Looking Back at a Pretty Good Year

This industry is vital — let’s face it, ours is not a manufacturing-based economy, nor an information-based economy. Right now, ours is a real estate-based economy.

While the pundits continued this year to predict the imminent decline of the market, I’ve said that there may be some adjustment, but that things are going to stay pretty stable. In fact, that a slight downward adjustment in prices is a good thing, letting move-up buyers do just that, and creating a (somewhat) affordable first-time buyers’ market, which Toronto, especially in the city proper, right now lacks. $600,000+ is hardly achievable for many people, especially younger people and those who aren’t already on the property ladder. (Maybe — see second story below.)

So I was happy to read Mark Weisleder’s column in the Star this week because I tend to agree with him. He says that with nearly 69,000 transactions by the end of September, we were behind only 1,000 units compared to last year, and that the first half of October saw an increase of nearly 20% over the same period last year. That would seem to predict that year-over-year we’ll outpace last year’s 82,200 units.

Average prices continue to rise and bidding wars continue to happen because demand exceeds inventory. Ontario (and in particular the GTA) continues to absorb more than 150,000 immigrants annually, and they need housing. Rental housing is in short supply, and so buying an investment condo to rent it out continues to make sense; he says the average rent for a two-bedroom downtown condo is $2,500, which is about what it would cost an owner to carry it, up to a price of about $500,000. Condo buyers don’t have to try to play the market, as long as they’re not in a hurry. They can just hang tight and build equity.

This has surely not been the disastrous year many predicted, even with the changes to mortgage rules; in fact, they might even have been a positive thing, since those who now qualify for mortgages are less likely to have trouble repaying them. Weisleder, a lawyer and industry advisor, says that he doesn’t see a crash coming any time soon.

But how long is a healthy market sustainable? Yes, such things are cyclical and we will see both sales and prices dip eventually. But by and large, our economy is fairly well set for continued success. Healthy sales and healthy prices don’t necessarily mean we have some bubble that’s about to burst — after all, there isn’t any bubble until it pops.

Canadians can’t walk away from their mortgages easily. Defaulting is not a way out of trouble; it’s just a way in to another kind of trouble. Your mortgage debt belongs to you, not your lender, unlike in the U.S. Your lender can take whatever reasonable and legal means they choose to get their money back, and that includes garnishing your wages. If you have a high-ratio mortgage, your insurer likely has some kind of program that will help you keep up payments even in difficult times. If you do lose your home to a power of sale, it stays on your credit report just as long as a bankruptcy. We Canadians don’t just mail in our keys and go rent an apartment. These are good incentives to honour your commitment. (I was appalled during the U.S. crash to hear so many cases of people — even those who still could afford the payments — walking away from their mortgages simply because their mortgages were now higher than their home’s value).

I don’t think we’re in trouble, but we should be proceeding with some degree of caution. Research has shown that recessions that follow huge debt accumulation run longer and deeper than those that don’t. I’ve said before that it’s common sense — don’t buy a house you can’t afford to keep, even if your finances change or mortgage rates go up.

Protect yourself by making good decisions, and let’s make 2014 a very good year, too.

***

There might be another factor buoying GTA home sales — parents chipping in to help buy their grown children homes of their own.

The Star’s Susan Pigg this week writes about one real estate agent who has encountered many a first-time buyer — three-quarters of them, apparently — who go house-hunting armed with tens of thousands in seed money from their Boomer parents. Another agent sees a proliferation of “gift condos,” where parents help their adult children get a foothold in the market by buying them a condo.

Benjamin Tal, deputy chief economist of CIBC World Markets, told the Star that he thinks this generation is getting more help than any other, and the market would undoubtedly be weaker if they weren’t.

One executive from a Vancouver-based research organization called Urban Futures said he thinks the cash flowing to the condo-buying kids is as important to the real estate economy as foreign investment, and are similarly helping drive up prices.

While some commenters wonder at the values such help instills, let’s be real. By the time your kids are in their 30s, their values are already instilled, for better or for worse. And, as Tal points out, the biggest transference of wealth in history is about to happen as frugal, wartime Boomers reach the end of their lives, so those children are going to end up with that money anyway. It might take some time yet, but it is going to happen.

In the meantime, we’re not talking about subsidizing bums. We’re talking about “kids” with good-paying jobs who would otherwise have to commute for hours, which as I’ve ranted many times is about the worst thing you can do for personal happiness.

We may be jealous, but who wouldn’t have taken that kind of help had it been available?

One thing we can say about the Canadian real estate market — it’s never boring. Multi-layered, multi-faceted, and filled with so much nuance it’s difficult to take it all in, whether prices go up or down, and interest rates likewise, there are few industries that are more engaging.