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Canadian Real Estate Market Growth Based on Demand

An interesting article on the national real estate market in Canada appeared in the Kitchener Record this morning. While 2009’s market ended the year very strong, economists caution people from thinking we may be in or entering a ‘bubble’ like we saw in the US market.

Record home sales capping 2009 due to supply and demand, not bubble

By Sunny Freeman, The Canadian Press

TORONTO — Record home sales last month are based on low supply and high demand and are more likely to drop off this year than inflate a housing bubble that could threaten a fragile recovery, economists say.

A Canadian Real Estate Association report released Friday said December and the 2009 fourth quarter were the best periods on record for home resales, while prices also rose sharply from their year-earlier levels.

…

A bubble occurs when prices increase without any sound underlying fundamentals, he explained, and that’s not the case in Canada’s housing market, which is closely tied to changing interest rates and economic fundamentals.

“We still do have a relatively tight supply situation and exceptionally low interest rates and a mild recovery in the economy, so there are a lot of good reasons why home prices are rising.”

“What we’re seeing is almost textbook recovery,” he said. “The speed of the recovery is mind-boggling, the fact that housing is leading the recovery is really not a surprise… it’s exactly what you’d expect to happen.”

Finance Minister Jim Flaherty said Friday he does not see a housing bubble yet, but he noted the government has many tools at its disposal — from raising down payment requirements on insured mortgages, to lowering amortization periods and urging the banks to be more cautious in their lending — to prevent such a thing from happening.

“We don’t want to have a group of house purchasers who purchased houses now at insured mortgages at relatively low rates who would not be able to manage them if rates were to increase later on,” Flaherty said in an interview with Business News Network, a cable TV business channel in Toronto.

“I’ve looked at the numbers with CMHC,” he added. “We’re monitoring it. I do not see evidence of a bubble right now, but we’re going to keep watching it. There are some steps we can take that we will take if it’s necessary.”

The association said 27,744 units were sold across Canada in December, up 72 per cent from the same month in 2008. The year-earlier period saw the lowest sales in a decade in the wake of a global credit crunch and the start of the recession in Canada.

…

Klump believes the market will balance out in 2010 because consumer demand will be met with a supply side rise as the number of new homes increases and cautious homeowners become confident about selling, which will add more homes on the market and help drive prices down.

Porter said Friday’s report signals that Canadians have regained their confidence in the economy and the surge in demand is beginning to be met with a serious supply response, citing a notable uptick in December housing starts.

“Builders had been very cautious and they’re only now starting to crank up their output again, but even so, the comeback in new housing starts has been much more modest than the rebound we’ve seen in sales,” he said. “And people who own homes have also been a little reluctant to put their house up for sale because of the broader uncertainty that we’ve seen.”

He said that the demand in housing was most pronounced in B.C. and Ontario, where home buyers might be hoping to beat the introduction of the HST, the harmonized sales tax which is set to replace provincial taxes in those provinces later this year.

As we talked about last week (Few more quick stats on the ‘09 Kitchener Waterloo Real Estate Market) 2009 was a very busy year for sales of homes on the KW real estate board’s Multiple Listing Service (MLS), with ‘09 being the area’s second busiest year ever behind 2007.  The second and third quarter of 2009 were the busiest ever on record, as mentioned in What happened in Kitchener Waterloo Real Estate in ‘09?.

What is the Bank of Canada doing with mortgage rates?

Many people are speculating that the Bank of Canada will be raising rates.  While the consensus amongst those I speak to is that rates have nowhere to go but up (and we are closing on a loan with a 2.4% interest rate on friday, so that’s a pretty solid perspective), the question seems to be when they will go up.  The Bank of Canada is indicating that they won’t be raising rates any time soon.

Bank of Canada Won’t Raise Rates in Short Term

Mr. Lane said the bank understands the concern, but it uses its lending rate to keep inflation in check for the whole economy and the housing market is “only one of several factors” that influence inflation.

Other sectors could be adversely affected if the rate jumped before the broader economy was ready, he said.

