Oxford Properties Group’s plans for rental apartment towers at Yorkdale Shopping Centre, Canada’s most productive mall by sales per square foot, are still in an early stage, President Michael Turner said. But construction has begun at the Square One Mall in nearby Mississauga, he said, and municipal authorities are evaluating a proposal for Scarborough Town Centre in Toronto’s east end.

“We’re starting to go vertical,” Turner said Tuesday in an interview at Bloomberg’s New York headquarters. “I can assure you that what you see today is not what they’re going to look like over the coming decade or two.”

Intense competition from e-commerce retailers and the loss of business caused by pandemic shutdowns have pushed several North American mall operators into bankruptcy. The erosion of the traditional shopping mall business has spurred more operators to add housing to their properties, tapping into a sector of the real estate market that has outperformed retail.

The idea has been seized on by mall titans including Simon Property Group Inc. and Canada’s Brookfield Asset Management Inc., with two primary motives: squeezing more value from the properties and bringing prospective retail customers closer to the action.

But getting municipal boards to approve the rezoning necessary to build housing has been a slow process in Canada, Turner said.

“I used to not appreciate why things went slow until I started to work for a developer,” Turner said, lamenting the “hundreds of meetings” with municipal officials and citizens and the “multiple times that you have to redo plans on the same site.”

The Bank of Canada struck a positive tone on Canada’s economic recovery from the COVID-19 pandemic in its most recent interest rate announcement, with Governor Tiff Macklem forecasting an “increasingly healthy economy” despite the lingering threat of inflation.

Speaking with reporters at the release of the Bank’s October Monetary Policy Report, Macklem said that while he expected inflation to continue rising – to around 5% at the end of the year, up from its current level of about 4.5% – he anticipated that would return to the 2% mark by the end of 2022.

“I’m struck by how much progress our economy has made since the start of the crisis,” he said. “We’ve come a long way and our forecast is for an increasingly healthy economy, even if these complications are going to be with us for a while longer.”

For mortgage professionals, the headline news from the announcement was undoubtedly the Bank’s revision of its forecast for changes to its policy interest rate. The timescale for planned rate hikes has accelerated, with the Bank now projecting they’ll take place in the middle quarters of next year rather than its previous prediction of the second half of 2022.

Did that news come as a surprise to the mortgage community? Not at all, according to RateHub.ca co-founder and CanWise Financial president James Laird (pictured top). He told Canadian Mortgage Professional that given the Bank’s recent ebullience on the economy, an amendment of its planned timeline for hikes had been in the cards.

“I wasn’t [surprised], given the positive news and that COVID numbers have stayed low in Canada, generally speaking,” he said. “I was expecting them to move that date forward; I thought it was possible they could have moved it even further forward than they did.”

That said, the Bank’s new timescale for the benchmark rate to begin rising is by no means set in stone, with the uncharted waters of the pandemic meaning it’s difficult to predict what’s in store for the Canadian economy in 2022.

Laird noted that a rapid surge in case numbers or the return of pandemic restrictions could lead the central bank to think again on its planned schedule for rate increases.

“This all depends on things continuing in a positive manner like they have been in Canada since June,” he said. “If we go backwards in the winter, they will change things for sure.

“If we have to go back to lockdowns, business closures and things like that, they will definitely push this out. I think this is dependent on us being towards the end of this pandemic.”

With variable mortgage rates tied to Canada’s benchmark policy rate, the news was also viewed as a signal that those record-low variable options are soon set to climb – although Laird said that with bond yields rising, fixed rates could also see further upward movement in the very near future.

Those yields crept up as the Bank announced the winding-down of its quantitative easing program, a staple of its approach to the pandemic since March 2020.

In its statement, the Bank said that it would be moving into the “reinvestment phase” which would see it only purchase government bonds to replace maturing bonds, having gradually tapered down its bond-buying program in recent months.

That decision arrived despite the Bank’s emphasis that “considerable monetary support” was still required to steer the economy through the current pandemic-related turbulence.

