Promising a Tumultuous 2019!

Posted on Posted in Brampton News, Burlington, Caledon, Hamilton, Liberty Village, Market Commentary

Political socioeconomic issues, such as Brexit, Russian hegemony, Merkeldammerung of Germany, global corporate debt, intellectual hacking, volatility within equity markets, 65 million plus global migrants, Totalitarian toned populism, global warming, etc. will remain contentious and largely unresolved.

Most people wonder, why and how, do these distant and murky questions effect my life?

Firstly, these hot button topics will not just magically disappear through 2019. Many will take years, if not decades to unwind. How we as a community, and more importantly, how our immediate elected officials respond to these challenges, will gainfully set the political and economic agenda for much of the next half century.

However, since charity starts at home, let us focus on socio-economic issues modestly closer to home.

It is almost unquestionable that one word above all others will dominate the GTA real estate lexicon for 2019, but also RE markets around the world. That word is affordability!

Looking forward, it is a near certainty that Jerome Powell and the other governors at the Federal Reserve will raise the US prime rate at least once through 2019 (if not thrice). The stated goal of reaching the new norm range infers that the prescribed Fed. rate shall eventually lie between 2.25% to 3%. This entails a minimum of a 50 to 75 basis point hike through the coming year or next 18 months. These rate hikes will inevitably reverberate through much of the US financial system. Ubiquitously higher interest rates will inevitably be encountered by every consumer. Duly note that former Fed. Governor Frederic Mishkin has recently stated, “that housing could be 5 times as sensitive to rate hikes as compared to the rest of the economy.” The most recent weakness in the housing sector can be attributed directly to the 1.5% rise in mortgage rates. Logically, one must ask how will this sector react to further increases?

Correctly we should all remember that the US economy remains the world’s largest economy, plus it possesses the most powerful armed forces in history. Consequently, the Greenback is almost unanimously considered to be the world’s premier currency. These aforementioned factors also facilitate that in times of economic uncertainty it becomes the primary safe haven for all other Fiat Currencies.

This financial reality means that all other central banks must, under normal circumstances, closely adhere to the monetary policy spelled out by the U.S. Federal Reserve. History has repeatedly demonstrated that if a country unilaterally breaks ranks with the Fed.’s prescribed financial policy, the resulting damages to its domestic currency are often dire. The global bond market is often a very hostile environment to outlier nations.

If this hypothesis holds, notably higher interest rates will, in due course, be felt by all global citizens!

Still closer to home, if Canadian interest rates follow their prescribed course and rise by a minimum of 50 basis points. The Bank of Canada rate will become 2.25%. Subsequently, Canada’s prime rate (the rate at which the 5 major banks will lend) should near 3.50%. Normally, most preferred loans start at prime plus 1. Standard loans can easily be prime plus 1.5% or more. Logically, all of Canada’s 8.5 million homeowners will feel the effects of these knock on bank rate hikes.

Notwithstanding, those estimated 1.5 million homeowners that are, by relative measure, awash in debt (>3 to 5 times their income) will be particularly vulnerable to rising rates. If we apply our own elementary algorithm and extrapolate that every 25 basis point rise in mortgage rates could result in approx. a 5% negative effect in the value of residential real estate prices.

This quasi theorem will be most observable in overbought urban markets, but particularly damaging to the numerous generic high-end subdivisions that abound through the peripheral parts of the GTA.

While many believe that the omnipotent will always come to our financial rescue, there are those of us that remain passively sceptical. Most certainly there are domestic financial levers that governments can pull.  For instance, it is highly probable that Bill Morneau, Canada’s Minister of Finance, will seriously consider reinstating 30, 35 and 40 year mortgage amortization periods. Most acknowledge that this readjustment of a mortgage schedule simply lowers one’s monthly payments but extends the period of indebtedness.

