On a sunny afternoon two years ago, as panic about the overheated housing market in Canada’s big cities was spreading, three key policy-makers hunkered down in Toronto to figure out what to do.

Federal Finance Minister Bill Morneau, Toronto Mayor John Tory and then-provincial finance minister Charles Sousa emerged with an acknowledgement that the housing market was indeed in a precarious state. They made a vow: they would try to take some action, but they would certainly not do anything that would make matters worse.

Morneau put a finer point on it. Government measures that would bolster the demand for housing were verboten. That’s because government helping out buyers would only drive prices up further, exacerbating the problem.

That vow hasn’t aged well, and now the federal government is thinking of jumping into the fray with budget measures on Tuesday to help young people to get into the housing market for the first time.

On the surface, there shouldn’t really be much of a public-policy problem any more. The housing market has cooled significantly in Toronto and Vancouver. Talk of a housing bubble wiping out homeowners’ wealth has quieted.

But to conclude that all is as it should be would be wrong.

In its most recent analysis of overheating in major cities across Canada, the Canada Mortgage and Housing Corp. (CMHC) concluded that there was a “high degree of overall vulnerability” at the national level, for the 10th quarter in a row. Vancouver, Victoria, Toronto and Hamilton are particularly susceptible.

More concerning — and this is where the federal budget comes in — is affordability. Real estate markets in the big cities may have backed away from the precipice, but prices are stabilizing at high levels. At the same time, the federal government has made it more difficult for homebuyers to qualify for a mortgage. And mortgage rates have risen.

At RBC, where economists have been measuring how affordable houses are at a national level and in big cities, its index is at the highest point since 1990. Put another way, homes are at their least-affordable point in almost 30 years. Average homeowners in Canada are putting 54 per cent of their family’s income towards carrying a house. In Vancouver, it’s 87 per cent. In Toronto, 75 per cent.

This means that moving to the big cities for a good job is unfathomable for many, unless they commute long distances or find substandard accommodation. There’s a growing concern that urban housing exacerbates income inequality, favouring those who already own homes in the cities to the detriment of newcomers, and to the detriment of companies hoping to hire new talent.

The federal Liberals believe the affordability problem is even worse for millennials, and point to recent research from CMHC that shows first-time homebuyers in the millennial age-bracket are stretched to the max. This group also happens to be fertile ground for Liberals looking for votes. Justin Trudeau’s victory in 2015 was thanks in part to new, young voters. And polling shows support among that demographic is still strong.

But the solutions are tricky, especially given the vow made two years ago to steer clear of bolstering the demand side of the equation.

The bubblelike conditions of Toronto and Vancouver are not yet a distant memory, and so policy-makers would want to avoid pushing markets in that direction so soon. And anything that would encourage homebuyers to take on debt is imprudent right now because the country’s dramatically high levels of household debt are probably Canada’s number one economic risk.

Canadian households now need much higher income to qualify to buy a home
Income required to cover the costs of owning an average home with a 25% down payment and clear the mortgage stress test, in thousands

However, pouring more federal money into building more homes — bolstering supply — is extremely expensive. The federal government has already earmarked $40-billion for housing over the next decade. Adding more, or speeding up its delivery, wouldn’t necessarily hit the specific demographics that the Liberals have in mind.

So the vow has been quietly revised, internally. Instead of “don’t touch demand,” it’s now “if you boost demand, you also have to boost supply.”

Some of the ideas have been around for a while: enhancing the ability of first-time homebuyers to use retirement savings for a down payment; or extending the length of time buyers can stretch out their mortgages.

There’s a new idea decision-makers are eyeing too: shared equity mortgages. Government would partner with certain first-time homebuyers in taking on a share — say 30 per cent — of a mortgage. When the time comes to sell the house, government would reap part of the reward, taking profits in proportion to its equity stake.

Unless, of course, there is no profit, and instead there’s a loss — posing a risk to the federal balance sheet. Given the political points to be gained, it’s a risk the Liberals may well be ready to take.

If you’ve ever nervously watched water drip from your apartment ceiling, or have nearly set your oven ablaze by neglecting a tray of chicken fingers, you’ve probably found comfort in your tenant’s insurance coverage. Homeownership is no different — something will inevitably burst, break or leak, and you’ll want the safety of home insurance for when accidents happen.

“Home insurance is always a good idea as it ensures all the things you value most are covered in case of a loss,” says belairdirect spokesperson, Jennifer Beck.

While home insurance isn’t mandatory by law in Canada, opting for coverage is one measure of defence against potential damages and unforeseen events — fire, severe storms, burglary and acts of God. Yet, as a new buyer, picking a home insurance policy is not like choosing other kinds of insurance; it’s a challenge to determine the exact coverage you’ll need for a home you’ve never lived in before.

