Tax changes target real estate

Proposed changes would deter investment

One of Canada’s leading tax lawyers has called proposed changes to the Income Tax Act that would affect investment in real estate “contrary to how our economy should operate” and has asked organized real estate to lead the battle against the changes.

Jack Millar, a tax lawyer with Millar Wyslobicky Kreklewetz LLP, says the changes to tax laws will dampen investment in Canadian real estate. Millar spoke at a session during PAC Days 2004.

“I am concerned that these rules are targeted at real estate investment,” he said. “They ignore the cyclical nature of real estate. They’re just completely unacceptable.”

At issue are proposed changes to section 3.1 of the Income Tax Act (Canada), which will serve in many cases to disallow the deduction of business and property expenses.

The proposed revisions would take effect in 2005. They would move the current test for deductibility – which currently says owners must have a possibility of profit – to a probability of profit, which is a more exacting standard.

As well, profit has been redefined to exclude capital gains, meaning that an investor who expects to realize a profit on the sale of a property, but not on a regular income stream, such as rental revenues, will be unable to deduct losses from other sources of income.

Proposed deductions would have to be considered on a year-by-year, property-by-property basis, and no provisions are made for grandfathering investments made under the current framework. Moreover, disallowed losses would not be able to be carried forward against revenues in future years.

“People will have to decide to dump investments because they will not have deductibility,” Millar said. “If the industry doesn’t watch it, they will be left holding the bag with respect to these provisions.”

Millar also warned that the changes could lead to lenders refusing to provide loans to those looking to close a highly-leveraged investment in real property due to concerns that disallowed expenses would affect repayment.

Toronto could triple levies

Increase could put brakes on new home supply

The City of Toronto is considering tripling its current development charges on new homes and condominiums, a move that home builders says threatens to slow the supply of new houses to the market.

Currently, Toronto charges $4,370 per single-family home or condominium. The new charge, which is added to the price of a new home, could be as high as $13,060. Home builders in the area say the increased development charges will raise prices and slow supply in the Greater Toronto Area.

"This measure will only serve to make housing more expensive in the city, and detract from intensification, a stated goal of the city," said Jim Murphy, director of government relations for the Greater Toronto Home Builders Association (GTHBA). "It is, quite simply put, a recipe for disaster."

The GTHBA released a report showing that since 1998, 74,587 units of new housing have been completed or are pending in Toronto. A jump in the price of new homes would have an echo effect on the price of resale homes in the GTA.

In 2003, home builders in the GTA sold 43,776 new homes, including condo units, which accounted for 51 per cent of all new home sales in the province. Sales were down 20 per cent from 2002 levels. Resales through the MLS® system accounted for 78,898 sales.

New home sales were projected to be around the 38,000 level in 2004, according to a report by PMA Brethour, while Canada Mortgage and Housing Corp. estimated new home starts at the 42,000 mark. Both forecasts were issued before the proposed increase on development charges.

The current development charge bylaw expires June 29. Toronto council will hold a public meeting on the issue in mid-May.

Essay contest for hotel flunks

Contest called off after legal challenge

A novel contest that would have seen a $1.5-million hotel given away to the winner of an essay contest has been shelved after organizers were presented with a legal challenge.

Cornerstone Opportunities, a self-described “entre-pioneering” company based in Grande Prairie, Alta., was offering the general public the chance to own and operate the York Hotel in Grande Prairie by submitting a 250-word essay – along with a $1,000 entry fee.

But those plans went awry after Alberta Justice contacted organizers with its opinion that the contest might violate the Criminal Code of Canada.

At issue was Section 206 (I)(e) of the Criminal Code, which basically states that anyone who manages an operation asking a person to pay money to try to win something which is valued at more than the entry fee, to which other persons have contributed, is guilty of an indictable offence and could face a prison term not exceeding two years.

Alberta Justice spokesman Jason Chance said the RCMP had contacted the department asking for a legal opinion on the contest. Alberta Justice reviewed the file and advised the RCMP that the contest was indeed an offence and an illegal lottery.

Dwight Logan, the manager of the York Hotel and one of three Logan family members behind Cornerstone, said he was disappointed with the result.

"It is quite a convoluted clause. We had sought out legal opinions in advance of (the contest)," Logan said. "We had three separate legal opinions (saying) this was OK."

The group had also involved the Solicitor General and the RCMP in discussions.

"We really thought that we were all right. We really thought that we had done our homework. It appeared the legal challenge to the competition ... we had the option of fighting it ... but it had merit as well," Logan said..

Cornerstone had hoped to attract 3,000 entrants into the contest. The winner would have received the deed to the 44-room hotel, complete with restaurant, lounge, and attached liquor store, free of encumbrances. Cornerstone says the hotel has a market value of $1.5 million, and it generates $3.4 million in annual revenues.

Cornerstone will return the money of everyone who entered, along with a letter of apology, before the end of March, Logan said.

Real Estate Bubble?

The prime rate, now at 4%, will be 3.5% within a few months. Variable rate, below-prime mortgages will be available for just a little over 2% by mid-summer. It will be that moment in Canadian history when the cost of money will be the lowest ever.

Unbelievably, unexpectedly and historically cheap money will keep the real estate market in high gear for the rest of 2004, leading to even higher prices, bidding wars in demand neighbourhoods, record amounts of mortgage debt and an almost panicked attempt by many people to borrow sums that a decade ago would have terrified them. The times will be anything but normal. This is part of the longer-term legacy of Nine Eleven, and also the spinoff of a war now raging between inflation and deflation. My money's on the latter.

That's one reason for my views on the Greater Fool theory of real estate articulated here last week - namely, these days will not last. Some people construed my comments as being negative on real estate in general, and a warning in specific not to be a buyer right now. No way.

There are major reasons to be a real estate investor. When it comes to your principal residence, of course, you can keep all of the capital gains generated when you sell, and pay not a cent in tax. This is the most significant tax break that most Canadians will ever receive.

And real estate is great because, unlike with stocks, bonds or mutual funds, you can leverage the heck out of it. All financial institutions will lend you gobs of money to buy properties with an absolute minimum of fuss. In fact, these days you can buy a house with 100% financing, and even a cottage with 90% financing. You can also borrow against your home with as much ease as going to the nearest ATM, since all the banks love to make home equity loans.

And intense competition among the big mortgage lenders means borrowers have never been presented with such choice, flexibility, cooperation or insanely good deals as today. If you can still breath, you can get a mortgage. The smart folks are staying with variable-rate mortgages which offer rock-bottom monthly payments, and the ability to lock in with just a phone call once rates start to rise.

Finally, what of real estate as an asset that will hold its value and reward those buying now? Well, long-term, there is no question that houses are worthy investments. And, yes, Canada is extremely cheap when compared to the rest of the world. A house in Toronto or even Vancouver, when set against its mate in Washington, Chicago or Miami is hugely affordable. When compared with similar digs in London or Paris, it's laughingly cheap. And lately we are not even keeping pace with property gains in place like southern New Zealand.

So long as there are inflationary pressures, so long as the economy is growing, jobs are being created and immigrants attracted, then real estate prices can be expected to rise. Over the decades, houses have performed admirably as investment assets - a pattern that seems destined to continue.

But that does not mean no danger exists for real estate purchasers. History is also strewn with the carcasses of investors who bought at the wrong time, for the wrong price and in the wrong place.

So, just imagine if the market turns - if only for a few years - after mortgage rates inevitably rise and escalating prices have resulted in dwindling legions of buyers. All those who looked so clever taking on big mortgages at 3% when houses are in demand could look like fools when mortgage payments double and real estate values head south.

If I'm wrong, house prices will go up forever and mortgages will stay at 2%. And I'd love to be wrong.

Positive outlook for housing

An article by Will Dunning in today's Toronto Star:

New-home sales in the Greater Toronto Area should reach the second-highest level ever this year, surpassed only by the 54,000-plus record achieved in 2002.

I am projecting sales of 47,800 in the new housing sector, a 7 per cent increase over last year.

The average price of a house should rise by 4.9 per cent this year, slightly lower than in previous years, but this will increase homeowner equity by $17 billion.

Low interest rates, coupled with moderate employment growth, are the reasons behind my bullish predictions for the new-home market.

Late in 2002, the Canadian dollar started to appreciate against the U.S. dollar, rising 19 per cent over an 18-month period. This increase in our currency will have significant consequences on the GTA's economy, which is so closely tied to activity south of the border.

Most of these consequences, though not all, will be negative. But there is little evidence to date of these effects.

Employment continues to grow at a moderate pace — 53,000 jobs were created in the GTA in the past year, representing a growth rate of 1.9 per cent.

Clear signs of an economic slowdown should start to show up by mid-year and, as a result, the Bank of Canada can be expected to keep interest rates low. In fact, the odds are good that there will be more rate reductions this year.

Already, mortgage rates have fallen by three-quarters of a percentage point since the end of last year. Today, the advertised five-year mortgage rate offered by most lenders is 5.7 per cent. Most borrowers can negotiate a discount of 1.25 percentage points, resulting in a borrowing rate of 4.45 per cent.

At this mortgage rate, the monthly cost of living in a typical starter home (priced at $199,000) is about $1,420. This figure includes mortgage payment, realty taxes, and utilities.

I expect these lower rates will set off a round of home-buying in the spring and summer.

As a result, housing starts will remain strong this year. Construction is now one of the strongest sectors of the GTA economy. As other sectors weaken this year, construction will remain a source of strength.

Housing is not just a place to live. It is the biggest investment most people will make. That investment is performing well.

During the past five years, the average house price in Toronto has increased at an average rate of 6.2 per cent per year. The amount of "housing wealth" in the GTA has increased by an astonishing $75 billion during those five years.

The growth in housing wealth gives homeowners increased confidence about their personal situations. That confidence will provide additional support to the economy in coming years.

My economic models tell me that rising housing wealth will be responsible for 71 per cent of the jobs that will be created during the next four years, or about 38,000 jobs per year.

Thus, the housing sector will create jobs in two ways: through direct effects of construction and as a result of the wealth effect.

Housing will be one of the main sources of job creation in the GTA in the next few years.

CREA concerned with tax changes

Foreign investors in REITs face larger burden

The Canadian Real Estate Association (CREA) welcomed the commitment to fiscal prudence unveiled in the first budget under Prime Minister Paul Martin, but also expressed its concern with changes to tax laws that would affect foreign investors in real estate investment trusts (REITs).

In the budget, Finance Minister Ralph Goodale restored a $3-billion contingency reserve fund, and allocated an additional $1 billion for economic prudence. Money left in the reserves at the end of the fiscal year is applied towards paying down the national debt.

CREA has for many years advocated setting annual debt reduction targets, rather than just relying on surpluses to pay down the debt.

“We wish the government would commit to incorporating rolling two-year debt reduction targets as an integral feature of every budget,” said Pierre Beauchamp, CREA’s chief executive officer.

The Association also expressed its concern with changes to tax laws that would see foreign investors paying capital gains taxes.

“These tax changes could discourage foreign investment in Canadian real estate,” Beauchamp said. “With real estate such an important part of the Canadian economy, any policy or tax that adversely affects the industry is regrettable.”

