Homes in GTA See Big Price Gain

Toronto Star

Business / Real Estate

Excerpted from Toronto Star

Homes in GTA see big price gain

Average prices for a single detached home in these high-end areas are up a whopping 12.7 per cent from last year

Toronto Star file photo

Average prices for a single detached home in some Toronto neighbourhoods are up 12.7 per cent from last year.

 

By:Madhavi Acharya-Tom YewBusiness Reporter, Published on Thu Jul 18 2013

 

Toronto has another $1 million neighbourhood.

 

The average price for single detached homes in Don Mills, Parkwoods-Donalda, and Victoria Village rose to $1.1 million in the first six months of 2013, a report by Remax Ontario-Atlantic Canada Inc. shows.
 

That’s up a whopping 12.7 per cent from the average price of $980,000 for the same period last year.

These high-end areas sit between Eglinton Avenue and Highway 401, from Don Mills Road to Victoria Park Avenue. Small bungalows start in the $600,000 range.
 

“At the end of the day, the Toronto real estate market continues to be healthy. This health is expected to continue,” Gurinder Sandhu, executive vice-president, regional director, Remax Ontario-Atlantic Canada, said in an interview.
 

The Remax report uses January to June data from the Toronto Real Estate Board to compare sales activity in 35 districts across the Greater Toronto Area to the year-earlier period.
 

The average price for all types of housing, (that includes condos, semis, townhouses, and detached) rose 3 per cent compared to the 2012 period. It stands at $522,000, according to the statistics.
 

The west-end reported a year-to-date increase of nearly 6 per cent and the average price now hovers at nearly $692,000. Keesdale, Eglinton West, and Weston-Pellam Park saw the biggest gain, 10.2 per cent, with average prices rising to $457,000, the Remax report found.
 

The average price is $580,300 in the east end, which also saw an average increase of 6 per cent. The sharpest increase, 8.8 per cent, was in Birch Cliff, Oakridge, Hunt Club, and Cliffside, where the price for an average single detached home now sits at nearly $579,600.
 

Home buyers are still feeling confident in the state of the economy as low lending rates continue. As well, population growth in the GTA continues, Sandhu said. “All of those things are creating this healthy demand and you’re seeing it reflected in the prices.”
 

There were approximately 46,000 transactions in the first six months of this year. That’s down by about 8 per cent from January to June of 2012, which was a record period as buyers rushed into the market ahead of tighter lending restrictions, Sandhu said.
 

Sales activity is expected to pick up in the second half of this year, he added.

Would-be buyers who were sidelined by stricter requirements “are now starting to make their way back into the market. They’ve saved more or they’ve resolved to buy a little less house,” Sandhu said.
 

Year-over-year price increases for 2013 are expected to remain in the low single digits, Sandhu said.
 

“This is a return to a healthier market. These low single digit increases can be sustainable in the long run with increases in employment and salary levels. In the past, we had years with low double digit increases. Those are not sustainable.”

Canadians Getting Richer as Average Net Worth Top $400K

Toronto Star

Business / Personal Finance

Excerpted from Toronto Star

Canadians getting richer as average net worth tops $400K, new report says

By:The Canadian Press, Published on Thu Jul 25 2013

 

OTTAWA—Canadians are richer than ever, even if they also have near-record debt.
 

A new report by Environics Analytics puts Canadian household net worth at the start of the year at over $400,000 for the first time in history — although it only rose above the mark by $151.
 

The average household’s net worth grew by 5.8 per cent at the end of last year from $378,093 at the end of 2011 thanks to a 5.4 per cent gain in liquid assets and a 5.1 per cent increase in real estate values, the report says.
 

Meanwhile, debt rose by a relatively modest 3.3 per cent.
 

The new calculation keeps Canadian households ahead of their U.S. counterparts in terms of net worth for the sixth straight year — $400,151 (Canadian) compared with $381,086 (U.S.).
 

At the time, the two dollars were worth about the same but Canada’s loonie has since lost ground to the U.S. greenback. At current rates, the U.S. net worth would be equivalent to $391,871 Canadian.
 