The telegraphed increases of 50 to 75 basis will “de-facto” double monthly mortgage payments for many homeowners. This has all happened inside approx. 36 months. Thus, the general forecast of 5 year fixed rate being >5% in 2019 would take things modestly higher. This potential increase in payments is further compounded by the new refinancing qualifications criteria initiated under the tenet of Stress Testing. Again, these lauded measures could conceivably be dropped by the Federal government. Not so surprisingly, the endemic restrictions associated with the Stress Tests have resulted in almost all Canadian banks experiencing their highest rate of mortgage retention in decades. Coincidently, it has also gravely restricted the ability of the consumer to shop around for the best open market loan rate. This rather mute point becomes salient when one realizes that approx. a 1/4 of all Canadian mortgages come due in 2019.

There are other possible measures that could be mandated which might assist legitimately qualified individuals (illness, loss of job, etc.):

The creation of federally and privately insured 2nd and 3rd mortgage pools; if these mortgages were to be rescheduled on 40 to 50 year amortization models with flexible repayment terms. This would mitigate the financial burden of indebted households and if repayment plans were flexible then this might incentivize the opportunity to pay down these 2nd and 3rd mortgages in a timely fashion. This suggestion regarding insured mortgage pools should additionally be underpinned by mandatory AIC appraisals.

The federal government could also stipulate that all bank financial planners have a sufficient university education, preferably a B.Comm. This would logically result in a notable uptick in the quality of advice being provided. Sadly, many are not “richer than they think”, despite banking assertions. Mandatory property appraisals provided during the conditional period of an agreement of purchase & sale would be an effective way of levelling the playing field for all parties. Regrettably, being bullied by a realtor or pushed by a banker in up or down markets is a far too common a RE story.

Additionally, the provincial government could jump start the affordability conversation by simply amending residential zoning by-laws to facilitate greater neighbourhood density. This would greatly enhance the utilization of much of their existing infrastructure. This intensification of density would revitalize communities much to the betterment of the majority and to the GTA as a whole. It would also help minimize our growing carbon footprint. Please keep in mind that Toronto is predicated to have a population of more than 8 million by 2040. Realistically, we no longer live in the Disney-esque era of Ward & June Cleaver, where everyone lives in a 2-storey home with a double car garage on a 50 ft. wide lot. This bucolic picture is muddied when considering the sentiments of millions of urbanites who commute several hours per day, and who fervently believe that the vastness of urban sprawl is just unsustainable. Hopefully, municipal governments can start to counterbalance this vivid reality by advocating for progressive, intensified and privately monetized development along rapid transportation corridors.

There is no doubt that these progressive steps will take a substantial amount of political will and foresight. Finding political candidates that have the political courage to advocate for a new style of development is already exceedingly rare, especially in this age of Nimybism. Shakespeare said “ Virtue is bold and goodness never fearful.” Confronting the issue of housing affordability will unquestionably remain that elephant in the room for the next couple of decades if we do not start advocating for inclusive change now!

History occasionally creates unforeseen extraneous circumstances that initiate fundamental societal changes. Perhaps the persistent issue of affordable housing and some of the inherent financial and social blowback just might be that catalyst?

Lest we forget, the commonly overstated fact that the average Canadian remains highly indebted, spending approx. 1.75 times their annual income. Combine this level of home-grown indebtedness with a global political scene which remains full of flatulence and we have reason for legitimate concern. Historically, virulent public protest rises and falls in rhythmic waves. The vast majority of these protests find their catalyst in issues associated with finances (taxes, wages and housing). Perhaps the billionaires of the world should start to take heed!

World oil prices look poised to remain low through 2019/20, which should help with economic growth. However, domestic transport bottlenecks have resulted in West Edmonton crude trading at a 35% discount to its southern cousin, WTC ($51 vs. $28). This singular commodity contributes >30% to Canadian tax coffers. Even a modest curtailment in tax revenues will limit our government’s ability to pull financial levers through any downturn (i.e. large infrastructure projects).

The consequences of swiftly rising interest rates are rather dour but almost inevitable after a solid decade of consumer binge spending! However there is much to applaud here in Canada and most of the G20 nations. Despite the current turbulence in global equity markets, it remains the 2nd longest bull market on record. Many well seasoned traders sense that this recent sharp drop will be followed relatively soon by an extended upward swing. It is most probable to assume that D.T.’s. second term hangs in the balance. Perhaps “selling into the rally” should become our next mantra?