Canadian commercial properties have increasingly become a preferred target for foreign investors over the last few years due to both their tax status and the fact their returns tend to be higher, on average, than those in other comparable countries.

The Association is also concerned the government did not provide Canadians with higher RRSP contribution limits. “Providing individual Canadians with avenues to save for personal retirement should be a policy priority,” Mr. Beauchamp added.

Betting the house

Over the past few years, house prices have been booming almost everywhere except Germany and Japan. Since the mid-1990s, house prices in Australia, Britain, Ireland, the Netherlands, Spain and Sweden have all risen by more than 50% in real terms. American house prices are up a more modest 30%, but that is still the biggest real gain over any such period in recorded history. Commercial-property prices in some big cities have also been looking rather frothy.

These property booms have been partly driven by economic fundamentals, but bubble-like symptoms abound. Real-estate investment has even made it into a TV series, “The Sopranos”. In one recent episode, the wife of Tony, the Mafia boss, suggested he invest in a real-estate investment trust (a fund which enables small investors to buy commercial property). Many viewers took her advice.

Rewards from investing in property in the past are certainly impressive. In Britain, for example, over the past ten years the total return from both commercial and residential property (including rental income) has been well over 10%, beating the return on equities or gilts. Over the past three years, British house prices have risen by 55%, whereas share prices are 40% down.

Over the past ten years, the total return from buying a house (including the implicit rental income) has exceeded the return from shares in half the countries in chart 3. But these figures understate the possible gains from investing in property. Unlike equities, most homes are bought with borrowed money, and the resulting leverage can greatly lift the return on the initial stake (or increase any loss). Suppose you had invested $20,000 in shares, which after five years are now worth $40,000, including reinvested dividends, implying an annual return of 15%. Then suppose you had used the $20,000 as a deposit on a $100,000 house that over five years had risen in value by a more modest 7% a year, to $140,000. Assume, for simplicity, that mortgage-interest payments and maintenance costs exactly offset the rental income. The average annual return on your deposit would have been almost 25%.

In addition, the taxman tends to treat housing far more favourably than financial assets. In most countries, owner-occupiers get tax relief on their mortgage interest payments or first-time buyers get a tax credit, and owner-occupiers are at least partially exempt from capital-gains tax. Admittedly the transaction costs of buying and selling property are high, but on reasonable assumptions the after-tax return from housing over the past decade has exceeded that from shares in most countries.

How long can the party last? Estate agents, builders, lenders, many economists and even Alan Greenspan, chairman of America's Federal Reserve, have all insisted that there is no house-price bubble. Rising house prices, the argument goes, are fully justified by low interest rates, rising real incomes, growing populations and a fixed supply of land. But this sounds a little like the “wall of money” argument used to defend inflated share prices in the late 1990s. Prices had to rise, it was said, because the number of shares in which pension funds could invest their billions was limited. Investors mistakenly came to believe that the traditional link between share prices and profits no longer mattered. Home-owners may be making a similar mistake today.

It is often argued that property is a much safer investment than shares because a share is just a (possibly worthless) piece of paper, whereas bricks and mortar are something tangible. Yet that tells us nothing about their relative value. Bubbles form when the price of any asset gets out of line with its underlying value.

Home prices are not listed daily in the Financial Times, but the same sort of valuation analysis can be applied to houses as to shares. The price you pay for a property should reflect the future rent at which you could let it. The fact that in many countries prices of homes and commercial buildings have been rising much faster than rents should be ringing alarm bells.

Housing is just as prone to irrational exuberance as is the stockmarket. Property is increasingly viewed as an easy way to make money. People buy a home in the expectation that its price will continue to rise strongly over time. Such expectations lie at the heart of all bubbles. Given the boom in the property market over the past few years, at the very least house-buyers betting on further rapid house-price gains are likely to be disappointed. Worse, there is a risk that house prices will take such a tumble that they take whole economies with them.

Inspectors seek self-insurance

Loss of national E&O plan raises concerns

The Canadian Association of Home and Property Inspectors (CAHPI) is moving towards self-insurance after the loss of its errors and omissions insurance policy.

Bill Mullen, president of CAHPI, says the association was told mid-2003 by its carrier, Emcon Group Inc., that it would no longer be providing errors and omissions insurance to members of the association. That left the association scrambling to cobble together an insurance plan for its members before its September year-end.

“We ran into real roadblocks in getting the plan up and running,” Mullen says. “We managed to get together a group of five insurance companies in some areas and three in others who would be willing to offer the insurance, but members had to apply for it on their own.”

The provincial home inspectors’ associations decided to advise their members that they didn’t have to carry the insurance, but they were obligated to disclose the fact they were not covered to potential clients.

“You can’t force people to carry insurance,” Mullen says. “It’s a business decision for each member.”

Mullen says that CAHPI is looking at developing a self-insurance plan by September 2004. “We’re taking the next year to develop the plan,” he says. “We’re doing a lot of research and we have insurance experts helping us with the facts and figures.”

Mullen says that as the general public engages in a growing number of lawsuits, E&O insurance becomes more of an issue for CAHPI members.

“So many claims that are filed these days are just frivolous,” he says. “Many people are under the impression that if they get a home inspection, they have a warranty on their house for as long as they own it. The insurance is to protect our members, not to replace a sump pump every year.”

Insurance Companies Profits

Figures released by the Insurance Bureau of Canada show the insurance industry recorded a 2.63-billion profit in 2003, a 673 per cent increase over 2002. The previous profit record of $2 billion was set in 1997.

The Insurance Bureau of Canada report said that in 2003, "industry return on equity returned to a historically 'normal' rate of 11.3 per cent." Don Forgeron, Atlantic Regional Vice-President for the insurance bureau, points out that the Royal Bank earned more than the entire insurance industry combined in 2003.

Jim Rivait, Alberta Vice-President of the bureau said insurance companies have gone through six "horrible" years of returns and have finally had one good year. If companies don't make some money, he said, there will be no insurance services.

Companies made 95 per cent of their profits on investments, not underwriting. "The average company net earning figure was approximately $13 million," the bureau said in a release. "The industry's rate of return ... while up over last year's ... remains lower than reasonable profitability targets accepted by government regulators and lower than levels seen in other financial services."

The black ink had governments in some provinces seeing red.

"I think they overstated their difficulties," says Nova Scotia Insurance Minister Ron Russell, who had to introduce legislation to roll back automobile insurance rates by 20 per cent last year. "I'm concerned primarily because last year I was being told that 2003 was going to be a disastrous year for the insurance industry, and that under no circumstances could they accommodate a 20 per cent reduction in premiums simply because they were an industry teetering on the edge of bankruptcy."

New Brunswick Justice Minister Brad Green said the insurance profits don't match up with what the industry has been telling residents of New Brunswick.
"I think the insurance industry has a lot of explaining to do with the people of New Brunswick," he said.

According to the IBC report, auto insurance in Ontario is a problem area for the industry. In 2003, companies paid out $1.18 in claims for every dollar collected in premiums. According to 2002 figures, auto insurance accounted for 49.4 per cent of premiums sold by Canadian insurance companies, followed by commercial property insurance at 15.4 per cent and personal property insurance at 15.3 per cent.

Time to diversify your assests?

As advertised, the elves at the Bank of Canada did their thing last week, dropping the cost of money yet again. The prime rate now stands at 4%, just a quarter point higher than the lowest point in history. Variable rate mortgages are available at 3% (0r even less, on an introductory basis), and houses are nice and affordable, despite recent price increases.

At the same time, the real estate mania continues. The latest gas to be poured on the fire came from the spigot of Canada Mortgage and Housing Corporation, which will now finance your home purchase even if you have no money for a down payment. This is highly revolutionary for an outfit that a few years ago would shun anyone who did not have 25% of the purchase price in hard cash.

But it's a sign of the times. It's been two decades now since a house assumed the crowning position it is currently in. Today, overwhelmingly, Canadians are keeping the bulk of their net worth in one asset, on one street, in one town. It is the ultimate lack of diversification, and yet the common mythology is that real estate is far less risky than, say, a equity mutual fund based on the performance of dozens or hundreds of companies.

But this could all end badly for those people - especially the pitiful, aging Boomers like me - who think our environment of low rates and high real estate will be permanent. Given our lack of retirement preparedness, there will be a lot of people forced to bail out of their houses a decade or more from now in order to get what we all need to live on - cash. This could mean more sellers than buyers and falling prices, especially in a climate of rising interest rates.

Ten years ago, I suggested that smart people should be diversifying out of their real estate by borrowing against it to invest in financial assets like stocks and mutual funds, held for the long term.

That strategy had some cache in the late Nineties when the technology bubble had markets spiraling to new highs, but in the bleak years since Nine Eleven, the rush has been from equities back behind the blinds of a house. Well, now that interest rates have crashed, stock markets have recovered and real estate is testing a new cyclical high, I think it's time prescient investors revisited this whole asset mix thing. If you are like most of your neighbours, then your RRSP is skinny, you mortgage is fat and your big plan is to pay off your house before your career flatlines. If you're one of the lucky ones, then you've already built up a whack of equity in your home.

So, now what? If you sell the house when real estate is hot, it just costs you an obscene amount to buy another home. If you wait until the market cools, you'll get less money for your property, and still have to live somewhere. If you think you'll stay put and figure it all out in a future decade, you're gambling.

So, maybe there is a better way. You can live in your home, and be building up a serious retirement nestegg of financial assets at the same time, while also creating a significant tax savings. This is the potential wisdom of a home equity loan. Every major financial institution will lend you money at the prime rate for investment purposes when you use your home as collateral.

That means borrowing at just 4% to invest in assets like stocks and mutual funds. Remember - the stock market went up about 20% last year, and the normal annual appreciation over the last few decades has been close to 10%. Sure, we get a few turkey years of losses every so often, but markets go up far more often than they decline.

That means a 50-something Boomer borrowing against real estate at just 4% has a good chance of growing money in an impressive fashion in the 15 years he or she has until retirement beckons. Will you house continue to appreciate at 10% a year, every year for the next 15? That would put a $300,000 home today at $780,000 in 2014 and $1,253,000 in 2019. Of course, houses are only worth what buyers will pay - and that's determined by family income and the cost of money. Unless you see the mother of all economic booms in the near future, this is totally unrealistic.

On the other hand, the TSE 300 index was at 4,000 a decade ago and today is double that - despite the collapse of Nortel, the dot-com bust, Nine Eleven, the Asian Flu, Y2K, the War on Terrorism, SARS and Mad Cow and even Martha Stewart. So why not borrow against at least a little of your home equity to get cash to invest in something that will give you more certain capital growth? And did I mention the interest you pay on this borrowing is 100% deductible against your taxable income? If you're in the 50% tax bracket, than a 4% home equity loan really costs you 2%, at a time when money is eroding by 1.5%, thanks to inflation.

Borrow money at one half of one per cent to invest in growth assets? Pinch me. I'm dreaming.

