Real Estate Roundtable: Our fall panel predicts a tamer but still robust market
L–R: Barry Cohen, Sherry Cooper, Elise Kalles, Brad Lamb and Scott McGillivray
Star of HGTV’s Moving the McGillivrays, which will premiere Sept. 25 at 9 p.m.
President & broker at Brad J. Lamb Realty Inc. and founder of Lamb Development Corporation
Canada’s #1 Re/Max agent
The #1 broker in Toronto for luxury homes
Dr. Sherry Cooper
Chief economist of Dominion Lending Centres
POST: Let’s start with the 15 per cent tax for foreign investors recently implemented in Vancouver. It’s meant to improve home affordability for local homebuyers but has been given mixed reviews by experts. How effective do you foresee the tax being?
Brad Lamb: It is a disastrous move. It really is a kind of racist head tax, and it is protectionist. Everyone knows this tax is aimed at foreign Chinese buyers. These taxes never accomplish what they set out to do. It may cause prices to increase because without the significant foreign investment money to fund the sales of preconstruction condos, less development may occur, limiting the supply of new multi-residential homes. Vancouver and Toronto have supply problems. Both cities have to relax zoning restrictions to allow for more density and lessen the red tape that delays rezoning. These actions will slow down price increases. The Ontario premier needs to restaff the OMB [Ontario Municipal Board] so projects aren’t sidelined for years waiting for a date to be heard. Restaffing the OMB will substantially increase the supply of multi-residential homes. Kathleen Wynne has allowed the OMB to shrink from 35 chairs to 15 on her watch.
Scott McGillivray: My fear would be that it’s not going to be as effective or as targeted as planned, and there will be loopholes found quickly. It’s too early to tell, but I do feel like it’s an interesting attempt to curb foreign investment although not necessarily a good long-term solution. I think it’s a band-aid solution and risks being quickly outsmarted.
Sherry Cooper: The impact on prices in Vancouver will be marginal and difficult to isolate. Let’s face it, 40 per cent year-to-year gains in house prices is unsustainable, and there are signs that it is likely to slow. Resales, for example, have slowed, and affordability is at its worst level in Canadian history. The impact of the new tax, however, along with these other factors, should slow the rate of house price inflation, but it certainly will not make Vancouver housing more affordable. Governments need to claim to be trying to improve affordability, but there is nothing the government can or should do to reduce house prices to levels that would allow the households with median income levels to buy a single-family home in the Greater Vancouver Area (GVA). Same is true in the GTA for single-family homes. According to RBC [Royal Bank of Canada], in Toronto, affordability stress is most intense in the single detached segment where it would take 71.7 per cent of a typical household income to cover ownership costs at market prices.
Barry Cohen: The 15 per cent tax on foreign buyers has already had a negative impact and will continue to have an impact on the Vancouver market, but it remains to be seen how it will play out in terms of affordability. The months before the new tax saw detached housing values rise to [an average of] $1.58 million. In July, sales dropped almost 19 per cent from the same period one year earlier. It’s possible the market was already poised to slow down. One thing is for certain though … if demand softens, prices generally stabilize or, in some instances, correct.
POST: Is a spillover to Toronto inevitable as investors look for ways to dodge the tax? What effect could it have on our market?
Brad Lamb: We could see some spillover, but the Vancouver real estate market is tiny versus Toronto. It is possible for Chinese buyers to boycott Canada altogether over this tax.
Sherry Cooper: Spillover to Toronto is likely but only at the margin, and it will be nearly impossible to track it.
Barry Cohen: There are those that think that foreign investment dollars will be shifted to the GTA, but I have yet to see an increase in foreign investment in recent weeks. That’s not to say it’s not happening, but I think we need more time to determine if that’s really the case. You would think that any spillover from Vancouver’s tax initiative would spur immediate activity in Toronto’s high-end market, given the average price of Vancouver housing, but I have seen none.
Scott McGillivray: The Toronto market can sustain a lot more than the Vancouver market can, just because of its size and its population. We have a housing issue, for sure; however, it is in interest rates, not taxes, fines or foreign investment. Interest rates are driving housing prices because everyone is purchasing based on monthly payments, not price.
Elise Kalles: Difficult to say whether buyers, who are end users, would move to Toronto instead of Vancouver to avoid the 15 per cent tax. Condominium investors, on the other hand, would consider moving their money to Toronto if they are planning to rent out the unit.
POST: Are there loopholes foreign investors could exploit to enter the market?
Barry Cohen: Friends and family who are Canadian or permanent residents may be able to buy on behalf of foreign investors.
Sherry Cooper: Sure.… Governments will need to administer this carefully and impose meaningful fines.
POST: Ontario Finance Minister Charles Sousa has said he will be keeping a close eye on Vancouver’s housing market as it responds to the tax. How will our market fare if it is enacted here?
Brad Lamb: If they enact a 15 per cent tax in Toronto, it will completely shut down our condo development industry and create a massive recession. The Ontario government needs to sit down with industry business leaders and get a “Condo 101” education.
Sherry Cooper: Sousa should give it at least six months to see the effect in Vancouver before taking action here. He should also be careful to grandfather existing pending sales from the tax to avoid potential renegotiation of deals. Regardless of the tax, house prices are likely to continue to rise, albeit at a slower pace, which was likely in any event. In other words, the effect of the tax is small.