“For home insurance, until you buy the property or put an offer in, you don’t necessarily know some of the issues — the age of the home, the wiring system, when the roof was last done,” says Pete Karageorgos, the Insurance Bureau of Canada’s Director of Consumer and Industry Relations for Ontario. “Those are all important factors that contribute to the final cost of insurance. In many cases you won’t know what those are until you’re buying.”

If you’re shopping around for your first home, here are a few tips to keep in mind when applying for your first insurance policy.

1. Even the broadest coverage will have some gaps. Know those gaps!
As with all contracts, it’s important to understand the terms of your coverage, right down to the nitty-gritty.

Insurance providers will offer a range of plans for you to choose from, starting from a basic no-frills policy with the least amount of coverage, up to comprehensive packages that cover all risks to your home and its contents. Home insurance will cover the expenses of damage, loss or theft to the inside and outside of your property, your possessions, and accommodation costs if you can’t return to your home right away. Insurance will also protect you from the expenses of damage or injury to others who are visiting your home, like if someone delivering a package slips and falls off of your porch.

Karageorgos explains that homebuyers need to read closely to understand what they’re covered for, especially if they opt for a named peril insurance policy — a plan that lists specific hazards or events that will exclusively receive coverage. Any potential hazard not listed on the policy could cost you.

“It’s unfortunate when someone does have a claim and realizes they didn’t have the right coverage,” says Karageorgos. “That’s why it’s important to understand the insurance coverages available, because some companies will offer optional insurance for those things, and consumers need to understand what the risks are.”

Karageorgos points to water damage as one of the main culprits for this. Canada has seen a rise in severe weather insurance claims, with insured damage reaching $1.9 billion nationwide in 2018, according to a report by Catastrophe Indices and Quantification Inc. Karageorgos finds that homeowners can overestimate the extent of their insurance. Even an all-risks policy, which provides the broadest coverage, might have conditions or only cover the most likely perils.

“Homeowners sometimes, especially new homeowners, take it for granted when they see that you’re covered for water damage and assume that water damage includes a whole list of things from burst pipes to flooding,” he says.

Karageorgos recommends talking with a home insurance professional to understand the depth of coverage you’ll receive for named policy perils.

2. Brush up on your history
An insurance provider takes several factors into account when determining your premium, which is the amount you’ll pay for the insurance. This will range from the characteristics of your home and neighbourhood, to your policy of choice. A provider will also factor in your deductible, which is the amount of your claim you’ll pay out first before your insurance company. The age of your home is one of the most important aspects to analyze, Karageorgos says, when it comes to insurance policies.

“The age of the property, the size of the property, how old the property is does make a difference because today’s building standards may be different,” he says. “From the insurance companies perspective, they may recognize that an older home may require greater costs to rebuild if it’s damaged by an event.”

Many policies provide coverage on a replacement cost basis, meaning they will either repair the existing item or replace it with a similar new item. In older homes, this is important as providers will need to consider old building and fixture standards compared to current ones. In some situations, Karageorgos says, insurance companies may have difficulty insuring older homes that don’t meet the structural demands of modern living, especially when it comes to electrical needs.

“There’s a lot more appliances, a lot more electronics in the home today,” he says. “They want to make sure the electrical system is appropriate for the type of use and appliances that homeowners are plugging in today.”

Karageorgos advises working with insurance professionals to determine the appropriate coverage for your home, especially if it was built prior to current codes.

3. Reno’d recently? Make sure you report it
If you’ve bought a fixer-upper or are planning to do some renovations down the road, you’ll need to keep your insurance provider in the loop.

“In the event the homeowner makes a change such as a renovation or installing a pool, they should inform their insurance provider to confirm they have the right coverage,” says Beck. “This will help ensure they always have the coverage they need and there are no surprises in the future.”

Karageorgos says that while insurance policies are typically reviewed annually, any major investment to your home is worth reporting. Otherwise, when you file your claim, your provider may only reimburse the old value of the item you’re making the claim on.

“If you increase the value of your home, you also need to let your insurance company know because that value that you originally bought the house for may be different now,” says Karageorgos.

This also applies to any added square footage in the home. If you’re building an addition, or finishing a basement, Karageorgos advises letting your insurance provider know that you’ll be needing coverage for these new areas too.

4. Cut costs, not corners
Homebuying isn’t cheap. Once you add up the lawyer’s fees, moving costs and land transfer taxes, you may feel like there’s little leftover. But Karageorgos warns not to skip over using professional services like realtors and home inspectors during the homebuying process just to save a few dollars.

“Sometimes we try and do things on our own, but it’s always best to seek out some professional advice, especially with protecting your most expensive asset, the most expensive thing you can buy, which is your home,” he says. “It’s beneficial to get some professional advice, to get the right coverages, to have someone you can ask questions to and get answers to as opposed to doing it yourself.”