“If the Bank were to raise interest rates to cool the housing market now – when inflation is expected to remain below target for the next year and a half – we would, in essence, be dousing the entire Canadian economy with cold water just as it emerges from recession.”

Instead, he said, the government could increase capital requirements for lending institutions, adjust loan-to-value ratios and change the terms and conditions required to obtain mandatory mortgage insurance.

“These instruments can be targeted to risks to the entire financial system that stem from particular markets or institutions,” he said. “Ultimately, it is the Minister of Finance who is responsible for the sound stewardship of the financial system.”

In an end-of-year interview with CTV, Finance Minister Jim Flaherty said the government would consider raising the minimum down payment from 5 per cent “to a higher figure” and reducing the amortization period of 35 years to "something less."

But the Minister stressed that the government has not yet made that decision.

If you want to invest in real estate and take advantage of the current low rates and generous financing terms, lock your rates in now. If you are dealing with a mortgage broker or bank that is familiar with helping investors, let them know you want to lock in a commitment for as long as possible (likely 60-90 days), and then call me to find a profitable investment opportunity. 

Money will be getting more expensive.  Look at borrowing some now if you had an investment goal on your list in 2010.

2009 Kitchener Waterloo Investment Real Estate Market Update

2009 was an interesting year to be buying, selling, and brokering investment real estate.

The turbulence in the global credit markets put a halt on a lot of lending, especially mortgages for student housing.  When CMHC stopped insuring loans on ‘student housing,’ many lending institutions and banks stopped lending against those assets, since without CMHC insurance the loans were harder to sell on the secondary market. 

There were 148 Multi Family & Apartment sales on MLS or $94 million volume in 2009, which is down 21.7% from last year.

While volume was off more than 20% from 2008, the value of Multi Family sales was down just 2% this year, reflecting a number of larger sales.

Specifically, there were nine apartment buildings, student rental towers and townhouse complexes that closed for over $1,000,000 in ‘09 on the KW MLS, including a $28 million dollar tower on King Street in Waterloo that was purchased by investors represented by our firm, Keller Williams in Kitchener.

In addition to a lack of financing, another reason that sales were down last year was that buyer’s were looking for higher cap rates, while sellers still wanted top dollar.  In Canada very few owners of Multi Family properties are ‘distressed’ and need to sell like we sometimes see in the US; that means they have cash flow coming in, rental income from their tenants, and can often afford to wait for a buyer to recognize the value and reach an agreement on price and terms.

There were 398 Multi Family listings processed through the MLS in 09 down 22%

Commentary on the Canadian Real Estate Market

Keller Williams released our monthly This Month in Real Estate report today, and there is some terrific information in it:

All around signs appear to be brighter than they were this time last year – banks are profitable, confidence is up, employment is on the upswing lately, and the housing market is moving. Ottawa’s Centre for the Study of Living Standards reports shows that consumption has grown in “leaps and bounds” from $30,000* per person in 1981 to $50,000* in 2008. That’s per person, with the average Canadian family being 2.37 people. That brings consumption per family to $118,500 for the average family.

The upcoming Olympics are expected to provide a beneficial influx of money for Canada and for Vancouver. The small business sector in British Columbia has the most optimistic outlook of all provinces in the country, most likely due to the games. The dramatic 253% increase in home sales in the Greater Vancouver area could also be partly fueled by the Olympics.

01 This Month In Real Estate Canada 2010

View more presentations from Keller Williams Realty.

The country appears to have traveled quite a distance over the past year – from the verge of the next depression last year to what appears to be an economy that’s found its way to firmer footing. One example is that most consumers planned on spending more this year on gifts for the holidays this year than last year.

With some concerns that the housing market has rebounded too much, too fast; it is important to keep in mind is that year-over-year increases are compared to an unusually weak year.

Read more

2009 Market Update – Kitchener Waterloo Residential Sales

This morning we looked at the strong sales the KW Real Estate market saw in 2009, with sales up from last year and 2nd only to 2007’s record sales volume.

In this video, I look at the year that was, in terms of residential sales volume, and what segments of the market saw the most action.

