Brian O'Donoghue

The industry reacts to the Fed's removal of the GST on new rental builds.

For years, the real estate development industry has identified GST as a simple change that would go a long way toward helping rental development.

In a bit of a surprising, but very welcome, turn of events, the Government of Canada is eliminating the GST on new rental construction, Prime Minister Justin Trudeau announced on Thursday in London, Ontario, in his remarks to close out the National Caucus Retreat.

Previously, under what was referred to as "self-supply" rules, developers of new rental buildings had to pay the 5% GST on the fair market value of the project — factoring in construction costs and land value, among other things — upon completion. (Rebates are available on units with a fair market value between $350,000 and $450,000, but many find the number too low to be helpful.)

However, developers of strata condominiums could, essentially, bypass the GST because it's paid by the individual homebuyers.

Building housing is a business, whether we like it or not, and for businesses, if it doesn't make money, it doesn't make sense, and this GST issue was a big reason — but not the only reason — why building rental housing didn't make a lot of.

As much as 15% to 20% of the total cost for a rental project consists of fees that have to be paid before construction can even begin, and although the GST is still 5%, construction costs have gone up in recent years and the 5% is charged on the fair market value of the project, which factors in construction costs, meaning the amount developers have to pay has gone up.

For those who can bear the 5% — along with the elevated costs of borrowing and construction, among other things — and go through with their projects, they inevitably have to charge higher rents to make back their money, so the issue affects renters and the general public as well.

The change was initially promised by the Trudeau-led Liberals, only for them to publicly change their mind in 2017 — after being elected — after realizing they'd be foregoing an estimated $125M in tax revenue per year. During today's announcement, Trudeau was asked about this flip-flop and said that the 2017 decision was made because they decided the Rental Construction Financing Initiative would be a better move.

"It was the right program at the time," Trudeau said. "But now, given interest rates where they are, given the challenges that people have in building new apartment buildings, we realize it's the right time to step up with removing federal GST on purpose-built apartment buildings."

It's better late than never, and the move is being welcomed by most, if not all, in the industry.

The industry has been in broad agreement that this is a measure the government can implement to really encourage additional purpose-built [rental] supply construction.

There does not appear to be too much fine print in the announcement today, but a few questions still need to be addressed. First is the question of whether the GST elimination will be retroactive to projects that recently completed construction, or if only projects that complete construction after today will benefit. Another question is whether there will be any regulations regarding the type of rental product, construction type, or size. It's also unclear if this policy change will have a sunset clause, such as the foreign buyer ban.

Trudeau also did not announce when the change would be coming into effect, only that they would be introducing legislation to make the change.

Consumer confidence rose to the highest level since the end of September as more Canadians see real estate values rebounding after the central bank conditionally halted its interest-rate hikes.

The Bloomberg Nanos Canadian Confidence Index, a measure of sentiment based on weekly polling, jumped by the most since the end of November. The index climbed to 47 on Friday, up from 45.7 a week earlier and 45.3 on Jan. 20, shortly before the Bank of Canada said it would stop to assess the impact of rate increases and hold its benchmark overnight rate steady at 4.5 per cent.

Improvements in sentiment point to expectations of an imminent recovery for Canada’s housing market, which saw benchmark real estate prices plunge 15 per cent from last year’s peak as higher rates squeezed buyers.

More than a quarter of respondents now expect prices to rise in the next six months, the highest proportion since September — though still below historical averages.

“Views on real estate have consistently been a foundational element in consumer confidence,” said Nik Nanos, chief data scientist of Nanos Research. “Although not returning to the exuberant levels from a year ago when the housing market was red hot, the weekly tracking is seeing the beginnings of a potential positive trajectory.”

The jump is more evidence of a sustained rebound for Canadian consumers at the start of 2023. Sentiment is still recovering from late last year, when the index recorded some of the most pessimistic readings since the depths of the COVID-19 pandemic because of uncertainty about the economic outlook, inflation and interest rates.

Every week, Nanos Research surveys Canadians for their views on personal finances, job security, the economy and real-estate prices. Bloomberg publishes four-week rolling averages of the 1,000 telephone responses.

Recession fears are also weakening. About 48 per cent of respondents now expect the economy to be weaker in six months’ time, down from nearly 64 per cent in November.

 Beginning January 1, 2023, non-Canadians will be subject to a two-year ban on the purchase of certain residential real estate in Canada – and anyone who knowingly helps a non-Canadian buy a house could find themselves in hot water.

In an effort to make housing more affordable, the federal government introduced the Prohibition on the Purchase of Residential Property by Non-Canadians Act in its 2022 Budget. The act received Royal Assent as part of Bill C-19 on June 23, 2022, and is expected to come into force on January 1, 2023, prohibiting non Canadians from directly or indirectly buying residential property in Canada for a period of two years. (the “Ban”)

Broadly speaking, the Ban prohibits foreign corporations and individuals who are not permanent residents of Canada or Canadian citizens from purchasing residential real estate in Canada between January 1, 2023, and December 31, 2024. Any contractual obligations arising or assumed prior to January 1, 2023, will not be subject to the Ban.

Certain key components of the Ban have yet to be determined and will be subject to additional regulations (the “Anticipated Regulations”) expected later this year. For example, the classes of persons exempt from the Ban and whether the Ban will apply to vacant land that could be subject to residential real estate development in the future have yet to be determined, among other items.

Who Is Impacted by the Ban?

Beginning January 1, 2023, persons who meet the definition of “non-Canadian” under the Act will be subject to the Ban, including:

• corporations incorporated outside of Canada;

• corporations “controlled” by foreign corporations or individuals who are not permanent residents • of Canada or Canadian citizens (with “control” to be defined in the Anticipated Regulations);

 • individuals who are neither a Canadian citizens nor a permanent residents of Canada; and 

• such other individuals and entities to be listed in the Anticipated Regulations.