Neglecting to get professional insight on the integrity of your home could backfire. When buying a resale property, a home inspection can uncover problematic construction, poor renovations or missing permits. By fully disclosing the conditions of a home to an insurance provider before filing a claim, a provider can make the best assessment for repairs and rebuilding.

“Insurance companies are obligated to rebuild something that is lawful and in good standing. It makes no sense for a homeowner to rebuild a property if you’re just going to have the municipality or local government deny you an occupancy permit because it wasn’t built to code,” says Karageorgos.

If you’re looking to save costs, Beck and Karageorgos recommend bundling your home insurance with other insurance policies, such as health and auto, under the same provider. In some cases, providers may offer you a discount for streamlining your plans together. Beck says you can also try opting for a higher deductible to lower your monthly payments.

The Bank of Canada for some time has been suggesting higher and higher interest rates are coming soon — until this week.

Economists are noting the central bank took on a dovish (read: less aggressive) tone at its March 6th policy meeting when it announced the overnight rate was being held at 1.75 percent.

“The Bank of Canada has finally pulled its head out of the sand and acknowledged that the deteriorating economy no longer justifies higher interest rates in the near term,” writes Stephen Brown, senior Canadian economist with Capital Economics, in a report.

The Canadian economy performed below expectations in the fourth quarter as the energy sector kept struggling.

As recently as at its January policy meeting, the central bank had been laying out plans for interest rates in the “neutral range” — considered to be between 2.5 and 3.5 percent — but now it is targeting rates “below” that range, albeit higher than at present.

“Although the Bank still expects its next move to be a rate rise, we think that it will end up cutting rates by the end of the year,” Brown continues in the Capital Economics report.

The central bank uses its overnight, or policy, rate to keep inflation in check, scheduling eight meetings a year to announce any changes.

Lower rates encourage borrowing and spending, and this demand typically inflates prices.

In a depressed economic environment, lower rates can stoke the flames while higher rates can keep an economy’s growth at a healthy level.

Faced with a more sluggish showing from the economy, the central bank may be more limited than previously thought in terms of its ability to continue to hike rates. Between summer 2017 and fall 2018, the bank increased the overnight rate five times.

In a separate response to today’s announcement, Benjamin Reitzes, BMO’s Canadian rates and macro strategist, also notes a softer approach from the Bank of Canada this time around.

“Following the lead of most of the world’s central bankers, the Bank of Canada continued to take a more dovish tone. It’s clear that while the hiking bias was left in, any potential move higher in rates is a long time away,” he writes.

While the general consensus among Canadian economists is not in line with Capital Economics’ prediction, it appears some observers are considering the possibility of a rate cut. “Indeed, any further deterioration in the backdrop will prompt discussion of rate cuts to heat up further,” Reitzes adds.

Urban Toronto reports on a new proposal submitted to the City at the end of February seeking rezoning and an Official Plan Amendment to permit an 8-storey development on Bayview Ave. south of Balliol St. The proposal by Gairloch Developments calls for the replacement of four existing buildings including two brick semi-detached homes numbered from 1408 to 1414. To the north of that two buildings numbered 1416 and 1420 are included. The new address for the condo would be 1410. The website notes a retail space of 98 m² proposed beside the lobby. It can be seen at the south end of the depiction above

MARKET SUMMARY

With the first two months of 2019 behind us, there was no shortage of events fueling political and economic uncertainty in Canadian markets. From Jody Wilson-Raybould’s recent response to allegations that she was pressured by the Prime Minister’s Office to intervene in criminal proceeding against SNC-Lavalin to the ongoing extradition case of Huawei’s CFO, all could pose major ramifications for the Canadian economy in terms of trade, employment and growth. Even with these potential challenges facing the federal government, there were some signs of progress. Firstly, Canadian financial markets surged as the S&P/TSX Composite Index rebounded by 11.7% over the past two months after plummeting by 5.8% in December alone. Moreover, the implementation of oil production cuts in Alberta has had a positive impact on oil prices, as the price differential between West Texas Intermediate (WTI) and Western Canadian Select (WCS) has narrowed to approximately $12.50/barrel. The surge in value of WCS since December to $44.25/barrel has also supported the appreciation of the Canadian dollar to $0.76 USD. Even with the recent increase in oil prices, the Bank of Canada will likely hold off on raising interest rates until the fall of 2019 due to slowing economic growth (both within Canada and globally), easing inflation, weak recent data on retail sales and the tumble that the housing market has taken due to the new mortgage rules and higher interest rates.

The latest GDP data for Canada, which was released on March 1st, shows that the Canadian economy only grew by 0.4% annualized in Q4 2018, reflecting the toll that weak oil pricing, the slow housing market and weak business investment is taking on the economy. Economic growth in Canada is predicted to decline from a lower than expected 1.8% in 2018 to a forecasted 1.5% in 2019. Ontario is expected to only slightly outperform Canada as a whole, with 2019 GDP growth forecasted to come in at 1.6%.

