'Market According to Mercer'

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

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
AverageGTA 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.

Does comparing price to income tell us anything?
0
100,000
200,000
300,000
400,000
500,000 1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010YTD
Sources: Toronto Real Estate Board; Statistics Canada
Average Income and MLS Selling Price
Average Household Income (Toronto CMA)

0
100,000
200,000
300,000
400,000
500,000 1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010YTD
Average Income and MLS Selling Price
Average Toronto MLS Selling Price
Average Household Income (Toronto CMA)

2.50
3.00
3.50
4.00
4.50
5.00
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010YTD
Average MLS® Price to Average Household Income Ratio

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
FrequencyofResponses
Down Payment Size
Down Payment Size for GTA HouseholdsIntending on
Purchasing a Home in 2010

But…what about mortgage rates???
2%
7%
12%
17%
22%
Source: Statistics Canada
Average5-Year Fixed MortgageRate

Interest payments are less of a burden today
3
4
5
6
7
1990.1
1991.1
1992.1
1993.1
1994.1
1995.1
1996.1
1997.1
1998.1
1999.1
2000.1
2001.1
2002.1
2003.1
2004.1
2005.1
2006.1
2007.1
2008.1
2009.1
2010.1
Canadian Debt Service Ratio
(% of Disposable Income Dedicated to Mortgage Interest)

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.

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).

Justified Average MLS® Selling Price Assuming 32 Per Cent GDS
50,000
150,000
250,000
350,000
450,000
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010YTD
Averagevs. Justified Selling Price in GTA
Justified Average Selling Price based
on 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

The Canadian economy continues to grow, albeit more slowly
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
Canadian Real GDP, Quarterly
Annualized Quarter-Over-QuarterPerCent Change

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

Housing sector not driving growth any longer
90
100
110
120
130
140
150
160
Indexof Leading Indicators: Housing Component

There are a lot of positive economic spin-offs from housing transactions
http://www.crea.ca/public/news_stats/pdfs/clayton2009.pdf

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

Canadian businesses still expecting growth over the next year
Source: Bank of Canada Business Outlook Survey, Autumn 2010. Click here for pdf

Canadian businesses planning to invest in machinery and equipment

Canadian businesses expect the lending climate to remain positive

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/USDollarExchangeRate

Value of Canadian dollar driven by Can-US interest rate differential
0
1
2
3
4
5
6
BoC Overnight Ratevs. US Federal Funds Rate (%)
Bank of Canada Target
for theOvernight
Lending Rate
US Federal Funds Rate
Canadian policy rate about
75 bps higher

Commodity prices also driving the value of the Canadian dollar
0
200
400
600
800
1,000
Energy Price Index $USD (1972=100)
Energy prices have
recovered

Low US consumer confidence are a risk to Canadian exports
Source: Bank of Canada, Monetary Policy Report, October 2010
http://www.bankofcanada.ca/en/mpr/pdf/2010/mproct10.pdf

0%
2%
4%
6%
8%
10%
12%
1991Q1
1992Q1
1993Q1
1994Q1
1995Q1
1996Q1
1997Q1
1998Q1
1999Q1
2000Q1
2001Q1
2002Q1
2003Q1
2004Q1
2005Q1
2006Q1
2007Q1
2008Q1
2009Q1
2010Q1
Source: US Federal Reserve Board; Canadian Bankers Association
Residential MortgageDelinquency Rates
Canada and United States
United States
Canada

100
125
150
175
200
225
Source: Standard&Poors
S&P/Case-Schiller US HousePrice Index
(20 City Composite) Not too much in the way of
recovery in US home prices.

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, Quarterly
Annualized Quarter-Over-QuarterPerCent Change

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

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

Income Growth Rate Will Be Below Average Through 2012
$99,149
$100,636
$102,649
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
Source: Statistics Canada; TREB Forecast
GTA Household Income

Key Interest Rates
0%
2%
4%
6%
8%
Key Interest/MortgageRates Average 5-Year Fixed Mortgage Rate
Prime Rate
Target for Overnight Lending Rate

The Bank of Canada explicitly targets inflation (began in early 1990s)
-2%
0%
2%
4%
6%
8%
10%
12%
14%
ConsumerPrice Index (Yr./Yr. % Change)
CPI:AllItems CPI:BoC Core
BoC Inflation
Target Bands

BoC Has Been Successful in Targeting Inflation
-2%
-1%
0%
1%
2%
3%
4%
Canadian ConsumerPrice Index (CPI)
Year-Over-Year Per Cent Change
CPI Annual Per Cent Change
Core CPI (Bank ofCanada) Annual Per Cent Change
BoC Inflation
Target Bands

Interest rates will increase more slowly than originally expected
2
3
4
5
6
7
8
9
Source: Bank of Canada; TREB Forecast
Canadian Primeand 5-Year Fixed MortgageRate(%)
Five Year Fixed
Mortgage Rate
Prime Rate

Affordability Recap
Borrowing
Costs Up
Incomes Rising
Slowly
Utilities & Taxes
Rising
What About
Average Price?