Types of Property Affected

The Ban will apply to certain property located in Canada that meets the definition of “residential property” under the Act, including:

• detached houses or similar buildings containing three dwelling units or less;

• a part of any building that is a rowhouse, semi-detached house, residential condominium or other similar premises intended to be owned apart from other units in the building; and

• such other residential properties to be listed in the Anticipated Regulations.

Available Exemptions

Notwithstanding the Definition of “non-Canadian” set out in the Act, the Ban will not apply to the following persons:

• refugees;

• non-Canadian individuals who purchase residential real estate with a spouse or common law-partner provided that their spouse or common law-partner is a Canadian citizen, a permanent resident of Canada, a person registered as an Indian under the Indian Act, or a refugee;

• temporary residents who meet certain criteria to be prescribed in the Anticipated Regulations; and,

• such other classes or persons to be set out in the Anticipated Regulations.

Penalties and Enforcement

Notably, every person or entity who contravenes the Ban and every person or entity who knowingly helps someone who is subject to the Ban buy a residential property will be guilty of an offence and liable to be fined up to $10,000. Furthermore, any directors, officers, agents, mandataries, senior officials or managers of a corporation or entity that contravenes the Ban may be held personally liable if they direct, authorize, assent, or otherwise participate in contravening the Ban.

If a person or entity is found guilty of an offence under the Act, the Minister will have the authority to apply to the local superior court to seek an order that the residential property be sold in accordance with the Anticipated Regulations.

Because the offence provisions under the Act are not limited solely to the purchaser tial properties, liability may arise for a plethora of persons involved in Canada’s residential real estate industry, including sellers, real estate agents, developers, assignors, assignees, lawyers and other professionals involved in any alleged contravention of the Act.

Moving Forward

Looking to the future, a variety of important details of the Ban have yet to be determined. We will know more once the Anticipated Regulations are published by the Government of Canada. However, what is clear based on the language of the Act is that those involved in the residential real estate industry will need to be cautious and make reasonable efforts to identify non-Canadian buyers and sellers who cannot utilize an available exemption under the Act.

Pre-construction condo sales plummet 79% as market cools

The third quarter saw the steepest annual decline since 2009, expected to impact construction later next year, said market research firm Urbanation. Greater Toronto Area (GTA) new condominium sales totaled 1,748 units in the third quarter, declining 79% from a year ago (8,320 sales) amid soaring interest rates and construction costs that sent Toronto region developers to join their customers on the market’s sidelines.

A record 189 projects in development reported zero sales during the quarter, a 67% share of total projects with available inventory. It was the biggest annual decline — apart from the start of the pandemic in the second quarter of 2020 — since the first quarter of 2009. That was the beginning of the global financial crisis, but Toronto’s condo boom was already underway by then.

It calls into question the viability of some projects, particularly those that launched a while ago and still haven’t met their sales targets to qualify for construction financing, said Urbanation president Shaun Hildebrand. Meantime, costs have continued to rise. “But most projects have sold enough to proceed, and they are fine with waiting for the market to come back in order to obtain the prices they are asking,” he said.

The slowdown in new condominium sales and presale launches is not expected to negatively impact construction activity until the second half of 2023, as developers will remain active in the next few quarters starting work on the large number of units that launched and sold in the previous quarters.

But Hildebrand downplayed the prospect of a market crash, saying his company has been predicting for months that developers would end up delaying about 10,000 units this year. It will be the second half of next year before the downturn in sales and new project launches impacts construction, he said. Until then, developers will be busy with the 96,510 condos they sold previously and are already building.

Ninety-one per cent of the condos that are under construction in the GTA have been pre-sold. Developers depend on pre-construction sales to obtain financing in order to build their projects. The majority of units are sold to investors. Sometimes they buy them knowing that they won’t necessarily make back all the carrying costs on rent for years, but the price escalation in the region has been such that those investors could expect to still turn a profit from the equity of their units.

“Ultimately, investors have a pretty strong outlet in the rental market,” said Hildebrand. “If they want to hang onto their unit and they have a long-term time horizon, then they’re not too dissuaded from having some negative cash flow or waiting for the unit to recover in terms of its price.”

Despite low sales and delayed launches, the inventory of condos also continued to decline and that’s helping push prices up, he said.

The projects that launched in the third quarter had a record average price of $1,380 per sq. ft. on a 642 sq. ft. unit. But the price for resale condos in the same quarter was down 5 percent compared to the second quarter and was 10 percent below a first-quarter record.

That difference in new construction versus resale units is part of the current hesitancy by condo buyers, he said. Developers can’t bring down the cost of pre-construction units because of high construction costs that are also subject to interest rate rises.

For now, there’s about a 20 percent premium buyers pay on a brand-new unit. But if the gap between new and resale doesn’t narrow, that could lower the price of presale condos, said Hildebrand.

“With more and more high-priced projects coming to completion and resale prices declining, by the second half of next year, if resale prices don’t see any improvement, basically these presale units will be worth less than what the buyer paid in pre-construction,” he said.

That could lead to a glut in assignment sales — those are sales by investors who bought resale construction units but then sell them before the building is completed. It’s a trend that has already begun, but because assignment sales aren’t listed on the real estate industry’s Multiple Listings Service (MLS), it’s not clear how many of those are already on the market.

By Introducing Forty Year Amortization, can the Canadian Government Fight Inflation and Stop a Real Estate Crash

Seventy-eight per cent of Canadians currently have a mortgage with an interest rate below 3.0%. Rising mortgage rates mean that the average Canadian needs to make a staggering additional payment of $800-$1100 per month for a mortgage of $800,000. This places enormous pressure on already strained households grappling with relentless inflation and rising costs of living – everything from higher gas and grocery prices to inflated hydro bills and property taxes.

