Surviving Toronto's Housing Market: Strategies for Home Ownership

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Alex Avery, John Pasalis and Jeff Rubin
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26 April, 2017 Surviving Toronto's Housing Market: Strategies for Home Ownership
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26 Apr 2017
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April 2017
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The Empire Club Presents

Surviving Toronto’s Housing Market: Strategies for Home Ownership with Panelists Alex Avery, John Pasalis and Jeff Rubin

Moderated By Greg Bonnell

April 26, 2017

Welcome Address, by Paul Fogolin, Vice President of the Ontario Retirement Communities Association and President of the Empire Club of Canada

While our panelists take their seats, I just want to thank everybody for coming tonight. My name is Paul Fogolin. I am the President of the Empire Club of Canada. Welcome, to our 113th season. This is the third evening event we have ever held in the Club’s history. I just want to thank, very briefly, Gord McGuire. Give him a round of applause— well deserved. Gord McGuire is on our board, and he co- chairs our Evening Events Committee, along with Amber Kanwar, who could not be with us tonight. She is not feeling well, unfortunately. They have done tremendous work to put together these sorts of events. We are traditionally a lunch club. We have been doing it since 1903, but we decided it would be great to start to do events in the evening. Not everybody could take two hours off in the middle of the day to come and hear people talk about the issues of the day. This is a new thing, and we are thrilled to have a great turnout tonight, and, particularly, for this subject matter.

The title of tonight’s event is “How to Survive Canada’s Housing Market.” It is pretty dire. Before we get started on the panel tonight, we have a prize draw. Adamo C. Palumo, you were the last guy to show up. You get a bottle of wine from Ripasso Bosan, sponsored by Cesari Fine Wines of Verona. Enjoy. It is good wine. I made sure to try it before we accepted it as our sponsor gift.

I am going to invite Derek Serra, from RBC Mortgages, to give the formal introduction of our panelists, but, before we do, let us just reflect on that Toronto is actually number one. Unfortunately, it does not mean our sports teams; it is in housing prices. We all know that Toronto has actually had the fastest rise in housing prices of any country, in any city in the world last year. This is tremendous for economic growth. It is very exciting for anybody who owns property. It is exciting for people who can enter the market, but it creates a tremendous sense of unease and a massive burden for people, especially, young people who feel like they cannot enter the market.

As we know, this housing hysteria led the provincial government to enact what they are calling the Fair Housing Plan, which I am sure we are going to get some feedback on and reaction to, tonight, from our panelists. Who knows if it will make a difference? Who knows what is going to keep happening? I think these gentlemen will have a better sense than anybody else, so we are thrilled to have them with us tonight. I would like to invite Derek Serra to provide the formal introduction of our guests.

Introduction, by Derek Serra, Regional Vice President, Mortgage Specialists GTR East, RBC

Thanks, Paul. It is nice to be here and nice to be representing RBC here tonight. Again, we have been kind of on a circuit in talking about mortgages, more so than ever before.

My line has always been, lately, other than Donald Trump, all people want to talk about is the value of their home and how their mortgage will fit into that kind of perspective in buying and selling and all of those kinds of great things.

At RBC, we have a fantastic team across GTR in terms of our salesforce. And, certainly, we have a few team members in the room. You will spot them out. They all look like bankers. Those are, in fact, bankers that are around you tonight. Anyway, I am sure that this will be a great conversation and one that we are really proud to sponsor. Thanks to the Empire Club for joining us.

On our panel this evening, we have Alex Avery, the Managing Director, Institutional Equity Research Individual for Global Markets, at CIBC Capital Markets; John Pasalis, Founder & President of Realosophy; and Jeff Rubin, economist and author of The End of Growth . And we have our moderator, Greg Bonnell. Greg is the Real Estate Reporter and Anchor, BNN. Gentlemen, over to you. I look forward to the discussion tonight. Thanks, Paul.

GB: You can tell by the way that they are elevated higher than me that they have the big ideas. I am the reporter, so I am just going to keep them in line in case they get rough.

Just a little bit about my background: I have been doing real estate for BNN for almost three years now. When I first started on the B, the fallback phrase when I went on TV, was the three hot markets: Vancouver, Calgary and Toronto. We know what happened to Calgary, and now we know what happened to Vancouver. It seems silly now that three years ago, we would be using language like “hot” because we were nowhere near 33% price growth year over year. As we discuss tonight how to survive Canada’s housing markets and how the government is trying to figure out how to fix them—whether they can or not—it is sort of important to start the discussion about what got us here in the first place, so we help them navigate it.

I think I am just going to go down the panel and get quick ideas from everyone about why they think house prices in Toronto got pushed to this level—because everyone I talked to has a different theory to that as well. We will start with Alex and move our way down.

AA: By day, I analyze commercial REITs, including apartment REITs, but a lot of shopping centres and office buildings and industrial buildings and things like that. I have been doing that for about 15 years. About a dozen years ago, I started to notice that a lot of the conversations that I was having with people when I told them I was a real estate analyst, immediately went to, “Is it a good time to buy a house?” That was sort of, I think, the early stages of the euphoria that, I think, has gripped the Canadian housing market. I started, I guess, writing down some of the experiences that I had and figured out that there were a lot of misconceptions that Canadians had about housing. They did not really understand the financial investments, the lifestyle impacts that they were making when they were buying houses.