One of the biggest question marks hanging over the Bank’s plans to hike the benchmark rate is whether those will be significant increases – not to mention the possibility of one rate hike being swiftly followed by another.

The answer to that question will be an important factor in determining whether a fixed or variable rate is the best option for most clients in the current mortgage climate.

“When [the variable rate] rises, how many times and by how much?” said Laird. “And what’s the timing of those increases? If they’re more spread out over a five-year period, then you can still come out ahead over the variable rate.

“But if there are many next year, and if they do any 0.5% moves instead of quarter-point moves, then the fixed rate will be the best strategy right now.”

In a survey of 950 real estate professionals across Canada, 79% said they would recommend selling this winter, given the current strength of the seller’s market. This is 15 points higher than the 64% who recommended listing in the winter before the pandemic.

There’s a commonly held belief, the report says, that it’s best to wait out the winter and list your property in the spring. But market conditions during the pandemic have totally changed that.

Of those who recommended selling, 82% cited the main reason as the lack of housing supply in their region coupled with high demand — a perfect storm that creates a very strong seller’s market.

“Last year, we saw one of the busiest winter markets in our history, and with demand continuing to climb, this winter will be another very active market in British Columbia and across the country,” said Adil Dinani, a sales representative with Royal LePage West Real Estate Services in Vancouver. “Our housing supply is terribly inefficient and simply can’t keep up with demand. Even if there are fewer buyers in the winter, it is unlikely there will be enough inventory on the market to satisfy demand.”

The recommendations to sell were strongest amongst respondents in British Columbia (93%), Quebec (87%), and Atlantic Canada (85%). Out of Canada’s largest cities, Greater Vancouver had the highest number of respondents urging sellers not to wait. But it’s not the only urban market where potential sellers may want to consider listing.

“When deciding the best time of year to list your home, there are many important factors to consider. But if you are not under any time constraints, current market conditions in the Toronto area are favouring the seller, which is not typical most winters,” said Tom Storey, real estate agent, Royal LePage Signature Realty in Toronto. “While we expect another brisk spring market in 2022, homeowners today have a lot of flexibility as demand continues to significantly outstrip supply.”

While Canadian home sales have noticeably slowed down since the peaks seen this spring, overall activity continues to be historically strong, according to RBC Economics.

A major driver of the moderation in sales is the lack of inventory, especially in the largest markets.

“Tight demand-supply conditions will maintain support for prices in the near term,” RBC said in its latest Canadian Housing Health Check report. “Despite rock-bottom interest rates, home ownership costs have spiked across much of the country. The lack of affordability is severe in Vancouver and Toronto, and becoming more problematic in Montreal.”

RBC said that the sales-to-new listings ratio “is still close to a record high nationwide.”

“This tilts the scale decidedly in favour of sellers,” RBC said. “The central issue in most local markets is a lack of supply.”

The trend towards lower prices during the first few months of the pandemic has all but disappeared, as well.

“Soaring prices more than reversed the affordability improvement earlier in the pandemic,” RBC said, adding that its aggregate housing affordability measure increased to 52% in Q1 2021, a reading that it deemed the worst level in 31 years.

“A sharp rise in household income and drop in mortgage rates led to a modest improvement in RBC’s measure during the early stages of the pandemic,” the bank said. “However, rapidly appreciating prices in most parts of the country have since fully reversed the improvement. Further deterioration is expected in the period ahead.”

However, the possibility of future Bank of Canada interventions is introducing some uncertainty.

“Rock-bottom interest rates are a huge driver of housing demand but rates could rise if the economy outperforms expectations,” RBC said. “Generational-low interest rates have provided a powerful tailwind for the housing market since the summer of 2020. Any material rate increase could easily swing the wind direction.”

Another disruptive factor could emerge in the form of post-election policy adjustments.

“The recent tightening of mortgage lending criteria has strengthened household resilience,” RBC said. “With all federal parties proposing changes to housing policies, the next federal government is likely to introduce additional measures, the impact of which is unknown.”