CMHC Home Buyers' Plan

According to an Ipsos-Reid poll, only half of adult Canadians will make contributions to a Registered Retirement Saving Plan (RRSP) even though a majority (63 per cent) of Canadian adults say "saving for retirement" is a very important financial goal for them. Reportedly, those with RRSP savings may also add to personal wealth by taking advantage of The Home Buyers' Plan (HBP) which allows home buyers access to RRSP savings.

Canada Mortgage and Housing Corporation (CMHC) research revealed that the HBP provides households with a net financial gain even if homeowners had to borrow to repay the RRSP or did not repay the RRSP and received a tax penalty. The CMHC interpretation of this pattern is simple: "By allowing households to make a tax-free withdrawal of an amount that gave them a tax credit when it was contributed, governments are implicitly granting these households an interest-free loan equal to the amount of tax to which the withdrawal should normally have been subject."

The Home Buyers' Plan, overseen by the Canada Customs and Revenue Agency (CCRA), aims "at facilitating access to homeownership by allowing households to withdraw up to $20,000 tax free from their Registered Retirement Saving Plans (RRSPs) to cover the down payment for the home." Between its introduction in 1992 and 1998, the HBP has enabled over 777,000 individuals to withdraw close to $7.5 billion from their RRSPs to finance the purchase of their first home and, in 1998, just over 111,000 households withdrew an average amount of $9,400.

These withdrawals must be repaid through a series of annual payments equal to 1/15 of the amount withdrawn over a maximum period of 15 years to escape adding the repayment amount to taxable income. Apparently, a significant proportion of participants do not make the full repayment required into their RRSPs according to the terms of the HBP.

The increase in the accumulated value caused by the HBP depends on several factors:

-The interest rate.

- The tax rate - The present value of the financial gain is then equal to the tax rate multiplied by the initial withdrawal from the RRSP. The HBP is therefore more profitable to those households with the highest tax rate. In fact, a household which has a marginal tax rate of 40 per cent and makes the maximum withdrawal of $20,000 benefits from a wealth gain with a present value of at least $8,000.

- The inflation rate.

- The initial withdrawal amount.

Whether or not the repayments are made - The gain is greater if the repayments to the RRSP, on which the return is taxed only at the time of the final withdrawal, can be made using assets on which the return is taxed annually. The least favourable case is where the household must borrow to contribute to the RRSP and to make the repayments required under the HBP, since the interest paid on these borrowings is not deductible.

According to CMHC, homeowners use the gain in their wealth to proportionally increase their consumption of other goods and housing. These increases in consumption and housing demand are also proportional to the lifetime gain in their wealth and also come with a proportional increase in terminal wealth. The total saving of the household, therefore, rises during the period of home ownership. Some home buyers use the HBP to buy a home of greater value, but not to the detriment of saving.

In general, real estate ownership makes solid financial sense. In a recent Financial Post/ COMPAS Inc. web-poll, and contrary to "media Cassandras foretelling dire straights as a result of rising debt," business leaders and CEOs did not see rising household debt as a problem, partly because it is linked to real property. They also predict no drop in real estate values even after a rise in interest rates and so are opposed to increasing interest rates or introducing regulatory barriers to household debt.

Infill feeds new urban housing

Most of the major developers and a lot of fledgling ones took the sweeping statements on neighbourhood rejuvenation from Toronto's Official Plan to heart, reported by Derek Raymaker at The Globe and Mail. New low-rise housing developments, particularly infill projects, can't really hold a match to the condominium boom, but they are on the rise.

There were 1,791 new detached homes under construction in 2003 in Toronto, which includes Scarborough, North York, East York and Etobicoke, compared to 1,631 in 2002, according to Canada Mortgage and Housing Corp.

Freehold row and townhouse starts rose to 728 in 2003 from 644 the year before. Semi-detached starts fell, however, to 255 from 634 in 2002, the result of the completion of a major semi project in Scarborough's Morningside Heights.

New high-rise condo units in Toronto doubled the low-rise starts, but as companies pack up and move their manufacturing facilities to Markham or Mexico, plenty of redundant industrial land in all the former municipalities of the old City of Toronto is now vacant. The city's Official Plan identifies them as prime spots to open up new townhouses, row houses and semi-detached homes as long as they blend in with the local community.

New low-rise developments have never been easily embraced in established residential pockets. But the "brownfield" developments - former industrial pockets along Islington Avenue in Etobicoke, King and Dufferin streets downtown, and along Finch Avenue in Scarborough and North York - are less likely to put the locals in a tizzy.

The residents who are there now largely welcome well-planned new housing because improved services and retail are generally likely to follow, not to mention improved property values.

Other Toronto low-rise development trends include demolition and replacement such as that seen along the first suburban tracts on Bayview Avenue and around Sheppard and Finch avenues in North York. In more established central areas, you're more likely to see homes in working-class, semi-detached neighbourhoods replaced with intensified townhouse or row house projects, such as you'll find in several pockets along Dupont Avenue.

Tax for Businesses Changed

The Ontario government has announced that it will change rules governing the way municipalities are allowed to charge property taxes on businesses and multi-residential properties for the 2004 taxation year.

Under current rules, municipalities are not allowed to raise tax rates for industrial, commercial and multi-residential properties if their rates are higher than provincially-mandated targets. Toronto is one of 35 Ontario municipalities whose current tax rates for these properties are higher than the provincially-mandated targets and, as such, the City has not been allowed to raise their tax rates.

The changes announced by the provincial government will allow the affected municipalities, including Toronto, to again raise tax rates for business and multi-residential properties for the 2004 taxation year. Under the new rules, these municipalities will be able to apply a property tax rate increase on business and multi-residential properties that is no more than half of any tax rate increase on residential properties. For example, an affected municipality seeking a two per cent increase in residential taxes could raise business taxes by one per cent.

In the past, the Toronto Real Estate Board has supported the restriction on property tax increases for business properties in Toronto because of the extremely high and uncompetitive property taxes already paid by these properties.

High demand for trade-ups

Reported by Elizabeth Church at The Globe and Mail, demand for more expensive homes from seasoned buyers is helping to push residential real estate prices to record levels.

The average sale price of an existing home in Canada's major markets hit a high-water mark last month of $233,921 on slightly higher volume. That represents a 10.5-per-cent jump from this time last year and is the latest in a string of records set by the booming industry.

At the same time, a survey released yesterday shows a dramatic drop in the number of young people under 25 who say they expect to buy a home in the next two years. Instead, the biggest increase in home-buying intentions was found among the 35 to 44 set, traditionally move-up buyers, where one-third said they would likely be in the housing market in the next two years, up seven percentage points from a year ago. Almost half of respondents in the Ipso-Reid survey, sponsored by Royal Bank of Canada, said they planned to buy a bigger home.

Grow houses growing problem

Commercial marijuana grow operations are a toxin that’s slowly poisoning residential neighbourhoods, according to Ontario’s Minister of Community Safety and Correctional Services.

“Like a cancer, what is visible on the surface seldom reflects the depths of the disease inside,” Monte Kwinter added in his speech to over 160 delegates to the Green Tide Summit in Toronto. The summit, co-hosted by the Ontario Ministry of Community Safety and Correctional Services and the Ontario Association of Chiefs of Police (OACP), brought together representatives of various levels of government, law enforcement officials, public utilities, and the private sector in order to discuss ways of dealing with what police say are an increasing number of commercial grow houses in residential neighbourhoods.

Delegates to the conference, including representatives from the Real Estate Council of Ontario, the Ontario Real Estate Association, and the Canadian Real Estate Association, were asked to identify areas where they depend on another industry or group for action to address the problem of grow houses. Delegates were then asked to identify how their organization or industry could address the issues brought forward by other stakeholders.

Representatives from the private sector outlined the impact grow houses have on their own industries. John Sanderson, CEO of Aurora Hydro and representing the Electrical Distributors Association, said with grow houses consuming, on average, 10 times the amount of hydro that residential customers use, the EDA estimates grow houses resulted in $260 million in lost revenues for public utilities in 2002-2003 alone. The loss is passed on to legitimate customers.

Andy Dykstra, from State Farm Insurance, told the conference that his company had 83 claims related to grow houses in Ontario from 2001 until Feb. 2004. Dykstra said 71 of the claims resulted from damage done to the house as a result of structural alterations from grow ops and damage, including mould, caused by humidity.

The average payout on those claims was almost $47,000 per claim. Eleven claims were as a result of fires in grow houses, with an average payout of $108,000 each. In total, Dykstra said, State Farm estimates it has paid out $4.5 million in grow house-related claims since 2001 in Ontario, and he suggested many insurance companies are changing their policies to exclude damages caused by grow operations.

“Coverage for many types of damage caused by grow operations on rental policies is excluded,” he said. “Most claims are filed under home owners’ policies.”

Dykstra offered the example of an unconventional real estate transaction where the title to a home changes hands, and an insurance policy is taken out on the property. Once the grow operation wraps up, a claim is then filed, and the homeowner claims ignorance of the fact that there was ever a grow operation in place.

Dykstra said scenarios like this one have resulted in insurance companies increasingly taking steps to exclude damage caused by grow operations in their policies.

The information, suggestions, and commitments presented at the summit will be compiled into a report to be released later this spring.

$56M for Affordable Housing

More than 2,300 affordable housing units will be created in municipalities in Ontario through $56 million in funding being provided under the Canada-Ontario Housing Program.

The announcement was made by the Honourable Andy Scott, Minister of State (Infrastructure) and Minister responsible for Canada Mortgage and Housing Corporation (CMHC), and the Honourable David Caplan, Ontario's Minister of Public Infrastructure Renewal.

The funding includes $41.8 million for 26 pilot projects located in eight municipalities; $13.2 million allocated for affordable housing in four municipalities; and $1.0 million for repair and renovation of housing in northern Ontario.

The Canada-Ontario Affordable Housing Agreement is a five-year commitment to create affordable housing in Ontario. This partnership combines $245 million in Government of Canada funding with matching contributions from the Government of Ontario, municipalities and other private and non-profit partners.

To find out more detailed information, go here.

New Home Construction Up

The seasonally adjusted annual rate of housing starts was 214,000 in February compared with 195,500 in January, according to Canada Mortgage and Housing Corporation (CHMC). Starts rebounded nicely in February,” said Bob Dugan, Chief Economist at CHMC's Market Analysis Centre. Both singles and multiples rose during the month to bring total starts back above the 200,000 mark. Housing demand remains robust, thanks to strength in employment and consumer confidence. Recent interest rate cuts by the Bank of Canada will help stimulate demand further and with resale markets still relatively tight, many households will look to new housing to meet their needs.”

The seasonally adjusted annual rate of urban starts rose 10.9 per cent to 188,500 units, with most of the increase coming from multiples. Multiple starts increased 18.6 per cent in February to 88,500, while single starts rode 4.9 per cent to 100,000.

The seasonally adjusted annual rate of urban starts rose in all regions except British Columbia. Starts were up 11.9 per cent in the Prairies, 24.5 per cent in Quebec, 11.6 per cent in Ontario and 12.2 per cent in the Atlantic Region. In British Columbia, seasonally adjusted starts fell 9.1 per cent due to a 20.8 per cent decline in multiple starts.