Homeowners and the real estate market will feel the burden of this jarring payment increase for at least the next five years. If our government doesn’t act soon, the effects could be disastrous and result in a major real estate crash in Canada, wiping the home equity and retirement savings of millions of Canadian homeowners across the country.

The solution is simple: Canada needs to introduce 40-year amortization. The government should allow homeowners who currently have an existing mortgage to renew their mortgages up to 40-year amortization. When we look at the data and the realities of the market on the ground, this could be the best solution we have available.

The fact is that the Canadian real estate market is healthy and strong, with very good fundamentals. Canada’s labor market remains exceptionally robust: workers’ wages are increasing, and our national unemployment rate in September was at 5.2 percent, while labour shortages have resulted in one million job vacancies nationwide.

To better understand how introducing 40-year amortization will help prevent a real estate crash, let’s take the example of Steve, a Canadian homeowner who has a $100,000 mortgage with a 2.5% interest rate and a 25-year amortization.

Steve is currently making monthly payments of $447.97, but that payment will jump to $581.61 at the current 5% interest rate with the same 25-year amortization, when his mortgage comes up for renewal in December. That is a significant $133.64 payment increase, on top of the tremendous financial strain caused by inflation and rising costs of living.

On the other hand, a $100,000 mortgage with a 5% interest rate and 40-year amortization would require a monthly payment of $478.81. This is only an increase of $30.84, which is significantly more tolerable and manageable.

Steve represents the 95 per cent of Canadian mortgage holders who have mortgages with terms that renew every 6 months to 5 years. Sooner or later, our homeowners must renew their mortgages at the current high rates. If we don’t change course, many Canadian homeowners will buckle under the weight of unaffordable mortgage payments and runaway inflation within a few months, once these mortgages are up for renewal.

Many people will have no choice but to put up their home for sale well below what they owe to the banks and the mortgage companies. This would also be terrible for CMHC and other insurance companies since they would be facing mountains of claims from the banks and mortgage lenders for these defaults.

Real estate is the biggest asset class that most Canadians have and thus it is critical that the Government protects it, in order to ensure the future of Canadians and safeguard their retirements and personal wealth. If our government doesn’t act soon, it could result in a real estate crash in Canada within the next 12-30 months, wiping the personal balance sheets, home equity and retirement savings of millions of Canadian homeowners across the country.

If the Minister of Finance allows the 40-year amortization through the OSFI and CMHC, this will offer Canadians a great and needed relief from higher payments without harming anyone or costing the government any money. It essentially gives homeowners more time to pay off their debt, while also allowing the government to tackle inflation. This policy would not apply to new purchases, only for Canadians holding existing mortgages, so that the new amortization length for existing homeowners would not heat up the real estate market

Canada’s Renter Population is Growing at More Than Twice the Rate of Homeowners

There’s a significant shift happening in Canada — and it’s between the renter population and the homeowner population. While the number of homeowners in Canada is growing at 8.4%, the renter population is growing at 21.5%, more than double the rate, according to Statistics Canada data that was published this week.

After hitting a peak of 69.0% in 2011, the overall proportion of Canadians who own a home was 66.5% in 2021. For comparison, the rate of homeownership was 65.5% in the United States, 67.3% in the United Kingdom, and 69.6% in Mexico.

The provinces that saw the biggest declines in homeownership from 2011 and 2021 were Nova Scotia (from 70.8% to 66.8%) and Prince Edward Island (from 73.4% to 68.8%).Homeownership rates declined in some of Canada’s most populous provinces as well, with British Columbia seeing the third-largest decline (from 70.0% to 66.8%) and Ontario seeing the fourth-largest decline (from 71.4% to 68.4%).

While the population of homeowners increased by 8.4% between 2011 and 2021 that same number increased by 23.7% from 1996 to 2006, indicating that while we’re still seeing increased amounts of homeowners, the momentum is now going the other way. And, as is usually the case, when homeownership goes down, rental rates go up, and the Statistics Canada data shows that is exactly what is happening.

Approximately 33.1% of Canadians, or 5 million people were renters in 2021, but what’s particularly noteworthy is both of these numbers — a 33.1% rental rate and 66.5% homeownership rate — are trending in opposite directions, regardless of where in Canada you look.

“The growth in renter households outpaced the growth in homeowner households from 2011 to 2021 in each of Canada’s 41 large urban centres,” Statistics Canada says. “In 30 CMAs [Census Metropolitan Area], the growth of renter households was more than double the growth of owner households over this period.”

The five CMAs in the Canada that saw the highest renter population growth rate between 2011 and 2021 came exclusively from two provinces: British Columbia and Ontario. Those CMA’s were Kelowna (+54.1%) and Nanaimo (+40.0%) in BC and Barrie (+47.7%), Oshawa (+41.1%), and Kitchener– Cambridge–Waterloo (+40.9%) in Ontario.

 Housing market crash unlikely … Immigration and smaller household sizes are expected to help drive prices upward.

New data released Monday by Statistics Canada found home prices increased by a mere 0.1 per in July compared with June — the smallest increase in more than two years and well below the average annual inflation rate of 7.6 per cent for that month.

But while experts are predicting the housing downturn could be the largest in four decades, they say two factors will protect the market from a full-blown crash: immigration and additional households as a result of Canadians choosing to live alone or in smaller groups.

If the rate of immigration and current changes in household formation behaviour persists, we would likely not have a housing crash over the mid-to long-term,” said Kate Choi, an associate professor of sociology at Western University.

A crash refers to a scenario where prices fall by about 30 per cent and housing demand completely erodes, said Carrie Freestone, an economist at RBC and the report co- author. The bank forecasts benchmark prices to fall by 13 per cent during this correction period — significantly less than the 30 percent threshold for a crash.

