WHY THE FEDS WON'T RAISE INTEREST RATES

Let's face it. Interest rates have a lot to do with the cost of homes right now, in Toronto and most of the country. We live in the golden age of low interest rates. Ask anyone who owned a house in the 1980s, and they will not hesitate to remind you that interest rates were once in the double digits. This story will often be told as a cautionary tale warning today's homeowners that interest rates can rise again.

...And I'm sure they will some day. I doubt we will see double digits any time soon or a great number of people would lose their homes, and the economy would be in a whole lot of trouble. Not a great move by the government.

Still, I don't need to remind most people that these low interest rates have never been so low. Buyers often qualify for larger mortgages at a lower interest rates. Because of that, they are able to spend more money on a new property,  and there is more competition at higher price points.

Recently, the Federal government has been under some pressure to tame the stubbornly buoyant Toronto and Vancouver housing markets. If the markets in these cities won't cool themselves, then the Federal government believes it should step in and help, or as some people see it, interfere.

For many of the past five years, condos in Toronto and Vancouver used to be the housing villain. They were the poster boys of a housing market on the brink of a collapse. Constant fodder for real estate doomsayers and cranky anonymous blog commenters. They were apparently in oversupply and at risk of taking the Canadian economy south - and I don't mean for a nice winter vacation.

These days, condos don't seem to be the bad guys any more. They have had reasonable gains in Toronto and Vancouver. The new villains seem to be detached houses that have been on a tear for the past decade often rising in the double digits each year. Right now, the average detached Toronto home is at roughly a million dollars. In Vancouver, it is closer to $1.6 million. So, we're not seeing a lot of starter homes here.

Some see this as a new reality in these cities, which have become international cities, and for better or for worse, have had much more investment from overseas that may have contributed to the higher prices, particularly in Vancouver.

An easy way for governments to control the housing market would be to raise interest rates. Of course, interest rates are not just here to influence the housing sector, but the entire Canadian economy. So, the government has to take into account if a higher interest rate would positively influence the oil sector, or the manufacturing sector or exports in general. There is a lot to consider beside the real estate market.  With oil prices falling, the government may be inclined to lower interest rates again, even into negative territory, to prop up the economy.

Also, the housing market is not exactly performing the same all over the country. In fact, property prices are dropping in Calgary and Edmonton, and flatlining in many other cities. So, an interest rate hike may send prices even further down in these cities adding stress to an already lacklustre or faltering local economy.

Yes, it appears that the rising home prices and high cost of living in Toronto and Vancouver have led to a dilemma for the Federal Government. Raising interest rates to tame the markets in Toronto and Vancouver would certainly not benefit the country as a whole.

Of course, that doesn't stop the government from creating other obstacles for buyers in an attempt to tame the wild beasts of Toronto and Vancouver. Right now, they are considering raising the minimum down payment on insured mortgages from 5% to 10 %. Personally, I don't think this will change much in the Toronto and Vancouver markets, but at least the government could say they are doing something.

Some other countries like New Zealand are going much further to contain their runaway real estate prices. Their government has proposed a 30% minimum down payment only for the city of Aukland and only on properties that are investments. The New Zealand governor who has forwarded this idea states; ""The objective of this policy is to promote financial stability by reducing the rate of increase in Auckland house prices, and to improve the resilience of the banking system to a potential downturn in the Auckland housing market."

It's an interesting idea. Instead of focusing on the country as a whole, New Zealand is proposing tougher mortgage qualifications for one major city, not the entire country. Furthermore, it only targets investors. Unlike Canada, New Zealand keeps track of overseas investors, and according to their statistics, there are many overseas investors who buy up properties in Auckland because it is a stable economy and sound investment. Unfortunately, this means more competition and higher prices.  So, the government is trying to target investors, domestic and foreign alike, to keep prices more reasonable.

I'm not saying I agree with such a proposal or that the government should get involved with the housing market, but I do think there is something smart here. It may be wise to create policies specific to certain cities or local economies. Real estate at a national level is very hard to navigate. One policy could possibly tame the property process for boom towns while really causing damages in more vulnerable markets.