Rural starts in February were estimated at a seasonally adjusted annual rate of 25,600 units. Year to date actual urban starts were 7.1 per cent lower in February than in February 2003. Single starts declined 3.5 per cent, and multiple starts were off 10.3 per cent.

Value added house features

A recent study by the National Centre for Real Estate Research in the United States calculated the value that is added to the selling price of a home with the following home features:

- Each additional bathroom adds 10% - 12 %

- A master bedroom sitting area adds 8%

- A fireplace adds 10 to 12%

To see the full report, go to: www.REALTOR.org/research

A Million Potential Buyers?

Reported by by Simon Avery at The Globe and Mail, about 40 per cent of all renters in Canada under the age of 50, or slightly more than one million people, can afford to purchase their own home. That is a dramatic rise from the 300,000 renters who could afford to buy during the interest rate peaks of the early 1990s, according to the Toronto company Clayton Research.

The percentage of renters choosing to sit out of the ownership market is slightly less in Ontario, where 36 per cent of them under age 50 can afford to buy, based on an average starter home price of $175,000. British Columbia has the smallest proportion of renters who can afford buy, at 26 per cent, and Manitoba scores the highest percentage at 66 per cent, Mr. Clayton said.

The average monthly rent in 2003 was $1,077 for a condominium bachelor apartment and $2,038 for a three-bedroom unit, the Toronto Real Estate Board says in its first rental market report based on leasing transactions done through the multiple listing service.

More than 12,300 condo apartments and townhouses were listed for rent on the MLS in 2003 and 5,824 rented, TREB says.

Spring Market Outlook

Inflation falls to two-year low

The Canadian annual inflation rate dropped to 1.2 per cent in January from 2.0 per cent in December, 2003, the smallest increase in almost two years, Statistics Canada said. Meanwhile, the American inflation edged up 0.5 per cent, the largest increase in nearly a year as higher costs for energy products and gasoline pushed U.S. consumer prices up. (Source: Toronto Star, February 20, 2004)

Rate drop opens door for more buyers

As of January 27, 2004, the five-year rate, after discount, was 4.75 per cent; the typical discounted rate was 5.35 per cent in mid-November. The shift in the mortgage rate is enough to unleash many potential new buyers into the market. As a result, the outlook for new home and condo sales this year in the GTA is looking better and better. Will Dunning is raising his forecast of new home sales for this year to 46,500 from 39,800. (Source: Toronto Star, January 31, 2004)

Boomers plan to retire in style

Many of Canada’s baby-boomers – people born between 1946 and 1964 – are turning their backs on the old notion of downsizing and are trading up to pricey luxury digs – even if it means taking out a new mortgage less than a decade before they retire, an industry study said. Factors that influence the retirement decisions of baby boomers include the accumulation of significant wealth through stock markets and through high-paying jobs, inheritances and being healthier and more active over-all. 39 per cent of Canadians between the ages of 55 and 64 had a mortgage in 2001, up 4 per cent from 1999, Statistics Canada reported. (Source: The Globe and Mail, and Toronto Star, February 19, 2004)

Housing affordability to remain high

The housing affordability index for Toronto edged up only slightly to 38.4 per cent at the end of 2003, from 38 per cent at the end of 2002, despite the fact average house prices rose 5.2 per cent, RBC Financial Group stated in a report. (Source: Toronto Star, February 18, 2004)

Bank predicts slowing rise in house prices

“For 2004, we expect affordability to remain solid as borrowing costs will continue to be favorable, while pricing growth will moderate thanks to an improvement in housing supply,” stated RBC economist Carl Gomez . The bank said the proportion of pre-tax household income needed to service the costs of owning a home averaged 31.9 per cent in 2003, up marginally from the all-time low of 31.7 per cent in 2001.(Source: Canadian Press, February 17, 2004)

Second Best February Ever

TORONTO -- Thursday, March 4, 2004

Toronto Real Estate Board Members recorded 6,060 sales in February, up two per cent from February of 2003 and the second best total for the month ever recorded.

"A number of factors that contributed to this result," noted TREB President Cynthia Lai. "The leap-year gave us an extra sales day in 2004 and last year's weather was even worse than in this February. Nevertheless, any month with over 6,000 sales is indicative of a very healthy market."

Prices trended higher in February, with the GTA-wide average coming in at $310,190, up five per cent over the January figure of $295,989, and up seven per cent from the $289,954 recorded during February of 2003. "This increase occurred across all four of TREB's four geographic areas," The President noted, "and was accompanied by a two per cent increase in the median price, which went to $265,000 from January's $259,978. However, it should be noted that not all districts or neighborhoods were equally active. Prices in the East end of Toronto, for example, rose one per cent over 2003."

Breaking down the total, 2,334 sales were reported in TREB's 28 West districts and averaged $287,714; 988 sales were reported in the 14 Central districts and averaged $419,686; 1,227 sales were reported in the 23 North districts and averaged $338,844; and 1,511 sales were reported in TREB's 21 East districts and averaged $250,045.

A shortage of lots

Smaller builders are being shut out

As reported by the Toronto Star, there is a critical land shortage in the Greater Toronto Area. There are virtually no serviced housing lots for sale to builders, and the cost of developable land has been pushed to the highest prices ever — as much as $300,000 an acre for draft-approved land in Brampton, and much more in areas closer to the city core.

In Brampton, a standard-sized building lot costs more than $3,000 per foot of frontage — as much as 30 to 50 per cent higher than a year ago.

In Markham and Richmond Hill, it's as much as $4,000 a foot or more, but there's nothing available to buy anyway.

As a result, the small- to medium-sized builder, who can't afford to develop his or her own land, is facing a critical problem: how to stay in business.

How did this happen? There are several reasons.

One important factor is the housing boom, which, in the past four years, has sold about 130,000 low-rise homes — more than at any other time in the GTA's history. We have not been able to replace the lots as fast as we're consuming them.

Next, there's the timing of municipal approvals. It takes five to 10 years to transform a piece of rural land into residential housing lots.

Many complex issues must be resolved before homes can be built, including sewage, water and transportation capacity to service new subdivisions.

Then there's the political will. Many suburban municipalities are rural in nature and want to limit growth. The new provincial government's proposed greenbelt area and temporary freeze on rezoning agricultural land there have exacerbated the problem. With these policies, Premier Dalton McGuinty seems to be encouraging municipalities to retard development.

But immigrants from out of town, province and country are still streaming into the GTA in record numbers. Where are they going to live?

Most want their own home and piece of land. That's one of our core Canadian values. The province is talking about redevelopment and intensification within the city limits. But an inner-city condominium is not most people's first choice.

Another problem is the changing nature of the development industry. It's now only for the big players. A small or medium-sized builder can't afford to develop his or her own lots; it's too expensive.

Take a 50-acre development in Brampton, which might yield 500 or so homes. Today, the land cost would be $15 million and the servicing, financing and municipal levies will cost another $15 million.

That's $30 million just to bring the land on stream. Very few builders have access to that kind of money, so most land development is concentrated in the hands of a very few large companies.

It wasn't always like this. In the 1960s, '70s and early '80s, when GTA land was relatively cheap, there were many players in the development business. Land was plentiful and approvals were quicker compared to today. Builders could pick and choose the best lot deals, and there was a real market that kept land prices in check.

That all changed in the mid to late '80s, when most developable land was bought up by a small group of companies. Because of the concentrated buying effort, prices rose and, as they did, fewer and fewer small developers could afford to stay in business.

By the end of the '80s and beginning of the '90s, most development land in the GTA was controlled by a handful of companies.

When the recession hit in 1989, there was suddenly a huge surplus of building lots and the crazy land prices of 1988-'89 could no longer be sustained. That put financial pressure on companies that had borrowed heavily to purchase and develop land.

When developers could no longer sell lots to builders at the prices they needed to justify their high land costs, they sold them to their own building companies instead — often at inflated prices.

Developers that didn't have their own building companies quickly created them.

In that way, even if the building side of the company lost money, developers could show their financiers that the land cost was not out of line.

As a result, land prices remained high throughout the '90s, even though there were thousands of lots available across the GTA. House prices did fall, but the decrease resulted as much from reduced builder margins and trade prices as it did from lower land prices.

Today, there are simply no lots on the market. Almost all developable land is controlled by a small group of companies that sell to their own building arms, so land prices are skyrocketing.

Small to medium-sized builders, who construct 100 to 300 homes a year, are almost out of business. Even larger builders, who produce 500 to 1,000 homes per year, can't buy enough land.

The GTA needs small and medium-sized builders; they keep the industry healthy and honest. They are often more efficient, keep prices down, customize homes and serve buyers on a personal level. But they are an endangered species.

One major Toronto builder is combating the land supply situation by buying up development land at the current high prices, servicing it himself and selling it to his building arm at a price well below industry norms. That allows him to sell homes for $10,000 to $20,000 below the competition.

But that option is not available to most builders, because of the capital financing required.

What can be done?

Governments would have to change their development policies to make approvals speedier and encourage greenfield or suburban subdivisions, but that seems unlikely and the new supply of lots would be largely tied up by the major players.

The provincial government could release its own surplus GTA lands for development. But to make that land affordable for smaller builders, the province would have to front the costs of installing water and sewer services. That seems unlikely.

If land prices go too high, the market might force an adjustment, but in this low-interest, high-growth environment, that also seems unlikely.

There's only so much people can afford. At least in the short term, it looks like we're in for higher land and lot prices, which means house prices will also continue to rise.

Baby Boomer Dilemma

To many Baby Boomers, it must seem like just yesterday that the moving truck pulled away, leaving you to unpack boxes in the kitchen while the kids raced each other up the stairs to lay claim to their bedrooms.

Could YEARS have past since you planted the seedling in the front yard, where now stands that majestic tree? Unbelievable as it may seem, you blinked and became... your parents!

Millions of baby boomers are now facing, or will shortly face, The Big Question: "What Do We Do About The Family Home?"

With children grown and leaving for college, or for homes of their own, some fifty-something folks find themselves grappling with a decision that many are just not ready to make.

Most boomers bought their present homes assuming that they would one day make a clear-cut, economic determination. They firmly believed that once the kids were out, they would sell the big house, pocket the profit, and scale down. They logically figured that no one in their right mind would continue hanging onto a four bedroom, two-and-a-half bath house after the children left.

Someday in the distant future, they mused, they would be heading for something smaller, something more manageable, something more appropriate for two people. Suddenly, THE DAY arrives!

Wonder of wonders, many empty-nesters find themselves completely unprepared. Like deer caught in the headlights of a car, they are paralyzed at the thought of having to move.

While realizing it probably does not make economic sense to maintain a residence far too big for their present every day needs, many empty-nesters still stay put. Why? The answers are as simple, and as complex, as human beings themselves.

First and foremost is the inability to face the notion that they have actually reached the "Someday" stage! Selling the big house smacks of being old. Baby boomers do not look , or feel, "old."

In addition, their home holds many emotional ties. Every room conjures up memories: all those family functions, all those prom pictures, all those birthday parties.