Between 2016 and 2021, the average Canadian household size declined by 0.02 people, according to a new report released Aug. 17. There were about 140,000 new households nationwide between 2016 and 2021 as a result of Canadians, especially young adults, starting out new, and that households have become smaller as more people are choosing to live alone and parents are having fewer children.

This trend will be responsible for just under 90,000 of the 555,000 new households created by 2024 and will provide a significant boost in housing demand.

“A greater number of households overall means that those households will need more housing,” said Choi. “So that, in turn, will exert an upward pressure on housing prices.”

That, paired with the federal government’s targets to bring in a record 1.3 million new permanent residents by 2024 — adding about 555,000 new households — will help drive housing demand and “contain a housing spiral.”

Between 2017 and 2019, there was a “pretty significant” housing correction because of Ontario’s Fair Housing Plan and the new federal mortgage stress test. That led to the first wave of demand, which was unleashed during the pandemic amid low-interest rates and households sitting on a significant amount of money.

However, when this housing correction period began in February, largely due to rising interest rates, the market never got a chance to fully catch up or satisfy all the organic demand that was coming through from that first correction. A caveat to the report’s findings, Choi noted, was demand and housing prices could dampen further if household size trends reverse and more young adults choose to live with their parents longer due to the rising cost of living, thus leading to fewer new households. Despite this housing correction, there is still a severe lack of housing supply to meet the demands of the market when this correction is over.

Canada’s Tax Authority Has Been On A Multi-Billion Dollar Real Estate Crackdown!

Canadian real estate owners are stuck paying huge penalties after trying to avoid taxes owed.

New data from the Canadian Revenue Agency (CRA) shows their crackdown on real estate

owners/sellers has led to billions in recouped revenue. Data provided by the agency also shows

they’ve collected substantial fines adding up to hundreds of millions, after diving into real estate

transactions. The program is largely focused on Greater Toronto and Vancouver, as a high volume

of red flags were being set off.

The CRA has been on a mission to crack down on real estate tax evasion, especially in Ontario and

BC. Red flags they’re looking for include:

Property flippers: People who regularly flip property for income without properly disclosing the

funds might get a second look.

Unreported capital gains: Sold property and didn’t declare? That’s a problem, even if taxes aren’t

owed.

Unreported worldwide income: Have cash coming in from outside of the country? If the CRA finds

hints of it and you haven’t told them where it’s coming from, they might have some questions.

Unreported GST/HST on a new or substantially renovated home: Built a new home on a lot and

sold it? You were supposed to collect GST/HST. Ditto in some cases where owners “substantially

renovate” a property before selling it (think gutting it and leaving a shell, probably not just adding

a new kitchen).

Lifestyle Assessments: If the owner is rolling in a high value home and there’s a big gap between

income and the payments, the CRA might want a second look.

There are other flags as well since the agency can correlate data, but those are the big ones they

mentioned.

Just in Ontario and BC. From April 2015 to March 2022, the CRA’s real estate crackdown produced

$2.2 billion in audit assessments. Included in that amount was $298.9 million in penalties for nonpayment.

The audit assessment values are split into three major categories: Income tax, GST/HST, and GST/

HST New Housing and new residential property rebates. Ontario and BC both showed about $1.1

billion in audit assessments respectively, but for very different reasons.

Ontario’s audit assessment included $147.6 million of income tax, and another $332.2 million

GST/HST. Most of the value was in GST/HST New Housing and new residential property rebates,

coming in at $662.9 million for the period.

The tax authority says they primarily focus on Greater Toronto and Greater Vancouver. Pricey

real estate combined with high transactional value, and aspiring investors that might not know

the rules are concentrated in these regions. The recent real estate boom and our recent dive into

property registry data shows a huge investment surge across the country, perhaps resulting in wider crack downs.

Toronto saw one of the biggest jumps in rent prices in the GTA, and experts warn a cooling housing market could mean high rental costs are here to stay.

A new real estate report shows that the price of housing in the GTA has skyrocketed and rents have returned to pre-pandemic rates. Recent data from Bullpen Research & Consulting and TorontoRentals.com shows the amalgamated average cost for rental units and condos combined in downtown Toronto is $2,325 a month, a 15.9 per cent annual increase. The price tag is much higher when square footage is taken into account, as Toronto has by far seen the most dramatic uptick in rent prices in the GTA.

How much is rent in Toronto? Rental rates have skyrocketed in Toronto, more than any other city in the GTA. Here's how the situation looks right now.

$2,065 One Bed Average monthly rent for a one-bedroom unit in Toronto.

$2,849 Two Bed Average monthly rent for a two-bedroom unit in Toronto.

$3,347 Three Bed Average monthly rent for a three-bedroom unit in Toronto.

$2,428 Average Average monthly rent for all unit arrangements in Toronto.

Real estate expert Ben Myers, president, and owner of Bullpen, says rental costs will only worsen as the larger housing market continues to cool off.

“So many people are returning to work, and tourism’s ramping back up … several cohorts of graduates will also be moving to downtown Toronto, who may be started full-time jobs online and are now ready to move into the office. They stayed in their university towns or with Mom and Dad, and now they’re ready to move,” said Myers. “The pandemic sent rents down 20 per cent, and so we’re just now getting back to prepandemic rental rates.

” Myers says the inflated price of single-family homes could be part of why the rental market has heated up so significantly. “After several consecutive months of monthly increases last year, average rent flattened out in the GTA, but higher interest rates could have tipped the scales, pushing would-be buyers back into the rental market, or simply preventing them from leaving it,” says Myers.

Interest in two-bedroom units also appears to have increased, presumably due at least in part to a higher need for home office spaces as the pandemic triggered a shift to working from home. Two-bedroom rent prices have increased by at least 10 per cent every month since January, according to the data. “If the ownership market continues to soften, expect rents to pick up,” says Myers.

Here are the average rental rates of all the GTA's municipalities

$2,177 Vaughan 1.9 per cent rate increase over last year.