Stay tuned this week for an update on the 2009 commercial and investment markets too…

GST Rebates & Investing in New Construction Rental Property

In January, a number of our clients are closing on new construction rental properties, mainly in Cambridge Ontario’s Maple Grove community (355 Fisher Mills Road, north of 401, at Hespeller Rd). A few of these clients are new Real Estate Investors, and were not aware that you could apply for a GST Residential Rental Property Rebate (link goes to the Revenue Canada site hosting the rebate application).

Most people know that there is no GST payable on residential resale properties, and that there are rebates when buying new construction to live in, but not that they may be eligible to claim a GST/HST rebate when buy a newly constructed rental property, or “substantially renovate” a residential rental.   The property must be under $350,000 , and there is a partial rebate available if the fair market value falls between $350,000 and $450,000

From the Governement’s form:

“Use this form if you purchased or built a new residential rental property, substantially renovated a residential rental property, made an addition to a multiple unit
residential complex, converted a commercial property into a residential rental property, or leased land for residential purposes.
You have to send appropriate documents with your application (we accept photocopies). See the guide RC4231, GST/HST New Residential Rental Property
Rebate, for details. We may audit your rebate claim.”

You can find the form here: GST Residential Rental Property Rebate

Waterloo Vacancy Among Canada’s Lowest

Waterloo’s vacancy rate is among the lowest among Canada’s real estate rental markets, according to a recent Canada Mortgage and Housing Corporation (CMHC) report (which we covered here: Vacancy rate in Waterloo falls to 1%), “thanks to a crush of high-tech workers and university students looking for short-term housing.” (via The Record)

The one-per-cent vacancy rate in Waterloo also means that city has the highest average rents in the region, according to the fall 2009 rental market report complied by Canada Mortgage and Housing. The data looks at the Kitchener census area, including all of Waterloo Region except Wilmot and Wellesley townships.

For example, (average) two-bedroom units go for $937 a month in Waterloo, compared with $835 in Kitchener, $850 in Cambridge and $709 in Woolwich and North Dumfries townships.

Nationally, the highest average rent for a two-bedroom apartment was $1,169 in Calgary, where the vacancy rate was 5.3 per cent. Toronto was second at $1,099, with a 3.1 per cent vacancy rate. The lowest nationally was $518 in Saguenay, Que., with a vacancy rate of 1.5 per cent.

“It’s more than the availability; it’s the cost of it,” said Trudy Beaulne, executive director of Kitchener-Waterloo Social Planning council.

High-tech workers and student housing are king in the city of Waterloo, creating a challenge for low-income families looking for options to live there. They may have to move to Kitchener to find an affordable apartment, she said.

“It’s different housing stock, too. If you’ve got a pretty high income, you have more choice . . . it’s not like if you’re on Ontario Works (social assistance).”

…

“[High Tech Workers] typically move to the area, rent for a year or two before they buy… you have a market where if they were in another area, they just buy a house.”

Kitchener is more of a balanced rental market, but there’s an “upscale pocket” growing downtown around the new satellite university. “It kind of mirrors Waterloo.”

In Cambridge, tenants are eager to rent within a few minutes drive of Highway 401 [emphasis added], because it makes for an easy commute to work in Mississauga. Move away from the freeway and the rental market is soft, Traschel said.

A one-per-cent vacancy rate in Waterloo doesn’t surprise Mike Belanger, director of residential services for students attending Wilfrid Laurier University.

That’s the usual fall vacancy rate for apartments to serve the 50,000 post-secondary students in Waterloo. The vacancy rate jumps to about eight per cent in mid-winter as students take out-of-town work placements. In summer, when school’s out, the student vacancy rate bounces to 30 per cent.

In the early 1980s, Belanger remembers student housing vacancy rates as low at 0.5 per cent. That student housing crisis eased long ago — just look at all the student lodging built along Columbia Street — but Belanger wonders if another crunch is looming.

As Laurier and the University of Waterloo continue to expand to help fight the recession, bank financing for new student housing projects has “dried up,” Belanger said.

