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November 10, 2010 -- The slides from the recent 'Market According to Mercer' presentation series are now available. Jason Mercer's presentation covered all aspects of the GTA housing market (resale, new and rental housing markets) and provided a forward looking view through 2012.
Citation preview
The Market According to Mercer
Presented By: Jason Mercer, TREB Senior Manager of Market Analysis
October/November 2010
1. Group Discussion
2. Assessing Measures of Affordability
3. Forecasting Affordability, Price and Sales in the Resale Market• Household Income• Interest Rates
4. New Home Market• New Home Sales• Housing Starts
5. Rental Market
Presentation Outline
October/November 2010
Is the current real price level cause for concern?
$0
$100,000
$200,000
$300,000
$400,000
$500,000
Source: Toronto Real Estate Board
Average GTA Selling Price
Real Average Price
Average Price
The issue is not the level of real price now, but rather how high it was two decades ago.
October/November 2010
Does comparing price to income tell us anything?
0
100,000
200,000
300,000
400,000
500,0001
98
6
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
YTD
Sources: Toronto Real Estate Board; Statistics Canada
Average Income and MLS Selling Price
Average Household Income (Toronto CMA)
October/November 2010
Does comparing price to income tell us anything?
0
100,000
200,000
300,000
400,000
500,0001
98
6
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
YTD
Sources: Toronto Real Estate Board; Statistics Canada
Average Income and MLS Selling Price
Average Toronto MLS Selling Price
Average Household Income (Toronto CMA)
October/November 2010
Does comparing price to income tell us anything?
2.50
3.00
3.50
4.00
4.50
5.00
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
YTD
Sources: Toronto Real Estate Board; Statistics Canada
Average MLS® Price to Average Household Income Ratio
October/November 2010
Most home buyers use a mortgage and pay over the long term
0%
10%
20%
30%
40%
50%
Less than 5% 5% to 19% 20% or More None/Don't Know
Fre
qu
en
cy o
f R
esp
on
ses
Down Payment Size
Down Payment Size for GTA Households Intending on Purchasing a Home in 2010
October/November 2010
But…what about mortgage rates???
2%
7%
12%
17%
22%
Source: Statistics Canada
Average 5-Year Fixed Mortgage Rate
October/November 2010
Interest payments are less of a burden today
3
4
5
6
7
19
90
.1
19
91
.1
19
92
.1
19
93
.1
19
94
.1
19
95
.1
19
96
.1
19
97
.1
19
98
.1
19
99
.1
20
00
.1
20
01
.1
20
02
.1
20
03
.1
20
04
.1
20
05
.1
20
06
.1
20
07
.1
20
08
.1
20
09
.1
20
10
.1
Source: Statistics Canada
Canadian Debt Service Ratio(% of Disposable Income Dedicated to Mortgage Interest)
October/November 2010
The share of income dedicated to mortgage payments has been flat
25%
30%
35%
40%
45%
50%
55%
Source: Toronto Real Estate Board Data and Calculation; Statistics Canada
TREB Affordability Indicator Share of Average Household Income Used for Mortgage Principal and Interest, Property Taxes and Utilities on the Averaged Priced GTA Resale Home
Assumptions: 20 per cent down payment on the average priced home, average five-year fixed mortgage rate, 25 year amortization period and the average household income in the GTA
Lenders have a rule of thumb that says no more than 32 per cent of a
household’s gross income should be dedicated to mortgage principal and interest, property taxes and utilities.
October/November 2010
The share of income dedicated to mortgage payments has been flat
Assumptions: 20 per cent down payment on the average priced home, average five-year fixed mortgage rate, 25 year amortization period and the average household income in the GTA
Let’s imagine that the average selling price always had to correct to make sure that the mortgage payment, property tax and
utility costs never accounted for more than 32 per cent of the average household income in the GTA.
Essentially, this would provide us with a JUSTIFIED PRICE – i.e. justified by the accepted lending rule of thumb (max 32% GDS).