I published a book earlier, just in the fall, called The Wealthy Renter. The objective of that book was really twofold: One was to highlight the merits and the appeal of renting in a homeownership-crazed environment. No one really stands up and says, “You are smart if you rent,” or “There is a lot of appeal to renting.” I found that, particularly, a lot of young people in their twenties and early thirties felt a lot of pressure to buy homes when you have housing that is moving up at 33% at record price to income, when you have got record low interest rates, record high personal indebtedness. That is not a recipe for success. I thought it was important to balance out that understanding of homeownership versus rental.

The second thing was, more broadly, to educate and give a better understanding to those people who do choose homeownership—I am a homeowner myself—to better before they make the plunge. One of the big themes in my book is really about government. When you look at the housing market, it is no more of a market than the Canadian dairy industry.

The government is coach, referee, cheerleader and fan in the game of housing. They determine all aspects of the housing market, everything from zoning and permits to property taxes, development charges, land transfer tax—you can take money out of your RRSP, and you do not have to pay capital gains. When you actually take a look at the housing market, it is almost entirely dictated by the policy that government puts forward towards regulating the housing market. When you ask what is going on in the Canadian housing market, I would point firmly to policy mistakes that have been made over the last 15, 20 years, and, most notably, they would be the Greenbelt and Places to Grow Acts. Those are, I think, almost singularly responsible for the current state that we are in. Lots of other things have had big factors; for example, low interest rates are just like gas on a fire, but I would say that policy is really what has got us to this point. I would lay this whole problem at the feet of government.

GB: What do you think, Jeff?

JR: Hi, just to introduce myself, my name is Jeff Rubin. For 20 years I was the Chief Economist at CIBC World Markets. I left in 2009 to become an author. I started my career back in 1988, putting out a call for a 25% correction in housing prices, which, at the time, was quite controversial. In the report—and I was looking at it this morning—there are many similarities with today’s conditions, and there are many differences. The report marked decline in affordability, speculation, potential inflationary transmission from housing prices to the real economy, but that is not really why I made the call. I made the call not about housing prices at all. I made the call about interest rates. We had a zealot in the Bank of Canada. He was on an anti-inflationary crusade. Unlike most people—or at least the other chief economists on Bay Street—I believed him. A housing bubble existed all the time. Toronto’s housing market was egregiously overvalued for at least three years before it crashed in 1989. If you want to talk about price increases—you mentioned the 33% increase this year—well, from 1986 to 1989, Toronto housing prices doubled. That would mean three consecutive years of a 33% increase.

What I am saying is the market could have crashed at any time in the interim trading period. What pricked the bubble, of course, was interest rates. Do you know what interest rates were when I made that call in 1989? A 91-day treasury bill in Canada was 12.2%. A long Canada bond was 9.65%. We had a hugely inverted yield curve. An inverted yield curve means the bond market is already discounting a recession, and hence, future cuts in short-term interest rates. How did we get to 250 basis point inversion of the yield curve? Well, because Canadian short-term interest rates, under the guidance of Governor Crow, in his crusade against inflation, was no less than 250 basis points above the federal funds rate, which was at the time, about 9.5%.

Really, it was not a call about affordability. It was not a call about speculation. It was a call about the cost to carry because real estate corrections are, ultimately, about the cost to carry, and that was also true in 2007/2008 where we had Fed tightening and the resets on the subprime mortgage rates. Without that Fed tightening, without the resets, who would know where U.S. property values and mortgage-backed securities would be?

What are the circumstances today? For all of Governor Poloz’s pontifications about household debt levels, unsustainable mortgage debt, the fact of the matter is that he has ruled out any rate increases, and, indeed, there is probably about a 50% chance still that the next move from the Bank of Canada will be a cut. While the Ontario government was unveiling its grandiose plan of 16 different points to rein in housing demand from vacancy tax to foreign speculator taxes, as if only foreigners speculate and domestic owners do not, guess what? Five-year mortgage rates fell about 20 basis points because of a curve-flattening rally in the U.S. bond market. If I had to net net, I will put my money on the impact of the 20-basis-point decline in five-year mortgage rates. That is not to say that a bubble cannot be pricked. That is not to say that Toronto’s real estate prices are not overvalued. What it is to say is there is no context today to prick that bubble. Until there is a context, overvalued as it might seem, real estate demand and real estate prices have only one direction to go, and that is up.

Later on in tonight’s discussion, I will point out what could change that world, but, really, the key here is borrowing rates and what is going to happen to them over the next 24 months. No one here is concerned about a plateau in housing prices. Why people came here today is they are concerned about a crash. The gun is loaded, but there is nothing to pull the trigger.

GB: All right, so we know where Jeff stands on the issue pretty clearly. John, obviously, you have a different perspective. It is interesting: I saw one of your tweets about the psychology of the herd today, and that really intrigued me.

JP: Before we get to that, it is kind of what is going on right now. Toronto’s real estate market is really interesting. I think for about 15 years, up to the start of 2016, I would say Toronto’s market was pretty normal. Even though a lot of people were talking about a crash because prices were going up 5–10% a year, it was a sustained boom. It was irrational. You kind of read this in the press. It made complete sense. The story of Toronto’s boom for 15 years was told very well by a few economists—two from Wharton and one from Columbia—who wrote this paper called “Superstar Cities.” What they highlighted were international cities, like Toronto, that are attractive for foreign capital and, in particular, immigration, and that are constrained by supply. What eventually starts happening is prices start disconnecting from incomes because you have a ton of capital coming in that is not local, and this starts driving up prices at a faster rate. On top of that, you have supply constraints. This is what we see in cities like San Francisco and New York and now Toronto. It seemed irrational because prices were going up so much, but it kind of made sense.