Next, there is the real issue of the disruption a move invariably causes. The process of selling one house, packing everything, buying another residence, moving, and then unpacking is exhausting.

And, where would they go? Still vibrant -- and probably still working - most baby boomers are not ready to pull up stakes and head for a smaller town, or a retirement building.

Even if the perfect condo or townhouse complex exists just around the corner, many empty-nesters are concerned about drastically changing lifestyles. What if they hate condo living? What if they miss their backyard? What if they can't breath with neighbors so close?

What Is The Answer?

While the decision of WHEN to give up the big house will remain a personal and emotional one, some objective financial factors should, rightfully, be contemplated now:

Is The Area Appreciating Or Depreciating? Empty-Nesters would be very wise to keep a finger on the pulse of the real estate market in their area. Tracking the appreciation record of an area is not a complicated matter.

For the Internet savvy, you might want to track sale prices of homes on streets and in condo buildings that you choose. In addition, call your local Realtor and request a CMA (Comparative Market Analysis). This should tell you the direction home values are taking in your area. If an area shows a flat rate of appreciation or, worse yet, if it reveals depreciation, then you may want to seriously consider selling sooner rather than later.

Do You Have The Ability And Desire To Keep Up With Maintenance?

Let's face it: All residences require maintenance, and the larger the dwelling, the more there is to do. If you have reason to believe that you may become less than diligent about keeping up with repairs, even as MORE chores show up (the house isn't getting any younger, either!) , then you may want to consider selling.

Homes that show signs of deferred maintenance (a fancy way of saying someone was too lazy, or too busy, to take care of things) will fetch less money on the marketplace.

When Will Major Components Need Replacing?

The longer that you remain in your home, the more exposure you have to expensive, necessary replacements. How old is your roof? What is the age of your heater? Your air conditioner?

In a nutshell, you should take a cold, hard look at the reality of your real estate. Determine how much extra it may cost you to remain in your present "comfort zone" for a few more years, and then decide if you are willing to pay the price.

The 100% financing comeback

As listing agents, we see the terms and conditions that buyers are offering when they make an offer to buy property. One trend we have noticed is that many buyers are electing to do 100% financing.

Why is this happening? Our thoughts are that perhaps due to the low interest rates the buyers are leveraging themselves to the maximum amount possible. In addition, buyers are wanting to keep cash in their pocket for property repairs. Whatever the reason, make sure you fully understand the consequences of 100% financing, and its terms. This can be an "iffy" situation in the event of a downturn in the real estate market.

Softer housing outlook

The Globe and Mail reports that the buying spree by young families entering the housing market for the first time is over, and 2004 will see a slight softening of the real estate market across Canada, particularly in the Toronto area, according to projections released this week by RBC Financial Group.

First-time buyers dominated the market in 2003, which set records for house sales and prices.

The bank's affordability index measures the proportion of pretax household income that is gobbled up by the cost of owning a home. It includes property taxes and utilities.

The report says the index rose nationwide in the last three months of 2003 -- to 32.2 per cent from 31.9 per cent in the previous quarter.

In the more expensive Toronto area, the index rose to 38.4 per cent of household income in the months October through December from 38 per cent in the July to September period.

The RBC predicts that 206,300 new homes and condominiums will be built in 2004 as developers continue to play catch-up with demand.

But condo construction will fall in the Toronto area, where supply is outstripping demand. Prices also are expected to decline because of the city's relatively high rental vacancy rate and the flood of new units built in the past two years.

Minimum standards for inspectors

Quebec Association cites concerns over lack of education, insurance

The Association des courtiers et agents immobiliers du Québec (ACAIQ) is calling for government to regulate the home inspection industry, saying the lack of both training standards for inspectors and errors and omissions insurance represent risks for those buying homes.

"Even though the building inspection practice is not legally regulated, a real estate agent must recommend to a buyer that he make his offer to purchase conditional on an inspection," said Robert Nadeau, president and CEO of ACAIQ. "Given this situation, we have undertaken to define a minimum inspection standard to protect one and all, which standard, in fact, is the strictest in North America."

ACAIQ also says that present standards allowing individuals to become home inspectors without standardized training puts the purchase of a home, “for a majority of people…the greatest investment of a lifetime” at risk.

A national initiative designed to identify current gaps in the training curriculum, the occupational standards, and the core competencies – the skills and knowledge needed to do the work of a building, home or property inspector – was launched as part of a joint effort by the Canadian Association of Home and Property Inspectors (CAHPI), the Alliance of Canadian Building Officials (ACBOA), and the First Nations National Building Officers Association (FNNBOA) and the national Construction Sector Council in December 2003.

The program also aims to develop national certification and accreditation models, so that the occupational standards developed by the Canadian Home Inspectors and Building Officials (CHIBO) in 2001 can be applied across Canada.

The inspection industry across the country lost its errors and omissions insurance in September 2003, when Emcon Group Inc., the carrier for CAHPI, told the association it would no longer be providing E&O insurance to members.

The provincial home inspectors’ associations decided to advise their members that they didn’t have to carry the insurance, but they were obligated to disclose the fact they were not covered to potential clients. CAHPI is looking at developing a self-insurance plan by September of this year.

Boomers Go Upscale

Aging demographic looks for bells and whistles

Wealthy baby boomers are shying away from the traditional path of downsizing properties as they approach retirement and instead are looking to upgrade to more expensive homes, according to a study released by Re/Max.

The First Wave report examined aging baby boomers and their impact on retirement housing in 18 major Canadian centres. The study found that a significant number of baby boomers – a demographic that tops out at those now 58 years old – were upgrading to more expensive properties. Some, the report says, are even assuming mortgages, a surprising trend at an age where many are enjoying the benefits of not having to make monthly payments.

“As the first wave of baby boomers head into their retirement years, REALTORS and builders alike are scratching their heads,” says Elton Ash, vice-president and regional director of Re/Max of Western Canada. “Bigger, better, and more expensive homes? Most of us work all our lives to be mortgage-free. The thought of incurring debt at this stage of the game has given many of us reason to pause.”

According to Statistics Canada, boomers holding mortgages is becoming more common. In 1999, 59 per cent of Canadian homeowners between 45 and 54 and 35 per cent of homeowners between 55 and 64 held mortgages. By 2001, those figures had jumped to 61.6 per cent and 39.1 per cent, respectively.

The report says that baby boomers are not content to live with the existing housing mix, especially as it pertains to retirement living. Low maintenance, security, and location are major factors driving activity. As a result, the report says, condominium sales are on the upswing across the country, representing anywhere from five per cent of the total sales activity in Cornwall, Ont., to a more significant 31 per cent in Vancouver and 30 per cent in cities like Toronto and Edmonton.

With the appeal of investing in U.S. real estate falling due to the high cost of health insurance and a high Canadian dollar, aging baby boomers are moving into major centres to be close to family, friends, cultural activities and health care services. Luxury condos, golf and adult-lifestyle communities, secondary residences, and smaller homes in better areas are prime targets for boomers looking to change residences.

With Canada’s senior population expected to double in the next 20 years to a level of approximately seven million, the report says housing inventory levels may be heavily taxed in the future, as builders and developers are only now moving to accommodate this demographic.

Sales up Six Percent Over 2002

Toronto annual sales for 2003 rose six percent over 2002, the Canadian Real Estate Association reported today in their 4th quarter CREAstat Report. In addition, the report stated that "resilient consumer confidence and attractive mortgage rates bode well for housing activity in the first half of 2004."

Other highlights of the report include:

-- In the fourth quarter, activity for condominiums in all price ranges above $260,000 rose.

-- Annual sales advanced in all areas of the city, led by East Toronto.

See full report.

January unit sales cool

MLS® prices continue to rise

January 2004 MLS® sales show higher prices but fewer units sold in many major Canadian markets, with an improvement in inventory of resale homes. Victoria and Winnipeg were two markets that went against the national inventory trend, with Victoria reporting a 21 per cent drop in the number of listings compared to January 2003. The national increase in inventory was driven primarily by increased numbers of listings in Montreal and West Québec.

MLS® sales from the Real Estate Board of Greater Vancouver tallied 1,954 units last month, down just 0.6 per cent from January 2003 as Vancouver’s red-hot sales market kept up its pace. The lack of inventory of existing housing pushed the benchmark price of a detached home in Vancouver up 15.4 per cent to $461,370 compared to January 2003. “The number of sales for January show the real estate market is solid and remains an attractive investment,” says Bill Binnie, REBGV president.

January sales results in Ottawa slipped to 644 units, down only slightly from the 653 sales recorded in January 2003, and only slightly off December 2003’s pace of 657. Average MLS® sale price rose from $217,882 in December to $228,417 in January. ”For the month of January, the supply of residential properties for sale has increased, along with the average number of days for a home to sell. These statistics might suggest a market that is becoming more balanced,” says Jeff Greenberg, first vice-president of the Board.

The Toronto Real Estate Board reports sales eclipsed the 4,000-unit plateau for just the fourth time in January results. The total of 4,256 sales was down from the record-setting level of 4,869 recorded in January 2002, but was still a source of optimism, according to TREB president Cynthia Lai. “Although the figure is down somewhat from the record-setting 4,869 sales reported in 2002, it is a signal that sales this year will remain active.” The average sale price rose five per cent over January 2003 levels to $295,989.

Regina experienced a massive drop in sales, falling 35 per cent from 192 units sold in January 2003 to 119 in 2004. The total residential sales dollar volume of $12.7 million was also down 34 per cent over the $19.1 million recorded in January of last year, while the average price of all residential types sold during the month of $102,216 was up 3.6 per cent over 2003's $98,687. The number of active residential listings on the market at the end of January was 568, down 25 per cent from 2003’s 754 listings. “Despite the decrease in sales, demand remains very strong as indicated by upward pressure on prices and the reduced number of days to sell. We are hoping to see more of a balanced market in 2004 with a greater supply of good quality listings coming on to the market,” says Gord Archibald, executive officer of the Association of Regina REALTORS Inc.

In Greater Victoria, sales rose slightly from December 2003 levels and only slightly underperformed January 2003 results. The Victoria Real Estate Board recorded 452 sales, up from 446 in December and off marginally from the 493 sales in January 2003. "The total number of properties available for sale in January was 1,678, down 21 per cent compared to 2,124 in January of 2003. The low inventory and strong demand will continue to put some upward pressure on prices, but we fully expect more properties to come onto the market in the coming months,” says Victoria Real Estate Board president Carol Geurts.

The Greater Montreal Real Estate Board says sales dropped seven per cent from January 2003 levels while the total dollar value of those sales rose six per cent. Overall, there were 3,202 sales in January 2004, a decrease compared to January 2003, when 3,430 residential properties changed hands. The total dollar volume of units sold rose to $547 million, compared to $516 million in January 2003. "Real estate is a worthwhile investment that contributes to the increase in the wealth of households in the medium and longer term," says Michel Beausejour, GMREB chief executive officer. "For the past few years, low interest rates have been very beneficial to first-time home buyers and everything leads us to believe that interest rates will remain low."