Theoretically, Schumpeter’s somewhat dated concept of “Creative Destruction” can probably be best applied to our GTA real estate market. It seems with relative mathematical certainty that there will be some near term adjustments within our market places. However, mid to long term, the future of the GTA real estate market has unlimited potential. Maybe it is time to paraphrase Sir Wilfred Laurier, the 21st century belongs to Canada.

  • Last but not least, there is much that could derail this series of probable observations:
  • The creation of a huge trade deal with China (somewhat probable)
  • Near immediate peace in the Middle East and Central America
  • Universal prosperity in Africa and South America
  • Revolutionary pollution free energy technology
  • Affordable mass housing

Since many of these things usually take decades, if not centuries, we advise resolute patience and focused attention to a greater measure of personal frugality.

For the moment, we should remember the words spoken by a less bellicose past occupant of the Oval Office: “Ask not what your country can do for you but what you can do for your country.”

We are all, at the end of the day, just temporary citizens of this small Blue Planet.

May everyone be blessed with a safe, happy and prosperous New Year!

PS: If you have any inquiries, do not hesitate to contact any of our 3 offices (Burlington, Liberty Village & Caledon) via

PPS: Near water properties in (retirement) villages and towns will experience prices increases due to demographic shifts.

For additional reading related to this topic, please check out the articles below:

The year higher borrowing costs and stricter mortgage rules hit home – Toronto, Vancouver housing sales plummet to decade-lows in 2018

Housing affordability to worsen in 2019 even as market cools, says RBC

Real Estate Fights the Law of Gravity

Fed Not Really The Problem

Interested in more? Check out the following article written by Michael Babad of The Globe & Mail below:

The Globe and Mail

Business Briefing

Housing affordability in Canada is so nasty that …

Michael Babad

Published January 25, 2019


Affordability erodes

Housing affordability in Canada is strained and getting worse.

In its latest look, National Bank Financial found that affordability deteriorated in the fourth quarter for the 14th three-month period in a row.

As The Globe and Mail’s Janet McFarland reports, major Canadian banks have just trimmed the posted rate for five-year, fixed-term mortgages, by 15 basis points, easing some of the issue on that front.

We’ll see how the first quarter plays out after those cuts. But as 2018 was winding down, higher borrowing costs were eating into affordability, notably in inflated markets such as Victoria, Toronto and Vancouver.

“All but two markets experienced a deterioration stemming from a 20-basis-point increase for residential mortgage rates, hitting harder the priciest markets in the country,” said National Bank deputy chief economist Matthieu Arseneau and economist Kyle Dahms.

“Financing costs were up for a sixth consecutive quarter, which marked the longest streak of rises since the period of [1999-2000],” they added.

The two markets where affordability actually eased were the oil-hit Alberta centres of Calgary and Edmonton.

Indeed, according to Mr. Arseneau and Mr. Dahms, housing affordability is now so nasty that:

1: Mortgage payments on a representative home, expressed as a percentage of income, climbed 1.4 percentage points in the quarter.

2: Home prices rose 0.9 per cent from the third quarter on a seasonally adjusted basis.

3: The benchmark five-year mortgage rate increases 20 basis points, while median household income also gained 0.2 per cent.

4: An eye-popper, this: In Vancouver, the measure for homes not including condos “crossed the psychological threshold of 100 per cent, as it would now require 101.5 per cent of pretax median household income to pay for a representative home.”

5: It now takes 340 months to save for a down payment in Vancouver, for a representative home based on a savings rate of 10 per cent, 102 months in Toronto and 34 months in Montreal. The time it takes to save eased in Calgary and Edmonton.

6: Based on average rent and monthly mortgage payments, it’s cheaper to rent a two-bedroom condo than it is to buy.

7: Home prices do not actually appear “extreme” in Canada compared with centres such as Hong Kong, London, New York, Paris, Beijing, San Francisco and Tokyo, based on costs as of last summer.

