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The Bank of Canada is persisting with its promise to hold interest rates at the current level of 0.25% after the latest rate announcement at the end of October. This decision was exactly what experts accept to be the way forward for Canada.
The rate has been kept at record lows for half a year now and the Bank wants to keep it fixed at least till June 2010. As any real estate agent would tell you, one of the major ingredients as to why the Canadian housing market has seen a good rebound from the recession, is the attractiveness of these low interest rates, which is allowing consumers to buy properties.
Sadly there is always a few that clamour for interest rate hikes. Huge bubbles around the world made people cautious. Many feel the best way to stop the bubble before it explodes is to raise interest rates. Regardless of rising prices and a faster pace in the real estate market, most of the experts say it is not the time to raise rates.
The most decisive reason is the confirmed growth of the GDP, which doesn’t seem to be following the BoC forecast of a 2% rise in the third quarter of 2009 (August growth was -0.1%). Additionally, the trade deficit is at a record high, what shows a more arduous recovery for domestic industry.
The use of leverage, which is a means of using debt to supplement investment, is still poor and there are no signs of it growing. There is more calmness around due to inflation running at approximately -1%. Lastly the real estate market has remained fairly steady without the massive fall that has been anticipated by all. Real Estate prices are growing nicely with a good supply on offer on realtors books. With the real estate downturn last winter there was a hoard of properties which are now selling, as the demand is greater so the prices rise.
It is very improbable that the BoC will retreat on its commitment to keep interest rates low till at least June 2010. At least now the home buyer can feel positive in buying their new property.
First Time Home-Buyers Tax Credit was one of the governments action incentives to help with the property depression. Even so, in comparison to the first time home-buyers tax credit granted by the US government, the Canadian one seems like a joke. But who’s laughing? Before we can judge, we need to analyze the two. The Canadian Federal government are proposing a Tax Credit based on a $5,000 deductible. Using the deductible and multiplying it by the lowest income tax rate, for a real estate owner this will come to less than $800 net if you haven’t owned a property within the past four years.
In the USA the real estate value is the key to this incentive as up to 10% of its value is used to find out the tax credit. There is one important difference – this sum is not taken away from the tax base (like ours), but deducted from the customer’s income tax owing. When the tax owing doesn’t top the maximum incentive then the new property owner can look forward to the money being cashed back to them. If a US citizen wants to take advantage of this tax credit then they can’t have owned a house in the last 3 years.
While the Canadian real estate market recuperation is credited by professionals generally to the Bank of Canada interest rate cut, the (still quite shaky) recovery of the American market was indeed fueled by their enormous tax credit. The American plan cut the pressure of finding a down payment for a property and paved the way for first time buyers to get on the property ladder. Although the answer is likely more complicated, wouldn’t you think that Canada would look at the benefits of the US tax credits a little closer?
Firstly, there is a question of necessity. The force of the Canadian recession vs the US recession on our specific property markets has been radically different. While dropping prices, lost jobs and a flood of inventory drove many Americans right into short sales or foreclosures, the Canadian market bounced back within a few months, with any impact hitting investors and real estate agents more than ordinary homeowners.
The next question is of a fiscal sort. Billions of dollars in lost tax revenue doesn’t support the already struggling budget deficit when 1.5 million taxpayers are claiming this tax incentive.
To see the rest, please follow our original article “Is the First Time Home-Buyers Tax Credit Really as Good as It Sounds?” Thank you.
At the end of October the Bank of Canada announced it was to protect interest rates at the current amount of 0.25%. Many experts agree with the Bank of Canada’s announcement.
The bank is wanting to keep the current level until at least June 2010 which will mean the level will have been low for over a year. As any real estate agent would tell you, one of the major reasons why the Canadian housing market has seen a good rebound from the recession, is the attractiveness of these low interest rates, which is allowing buyers to buy properties.
Interest rate increases are being demanded by certain bodies. While we are seeing a huge bubble forming around the world this is making individuals decidedly uncomfortable. A lot of people feel the best way to stop the bubble before it blows is to hike interest rates. Many experts still believe that regardless of increasing prices and these bubbles forming it would be a mistake to increase interest rates at this moment in time.
Canada’s overall economic performance did not follow the BoC’s forecast of a 2% increase for the third quarter of 2009 and this is why most experts do not believe an interest rise should occur. While there are still huge debts within the domestic industry, experts believe that increasing interest rates will damage the recovery which is already tortuously slow.