While the housing market saw a relative pause in March, in recent weeks data has shown a surge in home sales outside the city. Many of the area’s buyers have been choosing to go beyond the traditional bedroom communities in the 905. The boom has been caused, in part, by the flexibility afforded to those working from home.

“(In) the top seven municipalities that saw the biggest growth, sales are up 40 per cent over last year, over the past six weeks,” said John Pasalis of Realosophy Realty.

The areas of those sales, he said, were on average about 86 kilometres away from Toronto.

Pasalis said the early signs of urban exodus were being driven by those who had a person working from home while their partner also had a flexible work status.

Durham Region and other areas within a close drive to Toronto have been an affordable alternative for many in the past, but Pasalis said areas seeing sales growth were far outside those areas.

“Areas like Caledon, Innisfil, King, like, just these outer, outer suburbs that are kind of not even the typical 905 — like Markham, Richmond Hill,” he said.

Jeff McKay and his wife Breanne Drennan have been dipping their toe in the rural market for the past several months. When the coronavirus pandemic hit, they were living in a two-bedroom apartment near Dufferin Street and St. Clair Avenue West. With two children and McKay working from home, the lack of space proved too much for their family.

McKay works for an insurance startup, which he said was set up so that remote work made a lot of sense. When the community workspace on Front Street shut down during the pandemic, he said the two-bedroom they were living in for commuting’s sake no longer made sense.

“We kind of looked at ourselves, at each other, and we were wondering, ‘Why are we in Toronto?’” said McKay.

“We were losing our minds,” said Drennan.

“We never expected to all hunker in and have a workspace and a household in a two-bedroom apartment.”

Drennan said they were among the lucky ones because her maternity leave gave her the ability to spend more time watching their sons, who are five and 18 months old. But with McKay’s ability to work from home, the pair decided to make a major change.

Now the family is living outside of Flesherton, located about a 40-minute drive southwest of Collingwood. With so much uncertainty surrounding the pandemic, they decided to lease rather than buy. But with their $1,500 rent on a modest home on a one-acre property versus $2,400 for a 1,000-square-foot apartment, the couple is considering a more permanent move.

“Something that seemed impossible before now seems like, you know, it can work,” said McKay.

“It’s kind of a decision that’s dynamic and it’s changing, you know, as the situation changes with COVID.”

Pasalis said many others aren’t playing it quite as safe when it comes to choosing more home and space over larger debts.

“I guess they’re confident that this is going to go on for years and I guess that’s the big bet that they’re making,” he said.

But while there has been a boom in some regions, he said the traditionally low sales volumes in those areas also need to be recognized. The test, Pasalis said, will be to see how long the trend continues.

“I think it’s hard to say how long these trends will last, but we’re certainly seeing these early signs of people moving to the suburbs,” he said.

Progressively tighter market conditions and sustained buyer competition have impelled double-digit annual price increases in the Toronto market, according to the region’s real estate board.

The benchmark price in the market was up by 17.4% annually in August, while the average selling price across all residential asset classes grew by 12.6% during the same period to reach roughly $1.071 million.

A total of 8,596 sales took place in the region, moderating by 19.9% annually. The number of new listings also declined by 43% year over year.

“While the market has taken its regular summer breather, it is clear that the demand for ownership housing remains strong. At the same time, the supply of listings is down,” the Toronto Regional Real Estate Board said in its latest report.

The TRREB expressed grave concern over the volume of new listings, which were at their lowest level for the past decade or so.

“It is clear that the supply of homes is not keeping pace with demand, and this situation will become worse once immigration into Canada resumes,” said Kevin Crigger, president of the TRREB.

John DiMichele, CEO of TRREB, said that the trends merit concrete policy action by those who would eventually take the reins of government.

“With a federal election just weeks away, we are calling on all political parties to continue focusing on housing policies that address supply and affordability across the country,” DiMichele said. “Bold action, not promises, are needed to ensure that Canada has a stable and sustainable housing market now, and in the decades to come. This will ensure that the Greater Golden Horseshoe remains competitive on the global stage, in terms of attracting businesses and households to the region.”

