HOUSING MARKET STEADIES; IMPACT FOR APARTMENT DEVELOPERS?

Toronto and Vancouver offer soft landing on house prices, opportunities for rental stock.

For the past three years, there have been concerns about a possible housing bubble and affordability crisis within two of Canada’s largest residential real estate markets. Prices were rising sharply in the Greater Toronto Area and the Greater Vancouver Regional District, and while that meant quick profits for sellers and developers, concerns were raised about how sustainable this heated market could be, with some arguing that the bubble could burst. However, after regulators took steps to limit speculation within the hottest markets, there are signs that the residential real estate industry is cooling down slowly to more manageable and sustainable growth.

Earlier this year, Moody’s Analytics unveiled its 2019 Canada Housing Market Outlook. While it noted that “the Canadian housing market is going through a period of decompression”, the housing bubble has not burst, and the sky has not fallen in the two years since governments in British Columbia and Ontario tried to address rising housing prices in the Greater Vancouver and Greater Toronto markets. According to Moody’s, “at this stage of the process, authorities can claim at least a partial success. House prices in Toronto and Vancouver have leveled off and affordability is no longer deteriorating.” At the same time, the housing market elsewhere in Canada has largely remained steady, unaffected by measures to cool the Vancouver and Toronto housing markets.

Easing Housing Sales and Prices

According to the Canadian Real Estate Association, housing sales peaked in mid-2016 at almost 550,000 annualized. This number has slowly, but steadily declined since. Save for a blip in the last few months of 2017 as purchasers rushed to purchase homes before more stringent mortgage regulations, annualized housing sales now stand at the end of 2018 at 460,000. Moody’s attributes this slowdown entirely to the tightening of regulations associated with borrowing and housing investments. The ability of people to buy housing appears not to have dropped as the percentage of mortgages in arrears are now at a 12-year low.

The Bank of Canada is sending mixed messages regarding the housing market, however. While raising interest rates from 0.5% in mid-2017 to 1.75% in late 2018, they have signaled possible rate cuts as shifting commodity prices and retaliatory tariffs with the United States and China make economic growth less certain. Further, changes to the Office of the Superintendent of Financial Institutions (OSFI) mortgage borrower stress test have increased effective mortgage rates, putting home ownership out of reach for more residents and making rental more affordable by comparison.

One criticism of these changes is that the Bank of Canada and the OSFI appear to be addressing the supposedly overheated Toronto and Vancouver markets using tools that apply throughout Canada. However, while these changes appear to have brought about a slowdown in the housing market in Vancouver, Toronto and smaller metro areas near those centres, the housing market has not been adversely affected in the prairie provinces and Quebec, where housing prices have remained steady. Housing price appreciations dropped from a 9.6% increase in 2017 to a -2.7% increase in 2018 in Vancouver, and 5.8% to 0.3% during those same years in the GTA, while easing from 6.6% to 1.3% throughout all of Canada.

What this means for Apartments.

The heat of the housing markets in Vancouver and Toronto, while making home ownership less affordable, were also catching rental apartments in their wake. Canada Mortgage and Housing Corporation notes that average carrying costs, including borrowing costs, have outpaced rent growth for the past few years, but tight rental market conditions are keeping vacancy rates below 2%, and raising rents significantly. Average rents throughout the Greater Toronto Area, effective October 2018, now stands at $1,359 per month, up 4.9% over the previous year. In Vancouver, average rents now stand at $1,385 per month, up 6.2% compared to October 2017.

Some of the steps to cool the overheated housing market have had a direct benefit on rental supply. Recently, the City of Vancouver was permitted to apply additional taxes to residential properties that were left vacant. Similarly, the Ontario Fair Housing Plan was enacted in 2017 allowing for taxes to be imposed on vacant apartments. Both Ontario and BC have also brought in new land-transfer taxes on foreign investors buying homes. This disincentive to speculators to just hold onto property and not use it has brought new units into the rental housing market in two of the tightest markets around.

Outlook for the Future: Invest in Income, Not in Appreciation

Moody’s Analytics foresees significantly slower housing price growth, which is good for affordability, but might reduce residential construction. However, with Bank of Canada changes helping to reduce the debt service/disposable income ratio, Moody’s remains relatively optimistic about the long-term health of the real estate market.

The steadying of the housing market in Toronto and Vancouver has reduced fears of the bubble bursting, but the cooling off makes the housing market less of a sales bonanza for developers. The slow and steady market growth of the industry favours investors and developers who build rental apartments, for the steady income they offer during their longer-term appreciation.

While not offering the massive appreciation possibilities of previous years, the real estate marketplace has been made less risky, with investments favouring building forms that offer long term income rather than short term capital gains. Combined with low vacancy rates and rising average rents in