The Greater Toronto Area (GTA) on the other hand is one of only a few markets across Canada that are expected to see GDP growth increase in 2019, up 10 basis points from 2018 to 2.4%, however, this is based on the assumption that consumer spending and housing sales will pick up. On the residential housing front, GTA home sales in 2018 were down 16.1% from 2017, and the average selling price for all property types was down by 4.3%. Although sales and prices picked up slightly in January, they remain weak, with many now calling on Ottawa to review the mortgage stress testing rules, as it is having a deeper impact on the housing market than anticipated and still making housing unaffordable for new home buyers. A weak housing market always impacts consumer confidence, and with five interest rate hikes over the past 18 months, mortgage and lending rates are finally catching up to households. This combined with a 2.3% increase in the CPI Index for Ontario during 2018 will directly affect consumer spending in 2019. As consumption and residential housing were key contributors to economic growth in Canada, Ontario and the GTA over the past several years, slowing demand in both sectors will shift the focus towards business investment and exports.

Given this economic backdrop, the office, industrial and retail commercial real estate markets in the GTA continue to perform well and remain well within “landlord” market status. The office market vacancy rate has decreased by 90 basis points (bps) year-over-year to end February of 2019 at 5.0%, with the average net asking rental rate up 5.6% over the same period, to $19.51/sq. ft. per annum. With exceptionally strong demand from both finance and tech tenants driving down vacancy and pushing net asking rents up, it is no surprise that landlords and developers are confident about the future performance of the GTA office market. Furthermore, although rental rate growth has begun to slow, growth will remain positive for the foreseeable future. As such, construction activity continues to increase. There is currently almost 10.6 million SF of office space either under construction or expected to break ground imminently in the GTA, representing over 3.9% of existing inventory. These projects amount to approximately 8.4 million SF downtown, and represent 8.9% of the existing downtown inventory. Downtown vacancy remains tight, at 3.4% at the end of February 2019, however, it is up 10 bps year-over-year as limited options. It should be noted that meaningful new supply is now 12 to 18 months away, and those tenants who can hold off until the new supply starts coming online, will do so rather than taking space that may not necessarily meet their needs, resulting in a temporary slowdown absorption activity. Due to limited options downtown, suburban demand continues to pick up, with suburban vacancy down 160 bps year-over-year to 5.9%. With demand remaining strong, and new supply limited in the short term, expect rental rates to continue edging up. Downtown net rents are up approximately 20% year-over-year at $33.42/sq. ft. per annum, however, they are off slightly from $33.44/sq. ft. per annum at year-end 2018. Suburban rents have increased by only 4.3% year-over-year to $18.03/sq. ft. per annum in February 2019 and were up 1.1% since year-end 2018.

The industrial market experienced a 100 bps drop in vacancy year-over year to end February 2019 at an exceptionally low 1.4%, with availability down 100 bps over the same period to 2.3%. As a result of strong demand and limited availability and new supply (only 3.5 million SF in 2018), the average net asking rental rate continues to increase, up almost 13.7% year-over-year, to $7.8219/sq. ft. per annum in February 2019. Low vacancy rates and continued demand from transportation and warehousing users as well as non-traditional users such as film and television production, self storage operators and cannabis grow operations is driving both demand and increased construction activity. Construction activity is now at 10.6 million SF, compared to only 5.6 million SF a year ago, and this activity equates to 1.3% of the current market inventory. As a result of the above, and the fact that there is limited land available for new projects, expect vacancy to remain low and rental rates to continue rising. Rental rate expectations from landlords for new construction projects are increasing even further due to rising construction and land costs, and as a result, both landlords and tenants are going to have to start looking even further out around the periphery of the GTA for suitable options. On the retail front, despite the exit of several retails over the last year, both big and small, and weakening retail sales as a result of rising debt servicing costs for households, Canada, and the GTA specifically, continue to attract retailer expansions and new retailers. As a result, the retail vacancy rate has decreased by 100 bps year-over-year to 2.1% at the end of February 2019, with the average net asking rental rate up by 9.0% year-over-year to $26.12/sq. ft. per annum. The delta between the have’s and have not’s when it comes to retail properties, continues to grow. The landlords that are able to update and renovate their properties in order to attract the best tenants are also attracting the most traffic, whereas the landlords who are not, are being impacted the most.

These insights are made possible through CoStar, the largest commercial real estate source for property listings for sale or lease in Canada. CoStar enables users to gain insight into the approximate 91,258 properties currently tracked in the Greater Toronto Area, which include 2,339 properties for sale and 10,244 spaces for lease.

Source: Costar