GTA Sales Are Down But Prices Are Still Going Up in June 2013

Greater Toronto Area REALTORS® reported 9,061 sales through the TorontoMLS system in June 2013 - down by less than 1% compared to June 2012. Over the same period, new listings were down by a greater rate than sales, suggesting market conditions became tighter.

"The sales picture in the GTA improved markedly in the second quarter of 2013. While the number of transactions was still down compared to 2012, rates of decline were substantially improved compared to the first quarter," said Toronto Real Estate Board President Dianne Usher.

"As a growing number of homebuyers, many of whom put their purchase on hold due to stricter lending guidelines, now reactivate their search, the expectation is for renewed growth in home sales in the second half of 2013," added Ms. Usher

The average selling price in June was up by 4.7% year-over-year to $531,374. In line with the 2013 norm, June price growth was driven by the single-detached and semi-detached market segments, particularly in the City of Toronto. Over the same time period, average condominium apartment selling prices remained in line with 2012 levels.

"The short supply of low-rise home types in many parts of the GTA relative to the number of households looking to buy continued to prompt strong upward pressure on selling prices of singles and semis," said Jason Mercer, TREB's Senior Manager of Market Analysis. "We have also seen enough buyers in the better-supplied condo apartment market to provide support for selling prices at current levels.”

News from Bank of Canada - No Change To Prime Rate

At 10:00 am EST, Wednesday July 17th, 2013, the Bank of Canada again did what we expected them to do … they continued to maintain their overnight rate and remains at 3.00%.

Here is an excerpt of the announcement from the Bank of Canada and what they had to say about their decision:

“Global economic growth remains modest, although the pace of economic activity varies significantly across the major economies. The U.S. economic expansion is proceeding at a moderate pace, with the continued strengthening in private demand being partly offset by the impact of fiscal consolidation. The global economy is still expected to pick up in 2014 and 2015.

In Canada, economic growth is expected to be choppy in the near term, owing to unusual temporary factors, although the overall outlook is little changed from the Bank’s early projections.  Despite ongoing competitiveness challenges, exports are projected to gather momentum, which should boost confidence and lead to increasingly solid growth in business investment. The economy will also be supported by continued growth in consumer spending, while further modest declines in residential investment are expected.”

Based on this news and the somewhat stagnant and muted outlook for inflation, the Bank does not expect to increase their rate in the foreseeable future with any change most likely to occur not until maybe early  2014!   Remember, that any increase to the prime rate since 1992 has only been by 0.25% at any ONE time, so you won’t see a large significant increase all at once.

Fixed rates have gone up as the bond market has rallied over the last few weeks, at around 3.39% to 3.59% for a five year fixed term.

Based on this recent announcement, and the anticipation that the prime rate will still remain low for a while now, unless you feel otherwise, I’d recommend that you remain with your current variable rate product as the interest is lower than a fixed term rate right now.  However, if having a fixed payment is important to you, call me so I can calculate what your new payment would look like and also if it is suitable for you. The next announcement on any change to the prime rate is September 4th, 2013 at which time I’ll be in touch again.

Bad News for Investors. CMHC Changed Guidelines Calculating Debt Rations and Confirming Income

If you are investing in Real Estate, chances are you have to ensure your mortgages with CMHC from time to time. 

On June 27, CMHC issued new guidelines for calculating debt ratios and confirming income documents. These new guidelines will clarify that, and they become effective on CMHC-insured mortgages on December 31, 2013. (In practice, many lenders already apply them.)

These standards will apply to all insured 1-4 unit residential mortgages, regardless of the loan-to-value ratio. Uninsured (conventional) mortgages are allowed different policies, but most lenders will use the same rules for all their approvals.

Here are some of CMHC's newly minted insured mortgage “clarifications”:

• For variable income: Lenders must use “an amount not exceeding the average income of the past two years.” Variable refers to things like bonuses, tips, seasonal employment and investment income.
• For rental income:  If a borrower owns other non-owner occupied rental properties, the principal, interest, property taxes and heat (P.I.T.H.) on those properties must either be:
• deducted from gross rent revenue to establish net rental income; or
• included in ‘other debt obligations’ when the Total Debt Service (TDS) ratio is being calculated.
• For guarantor income:  A guarantor’s income must not be used in GDS/TDS ratios “unless the guarantor…occupies the home and is the spouse or common-law partner of the borrower.”
• Unsecured credit lines & credit cards: For these debts, “No less than 3% of the outstanding balance” must be included in monthly debt payments. Interest-only payments are no longer considered on credit lines. Furthermore, lenders must assess the borrower’s credit history and borrowing behaviour when determining the amount of revolving credit that should be accounted for in debt ratios.
• Secured lines of credit:  Lenders must factor in “the equivalent” of a payment that's based on “the outstanding balance amortized over 25 years.” That payment must use the contract rate (of the LOC) or the 5-year Benchmark rate (V121764) published by Bank of Canada (if the contract rate is unknown). Again, interest-only payments are no longer allowed for debt ratio calculation purposes.
• Heating costs:  Lenders must now obtain the “actual heating cost records” of a property. When no such history is available, the heat expense used in debt ratio calculations “must be a reasonable estimate taking into consideration factors such as property size, location and/or type of heating system.” That’s why some lenders have now moved to a set heating cost formula, like:
  
         (square footage x $0.75) / 12 months

Compared to past methods (which entailed flat heating costs, like $100/month), the new guidelines can double or triple the heating cost that must be factored into debt ratios on larger properties, and reduce it on smaller ones.

