Greater Toronto Area Residential Real Estate - Trends, Drivers and Outlook

1. WHERE IS IT
HEADING?
GTA Residential Real Estate
Venkat Ramadoss CFA
Dec-2015

2. WHERE IS IT HEADING – GTA RESIDENTIAL
REAL ESTATE
▪ The Fundamental Background
▪ Underlying Trend Drivers
▪ Underlying Trend Drivers – Future Changes
▪ Implications and Outlook
2

3. THE FUNDAMENTAL
BACKGROUND

4. Demand
Source
Supply
Type
Natural
Growth (20%)
Immigration
(80%)
Apartments
(16,000 units)
Non
Apartments
(16,000 units)
34,600 Units
per annum
32,000 units
per annum
•Not Wealthy Immigrants
•Buy to Rent Investors
•Young Adults (Millennials)
•Empty Nesters
•Commuting Haters
•Wealthy Immigrants
•Trading Up Families
•Space + Land preferring
•Okay with suburb and
commuting
Buyer
Type
Immigration data from
cic.ca (2011 to 2014) and
population and demand
estimates from Growth
Plan report for (2011-16)
CMHC completions data
from 2011 to 2014
GTA Real Estate Has Strong Demand / Supply Fundamentals
Data Sources
4

5. UNDERLYING TREND
DRIVERS
Urban Development Policies and Low Interest Rate
Environment

6. Two provincial policies…
• Greenbelt Plan – urban
development not allowed in
the greenbelt area
• Intensification drive – a
minimum of 40% target was
set in the Growth Plan
-10%
0%
10%
20%
30%
40%
50%
60%
Increase in New Urbanized
Land
Share of Total Growth
Accomodated Through
Intensification
Change in Average Density
Within Total Urbanized Area
Differences in Land Use Patterns
2006 to 2031 Change - No Growth Plan 2006 to 2031 Change - With Growth Plan
Source: Places To Grow
6

7. • Low interest rate environment lead to more mortgage debt
One national / global condition…
57.0%
58.0%
59.0%
60.0%
61.0%
62.0%
63.0%
64.0%
65.0%
66.0%
67.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
Q11990
Q11991
Q11992
Q11993
Q11994
Q11995
Q11996
Q11997
Q11998
Q11999
Q12000
Q12001
Q12002
Q12003
Q12004
Q12005
Q12006
Q12007
Q12008
Q12009
Q12010
Q12011
Q12012
Q12013
Q12014
Q12015
%oftotalliabilities
Mortgage/BankRates
Mortgage Rate Bank Rate Mortgages as a % of total liabilities
Mortgage growth slows down
eventually even though
interest rates trends lower
Source: Bank of Canada, Statistics Canada
7

8. Impact of the policies on the residential real estate market
• Cultural preference for single family housing lagged policy
initiatives for intensification.
• Low rise land prices increased due as they are going to be
limited, if not now but for sure in the long run.
• Developers incentivized to develop more high rises.
8

9. More High Rises and Fewer Low Rises Got Completed
* 2015 data till November
41% 38%
45% 44%
53% 52%
46%
53% 56% 51%
46%
51%
45% 47% 48%
43%
39%
46%
38%
31% 31%
27%
35%
30% 33%
17%
53% 52%
38% 41%
27% 25% 28%
16%
9%
17% 22%
13%
30% 28% 26%
33%
38%
27%
43% 47%
52% 56%
46% 50% 46%
74%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Single Semi-Detached Row Apartment
Source: CMHC
9

10. Single family home pries and land prices grew significantly
Low rise land price grew by 8.5%
CAGR from 2004-10
Low rise land price grew by 12%
CAGR from 2010-14
Source: RealNet Canada Inc. an Altus Group company, Self analysis10

11. Price growth for high rises diverged from low rises and
remained low and flat for the past 5 years. But,
Source: RealNet Canada Inc. an Altus Group company
11

12. High rise prices per sq.ft basis shows a decent growth rate as
apartments became increasingly smaller in size.
• High rise land price grew by
7.7% CAGR from 2004-10
• Average of 13,000 units
completed per annum
• High rise land price grew by
5.1% CAGR from 2010-14
• Average of 16,000 units
completed per annum
Increased supply resulted
in relatively slower price
growth
Source: RealNet Canada Inc. an Altus Group company, CMHC, Self analysis12

13. Construction starts indicate continuation of fewer single family
and more apartments delivery in the future
9,216
25,357
0
5,000
10,000
15,000
20,000
25,000
30,000
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015*
NumberofHousingUnits
Starts - Single Family Starts - Apartments
Source: CMHC
* 2015 data till November13

