Market according to_mercer

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Market according to_mercer

  1. 1. The Market According to Mercer Presented By: Jason Mercer, TREB Senior Manager of Market Analysis October/November 2010
  2. 2. 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
  3. 3. 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 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.
  4. 4. October/November 2010 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)
  5. 5. October/November 2010 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 Toronto MLS Selling Price Average Household Income (Toronto CMA)
  6. 6. October/November 2010 Does comparing price to income tell us anything? 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 Sources: Toronto Real Estate Board; Statistics Canada Average MLS® Price to Average Household Income Ratio
  7. 7. 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 FrequencyofResponses Down Payment Size Down Payment Size for GTA HouseholdsIntending on Purchasing a Home in 2010
  8. 8. October/November 2010 But…what about mortgage rates??? 2% 7% 12% 17% 22% Source: Statistics Canada Average5-Year Fixed MortgageRate
  9. 9. October/November 2010 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 Source: Statistics Canada Canadian Debt Service Ratio (% of Disposable Income Dedicated to Mortgage Interest)
  10. 10. 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.
  11. 11. 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).
  12. 12. October/November 2010 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 Source: Toronto Real Estate Board 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
  13. 13. 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
  14. 14. 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, Quarterly Annualized Quarter-Over-QuarterPerCent Change
  15. 15. 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
  16. 16. October/November 2010 Housing sector not driving growth any longer 90 100 110 120 130 140 150 160 Source: Statistics Canada Indexof Leading Indicators: Housing Component
  17. 17. 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
  18. 18. 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
  19. 19. 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
  20. 20. 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
  21. 21. 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
  22. 22. 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/USDollarExchangeRate
  23. 23. 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 Ratevs. US Federal Funds Rate (%) Bank of Canada Target for theOvernight Lending Rate US Federal Funds Rate Canadian policy rate about 75 bps higher
  24. 24. 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
  25. 25. October/November 2010 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
  26. 26. October/November 2010 Low US consumer confidence are a risk to Canadian exports 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
  27. 27. 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 HousePrice Index (20 City Composite) Not too much in the way of recovery in US home prices.
  28. 28. 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, Quarterly Annualized Quarter-Over-QuarterPerCent Change
  29. 29. 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
  30. 30. 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
  31. 31. October/November 2010 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
  32. 32. 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
  33. 33. October/November 2010 Key Interest Rates 0% 2% 4% 6% 8% Source: Bank of Canada Key Interest/MortgageRates Average 5-Year Fixed Mortgage Rate Prime Rate Target for Overnight Lending Rate
  34. 34. 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 ConsumerPrice Index (Yr./Yr. % Change) CPI:AllItems CPI:BoC Core BoC Inflation Target Bands
  35. 35. October/November 2010 BoC Has Been Successful in Targeting Inflation -2% -1% 0% 1% 2% 3% 4% Source: Statistics Canada 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
  36. 36. 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 Primeand 5-Year Fixed MortgageRate(%) Five Year Fixed Mortgage Rate Prime Rate
  37. 37. October/November 2010 Affordability Recap Borrowing Costs Up Incomes Rising Slowly Utilities & Taxes Rising What About Average Price?
  38. 38. 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 AverageGTASelling Price 3% average growth rate in 2011 and 2012 vs. over 8% in 2010
  39. 39. 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, PropertyTaxes and Utilities on the Averaged Priced GTA Resale Home Affordability Indicator Edging Up to 32% GDS in 2011/2012
  40. 40. October/November 2010 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 Source: Toronto Real Estate Board GTA Sales Trend (Annualized Rate) Sales trend based on population
  41. 41. October/November 2010 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 Source: Toronto Real Estate Board GTA New Listings Trend (Annualized Rate)
  42. 42. 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% AverageAnnualPriceGrowth Sales-to-NewListingsRatio Source: Toronto Real Estate Board GTA Sales-to-New Listings Ratio vs. Price Growth Sales-to-New Listings Ratio Left Scale)
  43. 43. 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% AverageAnnualPriceGrowth Sales-to-NewListingsRatio 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)
  44. 44. 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
  45. 45. October/November 2010 Total new home sales have recovered from recessionary dip
  46. 46. October/November 2010 Low rise sales have recovered somewhat, but still trending downward
  47. 47. October/November 2010 High-rise segment is now the driver of total new home sales
  48. 48. October/November 2010 With supply relatively low, low-rise and high-rise prices are still growing
  49. 49. October/November 2010 With supply relatively low, low-rise and high-rise prices are still growing
  50. 50. October/November 2010 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.
  51. 51. October/November 2010 …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.
  52. 52. October/November 2010 …high-rise builders are cooperting as well
  53. 53. 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
  54. 54. October/November 2010 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)
  55. 55. 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 CondominiumApartments Under Construction in the Toronto CMA
  56. 56. 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.
  57. 57. 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% AnnualMedianPriceGrowth Sales-to-ActiveListingsratio 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)
  58. 58. 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
  59. 59. 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 AveragePurpose-Built and Condo Rental Vacancy Rate Toronto CMA Rental Condominium Apartment Vacancy Rate Purpose-BuiltRental Apartment Vacancy Rate
  60. 60. 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. CondominiumApartments
  61. 61. 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 ActiveListings Rental Transactions Source: TREB TREB Rental Listings and Transactions May-Aug.2009 vs. 2010 2009 2010 +13% +21%
  62. 62. 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 AverageRent Increases May-Aug 2009 vs. 2010
  63. 63. 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.

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