$2,168 Etobicoke 15.0 per cent rate increase over last year.

$2,129 Richmond Hill 26.0 per cent rate increase over last year.

$2,096 Mississauga 8.5 per cent rate increase over last year.

$2,012 North York 5.0 per cent rate increase over last year.

$1,988 York 7.1 per cent rate increase over last year.

$1,870 East York 6.4 per cent rate increase over last year.

$1,869 Brampton 0.6 per cent rate decrease over last year.

$1,805 Scarborough 0.5 per cent rate increase over last year.

$1,795 Markham 5.2 per cent rate decrease over last year.

A Bubble, Eh? Scotiabank’s “Very Pessimistic” Outlook Is Real Estate Prices Rise 10%

Here we go again with another prediction! Canadian real estate is so bubbly a large bank sees prices soaring in a downturn. Scotiabank (BNS) reported earnings today, filing the bank’s macroeconomic forecasts. These forecast scenarios help to determine outlook, and include a base case, optimistic case, and two pessimistic ones. Even in the bank’s worst-case scenario, they forecast home prices will still rise at a breakneck speed.

Let’s start with what the bank thinks is the most probable outcome — the base case. This involves everything carrying on as is, with no improvement or deterioration. In the base case, the bank has forecast annual growth of 16.6% from April 2022. In contrast, they had forecast annual growth of just 9.9% back in January. Higher rates have somehow accelerated their forecast. Which is a little odd since they’re also forecasting the higher end for interest rates.

The best case, or optimistic scenario, sees slightly higher growth than the base. Home prices are expected to show annual growth of 19.5%. This is a huge jump from the 12.5% prediction in January.

The worst-case scenario, called a “pessimistic scenario” involves another downturn. They split this one up into two, and the first one involves short-lived stagflation - (a mix of slow growth and high inflation). In this scenario, home prices fall. BNS doesn’t actually see prices falling in their worst-case scenario over the next 12 months. Prices are seen rising 11.4%, up from the 3% in January. Since the last forecast, a conflict broke out, inflation soared to a multi-decade high, and interest rates are climbing. Somehow this boosted their outlook.

Then there’s the “very pessimistic” scenario for BNS, in which things become unhinged. It involves high commodity prices, financial uncertainty, and supply chain disruption. But the point is this is a terrible economy in this case. BNS sees this driving home prices 9.8% higher, accelerating from the 3.5% drop forecast in February.

The strangely high forecast is at odds with their interest rate forecasts. BNS has one of the highest forecasts in the industry and has been outspoken about inflation. Somehow reducing leverage doesn’t impact their outlook.

Bank chief executives and finance chiefs stressed they still expect economies to grow as COVID-19-related headwinds ease. They noted that most households are in good financial health, as many stashed away extra savings during the pandemic, while unemployment remains low in a tight labour market. Businesses are borrowing to bulk up inventories as demand for products outstrips supply, and some sectors, such as commodities, are booming.

The pandemic housing boom is winding down. Economists forecast a 10-20% price correction?

Economists are predicting that Canadian home prices will fall as much as 20 per cent this year as higher interest rates begin to hit the country’s booming real estate market. Mortgage rates are expected to climb again as the Bank of Canada aggressively hikes interest rates to deal with runaway inflation. Economists expect higher borrowing costs will lead to a significant price drop in some of the hottest markets.

Toronto-Dominion Bank economist Rishi Sondhi forecasts a double-digit percentage decline in the national average home price over the March to December period this year. Bank of Montreal senior economist Robert Kavcic predicts a 10-per-cent to 20- per-cent drop in the home price index in certain regions. “When we speak of housing correction it’s not a question of if, but where, how much and for how long,” Mr. Kavcic said in a research note.“Suburban markets in Ontario look shakiest,” he said.

The housing slowdown has been triggered by a rapid increase in borrowing costs over the past few months. The Bank of Canada’s next interest-rate announcement is scheduled for June 1. The central bank is widely expected to hike interest rates by another 50 basis points.

Realtors have described a sudden change in buyer sentiment. Some homes are not fetching any offers and sitting on the market for upward of a month. That is in contrast to the first two years of the pandemic when homes drew dozens of bidders and sold for hundreds of thousands of dollars over the listed price.

We are still seeing multiple offers happening in certain areas of the city, but we are not seeing the same frenzy that was present in the early months of the year. Showings have dropped off and buyers don’t seem to be in hurry to buy.

Don’t forget what CHMC said back in March 2020:

“Canada’s national housing agency is predicting home prices could plummet up to 18 per cent and mortgage arrears could soar to 20 per cent”

CMHC president and CEO Evan Siddall points to unforeseen circumstances as the reasons for their forecast error. CHMC lost its credibility after their failed housing crash prediction.

No one really knows what will happen to the real estate market. No one has a crystal ball to predict the future. We know we are state of change, and we will all learn to adjust to the changing market.

The Pandemic Has Made Canadians Feel More Emotionally Connected to Their Homes

The pandemic has transformed many aspects of society, but perhaps none so much as the concept of home: for many of the Canadians who locked down in efforts to stop the spread of the virus, where they lived became their gym, restaurant, and office. That’s had a significant impact on how we view our homes, according to new national data.

In a recent survey conducted by Ipsos a full 75% of Canadians (based on a sample of 1,002 respondents aged 18+) agreed that their home has become more important to them due to the pandemic, with an additional 65% saying they feel a stronger emotional connection to it. This has been reflected in an intensified demand for residential ownership since 2020, says Ipsos, despite rising prices and the supply challenges facing those trying to break into the market. Not surprisingly, this enhanced appreciation of the emotional benefits of home was stronger among those who own (70%) compared to those who rent (59%).

The survey also found that the most important considerations among Canadians looking to move have shifted. According to respondents, as of March 2020, the top two considerations when deciding where to live were the level of comfort in their home (73% ranked this between 8 and 10 in terms of importance) and level of safety within their community (71%). This outweighs the 58% who indicated the cost to maintain their home was the most important factor.