Also, financial pointers don’t present any signs of growing leverage (the chancy use of debt to raise return on investments). Inflation is close to -1%, leaving all worries behind for the time being. The other factor, is all this is the housing market, which doesn’t seemed to have crashed as anticipated. Prices are increasing, but the stock flow remains stable. The prices are following a sharp growth in real demand, which was boxed up during last winter’s slowdown.
It’s more than feasible that the Bank of Canada will not break its promise and will hold down interest charges for at least eight more months. At least now the home buyer can feel assured in buying their new property.
First Time Home-Buyers Tax Credit was one of the governments action plans to help with the housing depression. But this incentive doesn’t seem to be a blessing opposed to the USA tax plan, as well as coming off as a bit of a joke. Nevertheless does anyone find it remotely amusing? To start, let’s analyze the two tax credits. The Canadian First-Time Homebuyer’s Tax Plan, offered by the Federal government, is based on a $5,000 deductible. If you want to buy property in Canada and haven’t owned housing in the last four years, then this deductible is multiplied by 15% – total net of $750.
On the other hand, the American tax credit can be as high as 10% of the real estate’s value, to a maximum of $8,000. In Canada the amount is deducted from the tax base but in the USA it is deducted from income tax owing of the consumer. In cases where the income tax owing doesn’t go over $8,000, the comparable sum is cashed back to the customer. But in Canada a person can’t have owned a house for the 4 years preceding, in the US this is only 3.
The American housing market has entered a shaky but definitive recovery due to these gigantic tax credits, but in Canada the recovery of the property market is believed to be due to the interest rate cuts. The American plan reduced the pressure of finding a down payment for a property and paved the way for first time buyers to get on the housing ladder. Seeing the benefit of the US incentive, the first thought is shouldn’t Canada be looking more intently at these opportunities?
What Canadians must ask themselves, is “do we want it”? Although both Canada and the US have both been in recession there has been a marked contrast in the result of it. The Canadian market bounced back within a few months with the main losers being real estate investors and estate agents; but the Americans have seen the decline hit home owners with a lot of short sales and forclosures.
The second question is of a fiscal sort. With about 1.5 million taxpayers claiming the incentive, the US federal government has been deprived of around $10 billion in tax revenues so far, adding more weight to the already tremendous budget deficit.
To study the rest, please look at our original article “Is the First Time Home-Buyers Tax Credit Really as Good as It Sounds?” Thank you.
With the economic slowdown internationally many countries as well as Canada have special policies to assist with this. The Economic Action Plan is the name of these special policies in Canada. With 90% of the initiatives of the fiscal year 2009-2010 being actioned, it is time to have a closer look at it, spotlighting on the Canadian housing sector.
The Canadian economy is being supported with fiscal impetus by the projects which make up the Economic Action Plan. This inducement accounts for over 4% of Canada’s economic performance, otherwise known as GDP, and is one of the largest in the world.
Lowering the tax responsibility
The Action Plan has many incentives but one of the most critical parts of it is cutting tax. Property related tax reductions: – $2.5 billion Property upgrade tax credits over the period 2009-10. – Growth in Property Buyers’ Plan withdrawal restriction: $15 million. – First-time Home Buyers’ Tax Credit to see a $175 million lure.
These three tax reduction initiatives have already been smoothly implemented and millions of Canadian citizens already benefit from some of these. From every corner of the country we have noticed a very swift property rebound due to the First-Time Buyers’ Tax Credit initiative. Moreover, the home renovation credit has helped people to raise the value of their property and strengthen their position in the very competitive environment of the resale housing market and improved the overall quality of housing stock.
Plans on how to motivate the housing construction
The housing market needs new builds and is intrinsic to keep the market healthy, even if some resale home realtors do not find them an inspiring prospect. Notwithstanding the earlier mentioned tax relief, which boost private home ownership and stimulate the construction industry and thus the whole economy, construction has also been stimulated by direct spending on thousands of projects.
The action plan has seen over 4,000 projects in the housing market begin with a further 3,000 planned. Over the fiscal years 2009-2010 about 300 social housing projects will be initiated with over $1 billion dollars of the plans cash.
But the true overall budget for this area is in excess of $9.5 billion. The effect of these actions on the real estate market have appealed to realtors. In one of our earlier articles MoveOntario2020: Impact on Toronto Real Estate we examined the details on how infrastructure projects alter values of properties in their vicinity. Resale and rental markets are affected by social housing which also provides sustainable houses to those who have a low income.
Realtors that deal primarily with a real estate market influenced by the closeness of these types of projects will find them important. Projects that necessitate builds help the labor market, supporting jobs, therefore money in your pocket, which leads to the capability to purchase your own home, which leads to more properties needed; a profitable circle alround.
