Toronto’s real estate market reels from triple whammy
Compared with the roughly 10-per-cent drop in stock prices earlier this month, the January month-over-month collapse in Toronto home sales, at 26.6 per cent, was of giant proportions.
What’s overlooked, though, is the triple whammy realtors coped with last month.
January is when the feds’ new regime of mortgage-loan stress tests kicked in, requiring even prospective mortgagees with a comfortable 20 per cent down payment to prove they can cope with interest-rate increases on their monthly mortgage payments.
January also saw a Bank of Canada hike in its key lending rate, and lots of media warnings about the likelihood of still more bank rate hikes in 2018.
Finally, the December sales figure was inflated, as buyers rushed to beat the feds’ stricter lending regime.
It’s also worth noting that house prices were little changed in January.
Meanwhile, on the non-residential side, Toronto posted its seventh record year of commercial-property sales in 2017. Sales of investment properties, including office towers, hotels and vacant land zoned for residential development, jumped by 38 per cent last year, to $23.5 billion.
A variety of factors including Brexit, worries about U.S. hostility to immigrants and flagship investments by firms such as Google Inc. and WeWork Cos. have further raised global awareness of what already was one of the most globally attractive property markets.
Chicago’s LaSalle Investment Management Inc., a property manager with $59 billion (U.S.) in assets, is among the first firms to launch investment funds focused on Canadian commercial real estate.
While that might suggest continued upward pressure on GTA housing prices and rents, there are signs that shopping-mall developers — wary of the threat to malls from e-commerce — are shifting to multiuse developments of apartments, office space and a few stores.
If that trend gains momentum, it may do as much in easing the Toronto housing shortage as the feds’ slow-paced National Housing Strategy. An illusory market comeback? Like many institutional investors, the giant Caisse de dépôt et placement du Québec is wary of the stock market’s apparent rapid comeback from its dive earlier this month.
Instead of getting back in the action, the Caisse, one of North America’s biggest equities investors, is waiting for the “very significant opportunity” that another correction would bring, Caisse CEO Michael Sabia said recently in releasing the fund manager’s latest annual report.
The takeaway for investors is that they can’t count on the Caisse, the CPP Investment Board and their global counterparts to help propel the comeback that has characterized markets worldwide since the harrowing plummet of early February.
Which means that any short-term signs of a sustained comeback are in all likelihood illusory.
After all, the same danger signals that prompted the startling sell-off three weeks ago are all still flashing red. Most notably, the U.S. Federal Reserve Board has committed to at least three hikes in its key lending rate this year.
Higher interest rates make corporate and consumer borrowing costlier, of course, taming business investment and consumer spending. Higher rates also fatten bond yields, making bonds a potent rival to equity markets for investment funds.
Like many institutional investors, the Caisse de dépôt et placement du Québec is wary of the stock market’s apparent rapid comeback
Today’s equities markets are a give-and-take proposition, marked by a volatility that’s been absent for several years. It’s now a market of sudden spikes and dives, which is what we can anticipate for the rest of the year.
And that’s a verboten realm for stability seekers such as the Caisse. The $298.5-billion (assets) Caisse is keeping its power dry until it sees a sustained return to reasonable stock valuations. Since a great many equities remain stubbornly overpriced, it will be quite a while before the big institutions fully recommit to them.
And without those big-money players, it’s tough to see a new bull market on the near horizon. Canada and the Terrible Ten Canada’s notoriously high household debt has made it a trouble spot, an unaccustomed status for the Great White North.
Canada is now among the Terrible Ten countries in which total household debt exceeds the threshold of safety determined by the International Monetary Fund (IMF).
Canada’s fiscal and monetary authorities have been warning Canadians for a decade against flirting with unmanageable personal debt. Yet that debt has climbed ever since, a phenomenon also noted in Switzerland, Australia, Norway, New Zealand, South Korea, Sweden, Thailand, Hong Kong and Finland.
Each of those 10 countries has a household-debt-to-GDP ratio ex- ceeding the 65 per cent that the IMF considers a safety threshold.
Switzerland tops the list, at 127.5 per cent. In the U.S. prior to the implosion of a record-sized housing bubble in 2008, house prices almost doubled from their 2000 level.
During the lengthy housing booms in Canada, Australia, New Zealand and Sweden, house prices have more than tripled by some measures.
How alarming is this, and how forcefully will the IMF and other international authorities try to intervene more than they already have? (The IMF has repeatedly warned Canada that it’s risking a financial crisis.)
A reassuring fact is that today’s regulators are better prepared to respond to a financial crisis than they were before the unprecedented 2008 U.S. housing crash. And most of the Terrible Ten are affluent, developed economies best able to cope with a crisis.
Then again, the Terrible Ten economies account for a staggering $7.4 trillion in GDP, and collectively hold household debt of roughly that same amount.
And memories are fresh of the 1997 Asian financial crisis that began in Thailand, thought at the time to be too small a country to rock the global economy. But the collapse of the Thai baht drew attention to vulnerable currencies throughout the emerging-economy debt market, and the panic spread through Asia and Russia to North America.