Barry Cohen: When the tax was initially announced, many of my sellers were hoping to capitalize on the expected upswing in activity. The minister’s comments regarding a possible tax here leveled the playing field. Interestingly enough, I had two buyers put negations on hold with the announcement, only to return to the table days later when the topic had somewhat faded from the forefront.
Elise Kalles: There are enough national buyers to keep the Toronto market active. In Vancouver, the statistics state that one in 10 buyers are foreigners.
POST: Many have raised red flags. House prices are high relative to household income and housing rental prices across the country. Household debt and debt repayment obligations have also risen to record high ratios. Is the bubble ready to burst?
Sherry Cooper: I don’t think so, but I sure don’t think price increases will continue at the pace we have seen in the past year. We have been talking about bubble bursting for years (decades for Vancouver), but what does that mean? What if house prices fell 30 per cent? Homeowners would continue to make their mortgage payments. Equity would only return to levels posted 18 months ago. It would help first-time homebuyers and hurt those who have owned their home for 18 months or less, but as long as they are able to continue to make their mortgage payments, they will do [fine] — otherwise they would lose everything and have a terrible credit record.
Scott McGillivray: No one can predict the unknown, and something may very well end up triggering the bubble to burst; however, so far, it hasn’t identified itself. It could be oil prices, it could be the price of gold, it could be a terrorist attack, it could be corruption in our government.… We don’t have any metrics or statistics based on what we currently know to prove the bubble-bursting theory. People use metrics like housing prices and affordability, but they aren’t taking into consideration low interest rates. When you take into consideration low interest rates, the prices and the affordability, they cancel each other out because you can actually afford it based on low interest rates. I feel strongly that the only way the bubble will burst is if an unknown occurs that has a big enough impact on our real estate market.
Brad Lamb: There is no bubble. Outside of Toronto, Vancouver and Hamilton, real estate prices are very affordable in Canada.… Desirable cities around the world are experiencing exactly the same behaviour. This is not a Canada problem. It is a world problem. People in London, Sydney, Copenhagen, Hong Kong, Paris and Singapore are all screaming about high prices. The reality of Toronto’s situation is that detached and semi-detached freehold prices are very high. This is because the supply is fairly fixed. Condominium prices are still very competitive on a world- and Canada-wide basis. The supply of 416 freehold housing is fixed and prices will skyrocket further. We have options to keep prices from skyrocketing on 905/416 condos and 905 freehold. We just need to increase supply by relaxing zoning and density restrictions and fast-track development. Ultimately, housing prices will not fall until the next recession, which is likely years away. Watch interest rates as a leading indicator.
Barry Cohen: According to TREB [Toronto Real Estate Board] Marketwatch, our last bubble — from 1985 to 1989 — saw consecutive double-digit annual [housing price] increases of 27.3 per cent, 36.1 per cent, 21.4 per cent and 19.1 per cent respectively. That pushed the average price in the GTA from $109,094 in 1985 to $272,698 in 1989. Within that period, we also had a stock market meltdown (Black Monday, October 1987), a slowing economy, rampant speculation and five-year closed mortgage rates running between 11 and 12-plus per cent (according to the Bank of Canada). We’ve had steady upward momentum in terms of average prices, but our annual percentage gains have been under 10 per cent for the most part. Our frothiest increase will likely occur this year. Just keep an eye out for the third to fourth years following consecutive double-digit increases in average price with no intervention from the government. That could be problematic down the road.
Elise Kalles: I don’t believe we are in a bubble. Since 1996, people have called the Toronto real estate market a bubble. However, Toronto is a high-demand city for people across the country and around the world. As you look around the world at other cities, it makes you realize what an amazing city we are fortunate to live in — Toronto.
POST: Real estate drove Canada’s economy in 2015. Could this roadblock on foreign investment be detrimental to our economy?
Scott McGillivray: Here’s the thing: we’re a country that encourages immigration. We rely on the inflow of international investment into our country to drive and grow our economy; otherwise, we’re going to be a shrinking population, so it’s probably not a great idea to discourage foreign investment. I think that we need a more strategic approach to managing the real estate market and balancing the overall, long-term benefits to the economy.
Sherry Cooper: Residential construction is a big contributor to growth, but it is already beginning to slow. It was inevitable as demographic and land constraints begin to initiate a mitigating effect. The foreign tax will have a small impact, but housing activity at the first-half 2016 pace was unsustainable anyway. Housing will still grow in 2017, but at a slower pace, which is not a bad thing.
Brad Lamb: Protectionist taxes of this type always hurt the economy. The repercussions are potentially severe. It is possible that it could instigate a recession.
POST: What advice do you have for homeowners in our area who are considering selling? Is now the time to list?
Sherry Cooper: I think that those who are thinking of selling should do so once they have found their new residence. For downsizing boomers in Toronto, the condo market is very tight, so scout out the options before you list your house because you might sell it faster than you think. Having said that, there is the option to rent. Many boomers are relying on the equity in their home to help them financially through retirement. That is a risky proposition because you have to live somewhere. The sooner you can downsize, the better, as far as I’m concerned, because while single-family home prices are hot, they will not go up at this pace forever.
Brad Lamb: Sell, if you need to move. I don’t believe the Wynne government is insane enough to think this tax is a solution.
Barry Cohen: My advice would be to sell when you are ready to sell and for family needs or desires. It’s really hard to play the market. Keep in mind that values in the GTA have increased annually since 1996 and there will be a correction at some point in time, but all predictions of a correcting market thus far have been wrong.