The line where things changed was in 2016. One of the fun things about being in the real estate space is you see things at the ground level. Before it is in the press, before any economist has it in their spreadsheets, you see how people behave. In 2016, and I would say at the beginning of the year, probably 50% of the people that were contacting us wanted to buy a house as an investment. That was it: They just wanted to buy. Most of them were domestic. I would say our clientele is primarily domestic. Everyone wanted a house. When people were contacting us, they did not want a triplex or a duplex or a fourplex; they wanted a single-family home. We did the math and said, “Listen, you can buy a single-family home, but, when you do the math, you are probably losing $1,500 a month.” Everyone’s answer was the same: “I do not care. Why do I care about losing $1,500? It is going to go up—worst case 10% a year, probably 20% by next year.”

Anyone who studies history and economics knows this is not normal behaviour. This alarmed us a little bit. We actually started looking at the data. One of the things that our company does is we try to find what is going on in the data. We published a report last month where we basically looked at every single sale in the GTA from 2014 to 2016. We said let us look at all of these sales, and let us figure out what percentage of the homes that sold were rented out immediately after the buyer took possession. We were able to do this, because we had the MLS sales data, and we had the MLS lease data. This is just MLS leases. In 2016, the percentage of investors skyrocketed, in particular, in the 905, in areas like Aurora and Newmarket. In 2012, maybe 5% of homes were being sold to investors. In 2016, 20% of homes were sold to investors. Because we had all of the data in terms of what each investor paid for the house, what their taxes were, what they are getting for rent, it is not hard to calculate if they are making money or if they are losing money using some very basic assumptions. We just assumed that they put down 35%, which was pretty generous. And 95% of these properties are cashflow negative. They are losing money. On average, they are losing $1,300, I think it was.

What has happened in 2016—at least what I am seeing—was this investor psychology kicked in for buyers and investors. For buyers, the feeling was “If I do not buy a house now, I am never getting in, and I have got to pay whatever price my agent tells me. And for investors, the psychology was “Why do I not just take out a $200,000-home line of credit, put it down on a property? It is going to make 20% a year.” They are not going to find a safer and more secure investment than that. That is really what pushed prices, I think, through the roof in 2016 and in the start of 2017.

To Greg’s point about my tweet today about how I find this psychology of housing markets insanely fascinating: If you looked at how people were talking two months ago, everyone was looking at buying a house. The psychology was “If I do not buy a house now, I am done; I will not be able to buy one.” This is how people were talking. You would see them in sales offices. You would see 20 offers on houses and people paying 10%–20% more than homes were worth—just completely irrational prices. In the past four weeks, it has completely changed, and it has changed for a couple of reasons: A) New listings went through the roof.

The number of properties for sale is up 50%–60% over last year, which is an insanely high number. B) On top of that, you have more listings, and all of a sudden you have buyers holding back and thinking, “What is the government going to do? Is this going to impact the market? Is what happened to Vancouver going to happen to Toronto?” In four weeks, we went from this panic of buying to everybody stepping back. And houses now, on their offer nights, are getting no offers, or they are getting one offer. It is a complete shift, and it is really fascinating how things can just turn in four weeks.

GB: We know we have got cheap money. We know we have domestic speculators, even though everyone wanted to point the finger at the foreign boogeyman for the longest time. A couple of weeks ago, I was in Ottawa. I sat down with Governor Poloz. He said he cannot stop; the rates are an ineffective tool for stopping the speculation. He actually said to me if he raised rates by 5%, you would not stop the speculators expecting a 30% return.

I asked Bill Morneau if he was going to do something about capital gains. He said no. Then, the Ontario government comes out with its rules, and, as much as Finance Minister Charles Sousa has been beating the drum about the domestic speculator, they did not really go after them. Alex, you talked about the fact that you can lay it all at their feet because of the policy we have had. The government comes out with 16 points to fix it, and did they fix anything?

AA: Two days before they made those announcements, they made a solemn vow—the three of them, Morneau, Sousa and John Tory. They said, “Whatever we do, we will not do anything to increase prices.” Then, they introduced rent controls that will stifle the new supply of rental housing. That is exactly what they said they would not do two days earlier. I do not think anything that they have put forward will have much of an impact. Unfortunately, I tend to agree with Jeff that I do not see—the gun is loaded—anything in the near term that is likely to slow down this market. The policy mistakes that were made, were made 10 years ago, 15 years ago, and they should have been better thought out.

We were talking earlier about how the policy announcements that were made last week were behind the scenes being made up until hours before the announcement came out. This is not well thought out. That is one of the most dangerous things about housing policy is that it is so seductive to politicians to use it for political gain rather than in efforts to promote a healthy housing market. The people who are making the decisions are not educated about the housing market. They do not understand, and they do not appreciate the magnitude of the impacts that it can have.

