As a child I often played the Monopoly Board Game with my family.
The game of Monopoly is a real-estate trading game that was developed in the first half of the twentieth century. The premise of the game is that eventually, due to market forces simulated within the game as properties are bought, sold and leased, a monopoly will eventuate. The person owning this monopoly is then declared the winner. This early introduction to capitalism probably played its own small part in how I learned one can build wealth in real estate. This admission also reveals I’m entering mid-life, as there’s probably a certain set of readers who might not know much about this game. Popular in the age before computers, video and electronic devices you can tell this game is old, because there’s a luxury tax and rich people can go to jail!
Welcome to Part 2 of Urbaneer.com’s Summer 2012 Real Estate Forecast.
Recently Canada’s Minister of Finance Jim Flaherty, implemented tighter mortgage restrictions, with the intention of mitigating some of the lending risk as it is associated to property values. Read on to hear our thoughts on what these new lending restrictions might do to our market, and potentially to Buyers as well.
Change is Good?
The latest round of mortgage changes will, according to economists, do much to cushion a potential free fall in housing prices by mitigating (and hopefully neutralizing) threats that could poke holes in the market with disastrous consequences (think US subprime mortgage crisis). The changes include a reduction in maximum amortization from 30 years to 25 years, a reduction of the amount of equity homeowners can take out of their homes for refinance (from 85% down to 80%), the removal of CMHC Insurance backing on homes over $1million, and a reduction in the debt service ratios that are used as the basis of lending qualification and amount criteria for Buyers.
Urbaneer.com tends to view the latest round of mortgage restrictions (there have been four rounds in four years) as a visible show of support and strength in the Canadian lending system, which is inherently stringent, and is bolstered by some of the strictest lending policies in the world. However, while these changes are intended to remove “fringe” buyers from the homeownership pool, there is often the less desirable side effect of pushing some groups, for whom affordability is an issue, to the sidelines.
As to how this will impact our local market specifically, urbaneer.com believes that the stricter lending criteria on debt ratios and shorter amortization periods, will hit first-time home buyers the hardest already stretching to purchase their first condominium. Count on it specifically impacting the single buyer market as well.
In our opinion, the primary mitigating factor for a healthy housing market is ultimately the relationship between how stable a city’s economy is relative to the earning power of the local population and the affordability of its housing. If an economy falters, the risk that a large number of property owners will default on their debt and the fear that the whole ‘house of cards’ will come tumbling down, often creates an atmosphere of uncertainty and tension. We don’t see the government’s decision to try regulating this as negative, given the market dynamics have been suggesting property values are becoming increasingly susceptible to a downward correction.
Where Do We Go From Here?
We believe that when it comes to housing, slow and steady wins the race, and that much of the future health of the Toronto property market will lie in freehold housing. As has been evidenced by consistent housing stats for the GTA, freehold housing continues to rise in value at a moderate, sustainable pace. Not just that, demand continues to present itself as well. While supply and demand are still slightly out of whack in this category, the mechanics lend themselves better to a sustainable price increase.
Furthermore, what has sustained the downtown Toronto housing market in the past and will continue to support it in the future is the tried and true mantra of location, location, location. Proximity to green space, public transportation and village-shopping environments will still be major drivers in the value of urban property. In fact, we’re not terribly concerned about the Freehold Housing Market in the original City of Toronto. With condominium housing now the dominant type of dwellings, freehold housing is becoming elevated into a ‘boutique luxury market’ with price points to match. In fact, if you want to own a house downtown, you should probably make that purchase sooner than later, as there could well be a significant gap in values between freehold housing and the condominium market in the future.
Based on past experience the real measure of the market will not appear until the Fall, when Buyers and Sellers refocus their collective attention back towards the market. Historically, in the autumn, the market revives full tilt, and prices increase accordingly. Will that happen again this Fall? We’ll have to wait and see. Regardless, urbaneer.com still believes that there are some risks inherent in the Toronto condominium market in its current state, so prudence and informed decisions should be the guide when considering a purchase.
Want to read the entire Summer 2012 Real Estate Forecast? Click HERE to read it in its full original posting.
Whether you’re purchasing a personal residence, or you’re investing in your financial future, please know we’re here to help! Serving liberated, progressive pro-urban Torontonians for over two decades, our friendly, fashionable boutique real estate service always has your interests at heart. Building clientele for life, consider letting us help build your real estate portfolio, one property at a time. All without pressure or hassle! We’re here to earn your trust, then your business.
Steven Fudge and The Urbaneer Team, Sales Representatives
Bosley Real Estate Ltd., Brokerage