Location seems to have fallen by the wayside when it comes to buyer considerations; proximity to work, school, or other regular commitments has become more important to only a minority (30%) of Canadians — likely due to an increase in remote school and work options over the last two years.

The data also reveals that many Canadians, especially younger ones, became all around more knowledgeable about the real estate market during the pandemic; eroding affordability and lack of available supply have been especially hot-button issues over the last two years. According to the Canadian Real Estate Association, the average price for a home nation-wide has exceeded the $800,000 for the first time, following an annual increase of 20.8%.

“Emotional connection and long-term investment intersect even more as Canadians adapt to the socio-economic shifts resulting from the pandemic. Just under half (48%) of Canadians agree that they have become more knowledgeable about the real estate market in Canada during the pandemic, and 41% say they are more likely to see purchasing a home as a capital investment because of the pandemic,” states the report. This is especially apparent among the 18 – 34 age group with 59% agreeing they’ve become more knowledgeable, compared to 48% of those aged 35 – 54, and 40% of those aged 55+. A total of 57% of the youngest age group also indicated they’re more likely to consider real estate as an investment opportunity.

“This highlights the impact the pandemic has had in broadening younger generations’ understanding of the market and perceptions of investment opportunities in the lead up to their peak home-buying years,” reads the release.

An overwhelming majority of respondents indicated just how tough entering the market has been over the course of the pandemic, with 81% saying they believe there’s a severe supply shortage in Canada, especially among renters (87%) compared to homeowners (77%).

It may be difficult to buy a home or a plot of land in Toronto, so why not try the metaverse? Ever since Facebook announced it would change its name to Meta and focus on building its own digital world, interest in metaverse real estate has skyrocketed. In fact, real estate sales in the metaverse surpassed $500 million in 2021 and could double in 2022, according to data from MetaMetrics Solutions. Are we ready for this?

It’s becoming increasingly clear that commercial real estate in the metaverse is going to play a huge part in the global real estate industry in the years to come. In fall 2021, Tokens.com inked a letter of intent to buy a 50% stake in a digital real estate portfolio owned by Metaverse Group, which then plans to market the offerings as the first REIT (real estate investment trust) for digital real estate. The Metaverse Group believes that a public listing could come in 2022 or 2023.

The popularity of buying and selling digital property means companies like the Metaverse Group work for the most part, on the same type of tasks related to buying, selling and marketing as a traditional real estate company. As prices rise and buyers seem frenzied over virtual land — some express skepticism that investing in digital real estate will prove to be prudent down the road.

Yet despite the high prices, interest in metaverse real estate continues to grow, especially as the pandemic has driven more people online and made them more apt to virtually socialize. You can go into the metaverse and go to a museum. You could meet other friends there regardless of where they’re geographically located. Those interested in metaverse real estate also have competition, namely celebrities who have not been shy about touting their digital real estate activity.

The attention and interest given to the Metaverse have not escaped other companies besides Meta, formerly Facebook, and Microsoft, who are also eager to jump in on the action.

Like traditional real estate which often maintains value even during tough economic times, metaverse properties continue to boom despite ebbs and flows with Bitcoin (BTC) and other cryptocurrencies.

Investment firms are even dipping their toes into the Metaverse and continue to learn more about how they can get involved. High prices, popularity and the ease of buying and selling virtual land (in contrast to traditional real estate) mean the Metaverse will be more than a buzzword. Like the domain name scramble during the early ages of the internet, savvy investors and buyers who snap up properties in prime locations will look very smart as more and more people jump into the metaverse.

Keep in mind when assessing the metaverse as an investment opportunity, you can equate it to cryptocurrencies; getting in early can make you rich – but could also get you burned.

As the Metaverse continues to grow and expand — so will digital real estate. You can’t apply the rules of the real world into the metaverse. Savvy buyers and investors would be smart to stay ahead of the curve and assume the metaverse real estate boom is here to stay.

Canadian real estate prices are soaring, but the fastest growth is not coming from big cities. BMO chief economist Douglas Porter tells clients to really think hard about this growth. Home prices are now rising even faster than at the peak of the 1980’s real estate bubble. Most of that growth isn’t coming from emerging global hubs, but small towns. He asks investors to consider: Do all small towns have supply shortages? Or is the madness of the crowd taking over?

Canadian real estate prices are rising at a record rate, dismissing more supply and higher rates. Annual growth of the Canadian Real Estate Association (CREA) benchmark price reached 28% in January 2022, the “record” for the index. It’s not just a base-effect either, says the bank, with prices up 46.4% since January 2020. Most of this growth also isn’t occurring in larger cities, but small towns in the country.

Some of the wildest markets in the country are in smaller and medium-sized cities in Ontario. Not to pick on Brantford, but that fine city—previously known mostly as the home of Wayne Gretzky—has seen prices sky-rocket 86% in two short years.

A similar trend can be seen across Ontario’s “cottage country,” where prices rose the fastest. Places like Barrie, Welland, Tillsonburg, Woodstock, Chatham, and Guelph are further examples. These are all charming places that might be future global hubs at some point. However, they’re closing the gap between prices in Toronto so fast, they might be killing growth pre-maturely.

The CREA Home Price Index only goes back to the year 2000, so there might be questions about how it compares to the ‘80s bubble. For that, BMO has to use the average transaction price from land registries. But even on the somewhat more volatile average transaction price measure, where records go back to 1980, the two-year gain is also a record, at 48%.

In other words, the Canadian housing market has just seen bigger increases than ever witnessed through any two years of the great housing bubble of the late 1980s. Just as a reminder, that episode ultimately saw the overnight mortgage rate climb to 14% to suppress inflation and bring the market to heel. Prices then went into the wilderness for a decade.