October/November 2010
Justified Average MLS® Selling Price Assuming 32 Per Cent GDS
50,000
150,000
250,000
350,000
450,00019
8619
8719
8819
8919
9019
9119
9219
9319
9419
9519
9619
9719
9819
9920
0020
0120
0220
0320
0420
0520
0620
0720
0820
0920
10 Y
TD
Source: Toronto Real Estate Board
Average vs. Justified Selling Price in GTA
Justified Average Selling Price basedon 32 per cent GDS
Actual Average Price
Shaded areas represent periods when, based on the 32% GDS rule of thumb, a mortgage on the average
priced home was not affordable
1. Group Discussion
2. Assessing Measures of Affordability
3. Forecasting Affordability, Price and Sales in the Resale Market• Household Income• Interest Rates
4. New Home Market• New Home Sales• Housing Starts
5. Rental Market
Presentation Outline
October/November 2010
The Canadian economy continues to grow, albeit more slowly
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
Source: Statistics Canada
Canadian Real GDP, QuarterlyAnnualized Quarter-Over-Quarter Per Cent Change
October/November 2010
Some sectors have driven recovery in Canada more than others
Source: Bank of Canada, Remarks by Tiff Macklem, Senior Deputy Governor of the Bank of Canada: "Reflections on Monetary Policy After the Great Recession“ Click here for pdf
October/November 2010
Housing sector not driving growth any longer
90
100
110
120
130
140
150
160
Source: Statistics Canada
Index of Leading Indicators: Housing Component
October/November 2010
There are a lot of positive economic spin-offs from housing transactions
http://www.crea.ca/public/news_stats/pdfs/clayton2009.pdf
October/November 2010
Business and Exports Need to Account for Greater Share of Growth
Source: Bank of Canada, Remarks by Tiff Macklem, Senior Deputy Governor of the Bank of Canada: "Reflections on Monetary Policy After the Great Recession“ Click here for pdf
October/November 2010
Canadian businesses still expecting growth over the next year
Source: Bank of Canada Business Outlook Survey, Autumn 2010. Click here for pdf
October/November 2010
Canadian businesses planning to invest in machinery and equipment
Source: Bank of Canada Business Outlook Survey, Autumn 2010. Click here for pdf
October/November 2010
Canadian businesses expect the lending climate to remain positive
Source: Bank of Canada Business Outlook Survey, Autumn 2010. Click here for pdf
October/November 2010
High value of the Canadian dollar a risk for export sector
$0.60
$0.70
$0.80
$0.90
$1.00
$1.10
Source: Bank of Canada
Canadian Dollar/US Dollar Exchange Rate
October/November 2010
Value of Canadian dollar driven by Can-US interest rate differential
0
1
2
3
4
5
6
Source: Bank of Canada
BoC Overnight Rate vs. US Federal Funds Rate (%)
Bank of Canada Target for the Overnight Lending Rate
US Federal Funds Rate
Canadian policy rate about 75 bps higher
October/November 2010
Commodity prices also driving the value of the Canadian dollar
0
200
400
600
800
1,000
Source: Statistics Canada
Energy Price Index $USD (1972=100)
Energy prices have recovered
October/November 2010
Low US consumer confidence are a risk to Canadian exports
Source: Bank of Canada, Monetary Policy Report, October 2010http://www.bankofcanada.ca/en/mpr/pdf/2010/mproct10.pdf
October/November 2010
Low US consumer confidence are a risk to Canadian exports
0%
2%
4%
6%
8%
10%
12%
19
91
Q1
19
92
Q1
19
93
Q1
19
94
Q1
19
95
Q1
19
96
Q1
19
97
Q1
19
98
Q1
19
99
Q1
20
00
Q1
20
01
Q1
20
02
Q1
20
03
Q1
20
04
Q1
20
05
Q1
20
06
Q1
20
07
Q1
20
08
Q1
20
09
Q1
20
10
Q1
Source: US Federal Reserve Board; Canadian Bankers Association
Residential Mortgage Delinquency Rates Canada and United States
United States
Canada
October/November 2010
Low US consumer confidence are a risk to Canadian exports
100
125
150
175
200
225
Source: Standard&Poors
S&P/Case-Schiller US House Price Index(20 City Composite)
Not too much in the way of recovery in US home prices.