House prices are now extraordinarily expensive. I feel bad for people who are just starting out in a city like Toronto or in Vancouver, where you feel the pressure to get in. The stakes are very, very high. If you make a bad buy right at the top, you could be paying for it for decades, and it could ruin your retirement. If you do not get into the market and it goes up another 50%, you are left behind. Neither of those are good choices. Even the third choice of just a flat housing market is also bad because then you are going to be living house poor for the next 25 years as you try and pay off that mortgage. It should have never been allowed to get to the spot that it is at today. I do not see, really, any near-term solutions for it. My recommendation, when people ask, is definitely do not do it as an investment in terms of buying a house. Consider renting, and, whatever you do, protect your down side because this is an elevated-risk environment.

GB: I want to ask Jeff, given your knowledge going back to certain bank governors, why is Governor Poloz so unwilling to raise rates? The way I put the question to him was: “We are at ½%; go up to ¾%; go up to 1%. What would be the big deal?” He said he cannot do it. Five percent would not even change it.

JR: He said 5% would not quell the speculators. What absolute, utter nonsense, absolute BS

GB: I should have had you in the room with me. I would have…

JR: Half of that would not only get rid of the speculators, but it would deflate the whole market. Foreign speculators, domestic speculators and non-speculators would all see a massive devaluation in their property values that would have ramifications on lending institutions and the economy as a whole.

Let us understand why Governor Poloz is correct in not wanting to address the market: Not because he could not, but because the consequences of that would dwarf the benefits. The first thing you would have is an utter deflation in housing market prices. In 1989, it was about 25%. It took down about half of the trust companies at the time, if I recall. Olympia and York was funding Canary Wharf at the front end of the Canadian yield curve. There is a very good reason why: Then, there would be collateral damage to financial institutions. We have already seen an Alt-A lender lose about 65% of its share value in the last couple of— that is just a warm-up to what would lie ahead, and it would not just be limited to the AltA subprime market. Also, what were the macroeconomic consequences of the 1989/1990 housing market crash? They were a deep recession. This would be a policy-mandated recession. Lastly, within its own terms of reference, and ultimately the Bank of Canada’s primary mandate, as the primary mandate of all central banks, is price stability. There is not an argument to move interest rates. Inflation is barely at the 2% target, and unlike ‘89/’90, no evidence of acid inflation spilling over to general inflation.

While I disagree vehemently with Governor Poloz’s assessment that even 5% would not get rid of the speculators, I would ultimately acknowledge that he is right in not sacrificing the Canadian economy, collateral damage to financial institutions and a hard landing for property values just to quell inflation.

Hopefully, we will discuss a bit later. The interest rate risk does not just lie with what the Bank of Canada does. There are some fundamental changes in Washington that can fundamentally change the picture and, certainly, the Toronto housing market would be collateral damage from those changes.

GB: Let us get to that right now, then. We will go to John. Obviously, what we are talking about is not what Governor Poloz can control, which is just the overnight rate in Canada—the bond market, five-year yields dictate, obviously, five-year mortgages. When Donald Trump surprised the world and took the office, they jumped up. They levelled out a bit, but we could see further moves, higher. Is that what undoes the market, from your point of view, John, when you take a look at the cost of borrowing?

JP: I do not think so. I do not think it is going to go up in any meaningful way to curb demand. Rates would have to go up quite significantly to cool investor demand. I do not think anyone sees that happening anytime soon. I think most of us were expecting public policy to prick this thing and cool it down. I think the cool down we are seeing now in Toronto is going to be temporary. I think it is psychological. I do not think there is anything that has happened. I think people are just hitting pause. In three months, when they realize there is nothing really that has changed, everyone is going to jump back in, and we are going to have 20 offers on houses again. I do not think that is going to cool anything down.

GB: I am starting to hear the same about Vancouver, too, that they were scared, and now they are just going to get back in, and everything is going to go nuts there, too.

JP: They are jumping back in.

JR: When we are talking Donald Trump, we are talking about cutting corporate income tax from 35% to 15%. We are talking about a $15-billion increase in defense spending, not to mention the billion dollars of infrastructure—not just the wall against Mexico, but an infrastructure project spending in line with the highway projects that Eisenhower did in the 1950s. We are talking about a huge increase in U.S. deficits that are funded in the U.S. treasury market, quite apart from what the Federal Reserve Board does.

I think there really is significant risk if in fact that is the fiscal direction taken. The greatest risk— and this is a gamechanger—is if we bring back all those jobs from Mexico and China. Guess what? The price of everything is going up. The grand bargain of globalization is higher profits and lower consumer prices traded off for local production and employment. NAFTA is a perfect example of that. If Donald Trump goes ahead and imposes—forget about the 20% duty on softwood lumber; that has been going on for a long time, and it is a sideshow—a 35% tariff against Mexico and a 45% tariff against China, that is a gamechanger for inflation. This is bigger than just Donald Trump. Bernie Sanders, from the Democrats, was arguing the same thing, that trade deals have screwed U.S. workers.

If you look over at Brexit, that was the same vote. And Marine Le Pen, in France, is talking about taking France out of the EU and reversing globalization. These are game-changing events. They inherently involve distributional questions. They inherently involve the loss of the middle class, the reduction in real wages. But the quid pro quo here for getting that production back is higher prices, higher inflation. Higher inflation will be addressed by both the monetary authorities and by the bond market. Therein lies the challenge because, while Governor Poloz is not going to just slam on the breaks, like Governor Crow did back in 1989, I would say from the two to five year part of the mortgages is about the bond market, and that is really going to be about just how far does Donald Trump go in following through on the things that he has promised.