How effective is this action plan?
Canada’s economy has seen the real estate market become it’s driving force, hence it being one of the first areas that have seen a bounce back in the current downturn. The kick start to the housing market is accepted to be generated by the monetary policy according to many realtors. Nonetheless, monetary boost also plays a part. The national economy is shown by a healthy housing market, so any monies put into the property market, however expensive, will show as a healthy economy.
The transportation system is the backbone of every big city in the world and Toronto is no exception. Population explosion in the last four decades, multiplying almost five times since 1970, has been the most important reason why our transportation system is no longer capable to satisfy the demands. Yes, there have been some improvements in the past years, but mostly minor, offering only provisional solutions. At last, a project called The Big Move will completely change the face of the transportation of south Ontario in following years.
MoveOntario2020 is the name of the key branch of this overall transportation outlook. In June 2007, this plan has been announced (and just as well may have assisted to liberals’ reelection in October) and now is expected by broad public. There are 52 projects, scheduled till 2020, with the budget around $17.5 billion ($11.5 billion paid by Ontario). 1. GO Transit upgrades and extensions; 2. Major municipal transit expansions; 3. Cross-boundary subway expansions; and 4. Rapid-rail link between Toronto Union Station and Toronto
Real estate and transit system
The Toronto’s housing market is a very complex industry and can be affected by many different elements, either only a little, or the impact may be bigger. Even though we can’t always separate the effect of a particular change in the local or global economic environment, but some of them are more significant than others. One of the crucial elements is the transit system.
Most people can picture themselves how the quality of living is positively influenced by the transportation system. For example, it can reduce the direct costs of commuting, indirect costs of time consumption, easier access to public facilities or better environment with cleaner air, while the negative aspects are only minor and short-term.
There are a number of research papers attempting to quantify the effect of various improvements in transportation system. For example, in a paper from Tinbergen Institute, focusing only on railways, it is said that the home value may be positively affected by railway accessibility up to 25%. Just a simple doubling of public transport frequency increase means average 2.5% value increase for every home in the region – just one year after the works are completed.
What will change in Toronto real estate after MoveOntario?
We can base the expectations on recent study conducted by REIN Canada. One of the crucial methods of lowering the commuting time is a rail commuting system, which in Toronto is represented by underground and GO Train system.
The positively affected areas lie in about 800m range from every station, with value maximization in 500m range. Older neighbourhoods or areas with lower average income of citizens are typically influenced more. Specifically, Toronto quarters around Spadina and Younge subway lines extensions are great examples of the effect on property prices. For GO Train it’s more complex; there are 17 projects involving capacity expansion, new lines and/or lines expansion and there are 9 more projects involving GO Bus Rapid. New light train transit lines in the neighbourhoods of Waterfront and Eglinton will have a similar impact.
Conclusion
In this short article, we cannot analyze in detail the whole mechanism how MoveOntario 2020 will influence the Toronto housing market. The REIN study shows that the most positively influenced areas will be around Vaughan, Scarborough and Barrie. The second group of highly influenced areas consists of Milton, Brambton and Uxbridge&Stoufville regions. The house prices are expected to rise by 10-20% in these areas. Thirdly, actually all Toronto regions lying around the new lines, or old lines with plans for increasing their capacity, are going to profit as well. Positive impact on housing prices should be visible 1-3 years after the particular project is completed.
And that’s not all. The new transit system will improve life quality also near the old parts, because now more neighbourhoods will be easily accessible. Some 175 000 jobs are expected to be created thanks to MoveOntario, which may again positively impact the GTA real estate prices. More people, more investors and more business are going to be attracted with our well functioning transit system. The whole Toronto is going to profit and property values on the whole Toronto housing market may be positively affected for the next decades.
The Canada Mortgage and Housing Corporation recently published a report on the Canadian housing market conditions of 2008 and the 1st half of 2009. It deals mainly with the housing starts and with the affordability to rent & purchase.
The housing market in Canada is now slowly recovering from the last year’s shock, as it appears from the report. While new home market actual starts decreased from January to June 2009 by over 43 per-cent compared to the same period in 2008, the MLS sales increased by over 17 per-cent in comparison to the July 2008 figures.
New housing price index growth seems to follow the general trend on the housing market. The average price change in Canada has changed from -0.6% (January) to -0.1% (May). The new housing price in Toronto has changed only slightly over zero values, in keeping with the recovery of the resale market.
