2017 Real Estate Trends: Bidding Wars

As spring quickly approaches, the typical peak period housing market activity is almost here.  Only this year it seems to have come early.  The statistics for the first few months of 2017 have been off the charts.  Bidding wars are everywhere and people are asking when will it calm down.  Well today we are going to talk about some of the factors driving these bidding wars and buoyant market activity.

Low Levels of Inventory

It seems month after month the same story emerges.  Sales are up 10%+ and listings are flat to down on a monthly year over year basis.  As this trend continues, each month the increasing sales are eating up more and more inventory and driving down inventory.  We are now at the point where we have very low inventory… not enough houses to go around to meet demand.

Continued Low Interest Rates

Interest rates have been trending down for years and have pretty much held near record low levels for the past year to 18 months.  Today you would be looking at 5 year fixed rates in the 2.5% range and variable as low as 2%.  These low rates make it easier for the buying public to service more debt and afford to pay more for their homes.  This all leads to increased demand from buyers who are willing to pay more for what they want as it is still affordable to them on a monthly basis.

Immigration

The population is growing and a big part of that influx is coming from immigrants.  The type of immigrants coming to Canada these days have much deeper pockets than previous generations and hold widely held beliefs in the concept of home ownership and hard assets (such as real estate).  This is a large and growing segment of the market, and they also seem to be buying up lots of new construction.

Low Unemployment

Not that many years ago our region had among the highest unemployment rates in Canada.  We have rebounded from 10%+ to as low as 5.2% recently, which is below the Federal and Provincial average.  Manufacturing is booming again, the economy has become more diversified since the downturn, and now when we talk to business owners their biggest complaints are about difficulties in staffing.  What a turnaround it has been and these workers have steady paycheques allowing them to buy larger homes and more of them. Demand increased!

Those are some of the straightforward factors leading to the strength in our local real estate market recently.  Next week, we will continue on with some lesser known factors.  What has your experience been out there this year?

2017 Real Estate Trends: Reporting The Sale of Your Principal Residence

It's hard to believe, but it is almost tax time ladies and gents.  In preparation for that, we are going to touch on a new subject to consider, starting with your tax filing this year.  Trivia question: Do you have to report the sale of your personal residence on your tax return (even though any gain from the sale of your personal residence is tax free)?  If you answered yes, you would be right!  Prior to this year you didn’t need to report this but going forward you will.  Today we are going to talk about this subject so you will understand when your accountant brings it up.

What Do I Need to Know About This Rule Change?

As of January 1, 2016, if you sold your principal residence during the tax year, the sale must be reported on the T1 of your income tax return.  Because there is a principle residence exemption in Canada, there is still no tax payable on any capital gain on the sale of your home.  So in most cases it will not affect you.

Why Is CRA Doing This?

They want to improve compliance and administration of the tax system.  Prior to this there were no records of buying and selling of personal residence homes in Canada for its citizens.  This will allow CRA to keep track.

Who Are They Targeting With This Change?

It’s safe to say a lot of people have created wealth by owning real estate in Canada in the last 20 years.  And a lot of that wealth has been created tax free.  Its also safe to say a lot of people have abused the principle residence exemption during this period to make tax free gains.  House flippers, home builders and international investors, to name a few, are the targets of this change.  For example, in the past, a house flipper could purchase a property, live in it for a short period of time (or just claim to live there), renovate, and then sell it for a profit, tax free.  They could repeat this process over and over.  With the reporting of principle residences going forward, this will raise red flags at CRA and this person more than likely will not be able to do this.  They are essentially trying to protect against people making “income” tax free, using the principle residence exemption.

Is There Anything Else I Should Know?

Yes.  There is something called a “deemed disposition” where you don’t actually sell the property but it stops being your principle residence.  Take for example, you lived in a condo as your first home and when you go to upsize to a single family house down the road, you decide to keep the condo and rent it as in investment property.  When you move out of the condo, you have deemed disposition of the condo.  You’ve essentially sold it at market value and bought it back at the same price.  Your principle residence exemption stops on your condo after the deemed disposition and now it applies to your new single family home.  This concept can get confusing sometimes.

As always, since this is a tax matter you should contact your accountant with any questions you may have.  Did you sell your principle residence in 2016?  We’d like to hear how your filing goes with you taxes this year.

2017 Real Estate Trends: Sky High Hydro Costs In Ontario

Have you looked at your hydro bill lately?  Did you have sticker shock?  This is a topic that everyone is talking about in Ontario and it doesn’t look like relief will be coming anytime soon.  Naturally, the effects of this rising expense are felt throughout the economy, including the real estate sector.  Today we are going to look at some of the ramifications from a real estate perspective.

Reduced Disposable Income

All things being equal, this increase in utility costs equates to a lower disposable income for workers in the local economy.  This will affect retail sales, which will lower economic growth.  Potential home buyer’s budgets will be more stretched and therefore will lower the amount of money they have available to service mortgage debt, either reducing the value of homes they can afford or completely taking some buyers out of the market.  Therefore, demand will suffer.