Edmonton recorded total sales in January of 963 properties valued at $174 million, down 11.73 per cent from January 2003. At the same time last year, there were 1,091 sales worth $178 million. In December 2003, Edmonton saw 1,049 sales worth $184 million. “In the early ’80s and mid-’90s there was a glut on the market with inventory running from 5,500 to 7,700 homes. Today we have a balanced market with strong sales from a rapidly turning and adequate inventory,” says EREB president Bill Briggs. “Now that we are out of the January deep-freeze, the market activity will increase to bring us up to the norms we experienced last year.”

The Calgary Real Estate Board reports the third best January on record for MLS® sales. CREB recorded 1,495 MLS® sales in January 2004, up from December’s 1,360 and down from 1,640 residential units sold in the month of January 2003. The average combined residential sale price in January 2004 reached $218,904 – up from December’s $211,665 and also up over last January’s average residential price of $208,999.

Second Best Year for New Homes

“There were 2,330 new homes sold in the Greater Toronto Area in December, 2003, bringing the annual total to 43,776 units, the second highest level ever recorded” according to Mark Parsons, President of the Greater Toronto Home Builders’ Association (GTHBA).

“Looking ahead, Parsons is forecasting 40,500 unit sales in 2004. “All of the factors that have sustained the market for the past four years remain the same with the exception of interest rates, which have dropped even further and are forecast to remain very low,” said Parsons.

The new home sales report prepared for the GTHBA by RealNet Canada Inc., revealed that multiple housing product types (apartments, town homes and semi-detached) continue to form the majority of all new home sales in the GTA, “We’re selling an average of 1,000 condo apartments a month in Toronto, which is a very healthy market by any standard,” stated Parsons.

For further information, please click here.

Belinda For Interest Deductibility

Belinda Stronach, candidate for leadership of the Conservative Party of Canada has endorsed limited mortgage interest deductibility as part of her election platform.

In launching her candidacy on January 20, 2004 in Aurora, Stronach stated “To give hard-working Canadians a break, let’s make mortgage interest partially tax deductible.”

This suggestion echoes similar calls for mortgage interest deductibility by Ernie Eves during the 2003 Ontario provincial election and by former Conservative Leader Joe Clark, who advocated limited mortgage interest deductibility in the 1970’s.

No bubble, no trouble

In a year when Canada’s economy was hit by a number of nasty surprises, the housing market stood out as a good news story in 2003. Boosted by historically low interest rates, housing starts have rocketed to a 14-year high. And, in the resale market, the volume of unit sales is on track to reach a new record level, fuelling near-double-digit gains in prices for the second straight year. Not every local market across the country is turning in a sizzling performance this year – Ottawa and Halifax are two notable examples where conditions have cooled. But, for the most part, markets from coast to coast have seen activity ratchet up even further.

Better still, conditions in Canada’s housing market were still healthy as 2003 rolled to a close. As such, while a good case can be made that housing activity will return to more sustainable levels in the 2004-05 period, this shift will represent more of a cooling off than a major downturn. TD Economics is projecting Canadian housing starts to dip from 2003's estimated 220,000 tally to 200,000 units in 2004 and to 185,000 units in 2005 – a rate still well above the demographically-driven level of 170,000 units and the average of roughly 150,000 units chalked up over the past decade. In the resale market, unit sales are likely to edge down by a mere 3 per cent per year in unit sales in 2004-05. Such a mild drop in demand is not expected to put much of a dent in average resale prices, which are expected to increase by roughly 5 per cent per year in 2004-05.

Although housing markets have continued to defy gravity over the past year, there are few signs that the current expansion in the housing market is at serious risk of turning into a late-1980’s-style bubble that ultimately burst, and which led to a painful correction in the early 1990s. And, given that starts last broke the 200,000 mark in the late 1980s, it is not entirely surprising that some comparisons are being made between conditions then and now. However, as the table on page 2 shows, the Canadian housing market in 2003 is resting on much healthier underpinnings.

Interest rates in Canada are much lower now than in 1989. In the late 1980s, inflationary pressures were mounting, which prompted the Bank of Canada to raise interest rates to punishing levels in both nominal and real (inflation-adjusted) terms. Fast forward to 2003. Not only are interest rates about half of their levels recorded in the late 1980s, but the central bank’s ongoing success in keeping inflation in check implies that rates will remain relatively low over the medium term. In addition, the mortgage rates shown in the table represent “posted” rates. Today, financial institutions are offering customers more generous discounts off the posted rates than they did back in the late 1980s.

Despite their strong upward trend over the past four years, gains in average prices for new and existing homes – both in real and nominal terms – pale in comparison to those chalked up in the late 1980s.

Given the relatively benign interest rate and price environments, housing has remained considerably more affordable in the current cycle. Moreover, the lower ratio of the cost of servicing debt to income suggests that households are in better shape financially, and less exposed to a possible increase in borrowing costs.

In the new housing market, inventories of new homes in 2003 are about half the level posted in 1989, indicating that supply and demand conditions are better balanced.

The speculative element in both the new and resale markets that fueled the late-1980s housing bubble is virtually absent this time around.

Speculative element missing from current boom

The last bullet point deserves some clarification. The virtual assurance of locking in a large capital gain on both residential building and home purchases in the late 1980s poured considerable fuel on the fire. And, although sharp increases in activity were occurring in most major markets, this dynamic was no more evident than in the high-flying Toronto condominium market, where prices were rising at an alarming rate of around 30 per cent by the end of the 1980s. Notably, with highly-leveraged investors and financiers all in search of quick returns, an increasing number of condominium projects in the Toronto area were financed and built with fewer than one-half of the units pre-sold.

Contrast this with current conditions in the Toronto condominium market. Certainly, by any measure, activity in the city’s condo market remains red hot. However, at about 8 per cent per year since 1999, prices are climbing by about one-third of the late-1980s pace. Moreover, most developers and financiers – made wiser by memories of the early 1990s – are now requiring that 70-80 per cent of the units be pre-sold. Lastly, investment activity now appears to be driven much more by prospects for rental income than purely by capital gains. In fact, with the income picture in Toronto recently souring in response to the spike in rental vacancy rates in the Toronto region, the number of investor-held condos in Toronto actually fell in 2003, and is stuck at levels below those recorded a decade earlier. Rather, it is first-time homebuyers that have been driving activity in the Toronto condo market, attracted by the very low interest rates – a situation that appears to be mirrored in other markets across the country.

Economic picture to support Canada’s housing market

The absence of any visible excesses this time around bodes well for Canada’s overall housing market going forward. What’s more, the outlook for a healthy macroeconomic environment in Canada will create a favourable backdrop for housing activity over the next few years. More specifically, TD Economics is calling for real GDP growth to bounce back to 3 per cent per year in 2004-05 from this year’s sluggish 1.6-per-cent rate, pulling both job markets and personal income gains along for the ride.

Still, there are some developments taking shape that should skim some of the froth off housing demand over the next few years. These include a dwindling pool of first-time buyers, some further erosion in household affordability, and weakening trends in population growth.

The pool of first-time buyers is dwindling

Low interest rates and the lure of ownership have spurred many renters to enter the housing market since the current boom in Canada began in earnest in 1997. While it is difficult to get up-to-date figures on the total supply of renters, recent 2001 Census data show that even before the most recent spike in the national rental vacancy rate, the number of rental households had stagnated. And, while the Census data on renter households do not include young individuals who increasingly move directly from their parents home to homeownership – by-passing the rental market altogether – there is little question in our minds that much of the pool of renters has already been tapped. On the bright side, the slowdown in the first-time buyers market will be partially offset by continued brisk demand from move-up buyers.

The economics of buying will continue to erode

The cost associated with buying an average home has already moved off its lows, as prices have risen and mortgage rates have edged up. These trends are expected to continue in the 2004-05 period. As we noted above average resale prices are expected to continue to increase at a fairly rapid 5-per-cent annual clip, partly in response to the rising share of move-up buyers who tend to purchase more expensive homes than their first-time counterparts. And, while a softening rate of inflation and the strong loonie will give the Bank of Canada leeway to keep short-term interest rates unchanged over the next few quarters, by late 2004, the central bank is expected to begin to gradually take its foot off the monetary accelerator. In any event, bond markets will likely anticipate these moves by early 2004, putting some upward pressure on bond yields throughout the forecast period. We expect the 2-year bond yield to rise by between half and three quarters of a percentage point in 2004 and roughly one full percentage point in 2005. This would imply a hike in the 2-year mortgage rate of a similar magnitude, since residential borrowing rates tend to be driven off yields in the bond market.

Population growth will continue to slow

With the natural increase (births-deaths) in Canada’s population slowing over the past few years, the annual rate of increase in Canada’s population has slowed to about 1 per cent from the pace of about 1.5 per cent per year recorded in the late 1990s. Population gains are expected to hold at this lower level over the forecast period, weighing on overall housing demand.

Weaker demand to weigh on homebuilding

On the supply side, we expect to see the recent heady forward momentum continuing into early 2004, as builders follow through on projects that have received approval this year but not yet started. However, as 2004 progresses, the weaker overall demand profile, and a rising level of new home inventories, are expected to put somewhat of a damper on the rate of groundbreaking activity. And, given that a large part of the weakening on the demand side will be owing to the first-time buyer component, condominium development will be the most notable victim. In contrast, starts of single detached units are expected to hold relatively firm in 2004-05.

SOME THEMES FOR 2006-08 AND BEYOND

Looking beyond 2005, demographic factors will become the most important driver of housing market activity. For the nation as a whole, housing starts are projected to settle down to the range of 170,000-175,000 units per year in the 2006-08 period, which is in line with our projection of the demographically-driven level. This figure was arrived at by using population projections from Statistics Canada, and then estimating growth in the number of households. Moreover, we factored in a modest amount for conversions and demolitions of existing properties.

Looking out to the end of the decade and beyond, the rate of homebuilding activity is expected to slow even further. Most importantly, annual population growth is projected to continue to slip gradually over the next two decades – from the current rate of 1 per cent to 0.4 per cent – as the nation’s birth rate remains under downward pressure and as baby-boomer generation moves through their lifecycle. In fact, by 2026, births and deaths are likely to converge, meaning that advances in Canadian population will be fully dependent on gains in net international immigration. As such, growth in the number of households in Canada is slated to slow over the long run, pulling down annual housing requirements.

But, to focus solely on changes in the total population would miss other key trends that will likely influence housing requirements going forward. For one, Canada’s aging population base suggests that requirements for new housing will fall by less than that implied by population forecasts. This is because as individuals get older, they tend to form smaller households. And, second, the rising share of immigrants will likely exert a force in the opposite direction, since new Canadians have higher propensities to rent as well as to live together in larger numbers than Canadian born, at least during their first five years in the country. Putting together all of these factors, the rate of annual housing starts in Canada is likely to ease gradually to about 100,000 units per year by 2025.