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
AverageGTASelling Price
3% average growth rate
in 2011 and 2012 vs.
over 8% in 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,
PropertyTaxes and Utilities on the Averaged Priced GTA Resale Home
Affordability Indicator Edging Up to 32% GDS in 2011/2012

MLS® sales should track population growth in 2011 and 2012
20,000
40,000
60,000
80,000
100,000
120,000 1987Q1
1988Q1
1989Q1
1990Q1
1991Q1
1992Q1
1993Q1
1994Q1
1995Q1
1996Q1
1997Q1
1998Q1
1999Q1
2000Q1
2001Q1
2002Q1
2003Q1
2004Q1
2005Q1
2006Q1
2007Q1
2008Q1
2009Q1
2010Q1
2011Q1
2012Q1
GTA Sales Trend (Annualized Rate)
Sales trend based
on population

New listings will grow, but at a moderate pace
80,000
100,000
120,000
140,000
160,000
180,000 1987Q1
1988Q1
1989Q1
1990Q1
1991Q1
1992Q1
1993Q1
1994Q1
1995Q1
1996Q1
1997Q1
1998Q1
1999Q1
2000Q1
2001Q1
2002Q1
2003Q1
2004Q1
2005Q1
2006Q1
2007Q1
2008Q1
2009Q1
2010Q1
2011Q1
2012Q1
GTA New Listings Trend (Annualized Rate)

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%
AverageAnnualPriceGrowth
Sales-to-NewListingsRatio
GTA Sales-to-New Listings Ratio vs. Price Growth
Sales-to-New Listings Ratio Left Scale)

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%
AverageAnnualPriceGrowth
Sales-to-NewListingsRatio
GTA Sales-to-New Listings Ratio vs. Price Growth
Sales-to-New Listings Ratio Left Scale)
Annual Price Growth (Right Scale)

Total new home sales have recovered from recessionary dip

Low rise sales have recovered somewhat, but still trending downward

High-rise segment is now the driver of total new home sales

With supply relatively low, low-rise and high-rise prices are still growing

Many low-rise builders are cooperating with TREB members…
27%
21%
51%
Share of Low-Rise Builders Cooperating
with TREB Members
Yes
Call First
No
Source: RealNet Canada Inc.

…high-rise builders are co-operating as well
71%
25%
4%
Share of High-Rise Builders Cooperating
with TREB Members
Yes
Call First
No
Source: RealNet Canada Inc.

…high-rise builders are cooperting as well

Housing starts remain below pre-recession levels
10
20
30
40
50
60
70
80
Thousands
Source: Canada Mortgage and Housing Corporation
Toronto CMATotal Housing Starts
Seasonally Adjusted Annual Rate (SAAR)
Total Starts (SAAR)
Trend (12-Month Moving
Average)

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 CondominiumApartments Under
Construction in the Toronto CMA

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.

What happens when these condo apartments are completed?
-10%
-5%
0%
5%
10%
15%
20%
25%
0%
10%
20%
30%
40%
50%
60%
70%
AnnualMedianPriceGrowth
Sales-to-ActiveListingsratio
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)

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
AveragePurpose-Built and Condo Rental Vacancy Rate
Toronto CMA
Rental Condominium Apartment Vacancy Rate
Purpose-BuiltRental Apartment Vacancy Rate

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. CondominiumApartments

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
ActiveListings Rental Transactions
Source: TREB
TREB Rental Listings and Transactions
May-Aug.2009 vs. 2010
2009 2010
+13%
+21%

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 AverageRent Increases
May-Aug 2009 vs. 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.

'Market According to Mercer'

Recomendados

Recomendados

Mais conteúdo relacionado

Mais procurados

Mais procurados (20)

Destaque

Destaque (9)

Semelhante a 'Market According to Mercer'

Semelhante a 'Market According to Mercer' (20)

Mais de Harish Maraj

Mais de Harish Maraj (20)

Último

Último (20)

'Market According to Mercer'