At the height of the COVID-19 pandemic, when many of her peers were binge watching Netflix shows, Toronto’s Sewit Tamene decided she would finish getting her real estate licence, a process she had started almost a decade earlier.
This Week’s Top Stories: Canadian Real Estate Prices Increase Over 25x The Rate of US Home Prices, and BoC Sees “Gradual” Softening – Better Dwelling
Time for your cheat sheet on this week’s most important stories.
Canadian Real Estate
Canadian Real Estate Prices Grew Over 25x Faster Than U.S. Prices Since 2005
Poor policy choices have led to a comically large gap between Canadian and US home prices. Canadian home prices generally move in line with US home prices, but disconnect in 2005. Instead of falling, prices accelerate in growth through to today. The result is prices have now grown over 25x faster than US home prices over the same period. Most surprising though, is half of these increases occurred in just the past 5 years.
Bank Of Canada Sees Real Estate Softening “Gradually”
Canada’s central bank sees real estate softening “gradually” in the coming years. They believe the recent surge is due a shift in buying preferences, due to low interest rates. Sudden demand for single-family homes is due to this temporary shift. As these purchases normalize, the organization expects sales driven by the preference swap to fade. Along with the slowing sales, they expect “price growth will soften.”
Canadians Collecting Unemployment Benefits Surges To A Record High
The number of Canadians collecting unemployment benefits surged to a record high. There were 1.24 million unadjusted claims in November, up 200.9% from a year before. The previous month represented the bulk of the increase, due to CERB ending. That means the bulk of these claims were a result of unemployment earlier this year. However, the fact that it’s still rising indicates there’s still more people getting hammered by this recession.
Bank Of Canada Index Shows Real Estate Is The Most Affordable In Years. It’s Wrong
The Bank of Canada’s affordability index shows real estate is the most affordable in years. No one’s buying that narrative, so what gives? The index shows households require 31.5% of their disposable income for housing in Q3 2020. The past two quarters have been the lowest since 2015, raising some eyebrows. It has to do with how it’s calculated, and the CERB driven boost to disposable income. In other words, the indicator is broken during the pandemic.
Canadian Real Estate Markets Are Low On Inventory, As Pandemic Slows New Listings
The pandemic is encouraging people to stay put, but the BoC is encouraging people to buy. The combination is leading to very high demand, in a low inventory market. Small cities like Trois Rivieres, Sherbrooke, and Gatineau are seeing inventory sell almost at the rate it’s listed. Western Canada is still slower than the national average, but are still unusually busy for this time of year.
Ontario’s Most Popular Real Estate Market Is Now Rural, While People Flee Toronto
Ontario’s most popular real estate market isn’t a new hip urban area, it’s the country. Outside of census metropolitan areas (CMAs) saw a net intraprovincial increase of 10,392 people in 2020. The rural increases were unusual, until the surge of young people exiting Toronto over the past few years. Toronto’s net loss of population to other parts of the province works out to 50,375 people in 2020. This is the largest net loss in decades of data, and possibly goes back much further. Despite the pandemic contributing to the trend, it actually started a few years ago. Right around when home prices took off.
Vancouver Real Estate
Vancouver Residents Were Moving To Rural BC, And Abbotsford Before The Pandemic
The pandemic has Vancouver residents seeking more space in rural B.C., but the trend goes back further. There were 45,481 people that left the Greater Vancouver region in 2019 for other parts of Canada. Rural B.C. is the number one place for those migrating, which saw a net inflow of 5,751 of residents. The trend is believed to have accelerated due to the pandemic, which has led to a distinct surge in rural home sales. It didn’t start during the pandemic though, with the trend going back a few years now, to when home prices took off.
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Piles of commercial-real-estate loans at banks may be worth just 77 cents on the dollar — if that
The swift collapse of Silicon Valley Bank earlier in March put a spotlight on potentially painful losses lurking at banks from trillions of dollars in commercial-real-estate loans on their books.
It also sparked debate over what piles of older loans on commercial properties might be worth now that low interest rates and peak real-estate prices have vanished, and as stress in the banking system makes credit more scarce.
The sale of $72 billion in assets from the failed Silicon Valley Bank by regulators at a $16.5 billion discount, which pencils out to about 77 cents on the dollar, offers a glimpse into a new clearing price for commercial-real-estate loans.
“The way I look at it is: [that] the Silicon Valley Bank trade created a baseline for the market,” David Blatt, chief executive at CapStack Partners, a credit fund that buys commercial-real-estate loans from banks and originates short-term bridge loans and mezzanine debt.
“To me, that’s the top end, not the bottom end, for commercial-real-estate loans,” said Blatt, who studied the bank’s loan exposure.
Unlike stocks or bonds, loans in the estimated $5.5 trillion commercial-property market don’t sell in a transparent way, which means pegging their values can be difficult.
To be sure, not all of the sold assets of Silicon Valley Bank were related to commercial real estate. The bank reported about $13 billion of real-estate exposure at the end of 2022, according to a quarterly filing, which categorized about $2.6 billion as loans on commercial real estate.
Still, Blatt and other commercial-real-estate veterans steeped in previous bank-failure cycles told MarketWatch the sale provides a “mark” in terms of where loans actually changed hands in the wake of two regional-bank failures.
”Everybody is dusting off their old playbook,” said Jack Mullen, founder of Summer Street Advisors, a commercial-real-estate advisory firm that’s been involved in multibillion-dollar workouts. “There just hasn’t been much distress for years.”
Toll of higher rates
As with bonds, the Federal Reserve’s rapid pace of interest-rate hikes has cut the value of older, low-coupon commercial-real-estate loans. Mullen said recent bank failures also make it harder for banks to “sweep it all under the rug,” which likely means more loan sales by banks.