October/November 2010
Slower GDP Growth Moving Forward
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
Source: Statistics Canada; Bank of Canada Forecast (October 20, 2010)
Canadian Real GDP, QuarterlyAnnualized Quarter-Over-Quarter Per Cent Change
October/November 2010
The unemployment rate will not decline to “normal” for 2+ years
0%
2%
4%
6%
8%
10%
12%
14%
Jan
-88
Jan
-89
Jan
-90
Jan
-91
Jan
-92
Jan
-93
Jan
-94
Jan
-95
Jan
-96
Jan
-97
Jan
-98
Jan
-99
Jan
-00
Jan
-01
Jan
-02
Jan
-03
Jan
-04
Jan
-05
Jan
-06
Jan
-07
Jan
-08
Jan
-09
Jan
-10
Jan
-11(
F)
Jan
-12(
F)
Source: Statistics Canada (Historic); TREB (Forecast)
GTA Unemployment Rate
Average since January 1988
October/November 2010
Income Growth Rate Will Be Below Average Through 2012
-1%
5%4%
2%
1%1%
3%4%
3%
2%
4%
1%1%
1.5
%
2%
-2%
-1%
0%
1%
2%
3%
4%
5%
Source: Statistics Canada (Historic); TREB (Forecast)
Annual Growth Rate for Average Weekly Earnings
October/November 2010
Income Growth Rate Will Be Below Average Through 2012
$99,1
49
$100,6
36
$102,6
49
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
Source: Statistics Canada; TREB Forecast
GTA Household Income
1. Group Discussion
2. Assessing Measures of Affordability
3. Forecasting Affordability, Price and Sales in the Resale Market• Household Income• Interest Rates
4. New Home Market• New Home Sales• Housing Starts
5. Rental Market
Presentation Outline
October/November 2010
Key Interest Rates
0%
2%
4%
6%
8%
Source: Bank of Canada
Key Interest/Mortgage Rates Average 5-Year Fixed Mortgage Rate
Prime Rate
Target for Overnight Lending Rate
October/November 2010
The Bank of Canada explicitly targets inflation (began in early 1990s)
-2%
0%
2%
4%
6%
8%
10%
12%
14%
Source: Bank of Canada
Consumer Price Index (Yr./Yr. % Change)
CPI: AllItems CPI: BoC Core
BoC Inflation Target Bands
October/November 2010
BoC Has Been Successful in Targeting Inflation
-2%
-1%
0%
1%
2%
3%
4%
Source: Statistics Canada
Canadian Consumer Price Index (CPI)Year-Over-Year Per Cent Change
CPI Annual Per Cent Change
Core CPI (Bank of Canada) Annual Per Cent Change
BoC Inflation Target Bands
October/November 2010
Interest rates will increase more slowly than originally expected
2
3
4
5
6
7
8
9
Source: Bank of Canada; TREB Forecast
Canadian Prime and 5-Year Fixed Mortgage Rate (%)
Five Year Fixed Mortgage Rate
Prime Rate
October/November 2010
Affordability Recap
Borrowing Costs Up
Incomes Rising Slowly
Utilities & Taxes Rising
What About Average Price?
October/November 2010
Average selling price will have room to grow, but at a much slower pace
$0
$100,000
$200,000
$300,000
$400,000
$500,000
Source: Toronto Real Estate Board
Average GTA Selling Price3% average growth rate
in 2011 and 2012 vs. over 8% in 2010
October/November 2010
25%
30%
35%
40%
45%
50%
55%
Source: Toronto Real Estate Board Data and Calculation; Statistics Canada
TREB Affordability Indicator Share of Average Household Income Used for Mortgage Principal and Interest, Property Taxes and Utilities on the Averaged Priced GTA Resale Home
Affordability Indicator Edging Up to 32% GDS in 2011/2012
October/November 2010
MLS® sales should track population growth in 2011 and 2012
20,000
40,000
60,000
80,000
100,000
120,0001
98
7Q
11
98
8Q
11
98
9Q
11
99
0Q
11
99
1Q
11
99
2Q
11
99
3Q
11
99
4Q
11
99
5Q
11
99
6Q
11
99
7Q
11
99
8Q
11
99
9Q
12
00
0Q
12
00
1Q
12
00
2Q
12
00
3Q
12
00
4Q
12
00
5Q
12
00
6Q
12
00
7Q
12
00
8Q
12
00
9Q
12
01
0Q
12
01
1Q
12
01
2Q
1
Source: Toronto Real Estate Board
GTA Sales Trend (Annualized Rate)
Sales trend based on population
October/November 2010
New listings will grow, but at a moderate pace
80,000
100,000
120,000
140,000
160,000
180,0001
98
7Q
11
98
8Q
11
98
9Q
11
99
0Q
11
99
1Q
11
99
2Q
11
99
3Q
11
99
4Q
11
99
5Q
11
99
6Q
11
99
7Q
11
99
8Q
11
99
9Q
12
00
0Q
12
00
1Q
12
00
2Q
12
00
3Q
12
00
4Q
12
00
5Q
12
00
6Q
12
00
7Q
12
00
8Q
12
00
9Q
12
01
0Q
12
01
1Q
12
01
2Q
1
Source: Toronto Real Estate Board
GTA New Listings Trend (Annualized Rate)
October/November 2010
Market will remain balanced, but tight enough to promote price growth
-10%
-5%
0%
5%
10%
15%
20%
20%
30%
40%
50%
60%
70%
80%
Ave
rage A
nn
ual P
rice G
row
thSale
s-to
-Ne
w L
isti
ngs
Rat
io
Source: Toronto Real Estate Board
GTA Sales-to-New Listings Ratio vs. Price Growth
Sales-to-New Listings Ratio Left Scale)
October/November 2010
Market will remain balanced, but tight enough to promote price growth
-10%
-5%
0%
5%
10%
15%
20%
20%
30%
40%
50%
60%
70%
80%
Ave
rage A
nn
ual P
rice G
row
thSale
s-to
-Ne
w L
isti
ngs
Rat
io
Source: Toronto Real Estate Board
GTA Sales-to-New Listings Ratio vs. Price Growth
Sales-to-New Listings Ratio Left Scale)
Annual Price Growth (Right Scale)
1. Group Discussion
2. Assessing Measures of Affordability
3. Forecasting Affordability, Price and Sales in the Resale Market• Household Income• Interest Rates
4. New Home Market• New Home Sales• Housing Starts
5. Rental Market
Presentation Outline
October/November 2010
Total new home sales have recovered from recessionary dip
October/November 2010
Low rise sales have recovered somewhat, but still trending downward
October/November 2010
High-rise segment is now the driver of total new home sales
October/November 2010
With supply relatively low, low-rise and high-rise prices are still growing
October/November 2010
With supply relatively low, low-rise and high-rise prices are still growing
October/November 2010
Many low-rise builders are cooperating with TREB members…
27%
21%
51%
Share of Low-Rise Builders Cooperatingwith TREB Members
Yes
Call First
No
Source: RealNet Canada Inc.