More Efficient Homes Becoming Important

The stakes are high in Ontario these days when it comes to energy efficiency.  It is more important and economical to live in an efficient space than ever.  Some of the large, older homes have inherent difficulties in energy efficiency and the costs for utilities in these homes are becoming prohibitive.  Because of this we see a shift to more demand for newer constructed homes that are more energy efficient.  We also see a shift to people building smaller and smartly designed homes to be able to fit in everything they want in less sq ft.  Homeowners with 3,000-4000’+ homes are routinely getting $1000+ utilities bills. With utility rates projected to increase significantly from here, demand for operating these homes could slow as a result.

Renewable Energy Becomes More Economical, Technology Becomes Important

As prices of hydro continue to rise, the economics of the payback on renewable energy get more attractive.  Things like solar energy will look more attractive on a micro basis for consumers.  Technology like smart thermostats and appliances will also be important to conserve energy for the consumer.  Do your research!  As these alternatives become more widely adapted they should also come down in cost.

Increasing Costs to Businesses

As a large input cost to many businesses, hydro is getting to a tipping point in Ontario.  These could affect the future of many businesses in our Province and could lead them to turning to lower cost jurisdictions.  One would also assume the consumer will see prices increase as businesses pass on the additional costs.  This would result in an inflationary period where the consumer consistently get sticker shock.  Time will tell how this all plays out but its safe to say it won’t be positive for the real estate market!

Those are some of the effects we are seeing from rising hydro costs.  What are you seeing?

2017 Real Estate Trends: Government Intervention In The Housing/Mortgage Market

Have you noticed your local real estate market seems to get more attention than it used to?  Whether it be an article in your local newspaper or a conversation at a local dinner party, real estate really seems to be a hot topic.  And why wouldn’t it be?  In many markets, housing prices are at all time highs, inventory is low, and bidding wars are commonplace.  The government and the governing bodies of the real estate market have surely taken note.  Today we are going to talk about some of the policies they have undertaken that could affect the market in 2017.

Foreign Buyer’s Tax

In Vancouver, the city has imposed a foreign buyer’s tax of 15% on foreign buyers of real estate.  This has happened due to complaints of foreign buyers being the majority factor in driving local housing prices into the stratosphere.  This tax has resulted in a slow down in foreign purchases and in the market overall.  Time will tell how these policies play out long term and if they will spread to other cities.

CMHC Increasing Mortgage Insurance Premiums

CMHC is once again increasing the mortgage insurance premiums on buyers with less than 20% down payments.  These increases will take effect in March 2017 and will add (marginally) to the monthly payments of borrowers, decreasing their initial equity in the property.  This type of policy adversely affects the first time home buyer who already has the odds stacked against them in high priced markets.

Government Stress Testing of Mortgage Rates

Last year, the federal government imposed new rules on mortgage qualifications for insured borrowers.  Essentially, any insured borrower must qualify for their mortgage at the banks posted rates.  For those of you that don’t know, posted rates are inflated mortgage interest rates that are advertised at the banks.  For example, at the current time in our market you can easily get a 5 year fixed mortgage rate at 2.5-2.6%, but the bank’s current posted rate is more in the 4.6-4.7% range.  So as a borrower, you need to qualify for your mortgage at the inflated 4.6-4.7% range, which all else equal, means you will qualify for significantly less house than you would’ve otherwise.  The government hopes to slow down the housing market by knocking some buyers out of the market, at least until they have 20%+ down to qualify for non-insured financing.  This policy again will hurt the first time home buyer more than anyone else.

Zoning Regulations Limiting Residential Development

As the first three items try to address the demand side of the housing market, zoning affects the supply of housing.  You can only lower the demand for so long.  As cities grow and expand, housing supply needs to keep pace to allow for a balanced housing market.  Many cities in Canada haven’t been able to add supply to keep up with demand and the supply side of the equation has been a large reason for the increasing prices in many markets.  Red tape, drawn out environmental studies, expensive soft costs for developers and investors have all had negative impacts on new housing development.  This has been spoken about by different levels of governments as an issue that needs to be addressed.  Here’s to hoping.

Those are some of the ways government intervention will affect the market in 2017.  Have any of these changes affected you?

2017 Real Estate Trends: Trump

Did you hear the US has a new president?  Unless you’ve been living under a rock, you’ve no doubt heard about incoming president Donald Trump.  The unlikely victory by the polarizing figure has sparked protests across the US and the world.  No doubt, this a volatile time.  Regardless about how you feel about him and his term as president, there is change coming.  Today, we are going to discuss how some of that change could affect our real estate market.

Disgruntled US Citizens Moving North Of The Border

During the campaign season, you heard over and over from non-republican voters that they would consider moving to Canada if Trump became president.  Although this sounds great, I don’t think we will see a material population of Americans trying to move to Canada.  There are too many logistical issues such as immigration, etc that would prevent it.  Overall we don’t expect to see much impact from this.

Immigrants Choosing Canada Over The US

As two countries with lots to offer immigrants, Canada and the US sometimes battle over the most skilled applicants.  With Trump being viewed unfavourably by much of the world, these cream of the crop immigrants may choose Canada over the US.  This could be good for growth in Canada and therefore our real estate market.