“People are not going to let it carry into next year,” he said. “On the regulatory side, it’s coming right to the front of the line. People are supermindful of it.”
Richard Hill, head of real-estate strategy and research at Cohen & Steers, recently argued in a report that while banks hold an estimated 45% of all commercial mortgages, the debt isn’t a systemic risk for banks.
“We previously argued that [a decline of 10% to 20% in commercial-property prices] was reasonable to expect, and we now believe it could be 20–25%,” Hill wrote. He also said higher loan standards in the wake of the 2007–08 global financial crisis can provide lenders a cushion if property values fall.
In the reeling office sector, however, the value of older office buildings in Manhattan could tumble 70%, said Stijn Van Nieuwerburgh, a professor of real estate and finance at Columbia University’s business school, in a talk Thursday about turning older offices into homes hosted by the Volcker Alliance.
“Forty percent of that is just coming from interest rates alone,” Van Nieuwerburgh said, adding that remote work, current regulations and other pressures on the office-building market contribute to the value drop.
Real-estate investors also will be watching the sale of $60 billion of Signature Bank loans. Newmark Group Inc. was hired to market the assets from the failed bank that were excluded in a previous sale of its holdings.
“What everybody has been operating under is this hold-to-maturity veneer,” Blatt said of banks that have continued to value loans at 100 cents on the dollar, or par.
“There’s just no way these things get resolved at par,” Blatt said. With the discounted sale of Silicon Valley assets, “the write-down is kind of implied.”
The spring housing market could bring a reckoning for realtors in Canada
Realtors’ fate depends on whether buyers and sellers return in force and how that will affect prices
But by the time she completed the program in September 2022, the booming pandemic housing market had started to turn cold, with sales and new listings on the decline and prices rolling over, too. For Tamene, the timing was bad, but at least she still had a full-time job elsewhere. For her friends trying to launch careers in the industry, the transition has been more difficult.
“Maybe if they already had a history and they already had a client base and they were already sort of successful, it wouldn’t be hitting them as hard — but if you’re a newer agent, I definitely think that it’s a little bit more difficult to get going,” Tamene said. “Some realtors are definitely taking a pause or leaving the industry because there’s just not enough cake for everyone.”
The pressure on a swelling real estate profession — membership at the Canadian Real Estate Association (CREA) has risen 17 per since the end of 2020 to 160,000 while the number of brokers and salespeople represented by the Toronto Regional Real Estate Board is up 25 per cent since March 2020 — is just one of the storylines making this spring’s real estate market a make-or-break affair.
There’s just not enough cake for everyone
The big questions, the ones that will decide realtors’ fates, are whether buyers and sellers return in force and how that will affect prices.
The Bank of Canada’s dramatic interest rate hikes over the past year have reshaped lending markets, making homes even less affordable and pushing many would-be homebuyers to the sidelines.
Figures released by CREA on March 15 show that actual (non-seasonally adjusted) transactions in February 2023 came in 40 per cent below a strong February 2022. New listings also continued to fall in February 2023, decreasing by 7.9 per cent month over month and hitting record lows in some cities, including Calgary.
Industry observers have suggested the usually busy spring market might be the turning point that lures buyers and sellers back into the game, but that is hardly assured, and just where the balance of supply and demand lands will have significant consequences for the industry and the economy.
John Pasalis, president and broker of record at Toronto real estate brokerage, Realosophy, thinks demand has the upper hand. He said his brokerage has had lots of showings recently and that sales are growing faster than inventory. That is keeping the bidding process competitive and maintaining price levels, something he doesn’t see changing.
Pritesh Parekh, a Toronto realtor, said that while the lack of listings may be supporting prices, it is limiting the options for buyers.
“If a realtor is representing a buyer in this market, they’re definitely feeling the pressure of even finding homes that are suitable,” Parekh said. “And when they finally do find a property — and I’m talking more so houses than condos in this specific example — there are so many other buyers that are looking at that same home.”
“It was a market where properties were selling quickly and selling for high prices,” he said. “Part-timers doing lower volume sales or staying afloat based on the reality that there was a lot of business to go around, were selling properties relatively easily.”
Then, the market was buzzing from the Bank of Canada’s emergency interest rate cuts, sparked by the COVID-19 pandemic. The overnight rate sat at 0.25 per cent for all of 2021. A previously hot market seemingly got hotter that year.
“Properties were selling without being staged, without having repairs — even properties that had negative attributes were still selling at prices people couldn’t believe,” Parekh said.
Parekh thinks this spring will show that buyers and sellers are tired of playing the waiting game.
“There were so many people who were looking to buy last year,” Parekh said. “And once prices started going down, they held off to see what happens next. There are still people in the market who have been waiting since last year, and at this point there’s going to be a segment of them who are tired of waiting and say, ‘You know what, I’m ready to pull the trigger.’”
Adil Dinani, a realtor with Royal LePage West in Vancouver, has been selling real estate for 17 years and has seen three major market corrections. He said he is optimistic about the spring market and believes that “the worst is behind us.”
But he thinks a reckoning may be ahead for the industry, with less-established agents being winnowed out over the next few years.
“I think real estate practitioners need to work to provide value, to display market knowledge and really understand what’s happening out there (in real estate) because it’s a confusing time,” Dinani said. “If you’re a first-time buyer and rates are five and a half, six per cent, and prices have come down but not that much — you want to know where the opportunities in the market are.”
In spite of the uncertainty, Tamene is optimistic the market will bounce back.
“Things have been slower these past few months which can be discouraging,” she said. “I’m not a gambler but if I were placing a bet on Toronto and its real estate market, I’m going all in because that’s how confident I am that things will turn around.”
European real estate stocks hammered by banking turmoil
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