October/November 2010
…high-rise builders are co-operating as well
71%
25%
4%
Share of High-Rise Builders Cooperatingwith TREB Members
Yes
Call First
No
Source: RealNet Canada Inc.
October/November 2010
…high-rise builders are cooperting as well
1. Group Discussion
2. Assessing Measures of Affordability
3. Forecasting Affordability, Price and Sales in the Resale Market• Household Income• Interest Rates
4. New Home Market• New Home Sales• Housing Starts
5. Rental Market
Presentation Outline
October/November 2010
Housing starts remain below pre-recession levels
10
20
30
40
50
60
70
80
Tho
usa
nd
s
Source: Canada Mortgage and Housing Corporation
Toronto CMA Total Housing StartsSeasonally Adjusted Annual Rate (SAAR)
Total Starts (SAAR)
Trend (12-Month Moving
Average)
October/November 2010
The number of condo apartments under construction near historic highs
0
10,000
20,000
30,000
40,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 YTD
Source: CMHC
Number of Condominium Apartments Under Construction in the Toronto CMA
October/November 2010
What happens when these condo apartments are completed?
0
5,000
10,000
15,000
20,000
25,000
30,000
Source: Toronto Real Estate Board; CMHC
Condominium Apartment Completions and
MLS® Active Listings (Annualized Trend)
Completions Active Listings
Regardless of the number of condo apartments under construction, 15,000 completions per year appears to be the upper threshold.
October/November 2010
What happens when these condo apartments are completed?
-10%
-5%
0%
5%
10%
15%
20%
25%
0%
10%
20%
30%
40%
50%
60%
70%
An
nu
al Me
dian
Price
Gro
wth
Sale
s-to
-Act
ive
Lis
tin
gs r
atio
Source: Toronto Real Estate Board
Condominium Apartment Sales-to-Active Listings Ratio and
Median Price Growth (All Areas)Annual Median Price Change (Right Scale)
Sales-to-Active Listings Ratio (Left Scale)
1. Group Discussion
2. Assessing Measures of Affordability
3. Forecasting Affordability, Price and Sales in the Resale Market• Household Income• Interest Rates
4. New Home Market• New Home Sales• Housing Starts
5. Rental Market
Presentation Outline
October/November 2010
Rental Condo Vacancies Much Lower Compared to Purpose-Built Rental
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
Source: CMHC
Average Purpose-Built and Condo Rental Vacancy Rate Toronto CMA
Rental Condominium Apartment Vacancy Rate
Purpose-Built Rental Apartment Vacancy Rate
October/November 2010
Rental Condo Vacancies Much Lower Compared to Purpose-Built Rental
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
Halton Peel Toronto York Durham
Source: CMHC
Rental Vacancy Rates:Purpose-Built vs. Condominium Apartments
October/November 2010
Rental Transactions Up More than Listings – The Market is Tighter
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
Active Listings Rental TransactionsSource: TREB
TREB Rental Listings and TransactionsMay-Aug. 2009 vs. 2010
2009 2010+13%
+21%
October/November 2010
Average One and Two Bedroom Rents Up More Than Inflation
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
Bachelor 1-Bdrm 2-Bdrm 3-Bdrm+
Source: TREB
Annual Average Rent IncreasesMay-Aug 2009 vs. 2010
October/November 2010
Summary Points
• The pace of economic recovery has slowed (not stalled). The Bank of Canada has more flexibility with the direction of interest rates. The market consensus is for fewer rate hikes than originally expected through the end of 2012.
• The average price level, on its own, does not tell much about where price will go. Historically the best determinant of price growth or decline has been affordability. Right now affordability remains in check, thus the current average selling price is justified. Price growth will be slower in 2011 and 2012.
• MLS® sales will move closer to the long-term trend over the next two years and will more often than not hover in the 80,000 to 90,000 range on a seasonally adjusted and annualized basis.