Economic conditions: Unemployment
We can be fairly optimistic now in regard to our economy. First, the unemployment growth seems to have got under control. In July, the number of net losses was 13,000, whereas during the first quarter of 2009, the fall reached 273,000. Secondly, according to the Bank of Canada, the various stimulus packages brought out by many countries in the last year are slowly showing out some outcomes.
Affordability to rent
The home ownership or renting affordability is calculated based on the amount of working hours a person has to perform in a month in order to bring the average price of a 2-bedroom apartment rent or the average mortgage payment down to 30% of gross monthly salary. In 2008, the average hourly wages has grown by more than 5% up to $23.69 (Ontario: $24.65, Toronto: $24.93)).
From 114 to 113 hours per month – that is how the average number of hours required to bring the average rent for a 2-bedroom flat down to 30% has changed. While St John’s, Brantford and Guelph faced the biggest fall, Toronto observed decrease from 149 to 146, securing it’s position of the 2nd most expensive city in this regards right after Vancouver.
Affordability of home owner-ship
While the general decrease in the hours needed to rent was rather small, the general decrease in the hours needed to bring the average mortgage payments down to 30 per-cent of gross income is more significant – from 255 hours in 2007 to 240 hours in 2008. In Toronto, the decrease of hours needed to own was quite significant – from 299 to 286. But even so, Toronto still holds the 4th position among the most expensive cities regarding owning an apartment, just after Vancouver, Victoria and Abbotsford.
End notes
As a result of the current situation when the housing market is still cooling from the second half of 2008, the new housing is now somewhat more affordable, which is news I really like to bring to my clients, being a real estate agent in Toronto. First half of this year shows steady or slightly declining prices and slightly improving affordability of both renting and home owner-ship. As the interest rates are still staying quite low, it is now a good time for buying a property, before the market takes a second breath.
Vancouver BC real estate market grew for almost seven consecutive years, one of the longest and fastest growths ever registered in Canada. From 2001 to 2007, average home prices almost doubled, with inflation staying below 14% during the same time. Obviously this situation meant that many people, especially the ones entering the real estate market for the first time, couldn’t afford just to buy a home.
After the US real estate market got into problems, its Vancouver sibling still worked fine for some time and managed to grow until the beginning of 2008. Nevertheless, the market slowed down as it’s been influenced by the pressure of affordability demand, and the market freeze continued for a few months. The average price got stable at first, but later decreased. As the global economic crisis became an issue during autumn 2008, the sales of Vancouver real estate fell to extremely low values during January and February 2009, which aroused the general panic that we would face the same long and poor crisis period such as in the USA.
If you believe the same, look at the graphs around – February 2009 was the point of rebound, not the start of stagnation! Since then, all real estate key indicators in Vancouver BC show positive trend. Sales in June 2009 were almost 6 times higher than in February and almost double confronted to the last summer. The percent change in June 2009 was 75.6% in comparison to June 2008. In December 2008, the average price drop stopped and sustained at the same level till March, and since then it keeps showing steady increase. The prices in June 2009 reached again the same point as they were in October previous year.
These fact shouldn’t seem so surprising, if we analyze the numbers in detail. The new listings change graph will show us that the inflow of new houses to the market came to a standstill in October 2008, after this point it started to decrease.
It’s because one apparent advantage residential real estate can boast – people simply have to stay somewhere. Cars, hairdressers or holidays are not an essential condition for life, but of course a shelter to stay is one. It is possible that the demand for homes decreases, but it can hardly disappear completely, even if it was only for a short time. There are certain guideliness that the supply side should keep. Your house often is the most expensive item of your general property. In the period when prices are decreasing, you can decide to keep your home and not to sell it. On the other hand this would stimulate new housing starts. Eventually, an agreement has to be reached at some moment both for sellers and buyers, and the sooner the better.
So what are the arguments for the Canadian market recovering so early, whereas the US one is still going through the crisis? The reason lays in the fact that in Canada, we had no wave of foreclosures, which was the most critical point. The Canadian institutions and individual home owners are in better financial condition than the ones in the US. It doesn’t mean we are richer; it means we are more prepared to cope with sudden financial problems. Subprime mortgage sector (the most affected one in the United States) is much smaller in Canada; our economic fundamentals are not in the best shape now, but still quite stabilized.
So what would be the most likely future situation on the real estate market in Vancouver BC? Sales and average prices are likely to rise steadily during the few oncoming months. Nevertheless, as soon as the situation gets to the same level as before the bubble burst, it should calm down, due to overall economic stagnation. Next year will be awesome especially for first time buyers – with record-low interest rates and prices still under the recent peak, properties won’t be so affordable forever!
