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Real Estate Industry Reacts to Latest Bank of Canada Rate Hike – Storeys

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This Wednesday, the Bank of Canada delivered its sixth-consecutive rate hike, pulling its Overnight Lending Rate up by 50 basis points (bps) to 3.75%.

That brings the cost of borrowing to a 14-year high — but the market reacted with a sigh of relief. The central bank’s increase was smaller than the anticipated three-quarter hike economists had called for, and prompted optimism that it may soon calm its aggressive tightening cycle.

“Is this the pivot [that] markets, businesses, and homeowners have been waiting for?” posits Randall Bartlett, Senior Director of Canadian Economics, in a research note. “It looks like it could be. With monetary policy acting with long and variable lags, the Canadian economy hasn’t yet felt the full impact of interest rate hikes this year and the risks remain tilted to the downside.” 

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However, other market insiders aren’t convinced the Bank of Canada is slowing its roll, given its lingering inflation challenges.

“Only 50 basis points, hurray!” quipped Christopher Alexander, President of Re/Max Canada, to STOREYS. “I think what that probably means is they’re going to go 50 in December and not 25, but it’s anybody’s guess.”

“We’re desensitized now — everybody was expecting a hike, and I think there will be some relief because the majority believed it was going to be at least 75 points.”

Adam Jacobs, Senior National Director of Research for Colliers says he’s surprised by the optimism the relatively smaller hike has spurred, pointing out it’s still a significant increase with steep consequences for borrowers.

“I understand that when it doesn’t go to the full level of expectations people react and say, ‘This is a new paradigm, they’re easing up.’ I guess they’re easing up a little, but if this increase happened a year ago, we would have said, ‘Oh my god, this is a nuclear, unprecedented increase.’ Now we’re saying, ‘If it’s not the highest increase ever, then the Bank is easing up.’ In my mind, if they were really pivoting, we would see no increase at all.”

A Finder.com poll out this week found that 88% of polled economists are expecting another round of hikes, with a baked-in December increase and possible smaller move in January.

That means the rate pain being felt in all corners of the real estate industry — from beleaguered would-be homebuyers, to commercial developers — will persist for at least the foreseeable future.

Softer Months to Come for the Residential Market

The impact of rate hikes on the real estate market can’t be understated; both sales and average prices have tumbled across the country since March, with comparisons to the February peak revealing steep declines in Canada’s largest markets. According to the Canadian Real Estate Association, home prices dipped nearly 7% year over year in September, with sales down -32.2%. From late winter, the average home price has plunged by 21.5%, reflecting a dollar loss of $176,241.

READ: Home Prices Could See a Peak-to-Trough Decline of 10% by Early 2024: Moody’s

This downward trend is expected to linger through the winter, says Alexander, though recovery is on the horizon.

“My hunch is it’s going to be late spring, early summer — call it mid- to late-June,” he says. “The big challenge that we have is inventory is tightening. There is going to come a time when people can’t wait anymore to make their buying or moving decisions. We saw that already in August and a little bit in September, where all those people who were waiting out for a bottom decided to jump in. I think we’re going to see that again towards the late spring.”

He points out that this year’s market declines are in direct comparison to a record-breaking 2021, and that he still hears of multiple offer situations in strong markets, despite interest rates’ impact on buying power. However, rising rates have fuelled demand for the most affordable market entry points.

“Condos have rebounded in a huge way, and that also tells us that Canadians want to buy real estate. The expensive, single-family freehold market is taking the brunt of the rate increase uncertainty, but condos are performing very, very well, and so that is a big indicator that people believe in the long term health of real estate,” he says.

Credit is Tightening Up in the Commercial Sector

On the commercial side, rising rates have made it all the more challenging for developers to get builds off the ground; lenders have grown increasingly wary of funding projects that don’t have an immediate cash flow, says Jacobs. This is especially evident among land deals and land assemblies, where the asset may be held for years before any kind of construction breaks ground. 

“I think there’s still interest in the perceived safe assets. So, apartments and warehouses, just the leasing side of that is so strong — there’s growth, there’s demand for it, the demographics are in your favour. A lender can still look at that and say, ‘Ok, even if there’s an increase in borrowing costs, there’s still huge potential here. A tenant expires and then you lease it at double what you were leasing it before,” he says. “It’s just the other assets — office, land, retail — people are taking a pretty close look at that and trying to bake in a little bit of a downside, I think.”