If you think it’s different this time due to population growth, one should consider the pace in the 80s. At the height of the late-80s real estate bubble, population growth outpaced today’s recent cycle peak. In 1989, the population growth rate was more than a quarter larger than the 2018-2019 peak. It turns out immigrants stop moving to a place when the value proposition collapses. Shocking right?

Canada’s real estate market forecasts a strong spring – supercharged by the bank of mom and dad

Economist Benjamin Tal is forecasting a strong spring market in Canadian real estate and, with it, an even larger presence for the “bank of mom and dad”.

 

“You basically see people trying to get into the market before it’s too late,” Mr. Tal says. Parents have become increasingly generous in recent months as they pull out the stops so their adult children can buy a first home or move up to a better one. FOMO – fear of missing out – has infused the market with interest rate hikes on the horizon. Mr. Tal, deputy chief economist at CIBC World Markets, says the share of first-time buyers receiving help from parents has been climbing steadily to about 30 per cent at the end of the third quarter last year from about 19 per cent in 2015. His most recent data show the share of young buyers receiving gifts had edged up an additional one per cent by the end of 2021. The gifts have been getting larger as the average price has soared. Mr. Tal says the parents injecting cash have not been motivated by the pandemic as much as the trajectory of prices. The size of the average gift had jumped another $10,000 by December from the $82,000 earlier in the fall. In a market as richly priced as Toronto, that gift was more likely to be in the $130,000 range last year. Parents are also sharing their abundance with adult children who simply want to improve their living circumstances now. Mr. Tal warns that older generations should be cautious about being too generous with their gifts – whether they are handing over cash, signing on as a guarantor on a mortgage, or buying an investment condo for a young child’s future. Mr. Tal at CIBC is forecasting that the Bank of Canada will begin to raise interest rates in March. The economist expects the growth in real estate prices to slow in the second half of 2022 as rates rise. A gradual increase in rates would moderate demand and prove healthy for the market, in his opinion. Mr. Tal believes population growth and limited supply will cushion real estate prices from a correction. But he cannot rule out a pullback after the unharnessed run-in prices, he adds. “When prices go up by 20 or 25 per cent during the course of a year there’s always a risk. One possible trigger would be a faster pace of rate hikes than Bay Street is expecting. Currently, the narrative shared by many economists is that the supply chain issues will clear up and inflation will subside. But there is also the chance that narrative won’t play out as predicted, he cautions.  Mr. Tal notes that economic downturns in 1990 and 2008 were triggered by central bankers raising rates too quickly. “That can shock the system.” He cautions that parents who want to help their children should not do so by jeopardizing their own finances. 

“I definitely suggest that they should not take on a lot of debt,” he says. “If you get yourself into a situation where you are risking your retirement, think twice.

The average price of a Toronto condo is now $740,000 - Condo prices continue to rise in Toronto, like pretty much everything else lately, as more and more potential homebuyers look up to the sky for cheaper alternatives to detached homes.

Those who entered the condo market last year after prices dipped hard due to the pandemic are likely sitting pretty now, but many others are finding it increasingly hard to afford what used to be the affordable option for home ownership in Canada’s most populous city.

The Toronto Regional Real Estate Board (TRREB) is reporting a “record fourth quarter” for condominium apartment sales in 2021. A total of 5,336 condo units were sold in the City of Toronto proper between Oct. 1 and Dec. 31 of 2021 for an average price of $739,683, according to TRREB. The average price during this same period of time in 2020? Approximately $645,000.

This represents an average value increase of nearly $100,000 over the course of just 12 months — a solid return on one’s investment, whether a property was purchased in early 2020 while the market was lagging or pretty much any time before then.

The City of Toronto saw more condos sold than any other GTA region, followed by Peel and York Experts have been warning for a while that such a thing would happen as housing prices grew out of control. With even the suburbs growing unaffordable for most young first-time home buyers, the only places left to go for those looking to own is up into vertical communities, and the data is showing clear evidence of this trend.

The resurgence in the condo market was a key real estate story for 2021. First-time buyers, who arguably remained on the sidelines longer than existing home buyers during the earlier stages of the pandemic, re-entered the market with vigour last year.

TRREB’s Chief Market Analyst Jason Mercer predicted similarly, as other experts have, that condo prices will continue to rise at a clip well into 2022. “In the early days of the pandemic, we saw a spike in condominium apartment listings and a brief lull in condo price growth,” said Mercer. “The situation reversed dramatically in 2021, with the number of available units dropping in the face of strong demand. The resulting double-digit price growth will carry forward into 2022.”

How Baby Boomers are breaking Canada’s real estate market - In one of the tightest real estate markets ever recorded in Canada, Boomers are not letting go of their homes. It appears the real-estate wealthy Boomers are to blame for yet again disrupting markets. Traditionally, seniors sell their family homes and downsize or move into retirement communities. Born between 1946 and 1964, Boomers, who own a substantial share of Canadian real estate, are breaking that trend. They are ageing in place.

More than 20 percent of Canada’s population will be 65 within the next five years and they aren’t yet ready to move into retirement communities or nursing homes. It has been well-documented that the pandemic has intensified the problem in Canada. Boomers witnessed the tragedy that occurred during the pandemic in Canada’s long-term care and retirement facilities and are cautious of that future.

A 2020 Royal Society of Canada report that looked at long-term care in Canada during the early waves of the pandemic, highlighted its damaging state. Canada experienced a far higher proportion of total country COVID-19 deaths in nursing homes than other comparable countries — 81 percent in Canada, compared to 28 percent in Australia, 31 percent in the US and 66 percent in Spain. By March of 2021, more than 50 percent of all deaths from COVID occurred in nursing and seniors’ homes, according to the Public Health Agency of Canada.