“Working with provincial and municipal levels of government on solving supply-related issues is much more important to affordability than interfering with consumer choice during the home buying and selling offer process or revisiting demand-side policies that will at best have a short-term impact on market conditions,” Crigger added.

While most residents in Toronto have renounced their dreams of ever owning a home in the region due to its infamously overvalued real estate market, there are still the fortunate few among us who can afford not just one, but multiple properties in the GTA.

And, a new report from Royal LePage shows that, quite shockingly, a larger proportion of these owners are 35 and under than over the age of 35, somehow.

The real estate giant surveyed Canadians in and around the urban centres of Toronto, Montreal and Vancouver to learn more about secondary properties, the people who own them and how they use them.

Among the findings are the fact that most people who have more than one residence in Canada rent out the homes they’re not living in at least some of the time — 64 per cent of secondary property owners in the GTA specifically — while only a small portion (seven per cent in Toronto) leave them vacant as simply an investment to sit on.

The most surprising tidbit in all of the data is perhaps the fact that while only 11 per cent of homeowners over 35 surveyed said they owned more than one property, 18 per cent of those 35 and under did.

“Witnessing home values across the country rising to new heights, younger Canadians who are financially able to purchase one home are confident in purchasing a secondary property as an investment,” the report reads.

“Young buyers are looking to capitalize on the real estate market by investing in a property that will appreciate over time.”

Also revelatory is the fact that a fair chunk of boomers —29 per cent in the GTA — have or would loan or straight up give their children money to help them buy a home in the region.

And, as we all well know, boomers are obsessed with the idea of getting a foot in the door of the real estate world: 93 per cent of Toronto boomers surveyed said they consider home ownership to be “a good financial investment.”

A sales representative for Royal LePage noted that in recent years, many young people have been able to nab condos and small homes for quite cheap in suburbs a bit farther out of the city proper, such as London and Guelph, which have great potential as rentals for students.

“Parents of students in Ontario’s university towns are also taking advantage of the local rental market, purchasing a property — often times with multiple units — for their children to stay in while studying and also as a source of rental income from other students,” she added.

So though more millennials and Gen Zers in the Toronto area may technically have their name on the deeds of more than one property than their older counterparts, little real estate tycoons that they are, the money funding said properties is oftentimes coming from some wealthy boomer benefactors, whether here or overseas.

But, with economic reopening now in full swing and travel and immigration poised to return in the next few weeks, things have been heating back up again, especially for certain types of units.

The market for new condos (and three-bedroom units) in particular has been for the most part quite busy thus far in 2021 despite some people giving up on the idea of home ownership in the city, with new unit sales outpacing both that of resale units and new houses.

In June, GTA condo prices rose to hit 44 per cent more than they were during the 2017 housing peak — the biggest jump for any housing type — and were expected at that time to spike another $275,000, on average, in the next two years.

And contrary to some inconsistent numbers from the first quarter of the year, it appears that Q2 2021 was even stronger for new condo sales in the region.

According to the latest report from the condo experts at Urbanation, sales in the sector were 5.5 times higher than during the first quarter of the year, indicating a full COVID-19 recovery.

Of nearly 8,500 presale units that hit the GTA market between April and June, 81 per cent were purchased, setting a record high. The average price for these units also hit $728,160 or a whopping $1,100 per square foot, regardless of size.

(In Toronto proper, as of Q2, the average condo will of course set you back far more; around $834,504 or $1,276 psf.)

Another notable figure is the amount of new condo inventory that was left unsold by the end of June: only 10 per cent, which set an 11-quarter low and was a staggering 23 per cent below the 10-year average, making it clear that the demand for new condo builds is extremely high and very contrary to what was going on at the end of 2020.

This is even considering the fact that there were a record high number of new condos being constructed, making for a whopping 86,346 units plus an additional 22,857 in the pre-construction stage.