GB: Cannot have four houses and your TV if each one costs $3,000. I made that point on TV a couple of weeks ago. I am going to put Alex on the spot because we want to talk about surviving this real estate market. I find the hardest thing to convince someone is that they should not buy. You wrote a book about why you should rent—not only why you should rent but how you can become a wealthy renter. Convince these people. Maybe some of them are looking to buy. How do you convince them not to buy a house, but to rent a house?

AA: I wrote the book, and that is the message when you look at the front cover, but I think the message really is a little bit more. It is housing is like prescription medicine; everyone has their own prescription, and that prescription can change based on the person, but it can also change an individual person over time. There are all sorts of things that you need to consider. I think, outside of your own personal circumstances, when you are looking at a market that is at record highs, record indebtedness, record low interest rates, that is a good time to take pause and ask, “What is this the equivalent of?” If I am your financial advisor, I come to you, and I say, “Listen, Greg, I have got a great plan. Let us take five times your net worth. We will put it into a single stock that is trading at the highest price it has ever been, highest P/E it has ever been, and everyone in the market is levered to the roof; the transaction costs will be about 10%, and the market is totally liquid. You are going to hold it for 25 years, let us hope.”

GB: Put me in it, Alex. Put me in it.

AA: That is a fabulous personal financial plan. That is not to say that the market is going to go down; it is just that if you are not really appreciative and if you say to someone, “Listen, you have got $50,000 worth of savings, why don’t you go out and borrow another $50,000 and buy some bank stock,” which, in Canada is a regulated oligopoly, it is a pretty safe bet that almost no one is going to take you up on that. If they say you have $50,000, let us go out and borrow $950,000—20 times that amount—and buy a house that is going to cost you a lot of money every month, instead of paying you a dividend, that seems to be very popular. That goes back to…

GB: I think I am going to sell my house.

AA: I own a house. There are lots of good reasons to do it, but fear of missing out is not a good reason to get into the market. I do think that there are some challenges. I disagree with Jeff a little bit on the interest rates or the importance of interest rates. One of the things that I found is really bizarre about housing and the whole economist view is that affordability is important. Affordability really is not important, which is kind of a hard thing to wrap your head around. People do not buy houses because they can afford them; they buy them because they want them.

I went down to Manhattan about six, seven years ago. We had a woman who was working on the desk; she was about 26 years old and had a bunch of meetings during the day. We went out for a drink at night, and I said, “You moved down from Toronto nine months ago. How is it going?” She was like, “Oh, New York is fabulous. I absolutely love it.”

“Where are you living?” I asked. She said, “The Upper West Side.”

I said, “Oh, how much are they paying you?”

And then: “How big is your apartment because they are notoriously small apartments?”

She said, “It is 800 square feet.” In New York terms, that is a palace. She saw the shocked look on my face, and then she said, “No, no, no, I have three roommates.”

I was like, “You have a boyfriend and another couple?”

“No, no, no. Four separate people living in an 800-square-foot apartment with one bathroom.” That is a perfect example of a housing market where the price of housing is not dictated by what people can afford, but by the amount of people who want to work there.

I would say that, in the case of the Toronto crash, which Jeff correctly called ahead of time, which almost no one did—perhaps no one but Jeff—I would say that employment was another big factor in that one, in addition to interest rate changes. If we were to see a material change in employment, I think higher interest rates would probably coincide with that in the sense that—well, interest cannot really go up. The economy is over-indebted too much.

GB: Right. I am going to put this question to all three panel members. I want to start with John. I asked the Finance Minister last week because they all agreed— the politicians and the economist—that 33% does not make sense. It is not sustainable. It is not a healthy growth in home prices. I said, “What is the number? If you are trying to cool the market, if you are trying to bring stability back to the market, give me a number.” Whether he did not have the number, or whether he did not want to share the number with me, he just said, “I am not going to put a number on it.”

I did some research. TD Bank put at least an average on it a couple of years ago. In your mind, I am going to start with John: In a healthy market like Toronto, what should we expect, annually, in terms of price increases? Or do we say, “That is okay; we are cool with it”?

JP: I think everything we have had up to 2016 was not a normal rate of appreciation, which fluctuated between 3% to 10%. I think that is relatively high; let us not kid ourselves. That is a booming market. That is not a normal rate of appreciation, but it made sense for Toronto. It did not seem speculative. Everything was pretty normal. I think that is normal. Now, we are obviously in this crazy period.

AA: The long-term rate of appreciation of houses over a long, long period, hundreds of years, is about 1%.

JP: The problem with this—and every economist says this—is every economist says this is a justification to not own a home. They all own homes, which is the irony.

AA: For the record, I am not an economist.

JP I know. I think the problem with this, and I think why most people—not yourself—looking at buying homes do not connect with this economic argument that most academics make that it is only going up 1% and it does not make sense to buy a home—yes, certainly when you are looking at the U.S., as a whole, sure it does make sense. If you are including the Rust Belt and everywhere else in the U.S., yes, it is probably 1%. But, if you are buying in what I talked about earlier, these superstar cities—if you are in San Francisco, New York, Houston, Toronto and all of these places that are booming—that is not true. I think that is one of the problems for homebuyers. They hear these stories, and it is completely disconnected from what they see. It is not just Toronto; it is everywhere else.