The gap has also narrowed since the end of 2011 — in part because Canadian households continued to borrow and American household debt actually declined by 2.4 per cent.
 

Most measures of Canadian household finances have tended to focus on high levels of debt, which in the past year have topped 160 per cent of disposable income, one of the highest ratios in the world.
 

Analysts note, however, that along with a lot of debt, Canadians hold real assets, particularly the highest level of home ownership in history. Home prices in most parts of Canada have steadily risen despite a weak economy, and equity markets have recovered most of the losses sustained during the 2008-09 recession.
 

There is risk, economists say. If there is a sharp housing correction in Canada, household net worth will plummet along with home values.
 

Bank of Montreal chief economist Doug Porter says about half of household net worth is attributed to real estate values.
 

“At various stages last year, Canadian home prices were about 60 per cent above those of average U.S. home prices, which is off the charts. That accounts for the difference in net worth,” he said.

The Bank of Canada, which has long warned about high debt levels, noted last week that Canadian households are becoming more cautious both in retail spending and in real estate purchases, the latter in part due to stricter mortgage rules that came into effect last July.
 

“In the first quarter of 2013 . . . consumption rose only modestly and residential investment declined for the third consecutive quarter,” the bank reported in its quarterly economic outlook.
 

“This extends a recent trend toward slower growth in household spending, which, combined with downward revisions to the debt-to-income ratio and upward revisions in the savings rate, points to increased household prudence.”
 

The household wealth calculation does not take into account government debt, which is far higher in the United States than in Canada.
 

The data shows households in Regina had the biggest jump in net worth last year, rising 11.2 per cent to $391,826. That was fuelled by the strongest growth in real estate holdings among cities and the second fastest rise in liquid assets, behind Saskatoon, Environics Analytics said.
 

Hamilton experienced the second fastest growth in net worth among major cities, up 9.5 per cent to $420,515.
 

Vancouver, Calgary and Toronto remain Canada’s wealthiest cities.
 

Provincially, the report singles out Saskatchewan households as the big gainers in 2012 in terms of net worth, an increase of 7.6 per cent to $351,865, as liquid assets grew by 7.4 per cent and real estate holdings by 7.7 per cent. The improvement was achieved despite a 7.4 per cent uptick in average household debt to $100,437.

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How Do I Change the Rental Agreement with Tenants?


 
 
 


The Globe and Mail

Exerpted from The Globe and Mail

 

18 Toronto

The Globe and Mail

I bought a duplex: How do I change the rental agreement with tenants?

Ricky Chadha

Published Friday, Jul. 12, 2013 01:37PM EDT
Last updated Friday, Jul. 12, 2013 03:15PM EDT

Question:
My partner and I just bought a legal duplex and are moving into the main-floor unit. The upstairs tenants want to stay on in the house. They are currently paying an all-inclusive rent, however the house is fully set up as a duplex with a separate water heater, furnace and meters and we want to change the all-inclusive rent to rent plus utilities. We don’t take possession until Aug. 1, but don’t know how much notice we need to give the tenants, if we are allowed to change the rent and by how much, since we haven’t officially taken possession of the house yet.
Answer:

This is a tricky situation, and you need to be careful in your approach. Here are some scenarios – and I should be clear up front that my advice will be from an Ontario perspective:

1) You can have a discussion with your tenants and come up with a solution that will satisfy all parties.
2) You can go by the book if the first option doesn’t pan out, and increase rent according to provincial guidelines.

Before I delve into the specifics for each option, note that no action can be taken before you take possession of the house (the exception is if you are asking the current property owners to give requisite notices to vacate the property upon closing or another date).

Option 1: A meeting of minds Before approaching your tenant citing legislation and making demands, it would be wise to have a friendly discussion about your intentions. Depending on how long they have been there, you can explain the increased operating costs associated with purchasing a home at today’s market value coupled with increases in utilities.

True, this isn’t their problem, but you may be surprised with the reasonableness of people – especially if you’re reasonable yourself.

Option 2: Go by the book If the tenant has been residing in the unit for more than 12 months, and they are given a minimum of 90-days notice in writing, you can implement an increase in rent annually.