14. UNDERLYING TREND
DIVERS – FUTURE CHANGES
Some Changing and Some Not Changing

15. Current Market Situation
Rising Low-
Rise Prices
and Price
Correction
Worries
Rising High-
Rise Supply
and
Oversupply
Worries
Green Belt and
Intensification2
Supply Trends –
more High Rises4
Preference for
Low Rises
3
Ease of Funding 5
1 Fundamentals15

16. Underlying trends – future changes
Fundamentals – would remain positive
• Immigration and natural growth would remain sustained
Greenbelt Plan and Intensification – not changing
• Developed and transit served land for low rise housing would be in short supply
• Intensification drive would continue in its path
Preference for homes – not changing in the near term
• Household preferences tend to change only gradually
• Millennials with delayed marriage plans has driven high rise demand so far; they will
eventually get married and would demand larger space
• More incentives and convenience of living would facilitate long term change
1
2
3
16

17. Supply Trends – not changing
High Rise: High and rising supply
• Developers continue to focus on high rise developments
• Longer term growth would depend on improvements in transit infrastructure (York-
Spadina, Eglington Crosstown, SmartTrack, Scarborough Subway Extension)
Low Rise: Declining completions and Starts
• Sustained price growth should logically encourage more greenfield supply and infill
supply through rezoning
• Data so far is not confirming the above; increase in ‘under construction inventory’
with declining starts could mean delays
4
Underlying trends – future changes
17

18. Ease of Funding – Expected to change in some time
• Low interest rate environment should eventually give way to
rate increases.
• Mortgage rates could rise sooner than policy rates in
anticipation tracking bond yields.
• Impact would be on affordability and appetite from buy to let
investors.
5
Underlying trends – future changes
18

19. More on the financing conditions
• Mortgage rates closely follow long term
bond yields
• Bond yields would rise in anticipation of a
rate hike
• Bank of Canada expects the output gap to
be removed by mid-2017 – paving way for a
rate hike
• Mortgage rate increase if this holds good
could be by late 2016
Bank of Canada’s expectation on output gap
19

20. Mortgage Rate Rise – Impact on Low Rise Demand
• For every 1% increase in mortgage rate,
affordability falls by around 10%*.
• Income growth would limit affordability
decline.
• As it would take time to adjust for the lower
affordability – demand would temporarily fall.
• However overall future expected supply is low
and hence the impact would be limited.
• Transactions might get impacted but not
prices.
• If interest rate shocks are not felt, higher
supply would naturally have to occur to
moderate price growth
-10.40%
-10.20%
-10.00%
-9.80%
-9.60%
-9.40%
-9.20%
-9.00%
-8.80%
From 3% to
4%
From 4% to
5%
From 5% to
6%
ImpactonAffordability
Mortgage Rate changes and Impact on
Affordability
* Based on a 25 Year Mortgage with 20% down payment20

21. • High rise cap rates have a 2.5% to 4%
spread over 5 Year bond yields.
• Current spread stand at 3.2%, in line
with the average levels post global
financial crisis.
• Spread compression is likely only when
economic conditions and/or is highly
positive or when there is severe
undersupply.
• High rise spreads likely to remain at the
average level if not expand.
• Demand would moderate when rates
increase and affect prices.
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
Cap Rate - Avg. 5 Year - CAD
3.2 %
Spread
4.2 %
Spread
2.4 %
Spread
Multi Family Cap Rate and Bond Yield Spreads
Source: Bank of Canada, CBRE, Self Analysis
Mortgage Rate Rise – Impact on High Rise Cap Rates & Demand
21

22. IMPLICATIONS AND
OUTLOOK
Low Rise and High Rise Residential

23. $200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,000
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Below Inflation
Growth
Changes in
household
preferences in
the long run
Interest rate hike driven
demand slow down (2017
likely) and preferably more
supply
Low Rise – Price Trend Expectations
NewHomePrices
Source: RealNet Canada Inc. an Altus Group company, Self Expectations
Long Run
Near Term
20252020
23

24. High Rise - Price Trend Expectations
• Average of 13,000 units
completed per annum
• Average of 16,000 units
completed per annum
• > than 23,000 units
expected completions
per annum
Stable
Near Term
Long Run
Improvements in
transit infrastructure
and gradual changes in
household preference
24
202520202016 2018
Source: RealNet Canada Inc. an Altus Group company, Self Expectations

25. VENKAT RAMADOSS CFA
Contact: (416) 795-2714
Email: venkatramadoss@yahoo.com