It’s important to repeat that most of these policies are already being followed by most lenders. But there are exceptions.

Those exception-case lenders are commonly viewed as go-to sources when borrowers have tight debt ratios. These new guidelines are designed to minimize those “loopholes.”

All of this has come about, in part, because of Ottawa’s rule changes last July. At that time, the government fixed the maximum Gross Debt Service and Total Debt Service ratios for insured mortgages at 39% and 44% respectively.

Have you though about investing in retail space?

Toronto ranked as the 17th most targeted market for retail expansion in the world according to CBRE’s 2013 edition of How Global is the Business of Retail? CBRE's annual survey maps the global footprint of 320 of the world's top retailers across more than 200 cities and tracks cross-border retailer movements. The report found that retailers expanded into a wide range of markets in 2012 

When comparing new retail entrants by country, Canada tied for 6th overall with 25 new retailers entering the market in 2012. Hong Kong was the world leader with 51 new entrants. An analysis of specific cities revealed that Toronto attracted 15 new entrants into the market enough to rank 17th in the world, on par with Ho Chi Minh City and Moscow. Outside of Toronto, new entrants have been targeting Vancouver, Calgary and Montreal as gateways into the Canadian market.

“Canada remains an attractive destination in a very competitive environment,” said Tom Balkos, Senior Vice President and a Canadian Director of CBRE Limited’s Retailer Services Group. “We spend far more time finding space for major brands than we do convincing them of the need to come to Canada. The fact that Canadian malls are 50 per cent more productive on average than those in the U.S. and that there is less competition in each retail category in Canada has been more than enough to entice retailers to explore Canadian options.”

The report also found that U.S. retailers were the most aggressive by far when expanding store networks globally and they accounted for most of the new entrants into the Canadian market over the past year. Italian, British and French retailers are also highly active, focusing mainly on their own region, although Asia is also a key target for many retailers.

At the sector level, 'Mid-Range' fashion retailers entered more new markets around the world than any other sector last year, accounting for 22% of all new openings, followed by 'Luxury and Business Fashion' retailers (20%). 'Coffee and Restaurants' (13%) is another growth area, as international retailers expand to meet consumer demand for entertainment-based retail. ‘Mid-Range’ fashion retailers were particularly interested in entering the Canadian market. Toronto ranked 4th in the world in 2012 based on its ability to attract new ‘Mid-Range’ fashion retailers and was only bested by Hong Kong, Kiev and London.

Mature markets dominated retailer expansion plans last year, although six emerging markets made the top 20. Paris, London, and New York continue to garnering significant numbers of new entrants, while the top emerging markets included Kiev in second place with 39 new entrants, Sao Paulo (25 new entrants), lasi (19), Muscat (17) and Ho Chi Minh City (15).

One struggle that Canadian cities have in common with many emerging markets is the under supply of quality retail space. This has limited the influx of new retailers into Canada in recent years.

"In general, a lack of new prime retail space globally is limiting the ability of some retailers to meet their expansion plans. This is most notable in mature markets, but also affects many emerging markets where much of the new development is in the peripheral areas of large cities, appealing only to domestic brands. Retailers are also more selective than ever - both in terms of the countries they choose and the type of space they take, with the focus firmly on the best space in the biggest cities,” noted Peter Gold, Head of Cross Border EMEA Retail for CBRE.

A shift is underway in the Canadian retail market, which will allow retailers to enter the country more easily in years to come. A new retail construction cycle is underway which will create new and innovative space for retailers. Landlords are responding to high demand by expanding existing retail centres and building new formats like outlet malls. The national retail inventory will grow by 5.4 million SF in 2013 and new supply is expected to continue to trend above the 5.2 million SF 10-year average going forward. Balkos suggests that new dynamics, especially the churn in the department store sector, are likely to produce the retail availabilities that foreign retailers need to enter and expand in Canada.

“The combination of new construction and rightsizing in the big box category will produce a variety of space opportunities, but it’s going to take a deft hand and understanding of the market to successfully navigate what will be an increasingly dynamic retail environment in Canada,” said Balkos. 

To download a copy of CBRE’s 2013 edition of How Global is the Business of Retail? please click here.