Rent Increase Guidelines are set each year by the province based on the Ontario Consumer Price Index (CPI). In 2013, the rate of allowable rent increase was determined to be 2.5 per cent.
This means that with proper notice, you can lawfully increase the monthly rent by 2.5 per cent in 2013. So, if rent was $1,600 per month, an increase of $40 would be allowed.

You might be thinking that a 2.5-per-cent increase just isn’t enough in your situation, in which case you may have some recourse. Landlords can apply for an increase above the guideline with the Landlord and Tenant Board if growth in property taxes, utilities, security services and/or capital expenditures can be justified.

Unfortunately, the increase is not very substantial – 50 per cent of the current year’s allowable rent increase, to be exact. That would equal a 3.75 per cent (2.5 per cent plus 1.25 per cent) increase for 2013. The time and effort on your part in preparing proper documentation and cutting through the red tape may well not be worth it.

Finally, changing the lease agreement to exclude utilities is virtually impossible from my experience. This can only be achieved through a mutual agreement via a new lease (which the tenant has no obligation to enter).

As I’ve mentioned in previous columns, tenancy issues must be handled with extreme care and delicacy – you should always consult with an expert who has specific experience in your local jurisdiction and with your particular type of situation. Good luck!
Ricky Chadha is a broker with Royal LePage Estate Realty in Toronto, and specializes in applying social media and other digital tools to the business of real estate. You can find Ricky on Twitter @your416 or at his website RickyChadha.com .
Submit your questions to realestateexpert@globeandmail.com . Our Real Estate Expert will answer select questions, which could appear on The Globe and Mail website. Your name will not be published if your question is chosen.
The content provided in The Globe and Mail’s Ask a Real Estate Expert is for information purposes only and is neither intended to be relied upon nor to be a substitute for professional real estate advice.

© 2013 The Globe and Mail Inc. All Rights Reserved.

Home Sales Below Year-Earlier Levels in June, Higher From Previous Months

    

July 15, 2013

Excerpted from The Globe and Mail

Home sales below year-earlier levels in June, higher from previous month

By TARA PERKINS

Canadian Real Estate Association says year-over-year sales fell 0.6 per cent last month but were 3.3 per cent above May levels

Sales of existing homes in Canada remained slightly below last year's level in June, but rose from the prior month for the fourth time in a row, the Canadian Real Estate Association said Monday.
The number of homes that sold over the Multiple Listing Service last month was 0.6-per-cent lower than a year earlier. But, on a seasonally-adjusted basis, it was 3.3-per-cent higher than May, according to the association, which represents the country's realtors and tracks the data derived from their sales.

While the month-over-month figures show that the market has been gaining momentum this spring, the association is cautioning that rising mortgage rates could reverse that trend.

"Increases in mortgage interest rates likely prompted some buyers with pre-approved mortgages to jump off the sidelines and into the market in June, particularly in larger, more expensive urban markets where affordability is strained," the association's chief economist Gregory Klump stated in a press release. "We have seen this happen before. If fixed mortgage rates continue holding where they are or edge slightly higher, sales may ebb over the summer and early autumn, with slightly higher borrowing costs picking up where the finance minister left off last year to keep the housing market in check."

Finance Minister Jim Flaherty tightened the country's mortgage insurance rules last July in a bid to take some steam out of rising consumer debt levels and house prices. Those changes included cutting the maximum length of an insured mortgage to 25 years from 30, and saying that the government would no longer back mortgage insurance on houses over $1-million. Industry bodies representing realtors and mortgage brokers blamed those changes for the steep slump in house sales that stretched through the second half of last year into the beginning of this year, and is just now abating.

With Canada's housing market, and the degree to which it might be overvalued, being a hot topic among commentators abroad, there is some concern in Canadian real estate circles that Mr. Flaherty might take more steps to cool the market if it shows too much momentum this year.

There are large discrepancies between how various markets across the country are faring. Roughly half of the markets that CREA tracks had higher sales than a year ago in June, with the other half showing declines.

