This weeks top stories include how home prices across Canada are set to fall, how Bank of Canada governor Mark Carney took a moment to clear up any interest rate confusion, how the U.S. housing market has started to rebound, how Canadian consumer debt has rapidly increased in the third quarter of this year, how a condo developer is selling business condo’s rather than residential condo’s, how there’s a concern over the lack of information pertaining to condo assignments, how gas and heating costs are expected to rise this winter and how home sales across Canada are showing distinctive signs of cooling.
According to the latest Reuters poll, Canadian home prices will drop 10% over the next few years and home building will slow drastically next year. Reuters feels that the current property boom will not end in a U.S. style collapse but rather a significant slow and steady decline in prices over an extended period of time.
The survey was published last week on Friday and was taken from 20 forecasters. The majority feel that the government has provided enough change to mortgage lending guidelines to control run away home prices while preventing a market crash like the one south of the border. Craig Alexander, chief economist at TD Bank commented, “This isn’t a sharp correction, this isn’t a U.S.-style correction, it’s just simply an unwinding of the excess valuation that was created by artificially low interest rates for a long period of time. I would emphasize that while a 10% correction sounds scary, in actual fact, this would be a healthy outcome.”
U.S. home prices declined by crashing downward when the mortgage crisis of 2008 took place in the U.S. This triggered a massive financial crisis that left a trail of foreclosures and negative equity for millions of Americans. This went on for the past four years and prices have only now begun to rebound. Canadian home prices are now set to go down the same path but only expected to decline by 10% over the next several years. Housing starts are expected to decline more than that and drop by 17% by the middle of next year. What do you think of these numbers? Please comment below.
The world financial crisis of 2008 still lingers in the mind of the Bank of Canada (BoC) governor Mark Carney. The largest weapon in his arsenal to fend off global risk forces has been the BoC’s trendsetting interest rate but with borrowing costs currently at near historic lows for more than two years, it seems that his words may also have the same effect.
As of recently, even the words stated by Mr. Carney have been left open to interpretation, even when Mr. Carney states that he is absolutely clear on a matter. He commented, “The primary objective of monetary policy is achieving low, stable, predictable inflation.” Recent interest rate announcements and speeches leave many wondering when the BoC will actually begin raising its key interest rate from 1%, where it currently sits and has been since September of 2010.
The goal of the ultra low interest rate environment was to lower borrowing costs so that businesses and consumers will spend more money and help the economy come out of the recession. This backfired as consumers piled on record debt utilizing cheap borrowing costs to qualify for more money. The BoC has regularly stated that interest rates will rise in the near future and that the credit levels are unsustainable.
Mr. Carney commented further by stating, “It’s something we’ve been talking about. The situation is evolving. We’re being very upfront and transparent. What we’re doing is reminding people of the role of monetary policy.” Mr. Carney still has to evaluate external concerns such as the Eurozone debt crisis, fiscal concerns in the U.S. as well as the slowing Chinese economy. What do you think of the current economic condition of Canada and do you think the BoC should raise interest rates now? Please comment below.
If you would like to bet on the American housing market making a comeback but you are not in a place to buy just yet, there may be an investment vehicle that is perfect for you. A new package of real estate investments trusts (REITs) are making their way around with the purchase of distressed properties purchased by private equity investors at such a low purchase price that they can be rented out and still provide great returns even with the high costs of managing the properties.
Most REITs are limited to apartment buildings that are rental properties but this one is more focused on the housing sector. Toronto based Tricon Capital Group has built a portfolio of roughly 700 U.S. houses worth $80 million USD. Blackstone Group LP has built its portfolio of $300 million with the purchase of more than 2000 U.S. foreclosed homes. Although the properties may not be appealing to most, David Berman chief executive of Tricon Capital states that it’s all about the numbers. He went further by saying, “There’s no emotional attachment. We are buying workforce housing where real people need to live. There are people who owned their houses before and are now forced to rent.”
The companies have been buying foreclosed homes for as little as 40¢ on the dollar. They are buying in cash and low balling all offers. This has lead to a going in yield of 8%. Mr. Berman commented further, “If you are looking to buy a property or vacation home, there is probably no better time to do it. The dollar is high and the housing values are low.” Many are saying that the housing market has finally bottomed out which has caused many private equity investors to come flocking. What do you think? Has the American housing market finally reached its bottom? Please comment below.
Consumer debt loads in Canada expanded at their fastest pace in two years this summer, according to a report released on Wednesday of this week by TransUnion the credit reporting agency. Debt is expanding at a concerning rate given that the Bank of Canada (BoC) governor Mark Carney has continued to warn Canadians that household spending is out of control.
Non mortgage debt increased 4.6% year over year in the third quarter (Q3) of this year to an average of $26,768. When looking at a quarterly basis, debt grew 2.1% in Q3 when compared to the second quarter (Q2) of this year. Thomas Higgins TransUnion’s vice president of anlaytics and decision services commented, “It’s almost been two years and it’s the largest year-over-year increase we’ve had and I think it’s the largest quarterly increase we’ve had during that time period as well. Debt’s outpacing us and continues to outpace us, so at some point in time there’s going to be a reconciliation. Hopefully it’s not drastic and hopefully it doesn’t hit everybody, but there’s going to be a correction somehow along the way.”