Lenders have become increasingly picky about the quality of borrowers, as well. “When the market was really roaring, it was, ‘Ok look, most people are able to make a profit out of this, we don’t have to comb over everything, like the board of directors and how long is your company in business, and how could the deal have been done — basically most people can make this work,’ and now there’s starting to be a pullback,” he says. 

However, a tougher borrowing environment doesn’t spell bad news for all industry players. Entities with lots of cash on hand — such as REITs — aren’t as dependent on borrowing, and are benefiting from today’s lower real estate prices.

“They are not so sad about the situation that’s developing,” Jacobs says. “They found it very difficult to do deals during COVID because prices were running up so much and there was so much liquidity because everyone was getting into every asset. And I’ve heard some of them say, ‘This is good for us, we can actually get some properties at a price that we feel is reasonable because we’re not speculating.’ The balance of power has kind of changed — if you really need to borrow with leverage, this is terrible. If you don’t, this isn’t so terrible and you might find yourself on the right side of the market here.”

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How Sellers Should Approach The Current Vancouver Real Estate Market – Storeys

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STOREYS Custom Studio

We often hear “buyer beware,” but when it comes to the up-and-down real estate market, sellers would be wise to do the same — but not too much.

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Is this a good time to sell? Should I even be thinking about selling? These are questions people often have difficulty answering with confidence. But Kevin O’Toole, Vancouver-based Managing Broker at Sotheby’s International Realty Canada, sees the solutions simply.

“If you’re selling out of fear [of a market downturn], that’s not a good play,” O’Toole says. “Take a breath. Talk to your financial advisors. Talk to your realtor.”

O’Toole — who has 15 years of experiencing in the Vancouver real estate market — says if you want to sell because you need more space, or you want to downsize, or you’re being transferred for work and need to move, then go ahead and do it, because there is a decent chance you’ll be dealing with the same market influences in the future that you’re worried about now.

When O’Toole is faced with a client who has this kind of conundrum, he says he always makes a genuine effort to listen. He asks them personal questions, such as “What do you want to achieve?” and “What are your concerns?” or “What do you think would be a better investment?”

Once clients answer, O’Toole says he will often say “tell me more.” He jokingly says it makes him feel like a psychologist, but also says that he genuinely views himself — and other realtors — not as salespeople, but as consultants. And it’s times like those we’re in today when, he says, realtors provide the most value. “Realtors deliver value when there is uncertainty,” he says.

Realtors are not biased towards buying or selling, he adds. So if after the heart-to-heart, an agent feels like selling would indeed help you achieve your goals, they’ll tell you. And if they think it’s in your best interest not to, they’ll probably tell you that as well.

RELATED: Amidst Uncertainty, Vancouver Island’s Market Remains a Beacon of Stability

Once you’ve reached the point where you’ve decided to sell, O’Toole says it’s important to again work with your realtor to set a reasonable asking price. He says in the past month or so, he’s starting to see both sellers and buyers are getting a better idea of where the market is after a series of interest rate increases, and are often coming together to work out a deal.

“For a while, sellers wanted the price that they saw in the early-spring, but are now more amenable to prices for buyers,” he says.

Looking forward, he recognizes there are a few unknowns that could potentially impact the market. Premier David Eby recently announced changes to the Province’s Strata Property Act that would allow stratas to be rented out in all strata buildings. O’Toole says that could impact the market because it could open up another possible solution for those who are selling primarily due to financial concerns.

“There can be a ton of valid, and right, reasons to sell,” O’Toole says. “But selling out of fear is one of the wrong ones.”


This article was produced in partnership with STOREYS Custom Studio.

Written By
STOREYS Custom Studio

Content by STOREYS Custom Studio is created in partnership with companies and brands looking to tell their own stor(e)y.

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Ontario's real estate industry regulator is ineffective, Auditor-General says – The Globe and Mail

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Ontario Auditor-General Bonnie Lysyk speaks during a news conference at Queen’s Park in Toronto on Dec. 4, 2019.Aaron Vincent Elkaim/The Canadian Press

Ontario’s Auditor-General says the province’s real estate regulator has been ineffective in policing the multibillion-dollar residential property industry.

