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.

Your Future Awaits! Sorting Out The Real Estate Predictions of 2015

By nature, predictions are whimsical. That's why many of them are wrong. The real estate predictions of 2015 that I have come across are often a mix of doomsday scenarios and rosy outlooks, like every year for the past decade. So, let me filter these predictions, analyze them for you and offer a few thoughts of my own for Toronto real estate in 2015.

Let me start by saying what is a little different in the predictions for this year. Generally, they are fewer of them that are alarmist than in the past. Yes, we are hearing that prices can fall by 15% according to RBC, and yes we have someone named Hilliard MacBeth, an Albertan based porfilio manager who wrote a book entitled When the Bubble Bursts: Surviving the Canadian Real Estate Crash, calling for a nasty downturn in Canadian real estate. She predicts that house prices will fall 50%. Ouch. This may sound scary, but keep in mind that a book like this comes out almost every year. Why? Because these books sell! Think of Garth Turner in 2008 who wrote The Greater Fool: The Troubled Future of Real Estate calling for a 30% drop in Canadian real estate that year and more to follow in the subsequent years.

Even though we have some negative predictions this year, there are  fewer doomsday predictions than in previous years. I have a feeling that the public may be suffering from what I call "CLF" or Chicken Little Fatigue after years of hearing the sky is falling in real estate.  I suppose at some point, someone will be right. Some Canadian cities will have a slip in real estate prices, but not this year in Toronto.

All in all, I find all predictions a little more cautious for 2015. There will be smaller gains, but gains nonetheless. That seems to be the general consensus. Price appreciation but not as much as 2014.

The focus of the 2015 predictions has been largely around interest rates. As the American economy improves, many believe the Americans will start raising their interest rates, and in turn, Canada will raise their rates as well. Most predictions I have read point to the forth quarter for such things to happen. Some worry that the rise in interest rates will effect the housing market. I agree, it will slow it down. Others, however, think the interest rate hike will be the straw that broke the camel's back for the indebted Canadian, leading to a downturn in the real estate market. I don't believe it will cause the real estate market to crash, but it may put the breaks on some very big price increases that have happened over the past few years. I imagine if the rising interest rates start to effect the housing market too negatively, the government will put the breaks on the increases or even reverse them. Housing has become too big of an industry to just let slip.

From a more localized,  more Toronto-centric perspective, some of the trends that have been happening the past few years will become more pronounced in 2015. The low supply of houses and townhomes will remain in great demand since very few of them are built any longer, and the demand continues to increase as the city and region grows. Houses will increase in value at a much faster pace than condos.  Small boutique style condos in improving or established areas will generally perform better than giant condos. The dream of owning a house will still be affordable for some first-time buyers in the right emerging neighbourhood, though condos will increasingly be the terrain of first time buyers were the prices are more reasonable and the supply of new condos keep growing as the city grows.

For those who want a house with a smaller price tag, house hunters will turn to second tier cities like Hamilton where detached houses with a yard are comparable to the price of a one bedroom and even a bachelor condo in Toronto. Access from Hamilton to Toronto will continue to improve. Hamilton will be a good choice for many who love the urban lifestyle. It is still a city of 500, 000 people. Unlike Mississauga or Brampton or Oshawa or any other Toronto suburb, Hamilton does not suffer from suburban sprawl or a dominant suburban culture. Its downtown is coming back after decades of decline. This phenomenon is not exclusive to Toronto. Such migration to second tier cities is happening all over North American. In San Francisco, many house hunters head toward Oakland. Expensive cities like New York or Chicago have triggered some middle class folk who want more space to head to Austin, Denver, Nashville or Charlotte. The thing about Hamilton is that it is close to Toronto and the new GO station will link up quite nicely. So, you can have your Toronto job or social life, and live in Hamilton. Commuting time is required though.

In terms of Toronto neighbourhoods, we will continue to see some of the advanced emerging neighbourhoods steal some of the sparkle from the more estalblished neighbourhoods. The general shift of wealth from duller north Toronto to the more vibrant south destinations will continue. The cool quarters will continue to attract more demand. Roncesvalles, the Junction, Leslieville, West Queen West and Brockton will continue their quick ascent. Danforth Village will continue to draw in many first time buyers, though not all houses will be in the first-time buyer price range in this neighbourhood in 2015. Areas along the Eglinton Crossway that is currently under construction will be a good bet for a long term investment. This includes Mount Dennis, a neighbourhood with some of the lowest prices in Toronto. Mount Dennis even has its own indie coffee shop opened in 2014! And that's always a good sign for a burgeoning community hub. Like last year, bargain hunters will see the western flank of Scarborough that borders Toronto begin to take off.  Corktown and the Distillery District will really start to shine as all the construction wraps up and the Pan Am Games begin. This may be one of the top spots to buy a condo this year and next. It is a well planned area with a lot of amenities near by. High Park, Leslieville and the Junction Triangle are all places where condos have not been overbuilt and fit in nicely with the neighbourhood.

All in all, it appears it will be a tame year. Of course, anything can happen! No one called for the price appreciation we saw in Toronto houses and a healthy condo market in 2014. 2015 could be just as surprising.

Is This The Year of The Nosedive For The Condo Market?

This was supposed to be the year. The nosedive year. The condo apocalypse. The crash all the naysayers have been dying for. But why 2014? Well this is the year that we will have the most new condos coming to the housing market, more than we ever had before in the city of Toronto. And that doesn't even count the resale condos. With this incredible number of condo units  hitting the market, this is the year where we are supposed to witness a flooding of the market with new condos that will throw off the balance between buyers and sellers, sending prices on a downward spiral. "Yay!" you would cheer if you you've been waiting for years for this event so you can swoop in and buy a cheap condo after the smoke has cleared. "Oh God, no!" you may blurt out if you are a recent buyer or soon-to-be seller. Your timing could not be worse.

