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

Average GTA 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

500,0001

98

6

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

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98

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99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

YTD

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

500,0001

98

6

19

87

19

88

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89

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90

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91

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94

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02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

YTD


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

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

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96

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20

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20

02

20

03

20

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20

05

20

06

20

07

20

08

20

09

20

10

YTD


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

Fre

qu

en

cy o

f R

esp

on

ses

Down Payment Size

Down Payment Size for GTA Households Intending on Purchasing a Home in 2010


But…what about mortgage rates???

2%

7%

12%

17%

22%

Source: Statistics Canada

Average 5-Year Fixed Mortgage Rate


Interest payments are less of a burden today

3

4

5

6

7

19

90

.1

19

91

.1

19

92

.1

19

93

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.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

450,00019

8619

8719

8819

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

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0720

0820

0920

10 Y

TD


Average vs. Justified Selling Price in GTA

Justified Average Selling Price basedon 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

1. Group Discussion




5. Rental Market



The Canadian economy continues to grow, albeit more slowly

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%


Canadian Real GDP, QuarterlyAnnualized Quarter-Over-Quarter Per Cent 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

http://www.bankofcanada.ca/en/speeches/2010/sp051010.pdf


Housing sector not driving growth any longer

90

100

110

120

130

140

150

160


Index of 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

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

http://www.bankofcanada.ca/en/speeches/2010/sp051010.pdf


Canadian businesses still expecting growth over the next year

Source: Bank of Canada Business Outlook Survey, Autumn 2010. Click here for pdf

http://www.bankofcanada.ca/en/bos/2010/autumn/bos1010e.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/US Dollar Exchange Rate


Value of Canadian dollar driven by Can-US interest rate differential

0

1

2

3

4

5

6


BoC Overnight Rate vs. US Federal Funds Rate (%)

Bank of Canada Target for the Overnight 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 2010http://www.bankofcanada.ca/en/mpr/pdf/2010/mproct10.pdf

http://www.bankofcanada.ca/en/mpr/pdf/2010/mproct10.pdf



0%

2%

4%

6%

8%

10%

12%

19

91

Q1

19

92

Q1

19

93

Q1

19

94

Q1

19

95

Q1

19

96

Q1

19

97

Q1

19

98

Q1

19

99

Q1

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00

Q1

20

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Q1

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02

Q1

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Q1

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Q1

20

05

Q1

20

06

Q1

20

07

Q1

20

08

Q1

20

09

Q1

20

10

Q1

Source: US Federal Reserve Board; Canadian Bankers Association

Residential Mortgage Delinquency Rates Canada and United States

United States

Canada



100

125

150

175

200

225

Source: Standard&Poors

S&P/Case-Schiller US House Price 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, QuarterlyAnnualized Quarter-Over-Quarter Per Cent 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

$99,1

49

$100,6

36

$102,6

49

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

Source: Statistics Canada; TREB Forecast

GTA Household Income

1. Group Discussion




5. Rental Market



Key Interest Rates

0%

2%

4%

6%

8%


Key Interest/Mortgage Rates 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%


Consumer Price 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 Consumer Price Index (CPI)Year-Over-Year Per Cent Change

CPI Annual Per Cent Change

Core CPI (Bank of Canada) 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 Prime and 5-Year Fixed Mortgage Rate (%)

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


Average GTA Selling Price3% 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, Property Taxes 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

120,0001

98

7Q

11

98

8Q

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98

9Q

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99

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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

180,0001

98

7Q

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8Q

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0Q

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2Q

1


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%

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Ave

rage A

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Rat

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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%

Ave

rage A

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GTA Sales-to-New Listings Ratio vs. Price Growth

Sales-to-New Listings Ratio Left Scale)

Annual Price Growth (Right Scale)

1. Group Discussion




5. Rental Market



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


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 Cooperatingwith 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 Cooperatingwith TREB Members

Yes

Call First

No

Source: RealNet Canada Inc.


…high-rise builders are cooperting as well

1. Group Discussion




5. Rental Market



Housing starts remain below pre-recession levels

10

20

30

40

50

60

70

80

Tho

usa

nd

s

Source: Canada Mortgage and Housing Corporation

Toronto CMA Total Housing StartsSeasonally 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 Condominium Apartments 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%

An

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al Me

dian

Price

Gro

wth

Sale

s-to

-Act

ive

Lis

tin

gs r

atio


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)

1. Group Discussion




5. Rental Market



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

Average Purpose-Built and Condo Rental Vacancy Rate Toronto CMA

Rental Condominium Apartment Vacancy Rate

Purpose-Built Rental 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. Condominium Apartments


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

Active Listings Rental TransactionsSource: TREB

TREB Rental Listings and TransactionsMay-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 Average Rent IncreasesMay-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.

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Market according to_mercer