RealCapital Conference – Is there an Oversupply of Condominiums and Are They Underpriced?

by Leor Margulies

I attended at one of the sessions of the RealCapital Conference held 2 weeks ago  at the Metro Toronto Convention Centre entitled “Financing Commercial and Condominium Construction & Development in Today’s Market”.  Two well-known lenders in the community, Carmin Di Fiore, Senior Vice President, Real Estate Banking, Bank of America/Merrill Lynch and Stelio Zupancich, Vice President, Real Estate, TD Commercial Banking gave very interesting and somewhat opposing outlooks of the condominium market.  Stelio focussed on the supply issue and the impact on investors in the marketplace, utilizing readily available CMHC statistics, whereas Carmin addressed the pricing levels.

Stelio had a number of interesting observations:

1. Based on information from the CMHC for the last 4 years, rental vacancies have dropped from 1.8% to 1.6% and new units coming onto the market from investors are selling to homeowners units after registration, without any difficulty, with about 20-30% being retained by investors.  The current inventory of 1.8 months is not out of line and accordingly, there does not appear to be an oversupply or a problem with the investors in the marketplace.  Their units are either being rented or absorbed in the normal buying and selling once condominiums are registered.
2. Stelio also reviewed the status of unsold inventory held by developers.  61% of the total unsold inventory is for projects which have not even been started and which may never start.  Only 32% represents inventory in projects which have undergone construction but are not completed.  Finally, only 7% of completed new condominium projects remain unsold.  Clearly, there does not appear to be an oversupply of inventory either.
3. Stelio did note a number of concerns such as:

(a)               investors in multiple projects;

(b)               increasing land prices, the cost of which cannot be passed on indefinitely by way of increased price per square foot expectations; and

(c)                a possibility of production backlogs given that over the next 2 years, the amount of expected completions of condominiums is more than double the average of 15,000 per year.

Carmin on the other hand, took a much more conservative viewpoint which is reflective of the approach taken by Bank of America/Merrill Lynch.  Carmin is a Senior vice President in Real Estate Banking and has been in the marketplace for many years with the Bank of America and previously at CIBC.  Carmin had focussed on pricing of condominiums inTorontoand the commonly held view thatTorontois underpriced as a world class city in comparison to other major cities. 

He looked at various statistics such as the number of people per square mile, land area per subway mile and concluded that in comparison to the major cities in the world,Toronto’s density was extremely light on both counts.  He also concluded that although there may be significant inflow of people intoToronto, there is also significant outflow resulting in far less than 100,000 people on a net basis moving intoToronto.  His view was that there is substantial room for population growth inTorontoand the pricing of condominiums is not overly cheap given the limited density of people along subway lines and the limited subway availability creating the density in the first place. 

Who is right?  The debate continues.  An interesting bell weather will be the launches of numerous projects over the next few months to see if the appetite for investors forTorontocondominiums is as high as it was in 2011 and whether the increasing price levels being established byTorontodevelopers can be sustained.

Stay tuned.

Royal Bank Review of Bank of Canada Review– Household Finances and Risk of a Housing Correction

by Leor Margulies

The Bank of Canada Review recently came out with 4 papers relating to household debt trends, household borrowing and spending, fluctuation in house prices and household insolvency.  The papers focussed on the elevated levels of debt could make households “more vulnerable to adverse shocks”.  The reports downplayed the risk of such a shock coming from a housing correction, noting that “the Canadian housing market has not exhibited the excesses seen in other countries where severe economic disruptions have occurred in recent years”. 

One of the reports noted that people are using equity in their home to create additional availability of funds for personal consumption more than ever before.  If there was a 10% housing correction, this could result in a 1% decline in consumption in Canada which would be quite significant. 

Due to the low interest rates, high turnover of properties and expectations of increasing prices, the long-term trend has been for significant price increases above the trend line. 

Finally, the increasing indebtedness in the Canadian household has weakened their overall financial position and created a larger vulnerability to adverse economic shocks resulting from a correction in housing prices or a drop in the labour market.

David Onyett-Jeffries, an Economist with RBC Economics Research, Royal Bank of Canada, reviewed the reports and downplayed the potential for any household driven downturn.  RBC expects credit growth to continue to moderate both in the near term with only modest increases of interest rates in 2013.  They see no catalyst for a sharp correction in the labour or housing markets as a result of limited risk of a household driven downturn.