On the resale condo market, both transactions and the absorption rate (number of units sold vs. number listed) were also up drastically from last year, which was to be expected given hesitancy spurred by the health crisis at that time.

The average price for a resale unit in the GTA hit a new record peak of $707,000 for all unit types, with Toronto obviously leading the way at $740,000 or $930 per square foot, on average, for a lived-in condo.

“The second quarter showed that the GTA new condominium market not only fully recovered from COVID-19 but also returned to near record high sales volumes,” the report reads.

“The 905 continued to be a driving force as developers and buyers have shifted to more affordable locations of the region. With inventory approaching a three-year low, expect further upward pressure on new condo prices in the near-term.”

Any prospective homeowners who weren’t in a position to get into the market when there were still some bargains to be had can expect prices and competition to surge even more once immigration levels return to normal, but can always set their sights on other, farther away parts of southern Ontario, like those where one can still nab a home for less than $250,000.

Real Mortgage Interest Rates
Real mortgage interest is the rate of interest paid, minus the annual rate of inflation. Mortgage debt with a 2% interest rate in an environment where inflation is 2% is a real rate of 0%. If inflation holds steady the lender is giving you money, returned with no real profit. They can buy the exact same amount of goods when they’re paid as they can before they lent the money. It’s essentially a free loan. Generous people, eh?

It doesn’t happen very often, but it’s happening right now in Canada.

Real Mortgage Interest Rates Haven’t Been This Low Since The 1970s
Canadian mortgage debt is being lent out at less than the current rate of inflation. Generally, the most popular type of mortgage is the 5-year fixed rate term, so let’s peep that. The posted 5-year fixed rate was 4.79% in June, working out to 1.7% after inflation. That’s still a positive number, and would be a big profit margin. Healthy and booming market, right? Just one problem — no one pays the posted mortgage rate.

Most analysis is done on the posted 5-year fixed rate, which is often used to set policy. Lenders rarely charge that rate, and its primary use is to calculate penalties. The best available rate is typically 220 to 250 bps lower than the posted rate. A 5-year fixed rate actually looks more like the prime lending rate, often a few points lower. So let’s look at the prime lending rate now to get a better perspective.

The prime lending rate for mortgages is much lower than the posted rate. It was 2.45% in June, which is 234 bps lower than the posted 5-year fixed rate. When adjusted for inflation, the real rate is -0.6% for June. A small improvement over the -1.2% seen in May, but still — it’s a negative number. A fairly big one when we’re talking about billions of dollars as well. They’re lending for cheaper than the current rate of inflation.

Canadian Medium-Term Mortgage Rate
The Canadian prime mortgage rate, which closely resembles the typical 5-year fixed mortgage rate. In both nominal and real (inflation-adjusted) values.

Canada hasn’t seen this kind of deep discount in generations. The -1.2% real rate is the lowest seen since the late 1970s, when there was an inflation crisis. This led to everyone buying homes at massive premiums as “inflation hedges.” That created a bubble, which popped in the early 1980s, and many tears were shed. A mispriced asset is often repriced to a more fair value once the reason for the mispricing ends.

Canadian Mortgage Debt With Little Rate Protection Is Soaring
Low interest rates have pushed more conventional mortgage dollar volumes to variable rates. Long-term variable rate data isn’t available, but 1-year fixed rate data is pretty close. It is just 5 bps apart from the 3-year variable term, so they’ll give us a pretty close view.

Conventional mortgages with a 1-year fixed rate of interest came in at 2.79% this past June. After adjusting for inflation, the rate is -0.3% in real terms. Short-term mortgages in Canada have never been this cheap. Like, ever.

Canadian Short-Term Mortgage Rate
The Canadian 1-year fixed mortgage rate at nominal and real (inflation-adjusted) values.

Does This Mean I Should Borrow As Much As I Can?
I know, you’re wondering if that means you should blow your brains out with debt right now. If you’re renewing your mortgage, ask your mortgage broker — it might be like you just won the lottery. If you’re buying property, the answer isn’t so clear and it’s kind of a gamble.