The trend in prices is also mixed. The average price of homes that sold in June was $386,585, up 4.8 per cent from a year earlier. The association attributed much of that gain to recovering sales in some of the country's more expensive markets, especially the Vancouver area.

The association's MLS Home Price Index, which seeks to account for any change in the type of homes that are selling to create a more apples-to-apples comparison, rose 2.3 per cent from last June. Two-storey detached single-family homes drove the increases.

So far this year 240,068 homes have been sold over the MLS, 6.9 per cent lower than in the first six months of last year, the association said.

 

         

9 Jul 2013
Excerpted from 24 Hours Toronto

• 24 Hours Toronto

• LINDA WHITE
• Special to QMI Agency

Having a good credit rating crucial for consumers

If you’ve ever borrowed money to purchase a car or house, or applied for a credit card or personal loan, you have a credit report which is in turn used to generate a credit score. Though having a good credit rating is very important in today ’s credit-heavy society, many Canadians know little about it.

 

“A good credit rating can make the difference between purchasing a car, getting a mortgage at a reasonable interest rate, renting an apartment or even getting into the career you want,” says Patricia White, executive director of Credit Counselling Canada (creditcounselling.ca). “Without a good rating, many things become more difficult or more expensive.”

Credit reporting agencies track and use information on how you use credit products — such as credit cards and loans — and p.ay your bills in order to create your credit report and credit score, explains Julie Hauser, spokesman for the Financial Consumer Agency of Canada (fcac-acfc.gc.ca).

Building a good credit rating

The key to building a good credit rating is to pay your bills on time.
“That means not being even a day late with a payment on your credit cards or other credit products,” says White. “Paying on time is essential with all credit agreements and utility bills, including cellphone plans. If you can’t make the full payment, make at least the minimum payment. If you can’t pay a bill, contact the creditor immediately to make arrangements for repayment.”
 

It’s also important to ensure the accuracy of your credit report by checking carefully for errors. “Even minor errors may give lenders the wrong impression and result in a lower credit score than you should have,” Hauser says.

She recommends checking your credit report every six months. “Think of it as an annual check-up for your financial health. It can also help you spot signs of identity theft.”

Your free credit report is called a “credit file disclosure” by Equifax Canada (equifax.ca) and a “consumer disclosure” by TransUnion Canada (transunion.ca). It doesn’t include your credit score.

Repair a poor credit rating

Tips for i mproving your less-than-enviable credit score include not going over the credit limit on your credit card. “Try to keep your balance well below the limit,” Hauser says.
Reducing the number of credit applications you make is also helpful. “If too many potential lenders ask for your credit reports in a short period of time, this may have a negative effect on your score.”

Another way of re-establishing credit — particularly when you have no access to credit — is to obtain a secured credit card from a financial institution.

 

Printed and distributed by NewpaperDirect | www.newspaperdirect.com | Copyright and protected by applicable laws.

 

Buy Your First Home Faster

Excerpted from 24 Hours Toronto
Article rank

• 9 Jul 2013
• 24 Hours Toronto
• DOUG RIDING
• Special to 24hrs — Doug Riding BA, CFP, FMA, is a senior associate with Investment

Get Some Help Buying your first home faster

Find out how the Home Buyer’s Plan enables first-time homebuyers to use money from RRSPs as a down payment.

 

Are you looking to buy your first home? If so, why not let the government help you pay for it? With housing prices as high as they are, it is difficult to come up with the down payment required to avoid the high costs of CMHC (Canadian Mortgage and Housing Corporation) insurance. You can buy a house with as little as 5% down, but the insurance costs will run you as much as 2.9% of the loan. To get around this high cost, many first-time homebuyers will try to come up with 20% of their house price as a down payment and use their RRSPs to do that.

FOTOLIA With housing prices as high as they are, it is difficult to come up with the down payment required to avoid high costs of CMHC insurance. Why not let the government help you pay for it? The Home Buyers’ Plan is a program that enables firsttime homebuyers to use up to $25,000 from their RRSPs as a down payment. If you and your spouse or commonlaw spouse are interested in using this program, you can pool your resources and fund up to $50,000 from your RRSPs combined ($25,000 each). This will give you enough funds to purchase a $250,000 home and carry a conventional mortgage.