For a more detailed discussion, please see the following link:

http://www.rbc.com/economics/market/pdf/debt.pdf

The End of an Era – The Pending Demolition of the House of Chan Tavern

by Darrell Gold

For those who grew up in Toronto in the area of Bathurst and Eglinton West, and enjoyed the occasional dinner at the legendary House of Chan Tavern, the memories of those dinners may be all that remains as this fall the Toronto Transit Commission announced that it will need to demolish the House of Chan to make way for a new LRT station in 2014.

Last week, the Globe and Mail newspaper ran an article on the  House of Chan Tavern that was opened in 1957 or 1958 by a gentleman named Irv Howard. http://bit.ly/AtHhVZ 

 Since that time, the House of Chan became synonymous with great steak and seafood dining with family and friends in an atmosphere and decor that remained  virtually unchanged.  It also was a favorite meeting spot of many of Toronto’s elite business community, where numerous business deals were discussed and negotiated over a fine meal and a few drinks.

As the now former Indianapolis Colts star quarterback, Payton Manning said this past Wednesday at his press conference when it was announced that his time in Indianapolis was over: “We all know that nothing lasts forever. Times change, circumstances change,” and so indeed, it is the same for the House of Chan Tavern.

What about you?  Do you have fond memories of the dinner with family or friends or business associates at the House of Chan Tavern?

THE “UNSTOPPABLE” CANADIAN HOUSING MARKET

by Sheldon Goodman

Two interesting releases in this morning’s papers –

“StatisticsCanadasaid that the national average price of new houses rose 0.1 % in January from the previous month following a similar increase in December. On a year-over-year basis, the Agency’s new housing price index rose 2.4 % .”

“Bank of Montreal is reigniting the mortgage wars among the country’s major banks. BMO is bringing back historic low rates after pulling similar discounts a few weeks ago.”

Over the past weeks we have heard serious concerns expressed by both Bank ofCanadaGovernor Mark Carney and Minister of Finance Jim Flaherty about Canadian’s appetite for debt and the unstoppable real estate markets particularly inTorontoandVancouver.

Obviously a “mortgage war” among the Canadian banks will be good news for buyers contemplating purchases in the already stretched markets ofTorontoandVancouver.

We therefore have the makings of a real tug-of-war. The Federal Government and the Bank of Canada on the one hand trying to tamp down Canadian’s appetite for debt, and, on the other hand, lenders being very aggressive so as to avoid losing market share.

Who will win?  To use terminology from our neighbours to the south, I’m not sure it is prudent to  – “  fight the Bank of Canada”.

Listing/Commission Agreements – Do You Know what you Need to Know?

by Darrell Gold

The commercial listing agreement is a material document for the broker and owner. Fees can range from thousands to millions of dollars so it warrants attention just like other material agreements. It comes down to the relative leverage between the parties involved but there are some key terms to consider. Some are not contentious but others require negotiation to arrive at a balanced agreement that rewards the broker and ensures the owner gets relative certainty. Below are some examples:

• 1. The Term – factors include sums to be incurred by the Broker in advertising the premises, uniqueness of the property, supply and demand for similar sites. Six (6) months is common. Consider early termination rights below.

• 2. Early Termination Rights – may require a payment to the broker for time/costs for marketing and a reasonable notice period but it allows for flexibility if circumstances change e.g. triggering of a buy-sell clause in a co-tenancy agreement or a tenant’s exercise of right of first refusal on a 3^rd party offer.

• 3. The Agent – Did you choose a broker because of a particular agent? What if he leaves? Can he list competitive properties in the area during your term?

• 4. Marketing – What is the budget? The agreement should specify what is expected in terms of services/marketing/budget, especially if the property is unique e.g. internet and foreign market advertising.

• 5. The Fee – usually a percentage of gross or net rent (make sure additional rent is not part of that) or the sale price. Exclude tenant allowances/rent free periods. Always check the “going rates” before signing.

• 6. The Timing of Payment – Is the fee payable on “procuring a valid offer to lease” or “offer to purchase”? signing the lease?, occupancy?, payment of rent?. all of the above? Is there a renewal/extension fee with a formula?

• 7. Holdover Period – How long is it for and which prospective buyers/tenants does it apply to? Sixty or ninety days is not unusual. Provide for a list of serious parties, not those who merely received an email etc. Don’t use wording like “introduced” or “shown”.

• 8. “May” v. “Shall” – be wary of the use of “may” in terms of obligations and consider carefully if it should be changed to “shall” so there is a definite obligation.

 The Lesson: Strive to arrive at a balanced agreement that manages the parties expectations upfront to minimize disputes later on. It takes a little time and adds cost to the process but usually it pays off.