What Momentum Does to an Emerging Neighbourhood

Sometimes it's tough to consider a neighbourhood "emerging" when the average detached home in some classic Toronto emerging neigbhourhoods clear a million dollars in sales. Emerging neighbourhoods have traditionally been the terrain of first time buyers and investors. The thing is, the emerging neighbourhoods of years past have now become more that just emerging neighbourhoods. They have become established neighbourhoods with some serious draw to them. It is where the demand can be very strong, particularly if you are buying a house. They are no longer areas on the fringe that offer inexpensive prices at a reasonable cost. They are destinations where buyers are clamoring to get in.

Once upon a time, the middle and upper middle class largely lived in North or Midtown Toronto, north of Eglinton where there was less social housing, less rental units, and less diversity in the population. There were a few neighbourhoods that were still appealing to some. Back in the 70s and early 80s, High Park was considered quite middle class, though likely more artsie and hippie. Roncesvalles used to have its own Birkenstock store after all. Same goes with the Annex and the Danforth. A little more artsie and distinctive.

Nowadays, you have to be making a lot of dough or inheriting a lot of money to buy in central High Park and the Annex. Don't get me wrong. There are always deals to be had, but they are few and far between, and usually require a reno in these neighbhourhoods.

And it's not just in these neighbourhoods. A lot of interest has shifted to the south core of Toronto (south of Eglinton) in the last twenty years. King West, Queen West, Trinity Bellwoods, the Junction, the Junction Triangle, Riverside, Leslieville Corktown, and Parkdale all draw in their share of interest. The good restaurants, the exciting condos are often below Eglinton between the Junction and Leslieville. Neighbourhoods like Leslieville may still seem a little rough around the edges in a few spots, but don't be fooled that this is an inexpensive place to buy. It's no Leaside in terms of the prices, but it has become a desired neighbourhood in which to live. Those young families have attracted more families creating better schools and engaged parents. Well-invested and aging parents move closer to their adult kids in Leslieville because of the walkability of the whole place. There are amazing places to go here. Not just Subway and Tim Horton's but a Circus School for your kids, an indie coffee shop an every corner, and some of the best bakeries in the city.

To be clear, this post is not here to make the buyers of Toronto feel sad or hopeless. You shouldn't be. This should be an inspiration to you. If you don't have a good mortgage and a healthy down payment, you may find it hard to live in Leslieville, but you can live in a future Leslieville. It doesn't look like Leslieville now, but it may some day. Danforth Village is still filling up. The west end between St. Clair and Dufferin is ready for its next shift. And if you're really looking for a bargain, head out to Hamilton. Yes, that city is on the rise, and the momentum is building. Look for the potential, not just the end product. The nice shops and the better schools will come. Momentum is a hard thing to stop.

Are suburbs really dead?

Many books and reports have come out in the past ten to fifteen years regarding the death of the suburb. There's "Death By Suburb", "Death of A Suburban Dream" and "The End of Suburbs" to name a few. Of course, many of these books focus on the American city and how their inner suburbs are failing as opposed to the outer suburbs which are often still growing in successful cities.

The suburbs came into prominence after World War II, though the existence of suburbs have been around well over a hundred years. Returning war vets came home and purchased a slice of the good life. Buyers back then craved spacious homes, large lots and trees where there was generally a low crime rate and decent schools. The city centres at this time became a place where minorities would go whether they were poorer folks, outcasts or new immigrants from other countries.

So, what happened? Well, in the 80s and 90s young university-educated adults started returning to the  cities in great numbers attracted by jobs, and the urban culture which was often a reflection of the immigrants and outcasts who came before them. Plus, in growing cities like Toronto, the commute became too long. You couldn't be done work at 5pm and expect to be at the dinner table by 5:30pm like when Toronto was much smaller. We have seen the number of city dwellers explode in the past twenty to thirty years. Toronto, and most growing major cities now have a thriving downtown. The suburbs no longer pull businesses and wealth away from the city. In many cases, it's the opposite.

Strangely, Toronto's downtown never quite lost its appeal. It always maintained a village atmosphere and never had the flight from downtown that many American cities had. Still, the big return to the city centre has changed this city too.  And we have the condos to prove it.

It would appear that suburbs do not serve the purposes they once had, and now they are even more expensive for municipal governments to support because of their low density. There are simply just not enough taxpayers to go around. At a quick glance it would seem that the suburbs are doomed.

But wait! What was the fastest growing city in Canada last year per capita? Toronto? Calgary? Edmonton? Nope.  That would be Milton, ON, a suburb of Toronto.

