This week I had the opportunity to attend the RealNet sponsored “Informed Advantage” client briefing entitled “GTA 3.0 – Property Market Crisis or Opportunity”. As usual, I enjoy any chance to sharpen my overall knowledge of the real estate market particularly The GTA and specifically downtown Toronto. If you haven’t attended this briefing before, put in your day timer for next year. You will be glad you did. There where several great speakers, including Benjamin Tal, Deputy Chief Economist CIBC World Markets. I took copious amounts of notes and so I thought it would be worthwhile to talk about the top 4 take-a-ways from the day. Oil, Interest Rates and The Canadian Dollar, The Euro zone and The US recovery, and Ontario’s future. Call it a quick primer on what’s going on at the start of 2015.
Lets start with Oil.
Tal believes that falling oil prices are essentially a ‘Black Swan”, meaning there is no reason prices should fall. His says that it is nothing more than a big expensive experiment by OPEC. Saudi Arabia has been slowly losing market share to Russia, Venezuela, The USA and Canada. They can produce oil at roughly $20 per barrel and make a healthy profit. Russia and Venezuela produce it at a substantially higher price, nearly $100/barrel, while Canada’s Oil Sands projects break even at closer to $60/barrel. Simple economics dictate that if you lower the price of oil substantially you will squeeze out the competition. Tal believes prices will stabilize around $60/barrel. This amounts to a monumental savings for Canadian consumers. (Annual savings of $17 Billion, $1800 per family).
A couple of other points to discuss that relate to oil, namely, China is one of the largest importers of oil. Tal expects China’s economy to benefit from lower oil costs which will have a ripple effect around the globe. Alberta is expected to slip into recession as a result of Oil Sands layoffs. The Alberta Government could suffer up to a $10B budgetary shortfall however with one of the lowest tax rates of all Canadian provinces, they are likely to increase taxes to make up, at least in part, the difference. Tal reminded the audience that the last three major recessions followed a huge spike in oil prices. He believes that lower oil prices are a positive event that will benefit 85% of the Canadian population. Here’s a new catch phrase….The efficiency paradox…The cheaper something gets the more we consume.
Interest Rates and The Canadian Dollar
Tal believes that the Bank of Canada won’t touch interest rates, in fact his belief was that the rates might even go down. He obviously has a very powerful crystal ball as his prediction came true. The reality is that lower oil prices will limit the need to increase interest rates. He was clear in his thinking that the BOC’s agenda is to keep the Canadian Dollar low. A low dollar helps exports and fuels manufacturing. Speaking of interest rates Tal pointed out that one segment of the lending market we should watch out for is the alternative or B lenders. They are typically unregulated and are rising in popularity by almost 25% per year. In his mind this growth has all the ear markings of a blooming subprime market. The good news is that overall this only represents 2.5% of the residential lending market. And since we are on the BOC topic, Tal brought up their recent report claiming that Canadian Real Estate was 10-30% overvalued. He believes that this is a grossly oversimplified report (comparing it to a junior high school project) that only measures against other countries. What the report fails to take into account is the fact that overall values are driven by two markets, Toronto and Vancouver. Both those markets share similar properties that are creating high average prices namely they are the dense city centres and are bound by strict geographic limitations. Vancouver has water on one side and mountains on the other while Toronto has water on one side and is surrounded by a Greenbelt. In both cases, limited land is responsible for higher prices.
The Euro zone and the US Recovery
Where China’s government has the ability to orchestrate a soft landing and oil will fuel the next growth spurt, Europe is a different story. Two factors are weighing heavily on the Euro. First, Italy is in its third recession in 6 years and the winner of the Greek election could default on the countries loan or opt out of the EU altogether. Currently the Euro zone has almost negative interest rates which could effectively force a run on the banks. Tal believes that despite all the turmoil the Euro will survive.
The US recovery is being led by one simple fact…the easing of credit. The US needs higher rates but the market is driving the Fed and not the other way around. Employment is also rising and remains a strong indicator as to the health of the economy. The US recovery has many benefits to Canada through increased demand of lumber and manufactured goods.
Currently one in four Canadians live in Ontario’s Golden Horseshoe. The population is expected to grow in the region by 2.4 million people by 2036. Cap rates for investment properties are at an all time low, land prices are at an all time high as are new condominiums and low-rise development in the GTA. Despite that, the GTA hit a record high $13.5B in property transactions in 2014. George Carras of RealNet calls this a “Crisi-tunity”. 5 significant office towers are underway in downtown Toronto (with size more planned) but as Carras explains, much of the current commercial development is driven by a replacement mindset, meaning tenants aren’t looking for more space…they are looking for better space. It is interesting to note that Downtown Toronto has the second lowest vacancy rate compared to eight of the largest Canadian commercial centres.
Ontario is a major consumer of oil and will benefit from lower prices. Any effective layoffs in the oil fields will be absorbed by increased manufacturing thanks to US demands and low dollar. Peter Norman, chief economist for Altus Group has looked carefully at long-term housing demand and states that aging in place is on the rise in urban centres which has contributed to lack of freehold inventory. Meanwhile, Millennials are choosing apartment living in ever-increasing numbers. Hot on the heels of a strong year in condominium growth, the biggest concern for developers moving forward will be the time required to deliver new product to the marketplace. Municipal requirements and bank financing are slowing the process down greatly. It is important to recognize that the large increases in average home pricing is not limited to Downtown Toronto. Carras cited an example of a 3300 sq ft home in Vaughan that sold in 2004 for $573k. That same house in 2014 is now $1.553M.
In large part due to the restrictions of the Greenbelt, prices of low rise homes have rapidly escalated since 2011 and are now at $705,813. The price gap with high rise homes, which were only slightly lower by comparison back in 2011, are now $251,337 lower. High rise prices still increased in 2014 (up 4% to $454,476).
Clearly there is a lot to digest here. If you are able, download a copy of 2015 RealInsider™ Client Briefing. There are over 160 slides from the presentation available. Great stuff to share with your clients who are worried about buying in Toronto.
mark mclean is the Broker/Manager at the Bosley Real Estate Queen St W office and President-Elect for the Toronto Real Estate Board. The opinions expressed here do not reflect the opinions of TREB or Bosley RE.