In normal circumstances, the assumption is inflation will be stable over time. That’s not what central banks are saying. In fact, they are outright saying inflation will not be this high. A negative real rate today may not be one next year. In this case, the lenders are likely banking on a drop in inflation. This would allow them to support lending lower than the current rate.

The term length is also something else to consider. In the US, with the world’s most liquid currency, mortgage rates can be guaranteed for the life of the mortgage. No surprises if inflation gets out of control, and the state needs to stop suppressing rates. You already agreed for 30 years what you’ll pay.

In Canada, you’re paying a hefty premium for anything longer than 5 years. That leaves most playing rate roulette on the balance of their mortgage on renewal. Defaulting isn’t so much of a concern since these borrowers will be stress tested. However, appreciation of the home is likely to slow (or correct) in the event of higher rates.

What does this tell us? It shows evidence of the housing market’s massive inefficiency, right down to financing. The real rate of interest is below zero, as if they needed to stimulate more borrowing. This is during a multi-decade high for credit growth… while home sales are just under the record high, and prices are growing at the fastest rate in history.

TRREB released its initial forecast for 2021 at the beginning of February in conjunction with its annual Market Year in Review and Outlook report. The outlook for 2021 called for 105,000 transactions with an average selling price of $1,025,000.

The board says this forecast was released as the regional economy continued to improve, and very low borrowing costs were anticipated to continue to fuel strong demand — though this demand was expected to slow during the year due to stalled population growth.

Although the board says sales have peaked for 2021, first-quarter activity was higher than expected, after March home sales, at more than 15,000, represented an all-time monthly record.

Considering the record Q1-2021 sales result, TRREB has revised its 2021 sales forecast and anticipates the year will end with 115,000 transactions — 10,000 more than it originally forecast. With year-over-year sales growth continuing to outpace new listings growth, the forecast average selling price has also been revised upward to $1,070,000, a $45,000 increase.

“ Home sales soared at the start of the year, with a huge sales record in the first quarter. However, the record pace of sales has run its course as pent-up demand has increasingly been satisfied in the absence of normal population growth,” said TRREB Chief Market Analyst Jason Mercer.

“With this said, a persistent lack of inventory across most segments of the market will keep competition between buyers strong, resulting in an average selling price well above $1 million through the end of 2021,” said Mercer.

TRREB’s revised market update comes as new public opinion polling, conducted by Ipsos Public Affairs for TRREB, found public opposition to a potential increase in Toronto’s Municipal Land Transfer Tax (MLTT).

Last winter, City of Toronto Council directed City staff to report back in July regarding a possible increase to the land transfer tax for properties priced over $2 million.

“Any MLTT increase has a ripple effect on all market segments, and would further constrain inventory, making it an even more challenging environment for buyers. Recent polling by Ipsos shows a majority of residents understand this risk and more than half oppose a potential increase to the land transfer tax. Housing affordability is one of Toronto’s most serious challenges and City Council should be doing everything it can to make it more affordable, not less,” said TRREB CEO John DiMichele.

The board has previously said it had concerns about the potential tax increase. As DiMichele reiterated, not only could it further constrain the supply of homes for sale in Toronto, but it could also exacerbate housing supply and affordability challenges, especially for those purchasing modest homes.

The poll found more than half (54%) of respondents are against this potential MLTT hike, while 63% said they believe the increase could result in a tighter supply of homes for sale across all price points.

Additionally, the new forecast comes as Toronto moves towards implementing a tax on vacant homes, excluding principal residences. TRREB says it has worked closely with City staff, calling for evidence-based decision-making to ensure that the tax meets its policy objectives of improving rental housing supply and ensuring that appropriate exemptions are provided.

“We appreciated the opportunity for input, and we are encouraged that the recommended tax design is consistent with TRREB’s views, especially the need for various exemptions,” said DiMichele.

“TRREB is generally supportive of the list of exemptions included in the staff recommendations, and we look forward to providing further input as staff continues with the next step of public consultations,” added DiMichele.