We have discussed the hot housing market and different cooling strategies with a well known market research analyst, the President of the CHBA, and TREB’s Director Market Analysis. Recently, we had the opportunity to pick the mind of Barbara Lawlor, President and CEO, Baker Real Estate Incorporated, to see how she feels about the current state of the GTA housing market.
Before even jumping into the interview, Lawlor had this to say:
“Media discussion about home prices in the Greater Toronto Area is rampant, with differing opinions on whether to, and how to, cool the real estate market. The building, development and professional renovation industry creates thousands of jobs each year and contributes billions of dollars to our economy, so cooling the market can have serious negative economic effects. In my opinion, based on over 30 years of industry experience, our current home prices are mainly the result of demand outpacing supply.”
Newinhomes.com (NIH): The supply and demand issue does seem to be the main cause of rising prices. Can you expand on that? Is there anything else at play?
Barbara Lawlor (BL): One overwhelming truth in our industry today is demand exceeding supply. Government policy has contributed to the housing shortage, as regulatory red tape is holding back construction of new housing. Reducing some of these barriers would, over time, make prices more attainable.
In the GTA, we also have to deal with the land-limiting effects of the Ontario Places to Grow Act and The Greenbelt Plan. Recently, former Mayor of Mississauga Hazel McCallion called on Premier Wynne to consult with the Mayors and Chairs across the Greater Toronto and Hamilton Area before finalizing proposed amendments to the Growth Plan for the Greater Golden Horseshoe and The Greenbelt Plan. The Mayors and Chairs feel the proposed plans are unrealistic and will lead to an even greater housing affordability crisis. Instead of tightening up on land availability, the government should free up more land for residential development.
Adding to the situation, baby boomers are not selling their principal residences as much as was predicted, and they are reluctant to sell investment properties because of the substantial capital gains tax. Simultaneously, thousands of Millennials are looking for low-rise homes. This puts further restraints on our housing supply.
NIH: We take it you’re against a capital gains tax hike? (UPDATE: Federal Finance Minister Bill Morneau says there will be no capital gains tax hike)
BL: Changes to the taxation of capital gains on the sale of investments not classified as a primary residence could harm our economy. Our rate stands at 50% today, because in 2000, Prime Minister Chrétien’s budget reduced the inclusion rate of capital gains from 75% to encourage innovation and entrepreneurship in Canada. A major obstacle to new startups raising capital is that those who sell existing investments have to pay tax on capital gains.
At 50%, Canada has one of the highest capital gains tax rates among countries in the Organization for Economic Co-operation and Development. Several of these have no capital gains tax in order to encourage investment and entrepreneurship. Canada is trying to find our investment feet on the world stage, and raising the capital gains tax rate would be unwise.
Consider, too, that many seniors own a second home as part of their retirement income strategy. To ask for more tax money in addition to what these people already pay is illogical for a government that claims it wants to strengthen the middle class.
NIH: How about a foreign buyers tax?
BL: With the situation in Vancouver, we learned what can happen when a foreign buyers tax is implemented without careful forethought. Their tax cooled the market dramatically, but also lessened consumer confidence, and existing property owners now have to deal with the consequences.
At Baker Real Estate Incorporated, the number of condos we see sold to foreign buyers is in the 5% range, and I suspect that number is even lower across Canada. Remember, most foreign buyers are end-users – and we also have speculators who are not foreign. Why place so much emphasis on this segment?
Last year, RBC Capital Markets placed the impact of foreign buyers far down the list of major issues driving up house prices in Toronto. Ahead of it were low interest rates, higher incomes, a greater percentage of household income being spent on mortgages, and an increase in baby boomers helping their children with down payments. In February, the City of Markham voted against asking Ontario to impose a tax on foreign buyers, citing the need for improved infrastructure and a more streamlined process for approvals.
NIH: So how involved should the government (all levels) be when it comes to cooling the market?
BL: In the early 1990s when we experienced a true housing bubble in the GTA, government intervention was critical. Prices had skyrocketed and our market was flooded with speculators. Today, many experts do not foresee a bubble situation and feel that too much government intervention would be counterproductive.
Look at Vancouver, where the market was already undergoing a slowdown last summer because rising prices had lessened demand. The hastily imposed foreign buyer tax was likely not necessary. In Vancouver, they also brought in a substantial tax on vacant homes, as they have so many. That is not the case in Toronto, where our rental vacancy rate is at a historic low. There is talk of the government stepping in with rent controls, but that would discourage the growth of rental stock. After all, investors invest to make money.
Our governments are focusing on limiting the amount of debt Canadians can take on and foreign buyers driving up prices. They should focus on limiting development charges, opening up land for development and streamlining the approvals process. Another strategy would be to offer builders incentives to construct affordable housing.
If our government is going to continue to invite newcomers to Canada, it should also be taking steps to expand our infrastructure and make it easier to build new homes to accommodate the growing demand. In Toronto, our homes and condos have been undervalued by world standards for a long time. We are doing what we need to do, which is grow. Governments at all levels should think prudently on how to, or even whether to, cool the market. My attitude is, let the horses run and the market will right itself.
NIH: What do you think a larger required down payment would do to the market?
BL: Among the recent changes the Canadian government has made regarding mortgage requirements are increasing the qualifying interest rate, reducing amortization periods, and increasing the minimum down payment required for home buyers. As a result, some people postpone buying a home, and others purchase a less expensive home than they intended, or alter the way they structure their payments.
People are buying homes en masse in the GTA, so obviously they can meet our stringent rules on borrowing. Raising down payment criteria will prevent more first-time buyers from realizing their goal of homeownership. A recent CIBC report showed that one in four first-time buyers are receiving parental help to get into the market, but not everyone has this luxury.
Higher down payment requirements would lessen housing demand, which would have economic consequences for the myriad of people who make a living in the industry. That could have a negative domino effect on the economy, as the number of jobs in the new home industry is directly affected by the number of new housing starts.
NIH: Do you have any recommendations for first-time buyers?
BL: Current prices aside, real estate is still one of the historically best financial and lifestyle investments anyone can make. I advise first-time buyers to pull out all the stops and purchase as much house or condo as they can. It takes some discipline to grasp the concept of stepping up to paying a mortgage, property taxes and/or condominium maintenance fees – but people do it every day. That discipline led previous generations to gain equity and right-size later in life to accommodate lifestyle changes.
Find out whether family members can help with your down payment. Use what you can from your RRSPs through CMHC’s Home Buyers’ Plan, which allows qualified persons to withdraw up to $25,000 in a calendar year to build a qualifying home. Ask at sales offices if the builders you are considering have any incentives in place to help first-time buyers. Do your research so you can sign on the dotted line feeling confident about this important and exciting life step.
NIH: Detached homes in the GTA are out of reach for first-time buyers (for the most part). Do you think it’s time for other buyers to give up the dream of owning a detached home?
BL: Absolutely not. Remember that people who have a home to sell benefit from today’s high prices, and as always in real estate, everything is relative. What is different is the fact that nowadays, a “starter” home is a condominium suite rather than a low-rise residence. Condos are the only affordable entry-level choice for first-time buyers. From there, owners can graduate to owning a townhome, semi or detached home as they build equity and their circumstances change. The key to all of this is getting into the market in the first place. When you consider the massive demand we still have for low-rise homes and the under-supply, obviously there are many people out there who still dream of owning, and intend to own a detached home!
A big thanks goes out to Barbara Lawlor for sharing some advice and bits of wisdom she’s picked up from more than three decades of industry experience.