When the US real estate bubble burst some two years ago, innumerable Canadian home owners, perspective buyers and professionals began to ask: ”What will happen to the real estate market in Toronto or Canada in the future?”
We can identify two main reasons for such fears. First, Canadian property market, as our whole economy, has intensive attachment to the circumstances in the USA. Second, Canadian property business development in the years 2006 and particularly 2007 indicated the eventuality of a analogical bubble here. So what is the situation nearly twelve months after this?
I personally count myself among the optimistic part of the population, but clearly between years 2008 and 2009 we were only a small group against much more people who saw things quite pessimistically. The sales indicators from each month showed a huge fall, which culminated at -47% in confrontation to January 2008. So it’s apparent that the “depression panic” from autumn 2008 has hit Canada. No wonder that most Canadians were worried about making any crucial financial decisions, resulting in the property market almost coming to a halt. Under these circumstances, some “experts” foretold Canada facing similar collapse as in the USA. Nevertheless, the reality seems to be quite far from these forecasts. Let’s examine the 2009 statistics.
Number of sales and year-to-year change
These belong to the most characteristic and closely observed indicators. Looking at these indicators, it is apparent how the business froze in during the winter months. Nevertheless, the sales in June sprang to more than four times of the volume in December. In the first six months of 2009, the first month when we could see the sales volume growing was May, in comparison to May 2008. And in June, with its +27%, we could declare that the Toronto property market has fully recovered.
Days on market
Another important factor. While the previous ones draw the volume of the market, Days on market indicates the speed and freshness. This indicator is important because from the whole market volume numbers we cannot tell how long it would take for your property to get sold – it just gives us another viewpoint of the same problem. In January, during the most problematic spell, an average property stayed on the market just 14 days longer. Confronted with South Florida or Detroit, where days on market value reached 120-150 days, our slowdown was ridiculous.
Active listings flow change
We can estimate the atmosphere of the housing market when looking at this number. It is based on focusing on the number of new listings on the market. If the home owners are worried that their property price would go down and they want to save their investment, the inflow is naturally growing, while the opposite situation is generally considered as a good time to buy property. The future of other market’s indicators can be predicted from the active listings flow change. For example the positive change after January was understood as a market turn signal.
Average price
This one usually draws the greatest attention from my real estate clients. Usually, one of the greatest items on people’s property list is their house, which means that each market change can result in the owner getting thousands of dollars more or less. When the prices declined in autumn 2008, already the next April they increased back and higher.
What is the reason for such good outcomes?! We can still find bad economic news nearly every day. So how can we explain the fact that the housing market has improved so fast? There are two crucial arguments:
1. Failed expectations
The collapse of the US housing market was witnessed by many Canadians, who then expected the same would happen in their country too. Anyway, the major cause of the United States problems was in the subprime sector, and we have to realize this. Few defaults at the start created a chain reaction. In the beginning, the prices declined. Therefore, toxic mortgages could not be covered by foreclosures and short sales. Logically, the banks had to throw more foreclosured houses on the market, which resulted in the prices dropping even lower. I dare to say that Canada has a very healthy financial system, which in connection with very limited subprime sector where there are only a few foreclosures occuring makes our housing market a secure one. Homeowners realized this fact very soon and relaxed.
2. Stabilized economy and buying opportunities
Have a quick look at inflation, unemployment, GDP predictions and interest rate numbers. If we look at the real estate prices explanation, we can clearly see the importance of these numbers for the real estate market. We can clearly see from these statistics that even though our economy is slowed and stagnating, it is still quite far from a collapse – although of course the figures could look even more favourable. This was another reason to stop the real estate panic from winter.
Conclusion and the future
Toronto real estate market has first very well sustained the pessimistic mood during the winter months, and then it has got well very quickly. Now it is increasing again and condo resale market can be even evaluated as hot in the present. Low interest rates and reasonable prices after “one year break” offer great opportunity especially to first time buyers. Now it is also good time for investors to pick some cherries, as their prices still haven’t recovered. Sellers can relax too – the market is quick and their property will be sold probably within a month for a decent price. But we have to bear in mind that there is still some uncertainty pertaining and that the labor market is not quite up to its previous speed. If we take all this into consideration, we can conclude that in the next few years, a bubble is unlikely to create and that prices will probably grow only slowly. June’s 27% was rare, but this means the market is trying to catch the lost months and we can expect stabilization soon. Even in wild times, Toronto housing market represents a firm base for the economy of the whole Ontario country.