In a report released on Wednesday, Auditor-General Bonnie Lysyk found the Real Estate Council of Ontario (RECO) does not adequately ensure that the industry complies with the regulations and has failed to do enough to protect consumers.

Topping the Auditor-General’s list of concerns was the fact that RECO does not fully inspect real estate brokerages on a timely basis. The Auditor-General found that 27 per cent of registered brokerages have never been fully inspected.

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As well, the Auditor-General said RECO does not have a consistent process to assess those applying to be realtors and who say they have a criminal history. The report looked at a sampling of 25 professionals who had disclosed a criminal conviction or charge and found that RECO had approved 20 of them and did not provide any documented reasoning for why it did so.

RECO was also criticized for how it deals with ethics violations in real estate transactions. The report said the average fine imposed on realtors was often below the amount of the commission they earned in a transaction, and said the fine could be viewed as a cost of doing business instead of a “sufficient deterrent to future misconduct.”

RECO said it is committed to developing a plan that will address the Auditor-General’s concerns. RECO’s response was included in the Auditor-General’s 51-page report. Under the province’s real estate act, every real estate brokerage, broker and realtor must be registered with RECO.

The Auditor-General identified a host of other shortcomings ranging from RECO’s failure to track and analyze complaints, which would help it identify and address systemic problems, to a lack of protocols to ensure that students do not cheat on virtual real estate exams.

The report said one glaring lack of enforcement occurs after RECO inspectors discover a brokerage is violating rules. The regulator rarely follows up “to confirm that the brokerage has addressed the violations,” the report said.

The report also noted that RECO does not have a process to inspect whether real estate professionals are complying with anti-money-laundering laws.

“It is probable that money laundering is occurring undetected in Ontario’s real estate market,” Ms. Lysyk said in a press release accompanying the report.

During the pandemic real estate boom, blind bidding was heavily criticized for contributing to the spike in home prices when properties sold for hundreds of thousands of dollars over the listed price.Lars Hagberg/The Canadian Press

Realtors and brokers are required to report suspicious and large cash transactions to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), which monitors money laundering.

But over the past five years, when more than one million Ontario properties worth $760-billion were sold, hardly any transactions were reported to FINTRAC. The federal agency received no reports of large cash transactions from 2017 to 2020. Only last year, which was a record period for home sales, FINTRAC received 18 reports of large cash transactions, according to the Auditor-General.

The report recommended that RECO work with FINTRAC to share information. It also recommended that RECO update its procedures to ensure that brokerages’ reporting obligations are properly reviewed.

RECO said it had already begun to “explore opportunities” to share information and collaborate with FINTRAC.

Over all, the Auditor-General had 25 recommendations for RECO and the Ministry of Public and Business Service Delivery, which oversees the regulator. In the report, both RECO and the ministry said some of the recommendations would be addressed next year when the province’s new real estate rules go into effect.

That law includes a purported change to an opaque real estate sales tactic known as blind bidding, where competing buyers in a multiple-bid situation do not know what others are offering to pay for a home.

During the pandemic real estate boom, blind bidding was heavily criticized for contributing to the spike in home prices when properties sold for hundreds of thousands of dollars over the listed price.

The real estate industry has repeatedly defended the practice as giving homeowners choice. The new law, which comes into effect in April, includes a provision that will allow the homeowner to disclose the competing offers. However, homeowners are already allowed to sell their homes via an open auction.

The Auditor-General report recommended that RECO work with its overseeing ministry to gather data on which sellers choose an auction process.

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Real estate industry braces for foreign buyer ban

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Ottawa’s two-year foreign buyer ban applies to corporations and individuals who are not citizens or permanent residents of Canada and includes direct and indirect purchases of homes in the country.Graeme Roy/The Canadian Press

With financial markets roiling and house prices tumbling, investors in countries around the globe appear to have a diminished zeal for buying real estate outside of their own borders.

Even so, Canadian real estate mavens are brushing up on the temporary foreign buyers’ ban, which is set to come into effect on Jan. 1.

John Zinati, lawyer with Zinati Kay Barristers and Solicitors, warns that fines of up to $10,000 may be coming to any industry player working with a foreign buyer.

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“We’re going to be the ones subject to the fine,” says Mr. Zinati, including lawyers in that cohort – along with agents, brokers and developers.