AA: It is not everywhere else, though.

JP: It is.

AA: It is absolutely not everywhere else.

JP: It is most other booming, urban, core cities.

AA: Sorry, did you just define the subset of cities that you are talking about with high prices as cities that are booming?

JP: Yes.

AA: In all of the booming cities, house prices are booming?

JP: Yes.

AA: I agree with you.

JP: The numbers that I have seen, it is—

AA: No, no, I totally agree.

JP: I did not say all the house…

AA: In the booming cities.

JP: My point is that in the main urban centres, in these areas that are—

AA: Except for Montréal, except for Ottawa, except for Calgary, except for Edmonton, except for hundreds of large cities in the U.S.

JP Yes, exactly. They are not as supply constrained.

AA: They do not have high house prices.

JP: They are not attracting as many international—how many people are immigrating into Montréal, Ottawa and Québec City? It is not the same.

AA: It has the highest population growth.

JP: Having said that, I am not going to sit here and argue that this is the best time to buy real estate. Obviously, there are tensions here. I think what is happening now for Torontonians is if you are buying a house because you expect your house to go up 30% next year, you are a little foolish because this is a big assumption. And it is possible, but I think it is a big assumption. I think anyone—and I actually agree with you—who is buying a house today should factor in the assumption that they are not going to make any money for ten years. I think we are going to this place now where people who are going to buy a house, are going to buy a house for the reasons you should be buying a house: “I work a lot, and the idea of renting a home and getting kicked out every year or two is not ideal. I want a place of my own, and I am going to be there for 10 or 15 years. I do not care if 10 or 15 years from now, in real terms, my house is not worth that much more than it is today. I would still be happier with my own home than if I rented.” I think that is what people should be getting to.

GB: Is that a survival strategy, then? When we talk about surviving the market and not being so worried about this is where I am going to live? It is a survival strategy to be thinking in terms of “I am going to be here 10, 20 years; I do not care.”

JP: Yes, 100%.

GB: When I did not know what I was doing in my twenties, I wanted to go buy a condo because I got married, and that is what you do. When you get married, you buy some place. I remember my boss just showed me the little thing. He said, “Your house will probably do this. Do not do this, do not do this, do not do this, but if you stay in it long enough, you are going to be all right.” That is like our fallback strategy. Some people make the plunge because that is what they want. Do not get hung up on the paper value. I am not hung up on the fact that my house has gone up in the past ten years because it is just on paper. What does it matter to me? My mortgage is this much; I pay this much a month.

JP: Yes, I think so. I think so. Obviously, I think the problem a lot of people have is about whether they are overextending themselves? One of my agents sent me an article—I have forgotten what paper it was in, where she found that 81% of millennials who own property feel like they need to sell it because they are overstretched, financially.

This troubles me because if you feel over- stretched financially, that is a decision; that is not the market. That is you not thinking about where you are going to be three years from now: “I am getting married; I am going to have two kids. What does this cost?” And you are overstretched, financially. It does not just happen. It is a matter of people who are not planning and budgeting and thinking what they are going to need five years from now and of whether they can afford this house. Thinking about your finances is crucial.

AA: I agree. And, with respect to the 1% thing, I have a very similar view of that number, myself. What I was going to add, though, to your point about these super- star cities is, I think, that the context for Toronto is understanding what happened when we bought in the Greenbelt and the Places to Grow. For anyone who follows the stock market, we have three groceries in Canada. We have Loblaws; we have Metro, and we have got Sobeys. If one day you came in to work, and Metro and Sobeys announced that they were closing all of their stores, and they were never going to sell groceries out of those stores again, and, not only that, no one else ever could either, Loblaws’ stock would go up about 100%, maybe 200% that day because they would immediately have an oligopoly, and the supply and demand dynamic of grocery selling would have changed absolutely dramatically.

When we brought in the Greenbelt, and when we brought in Places to Grow, that is what happened to the Toronto housing market, but the Toronto housing market does not behave the same way that the stock market does. People do not forecast forward, so this 7% compound annual growth that you saw over 10 or 15 years was just really the market catching up to what should have been an overnight 40% or 50% increase in prices and then normal growth on top of that. If you decompose that 7%, interest rates came down a little bit, which improved affordability, but the supply of housing basically stopped, and population kept growing. You have some inflation in there, and, really, that 7% was not very remarkable at all. I agree with you. This 33% is now just pure speculative frenzy. I do not see it stopping.

GB: I am going to give Jeff the final thought, and then we are going to open the floor to questions.

JR: There was no Greenbelt to blame it on in 1989. The Greenbelt did not even come into existence for 11, 12 years later, so maybe there are some other dynamics at play here. People ask whether you should buy or rent. There is only one circumstance in which renting makes sense, and that is if you think there is going to be a big decline in housing prices. Do not forget: At today’s interest rates, how much of your payment goes to amortization? A lot more than in the days of 1989, when the treasury bill was 12%, and mortgages were 13 or 14%. Quite apart from slamming on the brakes, all asset values have their self-equilibrating mechanisms. You mentioned there are more listings. We will find an equilibrium, but it is not for Mr. Morneau, the Senate or for Poloz to say what is a targeted return for prices, what is a targeted return for the TSX, what is the targeted return for the Canadian fixed income market. It is what it is. There is going to be some years where the TSX is up 25%. There is going to be some years where it is 10%. Why do not we just invest it in bank stock? It does have all the oligopoly protection. But is it not funny, all those rents chase bad acquisitions in the U.S., so maybe it is not quite the safe ride it is that the chartered banking system would provide. I would say that at today’s rates, at today’s amortization schedules, the only real scenario in which it makes sense for you to rent and not buy is if you think that we are going to see an ‘89/’90 kind of correction in housing prices. I would not argue, and I would be the last person to argue that that could not happen again. I am just saying I do not see the trigger.