Canadian Housing Market Will Not Crash!

by Leor Margulies

Canadians are a very self effacing people.  They hate success.  Athletes, singers, politicians and businessmen who succeed generally do so despite the lack of support from Canadian audiences and people.  We just don’t like to be too successful. 

The same characteristics seem to apply to Canadian’s views of the housing market.  Certain sectors of the residential housing market in Canada including Vancouver, Calgary, Toronto and Montreal have done exceptionally well over the last number of years, with Toronto and Vancouver leading the pack in the high-rise sector.  Notwithstanding low rental accommodation and the need for new housing accommodation for immigrants and people moving into both of these metropolises at an amazing rate, 80,000 to 100,000 people a year in Toronto alone, Canadians, and in particular news pundits, seem to revel in predicting a housing crash, a burst housing bubble and similar words of doom.

The most recent group of alarmists include Canadian Business Magazine which had on its front cover of the February 2012 edition, predictions of a major housing crash.  Previous to that, 3 major banking CEO’s, Gerry McCaughey from CIBC, Gordon Nixon from RBC and Bill Downe from Bank of Montreal predicted a cooling of the housing market based on an oversupply and a concern of overheating in markets like Vancouver and Toronto.  More fuel for the fire.

Unfortunately, perceptions become reality.  When the media blasts headlines over and over again about an impending housing crash and overheated markets in excess of prices, and banks start tightening up lending guidelines to both consumers and high-rise construction loans, inevitably a perception of a crash can become a reality.  And headlines like that in Canadian Business do not help.

Certainly, an easing of the market over its frenetic pace over the last few years is warranted, but the continuing demand for rental housing stock, increasing rental rates, lack of alternative investment sources for both local and foreign investors, and low interest rates, make bursting the housing bubble (which it is not) unlikely.

One recent economist from BMO Nesbitt predicated that the Canadian housing market would be more like a balloon than a bubble.  What is the difference?  A balloon merely seeps out air slowly whereas a bubble bursts.  He forecasts a slight shrinking of demand and easing of price increases as a potential small price corrections but not a major crash.

Certainly there will come a time when the market merely needs to pause or factors will come together that create a lack of liquidity for both builders and owners and the affordability factor restricts demand.  The latter is probably the most worrying of all the factors based on not ever-increasing prices in the market but the inability of incomes to match the moderate increases in housing prices that have occurred over the last few years.  The one area that may bring the market down with some type of correction, will be the ability of potential homebuyers to afford purchase and carrying costs of houses given the limited increases in their earnings.

Hence, spending and income gains will largely depend on strength in the Canadian economy and world economies.  It is those areas that I would watch out for in the coming months, not headlines in the media.

War Horse

by Leor Margulies

This column usually tries to keep my readers up to date on the latest happenings in the real estate world.  However, today, I would like to share a wonderful theatrical experience I had watching War Horse earlier this week which is opening at the Princess of Wales Theatre for a long run.  Like real estate, horses and theatre are part of my passions as well. 

Even for those of you who are not big theatre buffs, War Horse is a unique, enthralling and spectacular theatrical and visual spectacle that should not be missed.  I had originally seen the production by the National Theatre in London, England in November 2007 when I was there on the BILD Housing Tour.

Since then, I have been sending people to New York and London for years to see this production.  Now, everyone in Toronto will have the opportunity to see this amazing story of a boy and his undying love for his horse, and the horrors of World War I.  It is impossible to describe how real the horses that are used on stage are, operated generally by 3 individuals.  They are so lifelike and real that it is beyond comprehension.  The audience feels their emotions, their pain, and their joy through their movements of various parts of their body.

But moreover, the play graphically brings home the senselessness of war and man’s inhumanity to man and animal.  World War I saw the useless destruction of millions of horses by machinegun and barbed wire and mechanized warfare.  It created four years of horrific daily living in the trenches by soldiers across the world, and the deaths of millions of soldiers, which ultimately solved nothing, other than sowing the seeds for World War II.

One leaves the theatre uplifted by the story but incensed by the fact that things have not really changed in the world.  Governments use their citizens as cannon fodder to achieve lofty political or economic goals.  Man continues to commit atrocities against man.  The only difference is time and place.

I hope that by experiencing War Horse, people will realize that there must be a better way to solve conflict.  I urge you all to take in this fantastic production.  It is 4 stars from top to bottom.

The OMB must stay just as it is, impartial and non-political

by Tara Welat

The fight for — and against — the Ontario Municipal Board (“OMB”) is getting heated after Toronto City Council’s recent recommendation that Toronto be excluded from the jurisdiction of the OMB. 