So, the suburbs are not dead yet. They just serve a much different purpose than they used to serve. In my opinion, there will be some suburbs that will deteriorate and ones that will not. Many of the outer suburbs have a better shot because they serve a purpose right now. The reasons many people are going to the suburbs have changed. Now, it is because many buyers cannot get the space they want in the city. Plus, it's hard for places like Toronto to grow when the city has limited land. Suburbs are not the promised land, but a compromise for buyers to find space while understanding they may have a long commute if they work in Toronto.

Suburbs have not really changed with the times though. The problem with suburbs is their poor design. They often lack good public transit and mains streets for people to form communities. As an investment, it has become a greater risk than the city. Cities are becoming more affluent and location is key to your investment. In the suburbs, you need to invest wisely. There are rich suburbs, like Oakville. There are new suburbs for the middle class like Milton. Increasingly, there are suburbs where the poor are being pushed toward. Not just the usual neighbourhoods like Rexdale or Jane and Finch, one of the few Toronto pockets where real estate prices have not increased in recent years, but there are increasing poverty rates in Mississauga, Brampton, Oshawa and Markham. To make things more complicated, there are suburbs like Etobicoke that were once a small town, then a suburb, then part of the city of Toronto. Even within Etobicoke, the change varies widely. Many parts of Etobicoke below the 401 that are becoming more city than suburb. There is  higher density and still decent access to Toronto. The same goes for Scarborough. Some parts of Scarborough would be a poor investment area, others would be great with access to the highway, the lake and the city. It's much closer than Milton!

In the end, location is becoming more and more important. It's not as simple as the further you go from the city, the cheaper housing will be, though there is some truth to that. You need to be in a neighbourhood with some potential or some current success, or a walkable main street, a community hub, something distinctive and appealing, or you need to be on a transit line or future transit line.

The suburbs are not what they used to be, but some are alive and thriving.  People are still going there... at least in some suburbs. In others, the suburban dream is over, like an old amusement park or an abandoned mall. Their time has passed.

Will Alberta Real Estate Bring the Rest of Canada Down?

Alberta has been riding high on its horse for awhile now. And really, who can blame the province for its exuberance? When you have the kind of oil they do, and the subequent growth, it's easy to see why Alberta has been the envy of many provinces for some time. Drawing in workers from all parts of Canada and abroad, it's been the fastest growing province per capita over the past ten years, and it still manages to keep its books relatively balanced, at least as far as Canadian provinces go. Though it does have a debt of $7.7 billion, it is nothing compared to Ontario's massive $281 billion debt. These happy times have led to real estate and population booms in both Edmonton and Calgary. Though prices are not as high as here in Toronto, the increases have been huge over the past 20 years in the Prairie provinces.

Of course, the good times have taken a bit of a pause in Alberta with the falling oil prices as of late. Jobs are slipping away, and real estate sales volume is at its lowest point in seven years. Some believe it is in an early stage of a correction.

As we have seen across Canada, a change in the demand for Alberta oil can effect things on a national level. Take, for example, the value of our dollar. Alberta oil has played a large part in bringing the dollar's value down across the country. So, would this mean that a slip in Alberta real estate prices could cause a domino effect in the rest of the Canada's provinces?

I think the short answer, in my humble opinion, is probably not. The fact that the dollar has slipped creates better opportunities for provinces like British Columbia and Ontario. Ontario manufacturing can now sell its products internationally at a lower price making us more competitive.

Of course, it could be a tipping point for the rest of the country if a certain amount of fear gets injected into the national consciousness. Real estate is run on emotion, despite the numbers behind it.

National real estate crashes are possible. Everyone remember the U.S. during the last decade. Prices fell an average of 30% across the country, much higher in states like Nevada and Florida.

Canada could have a correction is real estate, but it would require, in my opinion, a big change in the interest rates or major changes in the world economy. A sharp increase in interest rates would likely pause the real estate market across the country, and in some cases, lead to a fall in price. The thing is, rates will only go up if the economy of the country is undergoing strong growth, but with oil down, that's not the case.

The dropping oil prices in Alberta have had the opposite effect. Interest rates are lower now than they were last year making the interest costs on your mortgage lower this year than last year for the same priced home. Foreign investors are now seeing that Canada's low dollar may be an opportunity to get in on this market while the dollar is down, though some may be waiting for the dollar to bottom out.