AA: I think that is irresponsible and dangerous advice. JR: As opposed to buying bank stock?

GB: Do you want to open up the floor, let other people pick our brains up here?

AA: Sure.

JR: Yes, let us open it up.

Questions & Answers

Q: I will introduce myself. I am Peter Gilgan. I am the founder of a little homebuilder called Mattamy Homes.

AA: You had lunch with one of my colleagues today.

Q: Yes. I would say that I am a little experienced in this topic, but, anyway, you talked a lot about laying some of the blame at the feet of the provincial government for the Places to Grow Act, et cetera. You guys have all talked about how it would be nice if we had a more stable market, which we all would welcome. Describe how you think we would introduce more stability into the housing market here, in Southern Ontario, ten years from now.

AA: When you look back at what the Ontario government did with the Places to Grow and the Greenbelt Acts— greenbelts, I think, are a misunderstood dynamic. People think they are about the environment. They think that this is an altruistic thing for the future. The reality is that greenbelts are driven by municipal budgets. If you go back to the 1960s and 1970s, when you had massive suburban sprawl, that was at times when low energy prices, governments had very limited debt, and the plan was “We are going to build all this sprawl, and then we are going to pay off all the infrastructure,” and, by the time we need to replace the infrastructure, anyone in the investment world in the last ten years has heard nothing but massive estimates of what the deferred infrastructure deficit is across almost every North American city. The Greenbelt was, really, I think, more of a reflection of a lack of fiscal discipline within governments, municipal governments as well as provincial governments. When it was brought in, it was brought in as a stopgap solution to their inability to continue to finance low-density infrastructure.

If you go back, and you read all of the academic work on greenbelts that acknowledges some of this economic driver behind it, every single piece that you read will say, “Great idea. These greenbelts lead to more sustainable cities, less carbon footprint, all of these fabulous benefits.” And I agree with all of that, but every piece of research, every piece of academic study starts with one statement, and it is always, “Before you bring it in, invest massively in transportation infrastructure.” That is what we did not do. If we had a high-speed rail link to Peterborough, a lot of the excess population growth and constraints that we have would be satisfied by housing up there. If you could get from Peterborough to Union Station in 35 minutes, that would change everything. If you could get from Milton or Guelph or Hamilton to downtown Toronto, that is really the solution. The reason that I think we are in a really bad situation—and I do not think there is a near-term solution—is building that transit infrastructure is a 10-, 15-, 20-year, and in the case of Toronto, a 50-year exercise. That is really what needs to be done to make it a more sustainable housing market. I am concerned. I do not know what the future holds, but as I alluded to earlier, up is not good, and flat is not good, and down is not good. We are in a tough situation.

Q: Thank you for the presentation. Quick question. You have been talking about the housing market as if it was a single entity, but we have condos and we have houses in Toronto, and I think the prices are driven by different factors. Maybe each of you panelists can talk about that as well. Thank you.

GB: There was some suggestion, too, that it was all about single-family homes. Now, it is bleeding into other segments because you cannot afford a single-family home. What do see in it, John?

JP: The markets—I would say the condo story is probably the most interesting thing about Toronto’s condo market. This is the one segment everyone thought was just going to explode. You would see these stories about 25,000, 30,000 units being under construction and how we were going to be oversupplied and that they were all being bought by investors. And the interesting thing is that the exact opposite has happened. At least in the short-term, in the past three, four months, it has actually been the condos that have been lower in terms of supply, lower than single-family homes in the resale market.

Condos are booming right now. I think it is a combination of the mortgage rule changes that were put in place in November really put a lot of people who had less than 20% down out of buying a single-family home. It is done. Your budget got slashed by 20%. Your only option is a condo. That, combined with, obviously, the other factors, which are demographic and people really preferring to be in the core. All these stories we read about in different media sources of people wanting to raise a family downtown is true. People are just preferring it to have a different lifestyle—so not commuting for two hours. I think what is happening in Toronto is—and this is why I do not necessarily think the solution is more single-family homes—when cities develop, and they grow, you adjust from growing up assuming you are going to have a detached home on a 50-foot lot, to one where living in a condo is normal. That is the way most cities are. Toronto is unique for a grown-up city where that is not a serious option. I think we are getting to that point now.

AA: I would say that anytime you make an investment in real estate, you are making an investment in two things: One is the building, and the building goes down in value all the time, always, continuously forever with no exceptions. The only thing that can go up in value is the land. That is depending on where the land is. If you buy land in the middle of nowhere, it might be worth nothing forever, but, to the extent that you have positive dynamics, you can get land prices going up. To the extent that you want to maximize your real estate investment over long periods of time, you want to maximize the percentage of the investment that you make that is represented by the land and minimize the building portion. That is an entirely separate conversation from what your personal accommodation needs are, but I would say that in the short term, definitely.