As one of  Ontario’s longest-standing adjudicative tribunals, the OMB’s mandate is to hear land use applications and appeals on land use planning and other municipal issues. It is an independent and impartial body whose adjudicators are appointed by the provincial government and, accordingly, who remain largely out of the fray of local politics.

The fact that the OMB is not readily influenced by local political pressures – or more realistically NIMBYism – has meant that its decisions are not always popular with city residents.  Some Torontocolumnists have referred to the OMB as “secretive, even shadowy” and some have gone as far as calling it Toronto’s “century-old oppressor”.  However, everyone seems to agree that the OMB can make the unpopular development decisions which would have been difficult, nearly impossible, forToronto’s mayor or city councilors to make, and — at a lesser cost toToronto taxpayers. 

BILD’s position is understandably protective of the OMB’s critical role in the development process:

“In our current planning system, an appeal to an independent, non-political, unbiased decision-maker is essential to ensure that any municipality, community, ratepayer association and non-profit agency, along with the landowner has an opportunity to present and test the merits of an application against sound planning principles. This role is currently fulfilled by the OMB.”

As a testament to its impartiality, the OMB was able to oppose a proposal for a Walmart in Leslieville in 2009. Columnist Christopher Hume rightly asks the question  “…would council have had the strength to defy the world’s largest retailer?” Would city councilors have braved the backlash from their constituents and supported projects such as the Shops and Residences at Don Mills, or the condominiums in the Distillery District? It is evident that it would behoove City council to have an impartial body that protects projects that make sense from a planning perspective.

It is difficult to argue that the OMB is anything but independent.  In fact, that appears to be precisely what troubles those who would rather deal with a local body (funded byTorontotaxpayers) necessarily influenced by local constituent interests, and possibly dependent upon them.  While the OMB has been criticized as being ‘undemocratic’, would a local body susceptible to corruption be any more democratic?

BILD – A Thirteen Year Retrospective

by Leor Margulies

On Tuesday evening at the BILD Chairman’s Dinner attended by over 500 guests, I was honoured to receive the Chair’s Award of Merit from the current Chairman, Paul Golini of Empire Communities.  The award is given to a member who has shown dedication and made significant contributions to the Association over the years.  It was indeed a very special night for me.

It has been my pleasure to serve on the BILD (formerly GTHBA) Executive and Board of Directors since 1999.  BILD is an outstanding association, successfully representing its members with the media, to the public and to the government, both defending their interests whilst ensuring that consumers’ rights are enhanced and safeguarded.

Over the past 15 years, I have seen tremendous changes in the industry and our association.  Our membership has grown from 970 members to almost 1,400 members.  BILD is now recognized by all levels of government as a significant force, well beyond its mandate of representing GTA builders.  The GTA represents over 50% of new home sales in Ontario and 25% of new home sales in Canada.  All levels of government respect and give credence to our positions when presented.

We have had an array of outstanding Presidents over my tenure on the Executive, both men and women, who have devoted their time selflessly on behalf of our industry.  There have been many memorable moments over the last 13 years.  In the late 90′s, BILD was instrumental in the passing of provincial legislation which prohibits strikes for more than 6 weeks in the residential construction industry, and only once every 3 years.  In 1998, without that legislation, industry strikes wreaked havoc for consumers and builders. 

The growth of consumer protectionism from Tarion has been a significant factor with residential builders over the last 10 years.  I have witnessed Tarion taking on a much more consumer protection agency role, well beyond the original building warranty insurance/surety role it was set up for.  New home consumers have the best warranty and other legal protections in the world.  Ontario has become a leader in addressing residential new home consumer rights and the industry has adapted to the Tarion requirements and worked with Tarion to implement them.

The merger of GTHBA, the builders association, and UDI, the land development association in 2006 was a milestone.  The merger represented the evolution of the building industry whereby most major builders are now integrated and cover both land development and house/condominium building.  It was only natural that there should be one voice for this one land development/building industry, and it is now BILD.  I was proud to assist the Association and Desi Auciello, our President at the time to implement this merger, along with the hard work of our late CEO and President, Stephen Dupuis. 

I have witnessed the crises in the industry involving continuing the government restrictions on land development by way of greenbelt legislation and places to grow legislation.  I have seen the ever increasing amount of taxes including the dreaded HST imposed on new homes to the point where a new home could have in excess of $100,000.00 of built-in taxes.  One of the biggest challenges facing the industry and the government is how do we make homes affordable when there is no land for development, thereby increasing land costs and ever-increasing taxes which impose a huge chunk of cost on the purchase price.  BILD successfully lobbied the province in March 2009 to amend the HST legislation to allow for the eligibility of the $400,000.00 threshold rebate to apply to all homes and not only those sold for $400,000.00 or less.  A huge victory!