Parliament passed the Prohibition on the Purchase of Residential Property by Non-Canadians Act earlier this year after the Trudeau government unveiled the plan in the 2022 federal budget.

The two-year ban applies to foreign corporations and individuals who are not citizens or permanent residents of Canada and includes direct and indirect purchases.

Mr. Zinati says many details are still unclear but the information provided so far suggests that people who knowingly assist in a contravention of the law may be subject to monetary penalties on conviction.

“For every transaction after January 1, we’re going to be asking for proof” of Canadian citizenship or permanent resident status,” Mr. Zinati says of his firm.

The rules allow some exemptions, Mr. Zinati adds. Refugees, students and an individual purchasing with a spouse or common-law partner who is not subject to the ban may be eligible, for example.

Buildings with more than three units are not covered by the ban.

One aspect Mr. Zinati is keenly watching for is more information on how the rules will be enforced and whether the final regulations will be less stringent than the government’s original stance appeared to be.

“On the face of it, we could be subject to a fine, which is pretty aggressive,” he says.

Mr. Zinati points out that the Federation of Ontario Law Associations has raised concerns with the legislation. Some lawyers also believe the law may be challenged on the grounds that property rights fall under provincial government jurisdiction.

Interestingly, a sales agreement signed in violation of the law won’t be invalid, explains Mr. Zinati. The seller and the buyer would still be required to stick to the contract.

After that, the federal government would have the task of asking a court in the province where the property is located to order the property sold. The foreign buyer would not be allowed to profit from that sale.

Mr. Zinati says the process of enforcement would be so onerous, he wonders if the act will mostly serve as a deterrent.

“They may be relying on people in the industry to be afraid to do deals with foreign buyers.”

Mr. Zinati adds that the regulations will not apply to agreements signed in the remaining weeks of 2022, even if the deal closes in 2023.

Mr. Zinati says purchases by foreign buyers who have no ties to this country are rare. Looking at his own firm, lawyers are aware of the occasions when they need to remit Ontario’s foreign buyers’ tax on behalf of a buyer.

“That is not a very common instance.”

Mr. Zinati also believes the new ban will have little impact because the market has fallen since the spring when the budget was announced.

“This came about when the market was hot,” he says. “We have the not uncommon phenomenon – trying to calm a market that by all accounts is calming on its own.”

Mr. Zinati adds that the Ontario government recently raised the province’s foreign buyers’ tax to 25 per cent from 20 per cent.

Clients have been calling to ask him why the tax is being raised if purchases by foreign buyers are banned. The two levels of government are not working in tandem, he points out.

The City of Toronto also plans to implement a vacant homes tax. The annual tax will be levied on unoccupied homes beginning in 2023.

All residential property owners will be required to submit a declaration of their property’s occupancy status for the previous year.

For its part, the Canadian Real Estate Association (CREA) says the experience in British Columbia, which introduced a foreign buyers’ tax in 2016 and a speculation and vacancy tax in 2018, suggests that such measures have a small and temporary effect on real estate markets, housing availability and affordability.

The effects are largely isolated to large, metropolitan markets, with no statistically significant impact in smaller communities, according to CREA.

CREA made several recommendations, including a suggestion that the ban include an exemption for buyers from the United States and Mexico in order to avoid a reciprocal response from Canada’s trading partners.

The association is also watching for clarifications and definitions in the regulations when they are released. The legislation may be complicated, CREA cautions, so it is advising members to consult a lawyer for guidance and advice.

Simson Chu, real estate agent with Chestnut Park Real Estate Ltd., has not seen any signs of a rush to buy from overseas investors before the ban comes into effect on Jan. 1.

Mr. Chu adds that the ban is aimed at buyers who have no connection to Canada, and very few buyers land in that category.

Mr. Chu keeps an eye on the global real estate market, and he sees the slowdown permeating many economies as buyers wait for deals and further declines in prices.

At Capital Economics, chief global economist Jennifer McKeow, is forecasting widespread recessions next year, including shallow dips for Canada and the United States.

The economist notes that several countries are facing headwinds from tighter money policy and a move by banks to tighten their lending criteria.

“One consequence of this is that housing activity, which has already weakened, is set to deteriorate further and we anticipate declines in house prices across several major advanced economies,” Ms. McKeown says in a note to clients.

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