“There is some anxiety if the universities grow and the private accommodation does not.”

The note about being close to the 401 in Cambridge is spot on.  We just bought, along with a number of our clients, in a new construction Cambridge development just off the 401, on Fisher Mills Rd (which turns into Maple Grove which turns into Sportsworld Dr and connects up with the Kitchener Expressway), and we’re seeing very healthy rents there (between $1250 and $1399 a  month plus utilities)

If you have any questions about the current conditions in the rental market or how you can take advantage of investment opportunities in Kitchener Waterloo & Cambridge, Ontario you can email me or call me at 519-772-4376.  You can also follow me on http://twitter.com/BenjaminBach for up to the minute updates

Kitchener Waterloo’s Centre Block Condo Development Moving Forward

(image of proposed Centre Block development from City of Kitchener)

The Kitchener Waterloo Record is reporting that the long awaited Centre Block development in downtown Kitchener is moving forward:

A Brampton-based developer says he will sign an agreement next month with the City of Kitchener for a project that will add 385 condos to the core.

Peter Smith, president of Andrin Homes, said an agreement should be in place by mid-January for the redevelopment of the city-owned half of Centre Block, which is bounded by King, Young, Duke and Ontario streets.

The City of Kitchener has a lot of information about this development on their website, including these details about the proposed development:

Andrin envisions a dynamic, inspiring, sustainable and engaging redevelopmentconcept for the Centre Block, consisting of a mixed-use complex, combining:

• A total of up to 401 residential units, offering a range of residential suite types, including lofts, affordable condominiums, larger family oriented dwellings, live/work units and penthouses.
• Vibrant new retail spaces along King Street.
• A multi-level underground parking structure for up to 714 spaces, with public parking and parking for the retail users at the first level and secure residential parking on the lower level(s).
• A boutique hotel and spa in the restored and renovated heritage structures at the corner of Duke and Young Streets.
• A public/private courtyard with linkages from Duke Street, Young Street and the underground public parking structure. A linkage from King Street to the courtyard will be provided through a public galleria.
• A design that will strive for architectural excellence and be:
  • Compatible with the existing physical, heritage and social context of the site, including restoration and redevelopment of the existing heritage structures into a boutique hotel and spa;
  • Responsive to angular planes to minimize shadow impacts;
  • Address positively the existing City Hall to the west;
  • Enhance the main street qualities of the three street frontages;
  • Provide opportunities for outdoor animated uses such as cafés on King Street West; and
  • Overall safety and security within the site will be an important element of design considerations

The land was sold to Andrin by the City of Kitchener earlier this year for $3.1 million, after spending $13 million & 9 years to acquire the land.

What do you think about this development? Personally, I’m glad to see more well planned developments coming to the downtown Kitchener core.

Flaherty talks more about Canadian Real Estate & Mortgage Markets

Yesterday we looked at reports from Ottawa that Finance Minister Jim Flaherty was looking at tightening up mortgage regulations, specifically increasing the minimum down payments and reducing the maximum amortization periods (currently 5% and 35 years).

This morning Bloomberg has more from Flaherty (but still no specific proposals):

Flaherty, in an interview today, said recent price increases for homes in Canada are due to a “confluence” of factors including low interest rates, an improving economic outlook and a stabilizing job market.

“We always watch the housing market to make sure that we do not see the development of an asset bubble,” Flaherty, 59, said during an interview in his office in Ottawa. “There would have to be clear evidence of an asset bubble in residential real estate in Canada, which there is not right now,” for the government to take steps.

The lowest mortgage rates since the Korean War have helped fuel a 67 percent jump in existing home sales in November from their January low, with the average price up 19 percent from a year ago to C$337,231 ($317,335), according to data from the Canadian Real Estate Association.

Bank of Canada policy makers Dec. 10 cautioned that rising debt levels will make Canadian households more vulnerable when interest rates rise. Households have kept adding debt this year while other countries such as the U.S. and U.K. have seen reductions in debt-to-income ratios, leaving more Canadians at risk when interest rates rise, the Bank of Canada’s report said.