An 11% increase year over year in auto loans to an average of $19,228 seems to be the main growth of overall debt as consumers purchased vehicles. Mr. Higgins commented further, “During the recession people held off on buying the new car, they refinanced the lease or continued with what they had longer than they would have.” It seems that the low interest rate environment is continuing to cause many consumers to over borrow. Debt has risen to 163% of disposable income now and is a major concern. There are expectations that we will surpass this number once the Christmas season is upon us. What do you think? Please comment below.
There has been a shift in the sales of condominiums in Toronto. It seems that a Toronto developer is selling condo’s to businesses strictly for business use. Patrick Quigley, president of St. Thomas Developments, has offered space for sale for a commercial building in a nine storey tower he is working on building in the Yorkville district.
The average price in the building is $830 per square foot and it seems that it may be cheaper to own a unit rather than rent one. Mr. Quigley commented, “People sell their big homes, buy a condo and they still have business interests. They want an office and they don’t want to rent an office because they are throwing away the rent money. The equation can be very simple, the difference between renting an apartment and owning a condominium. It’s the same.” There are similar commercial properties for sale in residential condo towers in Toronto but this one will be filled completely with business tenants.
This is something that is more common on the east coast in places like Vancouver or other parts of British Columbia. The building is already 25% sold The product is fairly new to the Toronto market and is expected to be a win. The only outstanding issue on the table is the expansion of a business. Someone that needs 3,000 square feet today may need 20,000 square feet tomorrow if their business begins to gain traction. It would be hard to go to the landlord and state that you require another floor and would leave the owner in a position where they would be forced to sell the units in order to move. What do you think? Please comment below.
Toronto developers seem to be asking for more government information as they continue to refuse to disclose how many investors are assigning condo units prior to taking possession. Market research firm Urbanation abandoned a survey this week that was setup to track assignments after roughly 120 developers refused to answer questions.
Assignments are condo units that were purchased pre-construction by investors that had planned to resell them to new buyers at a markup prior to having to come up with anything more than their initial downpayment. This means that the buyer will never pay for final closing costs, including land transfer taxes, and never will be required to obtain a mortgage or even qualify for one.
Developers provided different reasons for not providing information on the survey with some stating that they did not have the information and others just outright stating they will not supply it. Tridel, Canada’s largest condo development firm stated that they would not supply information because it’s not relevant.
Canada Mortgage and Housing Corporation (CMHC) has been trying to gauge the assignment market for some time now and a lack of information could push them to add further restrictions on the condo market. We are already seeing some lenders change their individual policies to reflect a 10% down payment requirement in order to secure the purchase of a condo. Condo experts feel that investor ownership is currently between 60% – 95% of the condo market. What do you think? Please comment below.
According to the National Energy Board, Canadian consumers can expect to see a rise in costs for both this winter but price increases are expected to be moderate.
The price of natural gas is expected to rise slightly as supply is abundant. Gas prices on the other hand is something that is not stable. Gas prices reached a 10 year low last year due to a warm winter and slowed demand. That means that there is currently enough gas in storage to keep prices low but that could change on a whim if there is any disruption in supply due to forces beyond control.
Gas production continues to rise but an increasing number of electricity generating stations powered by natural gas fuelled turbines may increase demand and apply upward pressure on the price of gas. Even with the increase expected in the price of gas, the expectation is that the price will not surpass anything we have seen previously. What do you think? Please comment below.
Month over month, from October of this year to September of this year, sales of existing homes in Canada declined. Canada also witnessed year over year sales drop, according to the Canadian Real Estate Association (CREA). This is the latest news that continues the trend of a slowing housing market in Canada.
Sales were down 0.1% in the month of October from the previous month. When sales numbers were not seasonally adjusted, sales were down 0.8% from the previous year. The housing market has continued to slow after the government furthered tightening of mortgage rules to try and cool an overheated market.
TD Economics senior economist Sonya Gulati stated, “Housing market trends in Canada for 2012 can be characterized as before and after regulatory changes. In the first half of the year, sales and price gains were modest, but positive. More stringent mortgage rules and tighter mortgage underwriting rules have ’purposely’ knocked the wind out of the housing market sails.
She continued by saying, “While tighter mortgage rules have worked to slow the market, the big question is what will happen when that temporary cooling effect wears off in early 2013. What happens thereafter is less certain. The low interest rate environment could pull homeowners back onto the market, causing home prices to once again trek upwards. Alternatively, an absence of pent-up demand may leave the market in a bit of a lull until interest rate hikes resume in late 2013.”
This leads many to believe that there will be minimal housing price gains in the near future. Monthly declines in sales continue to grow in the meantime with declines reported in almost two thirds of local markets. Toronto and Vancouver are the main forces leading the declines. I wonder how long this downturn will last? What do you think? Please comment below.
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