The implications of changing demographics also extend to the type of housing required. Residential developers will focus their attention on satisfying demand for the fastest growing segments of the population, which include retirees as well as prime move-up buyers (aged 45-54). As a result, dwellings that carry lower maintenance demands, such as condos and townhouses, will remain attractive choices, particularly for the former group. However, the needs of prime move-up buyers suggest that the markets for both larger homes and renovations will remain important within the overall housing landscape.

Finally, the implications of the demographic changes sweeping across the country will also hit Canada’s local markets in full force. Down the road, most markets will likely see overall demand for housing slow in tandem with a downshift in population growth. However, those that are most successful in attracting migrants in Canada will experience the strongest housing conditions. While the past is not necessarily a good guide of things to come, in recent years, Canada’s three largest urban centres – Toronto, Montreal and Vancouver – have attracted about three-quarters of new immigrants from abroad. And, although Calgary, Edmonton, Ottawa, and Halifax have accounted for a relatively small share of international migrants to Canada, they have benefited from significant net inflows of migrants from other parts of Canada. Among the nine major markets, only Regina and Winnipeg have experienced a decrease in combined international and domestic migration over the past five years, with the former witnessing an outright drop in total population. If recent trends prevail, these two markets will be especially hard pressed to record growth in housing activity over the long term – that is, unless changes in housing tastes prove to be more significant than projected.

A City of Neighbourhoods

Embrace the City of Toronto, the City that works! And more recently, a place of international admiration for being a City of Neighbourhoods—a diverse collection of small communities, each with its own unique imprint, identity and flavour, spread across the city’s inner core and outer fringes.

Home buyers are increasingly interested in the neighbourhood within which they will make their final purchase decision. Concerned about how established local character suits their lifestyle—purchasers seek a community spirit which enhances their sense of belonging and instills a shared sense of values and interest with their neighbours.

Canada’s Warm Welcome to the World! Toronto’s diversity of neighbourhoods has Canada’s unique view of immigration policy to thank. It is a fairly accepted notion that, while the United States has traditionally invited its immigrants to a “melting pot” culture, Canada has encouraged newcomers to preserve their rich cultural past and values—not only in terms of respect for the past but also in the hope that they will share it with their new neighbours, within a multicultural Canadian community.

With this warm welcome, over some 200 years, countless peoples from across the globe have come to settle in this country, many in larger urban areas where the opportunities to find work and a higher standard of living have flourished. The Town of York, the City of Toronto’s original settlement, came to be one of the country’s primary reception centres for new immigrants, a town bursting with vibrant economic activity, in constant need of new sources of labour. Given respect for their distinct cultures and values, a number of ethnic enclaves organically developed—neighbourhoods where a clear imprint of ethnic and cultural identity strengthened over time, reinforcing itself with each new wave of immigrants.

The Development of Unique Neighbourhoods! The location of these ethnic enclaves was influenced by the city’s rich industrial economy which took advantage of Toronto’s natural harbour. As a result, factories and work yards agglomerated next to the waterfront while working class immigrants tended to congregate within walking distance, primarily in the old centre of town adjacent to the waterfront.

The new ethnic enclaves such as the Ward, Kensington Market, and Cabbagetown, became reception areas for waves of immigrants from different parts of the globe—Jews, Eastern Europeans, Italians, Portuguese, Vietnamese, Irish and the list goes on. The Ward, bordered by present day Queen Street, Yonge Street, College Street and University Avenue, became a nucleus for East European Jews at the end of the turn of the century. By the end of World War II, an outdoor market had begun to develop just west of the Ward strongly influenced by Ward residents, becoming the focal point for the majority of the city’s Jewish population. To the west of Kensington evolved another enclave, Little Italy, created by a large wave of Italians following World War II.

In Toronto’s east end, Irish immigrants fleeing the potato famine settled along the west bank of the Don Valley, then known as Don Vale. The new settlers, for the most part working class unskilled labourers, were known for planting hardy cabbages in the front lawns of their modest homes, hence the inspiration for the neighbourhood’s appropriate title, Cabbagetown. In the 1870s-80s, new waves of British immigrants arrived to Cabbagetown, some more affluent than their predecessors, who built stately residences next to the existing worker’s cottages creating an unsegregated area uncommon for Toronto at that time.

At the same time, the Town’s industrial and political elite flocked towards more quiet and spacious locations to the north and west, capitalizing on the many pristine ravines which offered a perfect setting for upper class suburban life. As a result, an alternative set of neighbourhoods developed, with streets that followed the lay of the land shaded by rich green canopies overhead, cut off from the hustle and bustle of downtown life. Places like Rosedale and Moore Park to the north, or High park and Swansea Village in the west. One of these suburbs at the edge of the Town of York, the Village of Yorkville, began as a middle and working class residential neighbourhood which, a century later, had become the centre of Toronto’s Bohemian beatnik culture.

Neighbourhood Identity Still Strong! These neighbourhoods continue to live on. Toronto has managed to preserve its inner city neighbourhoods from the negative influences of crime and automobile dependency which so characterizes cities in the United States. Often bearing names that reveal the rich cultural identity of their past roots and the people and places that made them what they are today, some appear relatively unchanged while others have modified their identity along with changing times.

That is why today, Yorkville has transformed itself into a stylish neighbourhood, undoubtedly the home of Toronto’s most chic district—trendy cafes, unique shops and boutiques, expensive restaurants and art galleries. By day, a place for browsing or sipping an aperitif. At night a glamourous magnet forthe vibrant gentry of Toronto.

Kensington Market continues to thrive although its original founders have been largely replaced by new immigrants, as well as by residents who have come to appreciate the charm and strong sense of community inherent in the Market.

Local street signs continue to pay homage to Little Italy, home to CHIN Radio, Toronto’s multicultural radio station. It was not too long ago, however, that most of the Italians departed their downtown dwellings for larger suburban homes at Toronto’s northern fringe—places like Maple and Woodbridge. Little Italy’s old cafes, once meetings places for men and hot espressos, have been transformed into trendy cafes and pool halls for young professionals and students seeking a European flavour. As for Cabbagetown, it is now recognized as “Toronto’s emblem of renewed downtown living.” Given its vast array of architectural treasures and curious laneways, its proximity to downtown, and its picturesque natural landscapes, the area has served as a magnet for new buyers who have, by their own accord, turned to renovating their homes.

Neighbourhoods Still Welcome Newcomers! Toronto’s neighbourhoods were born from historical forces and fostered by Canada’s warm welcome for immigrants to share their culture, values and community in a new land. Moulded over time, they now offer lifestyles that have the power to appeal to any home buyer, and in a Canadian tradition, these neighbourhoods continue to hold out a warm hand to any newcomer who wishes to make that community their own.

In learning about the kind of community you want—its flavour, identity and character — you will be able to open the gates to the neighbourhood that best fits your dreams.

Enjoy it while it lasts ...

Mark March 2nd on your calendar. That day could well see an event take place that will not be repeated for months - maybe years - to come.

That Tuesday morning, the Bank of Canada - an Ottawa gang of monetary experts ruled by gnarly career civil servant David Dodge - will review the country's prevailing interest rates, and judge them to be too high. The result will be a drop in the Bank's key rate, followed almost immediately by a reduction in the prime at Canada's chartered banks, taking it down to just 4%.

That will be a mere quarter point above the lowest point in history for the cost of money, and have an immediate impact on business loans, lines of credit and, yes, variable rate mortgages. All of a sudden, the cost of a floating home loan will sink into the 3% range, which means the monthly cost of carrying a $100,000 mortgage will be a ridiculous $512. This will provide further proof that anyone still renting a place to live needs serious counseling.

The central bank will make this cut because the value of the Canadian dollar is still too high, which is hurting both exports and job growth, and because the economy is fragile enough to need another stimulative jolt. But, alas, this could be it - the beginning of the end. The morning after March the second could go down as the moment when interest rates touched bottom.

Already the U.S. Federal Reserve has signaled that rates in that country are set to rise, after remaining at historic lows since Nine Eleven. The American economy has started to rebound along with the global outlook; the war in Iraq should soon start costing a lot less; the Yankee greenback needs a boost; and some inflationary pressures are rearing their ugly little heads. All in all, America's cheap money policy did the trick, and the Fed is poised to tighten.

That means the Bank of Canada will not be far behind. Economists I carouse with say they believe rates here will also be traveling north later in 2004, and the Bank of Canada rate could be double what it is now within a year. That would translate into a prime rate at the corner bank of around 6%, and boost the cost of a five-year mortgage to 7%, or beyond.

Now, by historical standards, that is still a cheap borrowing. It was only a decade ago that a five-year mortgage cost 14%, while the average over most recent decades has been more than 11%. But, history be damned, a 2% jump in mortgage costs over the next number of months could be a major big deal for hundreds of thousands of Canadians.

That's because the current level of mortgage debt has never been higher. Cheap money has induced millions of people to buy far bigger, more expensive houses than they ever dreamed they could afford. It's led to bidding wars in demand neighbourhoods among people happy to plunk down $50,000 or $100,000 more than the asking price - because that translates into just $300 or $500 more a month. And that has inevitably brought us to this point where the average house price in Canada has never been higher - and continues to rise.

Million-dollar mortgages are now almost common in dazed communities like Toronto and Vancouver, and the demand for new mortgage money has never been higher. Housing starts have been at an annual level of 200,000 or so for the past three years, which has not happened before; and the resale market set another record last year.

This real estate boom has been in full flower now for about four years, fuelled by rock-bottom mortgage rates and the belief that housing is less volatile and more secure than the stock market and just as cashable as mutual funds. But, that could change quicker than most of us imagine.

If mortgage rates do jump 2% or so, monthly carrying costs on all variable rate mortgages will be higher. For those people who borrowed big to buy big, this can make life a lot less comfortable. Higher borrowing costs will also decrease affordability, reducing the number of potential buyers and cooling off the fires of home ownership. Ultimately, this kind of a trend will serve to drop prices a little as fewer buyers confront a market with more sellers.

A real estate bust? Certainly not - instead, the inevitable cycle downwards after a protracted cycle up. As usual, the last people in will be the ones impacted the most. But just about everybody who owns a piece of real estate could soon learn there definitely is a difference between houses and mutual funds. It's called liquidity.

Housing Starts Hit 12 Year High

Seasonally adjusted annual housing starts in Canada rose to 237,300 in October from 232,200 in September, making October starts the second highest monthly level in 12 years.

Octobers strong results continue to reflect low mortgage rates and strong consumer confidence. High activity in the resale market also confirms the demand for home ownership remains strong while creating spill over demand in the new home market.

Economic fundamentals, low inventories of completed and unoccupied units as well as a buoyant new housing market are keeping home builders active. Raising house prices are also encouraging home owners to trade up to more expensive dwellings; this in turn is boosting housing demand in both the new and resale markets, according to Canada Mortgage and Housing Corporation.

The annual rate of housing starts in urban areas in Ontario stood at 91,800 on a seasonally adjusted, annualized basis in October, up from 82,400 in September 2003.

Home Insurance Concerns

The Ontario Real Estate Association (OREA) has called on the provincial government to form a task force, headed by an MPP, to investigate why the insurance industry is refusing to ensure homes previously covered or, in some cases, raising insurance premiums to unaffordable levels.

