection of world-class quality developments, a highly expanded vibrant well-populated city, an expansion of high-quality downtown office employment, low inflation, a moderately expanding economy (good consistent steady growth), low real estate prices on a world-basis, safe and secure streets, and well-managed government spending. Toronto is one of the world’s few safe havens for international investors. Lastly, the U.S. economy and housing market is recovering. This is the single biggest boost for Canada and Toronto. Nothing has changed for the long term real estate investor except for an increase in the opportunities available to generate incredible wealth.
This is the only big city in the world where all of the fundamentals are positive. Behave like the successful and wealthy; and use this buying opportunity to your advantage.