You will have to repay these amounts to your RRSP over a 15-year time frame, starting the second year after you borrowed the funds at a rate of one-fifteenth of the amount borrowed per year. A $25,000 loan from your RRSPs would create a $1,667 per year repayment over 15 years and if you do not repay that amount in any given year, you would include that $1,667 as income for the year and pay the income tax on that amount.

This is an excellent way to help you generate enough funds to realize the dream of owning your own home and it is another reason to make sure you are contributing to your RRSPs as much as you can and as early as you can. The amount you can contribute to your RRSP is dependent upon your income.
 

If you do not contribute in any given year, you can carry forward that RRSP contribution room to future years. This is why we encourage young people to make sure they submit a tax return every year they have earned income, even if they are earning a minimum amount of money. A $10,000 annual income will create RRSP contribution room of $1,000 that can be used later on in the Home Buyers’ Plan.

There are some restrictions on who qualifies as a first-time homebuyer, but you can participate in this program more than once if you have not owned your own home for at least five years. The money also needs to be in your RRSP for at least 89 days prior to using it for a down payment under this program, so planning ahead is important.

Outside of the tax-deferred compounding effect of an RRSP, you will also generate a tax refund on all amounts contributed to your plan. So, if you are in a 31% marginal tax bracket at around $50,000 income and contribute $9,000 to your RRSP, you will get a refund of $2,790.

These funds can be rolled into a Tax Free Savings Account to also go toward your new home or can be contributed to your RRSP in the next year to go toward the Home Buyers’ Plan — and get another 31% on that money.

Buying your first home is a huge decision and it takes good planning to come up with the money needed. This is not something you will be able to do on the spur of the moment, so keep your options open and use your RRSP to its full potential. Generate the tax breaks and benefit from tax-deferred compound growth and, if you do not own a home, try to make sure you have at least $25,000 in your RRSP and your spouse’s RRSP so you can take advantage of the Home Buyers’ Plan.
 

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Toronto House Sales Down in June, but Prices Up!

Toronto Star

Business / Real Estate

Excerpted from Toronto Star

Toronto house sales down in June, but prices up

Greater Toronto Area housing sales were down less than 1 per cent in June and prices rose year-over-year.

Aaron Harris / Toronto Star

Greater Toronto Area housing sales were down less than 1 per cent in June, 2013 and prices rose year-over-year.

By:Susan PiggBusiness Reporter, Published on Thu Jul 04 2013

 

The much-hoped-for June rebound in home sales failed to materialize in Toronto, according to figures released Thursday by the Toronto Real Estate Board.
 

While sales across the GTA were down less than 1 per cent in June compared to a year earlier, it was a far cry from Vancouver, which showed signs of a turnaround last month with an almost 12 per cent jump in sales, the biggest increase in two years.
 

GTA prices were up 4.7 per cent year-over-year to an average $531,374, while Vancouver prices slipped by 3 per cent.
 

Realtors had been expecting a flurry of activity in June. The winter that would not end put a damper on house hunting and buying through the usually busy spring market months of April and May.
 

Some economists had expected that the recent inching up of interest rates might also push a lot of potential buyers, armed with pre-approved fixed-rate mortgages, off the fence in June.
 

Some veteran housing analysts believe the June numbers are yet more evidence that the Canadian housing market is gliding to a soft landing, rather than heading for a crash. But Scotiabank economist Derek Holt cautioned Thursday that the numbers look more hopeful because they are being compared to last June, one of the weakest Junes on record.
 

Most of the 4.7 per cent price growth in the GTA was driven by the sale of detached and semi-detached homes, especially in the City of Toronto, notes TREB, plus the fact that new listings declined by 6.1 per cent, driving competition for too few houses to meet demand.
 

Even condo prices held steady, with GTA sales prices averaging $343,546 across the GTA ($366,532 in the 416 region and $288,604 in the 905 regions), despite the fact the inventory of condos for sale remains at unusually high levels and sales were down 3.5 per cent.