Boomers are deciding to renovate or hire private help inside their homes. Because of the equity accrued in their homes, many can hire private help to ensure they can stay in the homes they own in communities they love for as long as possible. This trend was also noted in a study this past summer that found a majority of Boomer homeowners - 52 percent- would prefer to renovate their current property over moving. The study also found 75 percent of Boomers own their own home, and 17 percent own more than one property.

The trend is creating a bottleneck in supply for first-time buyers and young families. Millennials are starting to have families and have struggled because there is less housing supply for growing families.

In Canada, the ageing-in-place trend is running smack into one of the tightest real estate markets ever recorded. There are currently fewer properties listed for sale in Canada than at any point on record. A report by the Bank of Nova Scotia found that Ontario, Alberta, and Manitoba have the lowest housing stock per capita.

Yet another factor cited in the trend for Boomers to stay in their homes has been the rise in reverse mortgages. Canadians aged 55 and over are able to draw on a portion of their home equity to boost their liquid income while staying in their homes.

Home Equity Bank, a major provider of reverse mortgage products in Canada, recently disclosed that the country’s homeowners are now carrying more than $5 billion worth of its reverse mortgages, the largest amount ever.

 A new report is urging Canada to consider a luxury tax on homes valued at over $1 million as a means to rein in surging real estate prices.

Home prices across Canada have skyrocketed over the past year, with month after month of record-breaking sales.

On Wednesday, non-profit advocate group Generation Squeeze released a report, funded by the Canada Housing and Mortgage Corporation, and in it, they recommended an annual surtax on all homes valued over $1 million. According to the report, homes at this price point make up just 9% of all homes, or 1,362,789 households in Canada.

In theory, the proposed surtax would reduce the tax shelter that reportedly incentives Canadians to rely on growing property prices as a strategy for savings and wealth accumulation. Since 1972, the report explains that Canadian tax policy has sheltered principal residences from taxation to help homeowners build wealth, but this has generated a “number of significant, unintended problems,” such as inflated demand and average housing costs.

The tax, as laid out in the report, would start at 0.2% and increase to 0.5% for homes between $1.5 and $2 million and go up to 1% for homes over $2 million. These taxes are estimated to bring in $4.54 billion in annual revenue.

The report noted that the government could use the collected tax to provide portable housing benefits for renters or other recommendations from the Lab, including investments in new green co-op and purpose-built rentals.

Generation Squeeze, who compiled the report with input from 80 experts, recommends that the tax be deferrable, meaning it would not need to be paid until the home is sold or the property is inherited. This would address any issues arising from individuals with limited income or whose home value is beyond their own wealth.

December capped off a record year for real estate in the Greater Toronto Area — both in sales and price. According to the Toronto Regional Real Estate Board, 121,712 sales were reported through its MLS® System in 2021 — up an astounding 28% from 2020 which was a hot market, and 7.7% over the previous record high set in 2016. But as demand remained strong, the number of new listings on the market couldn’t keep up, with just a 6.2% increase in new listings compared to 2020.The average sale price for the GTA was up 24% from the prior year to $1,157,849, and the City of Toronto was up 15.5% to an average of $1,033,029.

While some 6,031 sales were reported in the GTA in the twelfth month of 2021, this was 15.7% below 2020’s all-time December record of 7,154. That said, prices simply did not slow down, as all home types saw between an 18% (condos), 25% (semi-detached) and 28% (detached) increase year-over-year.

The death of the downtown condo throughout 2020 could not have been more turned on its head in 2021. So much so that TRREB credits the condo recovery in the 416 as a leading reason behind the resurgence of sales within the City of Toronto. While sales in the surrounding GTA were up an impressive 23.6% compared to 2020, the City of Toronto saw a significantly higher increase in its annual rate, with 2021 clocking in a rather stunning 36.8% above 2020 — a more than 50% higher jump in sales than the suburbs. In other words, if 2020 was the great migration from Toronto, 2021 was the great return.

Canada’s Gen Z shows surprising optimism when it comes to owning a home according to a new survey out of Vancouver. Gen Z (born 1997- 2012) is all too aware of pressing affordability challenges in major Canadian cities, notably Toronto and Vancouver. The survey results showed that 75% of urban Gen Z intend to own a primary residence in their lifetimes, with 11% already having done so. Moreover, while 82% of respondents expressed uneasiness about being priced out of their desired neighbourhoods, 70% want to purchase a single-family home during their peak-income earning years. Perhaps unsurprisingly, saving enough money for a down payment and considering other living expenses remains the major concern of more than a quarter of Gen Z respondents.

According to the survey, 50% had given up on the dream of owning a single-family home, but one of the things we must realize is this demographic is just coming into the workforce and starting to accumulate assets, and the interesting thing is 11% have already bought a home, so over time their earning potential will increase. Adding to that Gen Z is on the cusp of receiving a massive generational wealth transfer from their parents. So, economically, their buying potential will only improve over time.

In Toronto, 73% of Gen Z reported aspirations to own a primary residence, while 46% are “very likely” to, 28% are “somewhat likely” to, and 11% already do. But 84% of respondents who haven’t bought a home are worried they won’t be able to in their communities of choice because of surging price points, with fewer than half of this group “very worried,” according to the survey.

More than the other metropolitan areas surveyed, Toronto received the largest share of Gen Z respondents who said that current living expenses are the biggest hurdle to saving enough money for a down payment on a home. Additionally, 18% of respondents reported student loan payments were a big barrier. Owning a single-family home was also more pronounced among survey respondents in Toronto than in the other cities surveyed, with 72% declaring they would like to own one during their peak earning years, while 13% and 11% respectively preferred an attached home and a condo, and 3% stating that they want to own a duplex or triplex unit.

But 52% of respondents in the GTA have abandoned aspirations to own a detached home because the average price of which is now $1,540,432. Still, 38% of the city’s Gen Z respondents believe their first home will be a single-family dwelling.