Focusing On The Economy & Jobs

The emphasis on much of the policy Trump is expected to be putting forward centres around jobs and the economy.  He doesn’t really mind if he ruffles feathers in the process of gaining or keeping jobs in the US.  We’ve already seen announcements from different manufacturers about moving jobs back to the US or deciding the keep them there instead of moving to a lower cost jurisdiction.  Most of this rhetoric is aimed at low cost producing countries such as Mexico or China.  Canada is a higher cost producer and has a pretty balanced trade relationship with the US.  Therefore we do not see Canada as a trade target of the Trump Administration.  If we see a resurgence in manufacturing in the US, that could benefit our economy by proximity and inter-country companies building components in both countries, making it mutually beneficial.  As a border town, this could benefit our local manufacturing sector and therefore our real estate market.

General Uncertainty

Markets and companies don’t like uncertainty, which without a doubt, the incoming Trump administration has brought about.  People like to invest in stable economies.  During this period with Trump, Canada could look very attractive as a place to invest for companies and real estate investors.  Our real estate market could benefit from this perceived relative stability.

The times they are a-changing.  Those are some of the takeaways we see from the changing landscape under Trump.  What are your thoughts?

More Real Estate & Related Predictions for 2017

Last week we made a few real estate and related predictions about 2017.  This week we will take a crack at a few more.  So without further ado…

New Construction of Rental Units

With the vacancy rate dropping again last year to a minuscule 2.9%, conditions are ripe for new construction of multi-family units.  Very little has been built in our area since the 70s.  Combine that with some incentives being offered, like no development fees in the downtown core area, and investment is sure to show up.

The Residential Vacancy Rate Flattens Out

After topping out north of 15% back in the recession of 2008-09, the local vacancy rate has continued to plummet in the last 7-8 years all the way to 2.9% in 2016.  As the law of small numbers would dictate, additional improvement will be small from here.  Combine that with an increased number of sales of condos and homes to investors and new construction coming online, the supply of rental units should increase to flatten excess demand.

New Construction Of Industrial Space

The vacancy rate for quality industrial space has really plummeted to near zero levels locally.  Suppliers are worried that they don’t have the floor space to produce enough to meet contracts.  The market might finally be ripe for a wave of new buildings being built.  Increases in rent prices are almost at the point to justify new construction costs for landlords.

Office Shows Modest Improvement But Still Too Much Supply

With the local economy being much improved, demand for office space is getting better everyday.  Having said that, there is still too much supply in the market.  We expect to sop up some of that inventory, but not materially so.

Windsor-Essex Real Estate Market Continues to Get Positive Media Exposure

Last year was the first year where local and national media really started to notice the renaissance going on in our local real estate market.  General inquires for real estate are rolling in everyday.  With continued migration, immigration and a buoyant local economy, things look rosy for 2017 and therefore we should see continued positive media.

There are some more predictions for 2017.  Hopefully we get some of them right!  Do you agree or disagree with any of them?

Real Estate & Related Predictions for 2017

Happy new year everyone!  Hope you all had a great holiday season and are rested up for a busy 2017.  While the year is still young, we wanted to consult our crystal ball and take a stab at making some real estate predictions.  Here goes.

Interest Rates Edge (Modestly) Higher

Since interest rates are near all time lows, common sense would dictate that they don’t have anywhere to go but up.  We think this year that happens, albeit in a limited fashion.  With the combination of higher bond yields, and some of the government mandates coming down on the financing industry to curb runaway real estate markets in parts of Canada, this will finally be the year for higher rates.

Buyers Get Multiple Offer Fatigue

During 2016, it seemed like every listing had 5-10 offers on it and bidding wars ensued.  While the market dynamics forcing this are still in place, we feel a segment of the market is growing tired of the constant competition.  This will result in a lesser number of the crazy bidding wars we saw over the past year (hello 31 offers!).

Cap Rates Flatten Out

We remember back 6-7 years ago when obtaining an apartment building with a cap rate of 10%+ was common place.  Those days are long gone and prices have been bid up consistently since then, compressing cap rates.  Today you have a hard time finding an apartment building with a cap rate over 6%.  This dynamic has also been seen in retail plazas, office buildings, and other commercial properties.  We don’t see much more room to run on cap rate compression going forward.

Continued Sticker Shock On New Construction Costs

With new construction going through a boom in the last few years in our local market, builders and related trades are very busy.  Combine that with increased prices for land and imported material costs rising because of the low Canadian dollar, buyers will find their price range won’t get them as much when considering a new build.  We don’t see this subsiding anytime soon and if anything expect further price increases.

New Condo Projects Coming Online to Meet Demand

Build it and they will come.  It wasn’t always this way in our local market, as condo ownership was slow in being generally attractive to buyers.  But times have changed and the condo market may be the tightest of them all.  The market can now support more condo developments and developers will respond to this demand with multiple new projects in our area that we expect to be met with brisk demand.

Those are some of our predictions for 2017.  Time will tell if our crystal ball was right.  What are your predictions?