The Association has defended the interests of its members in many legislative and legal challenges.  The most recent victory was the OMB Decision of the Orangeville development charges case which upheld the existing, more conservative interpretation of population growth that has served as the accepted basis for the calculation of development charges, and as a result, there have been significant reductions of the increases in development charges that were otherwise going to be imposed pursuant to a new and more liberal interpretation being espoused by certain municipalities. 

The most memorable experience of all has been the fact that for the last 13 years, I had the honour and privilege of working with Stephen Dupuis, our late CEO and President.  I watched him grow in his abilities and stature in representing the industry.  A better representative for BILD, I cannot imagine.  His elevation in 2006 to CEO and President was well deserved.  His foresight, his humor and ability to “herd the cats” and yet retain the respect of both developers and politicians was unparalleled.  I will miss him deeply and only hope that we can find a replacement that can come close to what he brought to the table.

I look forward to continuing my long association with BILD.

Record Condo Sales Mask Low-Rise Shortage

by Leor Margulies

The times that we are living in are “usually uncertain” according to both Mark Carney, CEO of Bank of Canada, and Ben Bernanke, Chairman of Federal Reserve Bank in the U.S.  So if these times are so uncertain, why are we breaking records in the GTA for new home sales and condominium sales?  At the RealNet Conference held on Friday, January 20, 2012, for 300 of GTA’s top builders and financiers, George M. Carras revealed that 2011 saw the second best new home sales in the GTA ever with 45,926 total sales, second only to sales of approximately 54,000 new homes several years ago prior to the last recession.  Of those sales, over 28,000 were high-rise condominiums, breaking an all time record in the GTA.

Behind the euphoria of these numbers, however, is the stark reality of dwindling land supply, a shortage of single family homes and a dramatic increase in the cost of purchasing single family homes in the GTA. 

Inventory for low-rise homes is at an all time record low of only 4 months with record land prices being achieved for low-rise and high-rise sales.  The figure of 17,460 new low-rise sales was the third lowest on record.

The average price for a new low-rise home was $545,000, clearly not an entry level number even with low interest rates.  Even though average new condominium prices have dropped 2% to $434,000, this was only achieved by reducing the average size of units by 52 sq. ft. in 2011 and over 100 sq. ft. since 2010.  I am not certain people are getting smaller as well to fit into these tiny units which are not being built to accommodate families but merely singles and 2-income couples.  Notwithstanding the significant price differentials between condominiums and low-rise housing, there still remains very little demand by families for condominium units. 

The provincial government’s efforts over the last few years to reverse land sprawl and intensify existing urban areas has clearly been achieved by the reversal of the split between new low-rise and high-rise sales.  Ten years ago, the split was 75:25.  Now, it is 35:65 for low-rise/condominium.

Although the state of the housing industry appears to be healthy with great demand and low interest rates to finance acquisitions, there is a dramatic reduction in choice for new home purchasers and families in particular.  Commuting times are being extended dramatically given the lack of new housing in the GTA with people purchasing further afield in order to be able to afford the housing they require. 

In addition to the government’s policies of intensification, increasing red tape and massive indirect taxes included in the purchase price are rendering both low-rise and high-rise units unattainable for many lower or middle income purchasers.  When taking into account development charges, building permit fees, parkland dedication fees, HST and a myriad of other municipal and provincial charges, at least $100,000 is being paid out on account of taxes.

The good news is the development industry has managed to deal with numerous regulatory and tax obstacles in their way to date by switching to an investor driven high-rise market.  However, with the lack of available choices and increasing costs, it would only take interest rates to move a couple of points to really render the market very vulnerable.  The last thing we want to do is end up in a country where people have their children living with them into their 30′s (“bambalinos” as they are called in Italy) because they cannot afford housing, something which is common in Europe.

As well, it was noted at the conference that land costs are rising dramatically with the potential for increasing construction costs definitely a potential.  With those 2 significant cost components rising, when added to the already high cost of taxes, the ability of the marketplace to absorb price increases, whether high-rise or low-rise, will become questionable.

Both the economists and the statisticians at the conference were of the view that a breather in the marketplace is critical to ensure that land costs do not get out of hand and affordability is still maintained.  But to do that, the government needs to participate in the process as well in respect of the taxes it applies, the red tape it creates, and the services it creates, particularly infrastructure and roads.

So as I have said before in previous blogs, the word for 2012 is “caution”.