The first few months of this year have shown me that the price increases here in Toronto are similar to last year. It's a seller's market for the most part. Our Toronto real estate market is currently affected more by specific local factors than by national ones. There is a shortage of houses in this city. So, house prices, and condo townhomes are increasing in value more than larger condos. Certain emerging neighbourhoods are attracting more buyers who are priced out of established neighbourhoods. Transit, or lack of it, is determining where people will live. A well-built, well-run condo in a well-planned neighbourhood will do better than one that is not.

All in all, the cities of Alberta run a much stronger boom/bust cycle because their economy is tied to the resource sector. Luckily in Toronto, we have a diversifed economy that is not tied too much to one thing, and our steady appeal to immigrants from all over the world will keep the city growing and the real estate market healthy without the massive explosions of growth followed by a bust, like Alberta.

Have the Government's Good Intentions Led to Higher Prices in Toronto?

It made a lot of sense ten years ago. It appeareded as though the government was acting responsibly, but good intentions may have led to some negative consequences for those looking to buy real estate in Toronto.

If you recall, around 2004 the provincial government put in a policy that would discourage sprawl and encourage density. This provincial policy claimed that there can be no more development in the greenbelt surrounding the GTA. All development would need to be done inside the GTA or outside of it. Such policies had very good intentions behind them. A greenbelt would protect the farmland around the city and the surrounding area. So, if there were ever a failure in an external food supply from an outside country or another part of Canada, Toronto could still grow their own food to feed their population. Furthermore, it pushed developers to take up land that was previously a parking lot or an industrial land site, clean it up, and make it useful again.

From an environmental point of view, densification made the city more efficient. A better use of space and a protected greenbelt.  From a money point of view, the new policy allowed the city to collect more tax dollars. If an area that has 10,000 Torontonians had a number of new condos that added another 10,000 residents, then you would double your tax dollar revenues. There's no guarantee the province or city would spend the money wisely, but it would be there. It would put more stress on existing infrastructure, but it would be less expensive than building new roads and new water supplies in a brand new area. Simply put, it would not be cost effective to build more low rise housing.

It all sounds good and noble, but one of the results of this policy has led to a very distintive housing trend, partially a result of the greenbelt policy and partially policies of densification at the city level. Because the province and city encourage densification, developers build more high rise condos. The low rise supply of homes, like  houses or condo townhouses, are built less because developers make more money selling high rise condominiums (more units on a smaller piece of land).

So, if we look at the average price of high rise condo at the end of 2014, it would be $454,406. For a low rise condo or freehold house at the end of 2014, the price has shot up to $705,813. That's a $251,337 gap. It's the largest gap there has ever been between high rise and low rise homes, and that gap will continue to grow. In the late nineties, 40 % of the new construction was condominium. Now, it is over 80%. The supply of high rises keeps on growing. The supply of houses and low rise condos grows very little, far below the demand for it.

So, what does that mean? It means houses and low rise condos will likely become more valuable as time marches on. It also means for those folks who buy a condo in a high rise as a starter home will have a tougher time moving up.

It would appear the solution would be to get rid of the green belt policy implemented by the Ontario government, and let the developers build on the green belt. They will have more land to build low rise homes. The cost of losing the green belt would allow for lower Toronto home prices, at least for the short term. Of course, this would be poor urban planning. We still need to protect our food supply, and densification still allows for better uses of space and a fiscally responsible approach to city building.

I believe there are two solutions needed for the government to help remedy this situation. First, the government may need to insist that developers build more units that are suitable to growing families. Currently, we see condos getting smaller and built for couples or singles. There's little room to move up. If you want to keep families in the city, then you need to have more three bedroom condo units with amenities that appeal to children or couples or singles who want bigger spaces as they age and make more money. Second, we need better transit from Oshawa to Hamilton. If there is a desire for low rise homes, then we need to be able to move people to where the stock of houses and low rise condos are affordable to many people. We need a regional transit system like they have in big cites like Paris and London and New York that will take you from downtown Toronto quickly to Hamilton and Durham region. We can't keep thinking that Toronto functions as a separate entity from it's neigbhouring cities and town.  Some of this is happening already with improved GO transit coming to Hamilton, but it has to take place a lot faster and a lot more extensively. 

Transit will be the key thing all levels of government will need to focus on for the decades ahead. Toronto will very likely be an expensive city to live, where the downtown core will be pricey, but we need access to a wide variety of home price points and options that will accomodate the city we are becoming, not one that we were twenty years ago.