…

“There are very low interest rates of course, the Canadian economy is showing signs of recovering, although it has not yet recovered, the job market has stabilized, so there are some encouraging signs for Canadians,” Flaherty said.

Canada last year tightened mortgages rules. Home loans insured by the government through the Canada Mortgage and Housing Corporation were limited to a maximum term of 35 years and required a minimum down payment of 5 percent, up from zero.

Were the government to eventually consider new measures for the housing market, they would likely be similar to the changes implemented in 2008, Flaherty said today.

“What we have done before can be done again,” Flaherty said.

In other news out of Ottawa, Prime Minister Stephen Harper says that “the government is "optimistic that 2010 is going to be a year of recovery," he also cautioned that Canada’s record-breaking low interest rates will come to an end.”

CIBC World Markets just released a report stating that Canadians need to manage increasing debt levels, but that there are several factors that should ‘buffer Canadian homeowners from being saddled” with loans more expensive than they can afford:

These include the fact that some mortgage-holders have substantial home equity, even if home prices drop. Some also have high debt payments that could be reduced, because the high payments are meant to accelerate the paying down of the mortgage principal.

The report said that history suggests many Canadians will jump from variable to fixed mortgages in time to avoid the full brunt of a variable mortgage rate shock. Also, Canadian financial institutions generally issue variable rates only to customers who quality for a three-year fixed-term rate, which is well above current variable rates. So, while variable rates will likely rise, most will be able to absorb the rate increase and remain within a qualification threshold.

"The result is that [the] number of Canadians truly at risk could be substantially less than the Bank of Canada’s estimate," said Avery Shenfield, CIBC World Markets chief economist.

If you have any questions about how the current economic conditions relate to your real estate investment holdings, email me or call 519.772.4376 to set up a complimentary consultation. 

You can follow me on http://twitter.com/BenjaminBach for up to the minute updates about real estate investment opportunities & news in Kitchener Waterloo

Ottawa hints at tighter mortgage regulations

From the Globe & Mail today:

Hints by Finance Minister Jim Flaherty that Ottawa may tighten mortgage eligibility rules to avert a possible housing bubble sent ripples through the industry Monday, with analysts urging a cautious approach to avoid damaging the economy.

Mr. Flaherty told CTV’s Question Period that one thing the government will likely do is increase the minimum down payment on residential mortgages from 5 per cent “to a higher figure.”

The government may also reduce the amortization period from a maximum of 35 years “to something less,” he said.

…

The effect of any move to reduce the maximum amortization period would be difficult to judge. The last time that happened, when the period was reduced from 40 years to 35, “was probably not significant because not a lot of people were going to 40 and we hadn’t had it that long,” Mr. Siegle said.

Meanwhile, Mr. Tal took some comfort from the fact that Mr. Flaherty was not specific as to the size of the increase in down payment and reduction in amortization period the government was considering.

“The trend (on consumer debt) is not extremely positive but the situation is not alarming,” he said.

“I think they’re concerned about the next 12 months and where we will find ourselves a year from now. So they’re trying to be pre-emptive here and basically start to make sure the inflow of new business is of a higher quality.”

“Therefore I don’t expect this to be a huge increase (that would have) … an unreasonable and unnecessary impact.”

I’ve spoken to some other investors today who are a little annoyed that Flaherty isn’t speaking in specifics – i.e. raising minimum downpayments from 5% to 7,5% or 10%, or taking amortization terms from 35 to 30, or 25 – and I concur with them. I would like to see the government give some certainty when they start speaking about changing the rules for buying and investing in real estate, as opposed to speculating about possible changes.

If you are looking at a condo or home that is $200,000, a 5% downpayment is $10,000.  If the minimum downpayment required goes up to 7.5% or 10%, the minimum initial investment required would be $15,000 or $20,000 at 10%. 

If you are looking at buying real estate, whether to live in or as an investment to rent out, I recommend talking to your mortgage professional immediately to lock in loan terms.  Contact me by email or phone (519.772.4376) to discuss finding the right opportunity for you right now.

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