Dan Barnabic is the author of The Condo Bible for Canadians.
Before the recent federal election, the Liberal Party promised to "undertake a review of escalating home prices in high-priced markets – such as Vancouver and Toronto – to determine whether speculation is driving up the cost of housing and survey the policy tools that could keep home ownership within reach for more Canadians."
But this may be one of the first promises to fall by the wayside under our new government, judging from Finance Minister Bill Morneau's recent announcement that Ottawa has no further plans to cool the housing market, despite being concerned about the economic risks of high household debt.
Recent data from B.C.'s Macdonald Realty, one of the country's largest brokers, shows that 33 per cent of Vancouver's properties over all – and an astonishing 70 per cent of properties valued over $3-million – are sold to offshore buyers. Bidding wars for selective (mostly single-detached) properties, keep driving prices ever higher, at the expense of middle-class Canadians whose salaries make them unable to compete in the housing market. Today, the average Toronto house cost is 8.2 times the average median income, and it's a staggering 11.2 times for Vancouver.
The overbuilt condo market seems poised for a nearly immediate correction. The monthly Toronto Condo News magazine recently reported on condo sales in the Yonge North Corridor – the affluent and most densely populated condo community in Canada. Their trending charts show price declines of about $40,000 per unit between the first and third quarters of 2015, with units now taking an average of 35 days to sell, compared with 21 days at the beginning of 2014.
Toronto-Dominion Bank is forecasting a relatively sharp decline in home sales in Ontario and B.C. in 2016 and 2017. The real question is whether housing prices will adjust slowly or fall rapidly off a cliff. Only time will tell, but it's certain home owners who are already struggling with mortgage payments will be put to serious tests over the coming year and beyond.
The most disturbing thought that comes to mind is offshore buyers taking advantage of lower prices after a correction and scooping up even more Canadian properties than they already own.
The only way to put a damper on this ever-increasing foreign appetite for Canadian residential properties is a straightforward 100-per-cent surcharge tax for offshore buyers, across the country. Yes, they would pay double for Canadian residential real estate.
Such a radical measure would dampen demand, at least temporarily, bringing prices to the levels where Canadians can afford homes in their own country. Given the loonie's weakness, offshore buying would surely continue, but at a much slower pace. The surcharge would go to the public purse, rather than developers' pockets, helping to finance municipal infrastructure.
Diana Petramala is an economist at Toronto-Dominion Bank
Of all the tools available to cool home-price growth, history suggests that changes to mortgage insurance regulation may provide only a temporary fix. The federal government recently tightened qualifying rules for mortgage insurance for the fifth time since 2008, yet we still are talking about overheated markets in Toronto and Vancouver.
Since 2012, most of the growth in mortgage lending has largely occurred in uninsured mortgages and among non-federally regulated lenders, those that may not have to adhere to the tougher qualification standards. The most recent changes may be even less effective than earlier moves, given that they are targeted at this very small share of the market.
While less publicized, CMHC (Canada Mortgage and Housing Corp.) and OSFI (Office of the Superintendent of Financial Institutions) also announced some measures earlier this month that could prove more effective since they will effectively raise bank funding costs for mortgages. CMHC increased the fees of its securitization program, while OSFI has also announced plans to increase regulatory capital requirements on residential mortgages. Even then, there is still the question of how much of these costs will be passed on to consumers in the form of higher mortgage rates, given the competitive pressures faced by banks.
Regulation alone may not be enough to trigger a sustained cooling in the Toronto and Vancouver housing markets. Ultimately, a broader effect would come from an erosion in affordability – or higher mortgage interest rates.
We think this will begin to occur in 2016. Canadian five-year government bond yields are expected to rise by 50 and 55 basis points in 2016 and 2017, respectively, even with the Bank of Canada widely expected to keep interest rates on hold until the end of 2017. Bond yields – especially those of terms two years and longer – tend to trade off a spread relative to comparable U.S. Treasuries. The Federal Reserve has embarked on a moderate tightening cycle, which could cause Canadian bond yields to grind higher. Trends in the key five-year mortgage, fixed-interest rate are closely tied to those of five-year government of Canada bond yields.
Historically, interest-rate movements of this size have shaved 10 per cent to 15 per cent off existing home sales. However, given this year's lofty activity, Toronto and Vancouver are more sensitive to rising rates than they have been in the past. As such, even modest increases in Canadian mortgage rates in 2016 would be enough to bring housing activity in Toronto and Vancouver back in line with long-run, more sustainable levels. The combination of tighter mortgage insurance regulation and higher interest rates will help cool average existing home-price growth to a low-single-digit pace by next year.
Bryan Tuckey is president and CEO of the Building Industry and Land Development Association and a land-use planner who has worked for municipal, regional and provincial governments.
The Greater Toronto Area housing market is dynamic and complicated, and while many factors contribute to increasing prices, one pivotal way to improve affordability is for governments to recognize the effect of their policies on the prices paid by consumers.
These policies have a huge bearing on home prices. In the GTA, key contributors to the affordability challenge include land-use and land-supply rules; numerous fees and taxes charged at various levels of government; outdated municipal zoning bylaws and approval processes; and fiscal and municipal funding policies.
Housing affordability, especially for low-rise homes such as single detached houses, is a priority issue for the GTA's new-home development industry. We are in the business of building and selling homes, and we need people to be able to afford our products.
As an industry, we continue to innovate and provide consumers with new affordable housing choices. Ground-related developers continue to build townhouses and detached-home options. Condominium developers keep finding creative ways to maximize living space and reduce suite size to make them more affordable for buyers. But it's becoming increasingly difficult for us to design, build and sell the homes that buyers – especially first-time buyers – want and can afford.
As mandated by government intensification policies, the industry is building far more high-rise condominiums and far fewer low-rise homes than it did 10 years ago. However, demand for single-family townhouses, detached homes and semi-detached homes has not diminished. Demand is outpacing supply, and the result is reduced housing choice and higher prices for new and resale low-rise homes. Supply is limited due to a lack of land that is serviced with infrastructure and designated for development, both of which are controlled by government.
In addition to land supply, another main factor that reduces housing affordability is government fees and charges – especially development charges. On average, one-fifth of the cost of a new home in the GTA is government fees and taxes and the biggest contributor is development charges.
Development charges are a tax on new homes that affects the affordability of new homes. They are imposed by municipalities, transit agencies and education boards, as a means to help offset the capital cost of growth-related infrastructure such as roads, water and sewer services, transit and other municipal services.
Since 2004, development charges in the GTA have increased between 143 per cent and 357 per cent.
In addition to the taxes and charges on new homes, governments need to be more sensitive to the costs that their policies add to the price of homes. They need to recognize and correct these unintended consequences.