8: Canadian home prices, having jumped sharply before B.C., Ontario and the federal bank regulator move to hose markets down, are now rising at a far slower pace than in about 20 other countries.

Here’s a look at some key fourth-quarter statistics for homes not including condos, from the study by Mr. Arseneau and Mr. Dahms:

Housing affordability statistics

City Median price Months of down payment saving Mortgage payment as % of income
Toronto $902,916 111.9 75.8%
Montreal $369,234 37.3 36.5
Vancouver $1,318,768 414.5 101.5
Calgary $494,689 37.4 36.6
Edmonton $422,508 24.7 24.2
Ottawa/Gatineau $428,595 32.7 32.0
Quebec $286,491 27.5 26.9
Winnipeg $321,259 27.7 27.1
Hamilton $598,274 55.3 46.5
Victoria $850,469 124.3 86.2


Housing affordability at ‘crisis levels’ in Vancouver and Toronto, with Montreal pushing the limits

Michael Babad

Published March 29, 2019

Affordability relief

Here’s some good news for potential home buyers: Affordability is improving – slightly.

Of course, you probably still can’t afford it, particularly in Vancouver, Toronto, Victoria and, now, even Montreal, according to Royal Bank of Canada.

RBC’s latest affordability study, released this week, showed the cost of owning a home “dipped almost everywhere” across the country in the fourth quarter of last year.

“An easing in property values brought most of the affordability relief,” said RBC chief economist Craig Wright and senior economist Robert Hogue.

“The mortgage stress test, earlier increases in interest rates and policy tightening in British Columbia pushed many buyers to the sidelines. Home prices declined for only the second time in five years.”

They were referring to new mortgage-qualification rules brought in by the federal bank regulator in early 2018, aimed at preventing a credit bubble, which cooled housing markets.

The proportion of income needed declined by 0.7 of a percentage point to 51.9 per cent in the last three months of 2018, Mr. Wright and Mr. Hogue said.


THE GLOBE AND MAIL, SOURCE: rbc economic research


Area %
Vancouver area 84.7
Toronto area 66.1
Victoria 60
Canada 51.9
Montreal area 44.5
Ottawa 40.6
Calgary 40.3
Edmonton 34.8
Saskatoon 33.4
Halifax 31.9
Winnipeg 31.6
Regina 29.5
Quebec City 29.1
St. John’s 28.5
Saint John 26.5

Keep in mind, too, those are numbers for all types of housing. They go up from there for single detached homes.

In Vancouver, for example, it’s 115.5 per cent for a single-family detached, 79.1 per cent in Toronto, 65.9 per cent in Victoria, and 45.7 in Montreal.

“The fourth-quarter relief barely made a dent in Vancouver and Toronto,” Mr. Wright and Mr. Hogue said.

Affordability is still at crisis levels in these markets and pressure is intensifying in Montreal.”

Federal Finance Minister Bill Morneau, of course, recently introduced budget measures to help young people crack the market. We’ll see how those play out, but for now it’s tough for many.

“Buying a home in Vancouver, Toronto, Victoria and, increasingly, Montreal is still a stretch for ordinary Canadians,” Mr. Wright and Mr. Hogue said.

“Despite all four markets seeing some degree of improvement in the fourth quarter of 2018, RBC’s aggregate affordability measures remain close to record-high levels in the first three, and well above the long-run average in Montreal.”

That doesn’t mean homes are out of reach everywhere.

“A small majority of the markets that we track, in fact, boast affordability levels that are within historical norms,” the RBC economists said.

“These include Calgary, Edmonton, Saskatoon, Regina, Winnipeg, Quebec City, Saint John, Halifax and St. John’s. So the affordability strains present in Canada are still confined to a few – but large – markets.”

More relief is probably on the way nationally, Mr. Wright and Mr. Hogue said, noting what’s expected to be a lower “profile” for interest rates and “very little scope” for higher home prices.

“Our forecast for Canada calls for prices to remain unchanged. Current trends even point to likely declines in Vancouver and Alberta markets. And with the tight labour market poised to keep household income growing, the stars are aligning for more affordability relief in the period ahead.”

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