Toronto Home Prices Could Fall as Interest Rates Creep Up

Toronto Star

Business / Real Estate

Excerpted from Toronto Star

Toronto home prices could fall as interest rates creep up

Even a half point rise in rates could translate into a 9 per cent slump in sales and a 2.6 per cent drop in prices by 2015, says a veteran housing analyst.

Aaron Harris / Toronto Star

A sustained rise in interest rates could affect the broader economy in unpredictable ways, says veteran housing analyst Will Dunning. “It could be that once consumers start to expect prices to fall, the reduction in demand will be larger than it needs to be (based on economic fundamentals) and therefore price reductions will be larger than they need to be.”

By:Susan PiggBusiness Reporter, Published on Wed Jul 03 2013

 

A sustained rise in interest rates of just one per cent could cause Toronto area home sales to tumble by 15.3 per cent and prices to decline by 5.8 per cent by 2015, predicts a veteran housing analyst.
 

Even a half point rise in rates, which have been edging up incrementally the last few weeks, could translate into a 9 per cent slump in sales and a 2.6 per cent drop in prices by 2015, compared to where the market stood in 2012, notes economist Will Dunning in a rates-impact assessment released Wednesday.
 

“Once house prices start to fall, the outcome is unpredictable,” depending on how consumer confidence is affected, he says.
 

“It could be that once consumers start to expect prices to fall, the reduction in demand will be larger than it needs to be (based on economic fundamentals) and therefore price reductions will be larger than they need to be.”
 

“Moreover, because “housing wealth” is a very strong driver of job creation, what starts as a small drop in house prices can turn into a major event for the broader economy.”
 

Dunning is chief economist for the Canadian Association of Accredited Mortgage Professionals, the umbrella group for mortgage brokers.
 

But he stresses that he did this analysis on his own because he’s been asked so many times lately what could happen to the housing market – which has already suffered a slump in sales and an easing of growth in prices since tougher mortgage lending rules were introduced last summer – if interest rates inch up from historic lows.
 

Many economists believe Toronto’s decade-long housing boom has been largely credit-driven and that, as rates start climbing, the bubble could burst, especially in what the Bank of Canada has warned is the city’s over-supplied condo sector.
 

Dunning recently cautioned that Ottawa’s attempts to cool Toronto and Vancouver’s overheated housing markets, by making it tougher for first-time buyers to qualify for financing, is likely to result in a 25 to 30 per cent decline in housing starts by 2015 and 150,000 fewer construction jobs across the country.
 

And that dire prediction came before many of the big banks had started incrementally increasing rates on their fixed-term mortgages in the wake of market reaction to U.S. Federal Reserve Chairman Ben Bernanke’s recent warning that $85 billion (U.S.) in monthly bond buying may be coming to an end this year.
 

As of Friday, BMO’s five-year fixed mortgage climbed 0.20 per cent to 3.59 and RBC’s was set at 3.69.
 

Dunning believes the rate increases aren’t justified and that they could retreat somewhat in the next few months. But he adds that “if the rises persist, the risks (to the housing market) are increased.”
 

Dunning says that Toronto Real Estate Board sales numbers for June, being released in a few days, will likely show there has been a rush of buyers into the market recently, trying to fast-track house purchases armed with pre-approved mortgage rates negotiated before rates started increasing.

He calls that “borrowed activity from the future.”
 

“The real test will come in the fall,” says Dunning, when those pre-approvals have expired, especially if rates hold at their new or even slightly higher levels.

Prognosis Grim for Toronto Condo Investors

The Globe and Mail

Excerpted from The Globe and Mail

18 Toronto

 

Condominium development in the Liberty Village area of Toronto on June 25, 2013. Even before rates began to spike in May, Toronto condo sales were flagging, with sales down a whopping 55 per cent in the first quarter of 2013 versus a year ago.
The Globe and Mail

Prognosis grim for Toronto condo investors

SHERYL KING

Published Tuesday, Jul. 02, 2013 05:00AM EDT
Last updated Tuesday, Jul. 02, 2013 12:44PM EDT

Warren Buffett is fond of saying that “you never know who is swimming naked until the tide goes out.” Well, when interest rates start to climb, Toronto’s condominium investors may be about to get a lesson in the perils of swimming in the buff.

