In Canada the housing sector has been very heated with demand outstripping supply across the country within the last six months. The underlying supply/demand fundamentals are currently very strong, with housing starts below long-term demographic needs. At a national level, a February 2010 REMAX report examined real estate trends and developments across the country in 16 markets to find that inventory levels remained very tight.
The markets that they found to have the tightest inventory levels included:
– Greater Toronto Area, GTA (-41%)
– Kitchener-Waterloo (-33%)
– Ottawa (-30%)
– Victoria (-30%)
– Greater Vancouver Region, GVR (-27%)
– Halifax-Dartmouth (-19%)
– London-St. Thomas (-18%)
– Regina (-16%)
– Winnipeg (-13%)
They also mentioned that inventories in Calgary, Edmonton, and Saskatoon were beginning to tighten, specifically within the single detached homes category.
The Greater Toronto Area (GTA)
In the GTA inventories have continued to decline to very tight levels partially due to the shortage of serviced land, and land that is zoned for low-rise residential development. Approvals for high-rise condo development have remained high. Increases in demand and consequently their prices, have lead the real estate market. But the livable square footage within most suites remain well below the needs of most families. Most condo units range from 500-800 sq ft, with condo’s above $400,000 offering 1000-1200 sq ft, and anything larger than that usually over $500,000.
A journey across the GTA into new development showrooms have indicated that new low-rise developments have been selling out at a very quick pace in recent months for homes in the 1600-3000 sq ft range that are below the $600,000 price point. These areas include Burlington, Oakville/Mississauga, Milton, Vaughn/Maple, Markham, Richmond Hill, Ajax, and Stouffville. According to RealNet Canada Inc, a company that tracks the housing market, by the end of December 2009 the average new home price in the GTA was $459,573 (up about $7,650 from the beginning of 2009), while the Toronto Real Estate Board (TREB) indicated that resale home prices averaged $411,931.
Another contributing factor to the high demand is the historically low borrowing costs. When borrowing costs return to a more normal level (Bank of Canada rate hikes), it is likely the housing activity will cool off a bit. How much the retail bank mortgage rates rise will also determine the monthly payments for borrowers. With that, we need to look at general increases in income levels to see if they can offset the increased mortgage payments. If income levels do not increase by a proportional amount (very possible), we will see many households become to top heavy with debt (which they already are). Affordability will be the problem going forward as prices and rates increase. Normally, without significant income increases, the price increases would be unsustainable in the long run.
Even with borrowing rate increases, it looks as though prices will likely continue upwards, but at a moderate pace, due to strong supply/demand factors. Buyers are anticipating rate increases and tighter lending rules, which have further increased demand. In British Columbia and Ontario, the governments are set to introduce the new Harmonized Sales Tax (HST), which has a significant impact on home purchases once it is in affect. The HST is set to begin in the middle of this year.
However, looking past the next six months, the GTA is expected to continue growing by 100,000 new immigrants a year, and the Canadian Housing & Mortgage Corporation (CMHC) expects the population growth to sustain demand and moderate growth in the long term (over the next two and half decades). The GTA remains the single greatest beneficiary of immigration, is favored due to area’s attractive multi-cultural diversity. An aging population with lower and declining fertility rates, means that immigration will be looked to, in order to maintain labour/population/demographic targets. According to Canada’s 2006 Census report (every 5 years), approximately 57% of the population in Markham are foreign-born. Mississauga is at 52%, Brampton is at 48%, Vaughan is at 45%, Ajax is at 30%, and Aurora is at 22%.
What Should A Potential Buyer Do?
If you are considering purchasing a home in the tight inventory level category (low-rise), it is difficult to predict with much accuracy how the prices will change. Given the trends, demographics, population growth, and other factors prices are likely to increase in general. Although it is also possible to see a slight decrease (never count out the opposite possibilities no matter how unlikely). Price trends also depend largely on the specific area in question as we have seen.
No matter where you purchase, and whether it is for investment or personal reasons, the numbers need to make sense. Don’t overburden yourself with debt (mortgage/loans/etc), and ensure the numbers allow for enough cash flow to make monthly payments on all expenses comfortably (including the mortgage). Ensure there is enough room to build an emergency fund in the case of income loss and other unforeseen events.
– If its for investment purposes don’t fall in love with the property, fall in love with the numbers!
– For both investments and personal, make sure you do proper research & numeric analysis, and don’t base your calculations on possible future prices. If it works out, then it won’t matter if the price increases or decreases afterward.
Given the shrinking affordability factor, another question to ask yourself is do you really need to make a purchase in the foreseeable future? Often current homeowners are actually fine where they are, as their homes are well maintained, in a decent area, and already meet their family’s future needs. Issues to look at are:
– Will family needs out grow the current home?
– Is there any distance issue?
– Any serious maintenance issues?
– Long term trend of the neighborhood (is it likely to go downhill?)
– How much is left on the mortgage vs how much the new mortgage will be?
– Costs involved with a move
– Pros/Cons of moving
Don’t do it for the sake of keeping up with the Jones’. In the end the benefits must clearly outweigh the disadvantages.
Thanks & Happy Investing! — The Investment Blogger © 2010