But the truth is, it's likely not happening. Though three quarters of the year lies ahead of us and anything can happen, I'm not seeing a crash building up. In fact, I'm seeing something fairly balanced taking hold.

So what happened? Why no crash? Well, here are my thoughts on the crashless Toronto condo market of 2014, and why it's not taking place:

1.  The Housing Market is Nuts. I've said it before and I'll say it again. There is a limited supply of houses in this city. It is like the housing market and the condo market are not related at all, even though they are in the same city. Concerns over oversupply are big on the condo side of the properties for sale in Toronto with very few bidding wars. On the freehold/house side of things, we see limited supply of houses for sale and a lot of bidding wars for the ones that are. Though these two Toronto property markets have been functioning differently, one still does affect the other. I'm witnessing many exhausted or priced-out house buyers beginning to turn their attention to buying a condo, and in turn, adding more buyers to the condo market. In this market, one can more easily find something in the price range and not have to compete nearly as much.

2. The Condo Market Has Been Tame For Many Years.The key to the past few years was to buy or sell a condo in the right building in the right neighbourhood. Some condos have slipped in value over the past three years, some have risen in value, and some have stayed the same. My point: Prices have not been rising uncontrollably in the condo sector. In fact, it's been relatively flat.  If there is a condo bubble, the air has been let out of the bubble just a little bit already.

3. Interest Rates Are Low. And by low, I mean low. Nothing gets buyers out more than a low interest rate, especially when they are seeing 5 year fixed rates just below 3%. Rates are about as good as they get right now making it a pretty good time to buy from a mortgage point of view.

4. Most Condo Sellers are Not Desperate. We are not seeing a lot of distressed sales where condo owners are forced to sell because of their financing. Instead, we see investors holding on to their condos and renting them out. Since rents are pretty good in this city and condos take up a lot of the rental demand , some investors are holding on to their investments.

5. Condo Appeal. Demographically, condos appeal to two big and bulging groups in this day and age. Namely, the downsizing baby boomers, who are selling their homes for smaller and easier living, and the echo generation, the boomers’ kids who often look to condos as their first buy and a way to build equity. Of course, there are others. Most importantly, those buyers who just want to live close to the neighbourhoods they love in a downtown environment or an established neighbourhood without the hassle of a yard or fixing up a house. They want to be able to lock and leave when they go on vacation.

So, for all of those waiting for the crash so they can swoop in and buy up condos, sadly I don't think 2014 is your year. I cannot say what the future holds in the years to come, but for now the condo forecast looks calm and steady.

Rising Interest Rates:For Real This Time?

I think for many of us, we never thought the day would come. We have been warned over and over again, for years and years, that rates are going to start to go up very soon, but these frequent warnings have become as effective as a car alarm.

There has, however, been some changes in the past few weeks with the banks, and I think it's time to start paying attention to rate hikes. And by paying attention, I don't mean panicking that rates are going to return to the terrifying heights of 22.75%, as it did in August of 1981. That was a different time with a very different set of circumstances.

In the here and now, banks have been gently, but repeatedly, bumping up their rates. In the last week, rates have gone from 2.79 to 3.29%. My mortgage broker tells me she can barely keep up with the changes. Five year bonds keep going up, and the interest rates keep rising in step.  Though the rate hikes so far may be a bummer for any one with a variable mortgage, it probably won't change the world for most. Still, some believe this is the beginning of continuous rising rates. They have been so low for so long there is really no reason why they wouldn't go up. They certainly couldn't go down any more.

But what does that mean for the housing market? In the short term, it's making buyers move a bit more quickly to the buy. Many current buyers who have locked in their rates before they went up last week, have become more keen to buy now, before their pre-approved rate expires. So, if you were lucky enough to get locked in at 2.79 or 2.89, you will likely be a lot more keen on buying some thing with that rate while you have it. If you wait, you may lose that rate and have to take the higher rate.

In the short term, this is good for sellers too since it brings more buyers to the table. So, perhaps you own a property that has been sitting on the market for a month with no showings. This week you'll probably get three or four viewings.  One property in the east end received 18 offers this past week, way more than any one has expected - or at least me.  And I'm pretty sure this has something to do with these buyers who would like to buy with the better rate. Of course, this is not the norm. It doesn't mean all properties are selling off in huge bidding wars. It means there is a slight uptick in buyer activity and sales.

If rates continue to go up in the long term, it may effect the affordability of Toronto properties, effectively putting downward pressure on the rise of the value of homes. For buyers it simply means there money won't go as far. So, on the down side, paying off a new mortgage of $600,000 may cost you more in the months to come than it done a few months ago.  But rising rates can also mean that prices won't increase as much as they do when rates are low.

Also on the plus side for buyers, you will have less competition for condo units and houses. Because of the rising rates, some investors may start to find better returns on different kinds of investments, like a simple GIC, that will become more appealing at a higher interest rate.

If the government, like the banks, also raises rates, they will create some needed wiggle room. If the economy decides to tank again, the government will have a buffer. They can lower the rates and stimulate the economy, if necessary.  That would be pretty hard to do with today's interest rates.

In many ways,  we may be returning to more "normal" interest rates. But if you are a buyer, you may want to get pre-approved and lock in your interest rate as soon as you can, and get out there and buy something. Sellers, your property will be a lot more appealing when rates are low. It's one of the few times where buyer and seller can benefit at the same time.