The association noted the change in the insurance climate in Ontario from an aggressive business growth mode with many new players to a less-aggressive lose control mode in a shrinking pool of insurers and concerns arising from an increased awareness of safety and environmental issues in and around the home. Real or perceived threats such as electrical, heating, roofing and plumbing systems are making insurers and consumers more conscious about home safety.

Environmental issues including mould, asbestos, and contamination from leaky fuel oil tanks have changed the way insurers think about homes. It is also changing the way that consumers look at resale homes.

As a result, many home purchase offers are now made conditional on the buyer being able to get insurance for the home. This is frustrating for buyers, sellers and REALTORS because it slows down or stops the transaction. It is also challenging for the insurer because it is difficult for them to learn everything they need to about a house that is not yet owned by their client, especially in the tight timeframes involved in real estate transaction. Potential home owners can not qualify for a mortgage without insurance.

OREA plans to take its proposal for a task force direct to the Finance Minister Greg Sorbora early next year.

Residential investment rises

More Canadians put money into their homes in 2003. Investment in residential construction increased 11.1 per cent in the third quarter of 2003, topping $17.6 billion, according to Statistics Canada.

Residential construction investment is made up of the value of new housing construction, renovations, and acquisition costs. Since the start of 2003, the value of investment in the housing sector has reached $45.3 billion, up 11.2 per cent from the same time period in 2002.

StatsCan says new construction accounted for $9 billion of the quarterly total, up 8.6 per cent from the third quarter of 2002. Acquisition costs rose 9.5 per cent to $1.6 billion, while renovations made the largest gain in expenditures, up 14.9 per cent from the third quarter of 2002 to $7.1 billion.

Québec had the largest annual increase in dollars spent, jumping 18.8 per cent to $4.1 billion, while Prince Edward Island, the Northwest Territories and Nunavut all saw investment drop. Nova Scotia had the largest percentage increase of any province, rising 20 per cent to $484 million.

Registration Goes Electronic

Paper no longer an option for title registry. Toronto residents buying property in December will have to register their land title with the city as normal – they’ll just find themselves doing it in a different format.

Starting Dec. 9, all land title documents in the City of Toronto must be registered electronically, rather than as paper documents. Electronic registration has been available in the city on an optional basis since September 2002, with about 90 per cent of all titles registered electronically since that date.

Toronto residents can also search title records, register documents and conduct writs of execution searches online. The Toronto effort is part of a project designed to introduce the service to all land registry offices in Ontario. Twenty-seven of the 55 busiest land registry offices in the province already have the service, with some degree of automation planned for all offices.

Rental Property Bylaw Upheld

The Ontario Court of Appeal has upheld a Toronto bylaw regarding the use of rental properties preventing the conversion of rental units to condo’s

According to this bylaw, the City can reserve the right to say no to rental development projects unless the developer agrees to replace the affordable rentals. Replace in this case would mean renting the new apartments for the same price as the previous ones.

Freeze Oak Ridges Moraine

The Ontario Government has imposed a temporary freeze on the construction of homes on the Oak Ridges Moraine lands in Richmond Hill while the government continues discussions with landowners, according to the Municipal Affairs Minister John Gerretsen.

By signing a Minister’s Zoning Order (MZ0) under section 47 of the Planning Act, the government has imposed a moratorium on new building permits for planned development on the Oak Ridges Moraine until November 20, 2003.

Under the deal struck by the previous Tory government, homebuilders have moved forward with development. The majority of the Richmond Hill lands proposed for development and covered by the zoning order are at various stages of development, with most of the lands cleared and prepared for services and utilities.

“We appreciate the actions of a number of developers who temporarily halted their activities on these lands,” said Gerretsen. “While the order is in effect, we expect that discussions with these developers will continue as we work toward a solution that is fair for all.”

How Much is Too Much?

He's the chief economist at one of the country's big banks, and for holding that position gets a corner office in the clouds over the corner of King and Bay. But like most economists, he is completely absorbed by the day-to-day activities of all those little people on the sidewalk far below, watching where they spend their money and tuning in to their dreams and fears.

"It is absolutely remarkable," he said last week. "We have run the numbers a dozen times, and they point to the same thing - a total disconnect."

He's talking about real estate, and the "disconnect" is between what's been a weak, sputtering, jobless economy, and a housing market that just will not quit. In July, resales were up a stunning 14.5% across the country. In August, housing starts once again topped the magical annual number of 200,000. In June, housing permits surged more than 4%, and the pace continued into August. And now it's September, and the hordes of buyers are again trolling desirable neighbourhoods, looking to pounce.

The common practice among hip urban realtors these days is to take a listing, let people tromp through for two or three days, and then allow offers to come in for presentation. It's a deliberate attempt to set up an auction-like environment, which forces anxious buyers to pony up their very best, all-or-nothing offer, or risk losing the bidding war in its first, early, grisly, violent moments. And it works.

These days we have the highest average price for residential real estate in the country's history. In places like Vancouver and Toronto, $200,000 will buy a lot without a house on it, miles and miles away from the downtown core. In chi-chi places like Chester or Whistler, it is routine to see millions being spent in a heartbeat on unique vacation properties. A financial buddy of mine recently put down $1.1 million for a fixer-upper in mid-town Toronto which will take $700,000 and a few months to render habitable.

This is the "disconnect" the economist was speaking of. At a time when Canadians are getting into more mortgage debt than ever in history, the economy has been barely growing, job creation has gone into reverse, the national unemployment has topped 8% for the first time in two years, and we have been sideswiped by SARS, mad cow, wild fires and a continental power blackout.

Why is this happening? Why are people doing arm-to-arm combat for the privilege of buying a home for tens, sometimes hundreds, of thousands more than the sellers are asking?

The first reason, of course, is the cost of money. Mortgages have been ridiculously cheap now for a couple of years, and the Bank of Canada has just finished erasing the hasty rate hikes it brought in last Spring. The prime rate is back down to just 4.5% at the chartered banks, and below-prime, variable rate mortgages are widely available in the 3% range. That means houses can get more expensive and mortgages can get bigger, and yet monthly affordability is hardly impacted. The good news is, these cheapo rates are going to last quite a long time - certainly well into 2004. Yes, that means variable is still the way to go.

The second reason for the real estate renaissance is more emotional than logical. Most Canadians apparently believe that no matter how expensive housing gets, it is still safe and secure. They are still scared by the volatile stock market, soured at the lousy returns their once-darling mutual funds are paying, and disgusted at the amount of interest flowing in from GICs, bonds or bank deposits. Financial advisors are in ill repute these days, while corporate leaders are suspect and stockbrokers considered crooked.

Because most people think they understand real estate, and because most of their parents made decent money through this one single investment, then they consider it sacred. No risk. A no brainer. This is precisely why the vacancy rate is going up and why a lot of landlords are desperate - it is actually cheaper to buy a home these days than to rent an apartment.

How long are these disconnect conditions likely to last? Probably a few more months - perhaps most of a year. Rates will be low and prices will continue to edge higher. But it is all going to turn later in 2004, when the price of money starts to edge relentlessly higher and the American economy swings into top gear. The stock market and mutual funds will regain their sparkle, and a bunch of people will wake up to the reality they owe hideous amounts of money on houses they bought at a premium.

Of course, it happened before. It's just that we don't remember.

Cool Condo a First

Element, Tridel’s 24-story condominium with about 379 units located on the northwest corner of Front Street and Blue Jays Way in downtown Toronto, will be the first residential building to be cooled using cold water from Lake Ontario.

The condo will also include other environmentally friendly and energy saving devices such as low flow faucets and thermally insulated Low-E double-glazed windows.

For more information, go here.

Construction Industry Advisory

Ontario is creating a Construction Advisory Council to help strengthen the sector, improve the industry’s competitiveness and create jobs according to Jim Flaherty, Minister of Enterprise, Opportunity and Innovation announcement.

The advisory council is the first in Ontario to represent the full scope of the industry, including residential, non-residential and civil engineering sectors, with representation from architects, interior designers, contractors and the building trades.

The 12-member advisory council will hold its first meeting shortly to identify priorities and establish a protocol to report to the Minister. It will also hear presentations from some of Ontario’s top engineers on the theme of innovation in construction.

The Minister will seek the council’s advice on advancing the competitiveness and effectiveness of the Ontario construction industry. It will make recommendations that support the industry’s initiatives ranging from apprenticeship training to export promotion to increasing a focus on innovation

Home Starts Higher

Housing starts are expected to reach 203,200 units this year, the second highest housing start level in 14 years and renovation spending will rise to $32.1 billion, according to Canada Mortgage and Housing Corporation’s (CMHC) third quarter National Edition report.

“Another solid year for home construction is expected for 2003 but the pace of new construction will ease over the remainder of the year,” said Bon Dugan, Chief Economist at CHMC. “Greater availability of existing homes on the resale market along with slightly higher mortgage rates will lead to a further reduction in new home construction in 2004 when starts are expected to reach just over 188,000 units.”

“While low interest rates and strong employment growth have supported strong demand for housing, sales of existing homes will fall slightly short of last year’s record pace reflecting slower economic growth. Increases in the average resale price of homes will continue to outpace the general rate of inflation. However, as sales edge lower relative to the supply of new listings coming on the market, growth in house prices will moderate from the 2002 pace. The average price of existing homes will increase by 7.4 per cent this year and 4.4 per cent in 2004.

Residential construction peaked last year in Ontario. Though lower, home starts will remain robust this year and next because of low inventories of newly completed and unoccupied homes, employment gains and low mortgage rates. Multiple family home starts will be strong this year, especially condominiums in the increasingly expensive home markets such as Toronto. Lower but solid migration will nudge starts down in 2004.

Housing affordability improves

Falling mortgage rates for Ontario in June helped sales bounce back from weaker levels in the previous two months, lifting total sales by 4.1 per cent during the second quarter, according to the Royal Bank of Canada (RDC). Market conditions moved further into balance with a notable improvement in new listings, which helped starve off more severe upward pricing pressure.

After dropping in the first quarter of the year, home sales improved by 5.3 per cent in the second quarter in Toronto. Potential buyers responded not only to the lure of lower mortgage rates but also to greater choice from an increase in new listings. In fact, for the first half of this year, Toronto housing starts were running 2 per cent higher than last year, led predominantly by the multiple market. While housing activity will remain quite strong during the summer months, some signs are emerging of a slightly softer market for the remainder of this year and next.

The benchmark price of a single detached bungalow increased by 4.4 per cent to $208,117 marking the slowest pace of price gains in more than a year. The softer rate of price growth along with lower mortgage rates helped the affordability index move down to 30.4 per cent from 31.1 per cent in the previous quarter. Canada's housing affordability index measures the proportion of pre-tax household income needed to carry the costs of owning a home.

Activity in Ontario’s housing market market is probably past its peak. The first half of the year, housing starts were running 2 per cent below last year’s levels with most of this activity concentrated in the volatile multiple market. Higher vacancy rates and more balanced resale markets also suggest that there is very little pent-up demand left to push activity beyond last year’s pace