We had a surge of completions and condominiums last year. The market got a little bit spooked by the magnitude, worried that it would not get absorbed. It got absorbed just like that, and now there is actually a shortage in the pipeline. I think we saw an 11% condo rent increase in the last 12 months, which is huge and was unexpected, but I expect that you will probably see that for the next year or two as we continue to have a shortage. It is a shortage of aggregate housing in the shorter term.

In the longer term, the only way that we can satisfy the demand for more accommodation in Toronto, absent some significant policy changes, is just more high rises. In terms of supply and demand, you are going to see a lot more supply of condos, and single-family homes in the GTA are almost tapped out. As a percentage of the whole, there might be another 3% or 4% supply increase. If we do not have policy change, that is all the single-family homes that we will have.

JP: A quick comment on the earlier question because I think it is very interesting, the first question about what we do ten years from now to cool the market or to manage it. I was in Dubai about two months ago to look at how their government manages their real estate sector. Obviously, my role, coming from Canada, was connected with what they can learn from developed countries that do. While there are a lot of things we—my counterpart and I—were able to tell them that they can improve on, it was fascinating. Because we went there, and, because their market is so new, they are doing things that we do not do here. What I mean by that is that they have so much information about what is going on in their market. They can introduce policies instantly to change it. Every new construction property is registered on the land registry system. It cannot be assigned without people paying taxes. If people start flipping properties in short periods of time, they track it, and they will instantly introduce a speculation tax if more than, say, 10% of people are flipping homes. They have so much data at their fingertips and are really able to manage it. I think that is one of the problems we keep hearing about in Canada.

GB: Either we do not have the data, or no one is willing to actually collect it and tell the truth about it. I think we have time for one more question.

Q: You mentioned Toronto as an international destination and attracting foreign speculation, and you also brought up that flexibility in foreign countries to adapt with the housing market. In that context, how effective is the conversations around the foreign tax being discussed, taxing the foreign buyers at 10% and following the Vancouver model?

AA: I think it is politically expedient. I do not think it will have much of an impact. I think people can get around it. I think there is lots of domestic speculators. John will probably be able to talk to that better.

JP: The foreign buyers are a bit of a scapegoat. Of course, there is a lot of foreign speculation and investment. I think domestic is probably higher. I think these rules they put in place are really just to make it look like the government is doing something when they are really not. There are so many loopholes. The only person who really qualifies to actually pay this tax is someone who, literally, has no connections to Canada, puts their finger on a map about where they want to drop $1 million to invest and chooses Toronto. That is kind of the only person who is going to have to pay that tax because, if you have a kid here who is going to university for a year, you can now invest. If you are here on a part-time, one-year contract, you can invest. It is not going to have a big impact. Like I said, all this slowdown is just psychological because people are worried sales are going to drop 40% the way they did in Vancouver.

GB: Jeff, I am curious, who were we blaming in 1988 when house prices were running up? I was not paying attention; I was in high school.

JR: We were blaming speculators, at the time. We were blaming people flipping houses. All of that was happening, but, at the end, we blamed the Bank of Canada because I think that for many years, the real estate industry and financial institutions that were lending to the real estate industry were materially impacted. I think credit for realtors—there was a quantum change there. I do not think that financial institutions, not just trust companies, but banks, just like in 2007, never realized, in the U.S., that there could be a real estate correction of this magnitude, hence they did not engineer their due diligence to accommodate that. When that happened, there was huge financial fallout. I am not, personally, so convinced that there would be any less financial fallout on lending institutions if we replayed 1989/1990. Again, as I have argued, there were special circumstances that pricked that bubble. Maybe the Trump agenda will provide the circumstances for a whole resetting of interest rates, and then there is a real risk. I think the lesson from ‘89/’90 was basically that both the industry and the lending institutions were unprepared for the severity of the price shock that occurred.

GB: We could talk about this all night, obviously. I want to thank the three gentlemen for making my job so easy. I just sat back and listened.

PF: We have hosted over 20 events at the Empire Club this season. I can say, without reserve that that was one of the best discussions we have had. Another round applause for our panelists and our moderator.

And it is my pleasure to invite Derek back up to officially thank our panelists. Our next event is on May the 5th. It is a lunch event. It is not an evening event, and it is with the new CEO of the Royal Ontario Museum and the CEO of the Art Gallery of Ontario, together, talking about our cultural institutions. We like to mix it up at the Empire Club and provide a lot of different types of events.

Concluding Remarks, by Derek, Regional Vice President, Mortgage Specialists GTR East, RBC

Thanks so much. Gentlemen, that was great. I think the one piece I would add to all that discussion is really just that when you are thinking about buying or anything that you are doing now more than ever before, clients need advice, and they need to sit with a professional who understands the market, who can provide very educated advice and move at the speed of the market. That is something that RBC is great at, and that is why we have become the leading, trusted brand in Canada. And, something that I would highly encourage all of you to do, if anyone is thinking about buying, is to not look at the CIBC guy. Another great brand. For me, it is about advice and sitting with your bank and talking about these scenarios. This is more important now than ever before because there is just so much discussion about it and so much uncertainty. In certain cases, when you have the advice, and you are working with the numbers, you get a better understanding of what is possible, what is doable and what the future looks like.

We were just really pleased to be a part of the event tonight and look forward to chatting with others afterwards. Again, great discussion, gentlemen. Thanks so much.

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