Bond yields worldwide jumped in recent weeks as the Federal Reserve hinted its bond-buying program could soon begin to wind down. The Canadian bond market has not been immune to this force, with 5-year government bond yields up from 1.33 per cent five weeks ago to 1.84 per cent last week.

Ten-year yields are up 80 basis points over the same short time span. (A basis point is 1/100th of a percentage point.) Posted mortgage rates in Canada have moved higher in lock-step, with the cheapest five-year fixed mortgage rate up 65 basis points over the same period, putting it back above 3 per cent.

This puts significant pressure on Toronto condo investors. Yet a recent blog post on Urbanation, a website that tracks Toronto’s condo market, touted the invest-to-rent option – presumably because the previously popular invest-to-flip option is no longer profitable – noting that the average rent for a Toronto condo is now $1,856, handsomely up 10 per cent from two years ago.
Based on the average condo sale price of about $330,000, this appears to be a healthy rental yield of 6.7 per cent – on the surface, it’s a tidy sum compared to the low-risk option of parking money in a “return-free” savings account at a chartered bank. What the report failed to mention, however, were the carrying costs.

So, here are the sober math facts of the net rental yield. Interestingly, banks do not charge a premium for an investment-property mortgage (under a puzzling assumption that there is no added default risk to investment properties versus owner-occupied purchases) so the posted rates apply to an investor.
Based on a 3.05 per cent mortgage rate, a five-year fixed mortgage with 20 per cent down-payment and 25-year amortization period requires a payment of $1,265 per month or $15,187 a year on an average condo, a 7-per-cent increase from just one month ago. Monthly maintenance, including utilities, will set the investor back conservatively $4,000 per year on a one-bedroom downtown condo. Take another $2,600 per month off for real estate and income taxes.
All that is left is $535 per year, for a net rental yield of 0.16 per cent. And a repair or a paint job could wipe out that profit in a flash.

The question becomes, why would an investor take on the risk of owning a condo for virtually no annual return?

The answer: They are not. Even before rates began to spike in May, Toronto condo sales were flagging, with sales down a whopping 55 per cent in the first quarter of 2013 versus a year ago. Diminished affordability was no doubt a contributor to the sales slump as the market felt the pinch from the new regulations requiring a shortened amortization period – the equivalent of a 100-basis-point increase in the five-year mortgage rate.

However, potential buyers are also worried about a price correction. Price gains in the condo market were a skimpy 1.2 per cent in May, which is a far cry from the 10-per-cent-plus returns investors had come to expect before the federal government’s mortgage crackdown. Double-digit returns made condo purchases worth the risk; 1 per cent annual returns, not so much.

Added to the reduced affordability and flagging price expectations that have beaten down demand is that builders are using flawed demand projections. Urbanation cites the latest household formation number for Toronto of 34,000 units per year, according to the Census published by Statistics Canada, as the expected annual sales figure for condominiums.

The problem is that – at best – only half of those households are interested in high-rise living. According to the same Census report, the true household formation rate for condo demand is 17,000. This 50/50 split between single-family households and multi-unit dwellers has not changed in Toronto in the past 10 years. As such, the often-heard argument that shifting demographics will absorb this excess inventory does not stand up to the facts.

With these facts in mind, the pipeline of condo construction becomes much more daunting. Condominium builders completed 17,000 units in the past year, yet still have more than 50,000 units under construction. As such, the facts are that builders are sitting on more than three years’ supply at a time when it will only take another 50 basis point rise in mortgage rates to put a rental investor into a position of negative carrying costs.

From oversupply, to reduced price expectations, to surging mortgage rates, the Toronto condo market is feeling the squeeze from all sides now. Here’s hoping the spike in mortgage rates is short-lived.
 
 
Sheryl King is an independent macroeconomic strategist with more than 20 years experience in the international financial industry and central banking.

© 2013 The Globe and Mail Inc. All Rights Reserved.