“Should you buy a house or continue to rent?” The current real estate prices and rentals present a daunting conundrum to anyone looking to buy a home. If you are one of those who is contemplating this decision- you are lucky enough to be able to afford one. As per an article, only top 10% income group can afford to buy houses for sale in Toronto at a benchmark price of $873,100 with only top 2.5% being able to afford one in Vancouver with the city’s benchmark at $1,441,000. The hard reality for a majority of single professionals is that buying a home in GTA is beyond their budget. For the high income earning working couples though, it is more of a decision to build one’s own equity in a home rather than perpetually funding the landlord’s EMI’s. Let us take a closer look at the crucial fundamentals of the real estate market in Canada- more specifically GTA. Something as simple as demand vs. supply.
Some of the factors impacting demand
Professional immigrants: From a demand perspective, the current prices are crucially propped up by the persistently increasing rental yields due to an influx of professionally educated immigrants. Since most of the immigrants under Express Entry program are white collar professionals- they prefer to rent out in Toronto and GTA rather than dispersing across different geographic regions. Such was not the case when a lot of immigrants were unskilled and could find productive employment in other regions as well. Investors loved the sudden spurt in rental yield and highly leveraged themselves to buy real estate assets, supported by a low interest rate environment. The price appreciation was stratospheric given that prices in some areas almost doubled within a short span of 3-4 years!
Global capital: Stupendous gains for initial investors defied the classical risk-return equation leading to a global rush to invest in Canada- including some dubious routes. Those who have closely studied the boom in China would know that a lot of people became millionaires in a short span of time by simply investing in real estate. As the Chinese economy chugged 10% GDP growth for two decades, a lot of real estate owners quickly became wealthy. A lot of these multi-millionaires decided to repeat their investment philosophy by acquiring properties in Canada to capture exceptional returns. There is a survey that states that 1 out of every 10 sales in a new project in Canada is to a Chinese buyer. Not all of the money pouring into Canadian real estate was legitimate. A study by Transparency International found that the ownership of almost half of 100 most expensive homes in Greater Vancouver, amounting to CAD $1 billion, is effectively untraceable. Individuals use shell companies, trusts and nominees to mask their beneficial interest in the luxury property market. This article notes that at least 10% of the new condos built in Toronto between 2016 and 2017 are owned by non-residents. Here is an interesting bit for you- the highest non-resident ownership in Ontario is close to the American border in areas like St.Catherines- Niagara, Kingston and Windsor.
Regulatory policies: Deeply concerned about an impending real estate bubble, the Canadian Government responded with two key measures: levying a 15% speculation tax on non-resident buyers (in 2017) and mandating additional stress tests by lending institutions (in 2018) before sanctioning a home loan. Stress tests alone disqualified 10% of the Canadian residents from buying a home. These two disincentives were largely responsible for cooling down the market substantially.
To stimulate demand, Federal Government has now announced a First Time Home Buyers Incentive (FTHBI) plan in March 2019. FTHBI provides an interest free loan of 5% toward the purchase of a resale home and either 5% or 10% towards the purchase of a new construction home. The incentive effectively enables the first time home buyers to reduce their monthly mortgage payment without increasing their down payment. To know more about the program you may read Everything you need to know about the First Time Home Buyers Incentive Program.
According to ratehub.ca 5 year mortgage rates have fallen to their lowest level in two years. Most rates are below 3%. It should be noted that lenders finance fixed rate mortgage loans based on rates they get in the bond market while variable rate loans are linked to the Bank of Canada’s benchmark rate- which is in fact quite high at 1.75%.
Settlement pattern: The typical settlement pattern for immigrants is that they initially occupy rental units like apartments and condos. Once they have a kid they prefer to settle down in the suburbs in large independent houses, townhouses etc. In short, most of the demand eventually moves to standalone units while the condos market is propped up by the immediate rental needs of immigrants.
The question now becomes- what factors can we study in order to predict the future movement of rates?
So- should you buy a home?
This is literally a million dollar question and with an interplay of complex and difficult to quantify factors- probably your guess is gonna be as good as mine. My sincere belief is that Government of Canada controls both the demand and supply of housing tightly through use of various tools like immigration policies, interest rates, stress tests, speculation tax, construction permits etc. Most banks are overtly exposed to real estate loans and the economy is generously propped up by it. Everybody knows that real estate here is a bubble and a small correction has been evident in some areas. The Government will use tools at its disposal to make sure there is no collapse of the market as such- take the FTHBI incentive as an example. Having said that there is only so much that a Government can do. If there were a recession in the North American market, the tools may fall far short of what may be needed to prevent a crash.
However, given how high rentals are in Toronto with only a small gap between the monthly rental and EMI- end users would still want to buy. Perhaps the investors would not. I personally see more value in buying independent homes rather than condos as the supply of such homes close to Toronto is somewhat limited. As a result, they might wield a larger premium in the long run. But then again, if the market were to correct substantially and given that such units are more expensive- you would lose a lot more of your equity compared to buying a 400k condo. If immigration were to slow down due to policy decisions, prices of condos might fall more due to an immediate pressure on rentals. It again leads us to what I said earlier- your guess is gonna be as good as mine. But for starters- lets watch the upcoming elections closely!!