A Middle Eastern royal’s purchase in May of the penthouse suite and unit below it at Vancouver’s five-star Fairmont Pacific Rim hotel for C$40 million ($39 million) was the most expensive condominium purchase in Canada.
The oceanfront apartment was also part of six consecutive months of monthly home sales gains, the most since January 2011 and defying the predictions of the Toronto Real Estate Board and the Bank of Montreal that the market is cooling. Analysts and investors including Bank of Nova Scotia and Sun Life Financial Inc. now say it represents the excesses of a market that may be peaking.
“I’m not bullish on Canadian housing,” said Stephen Groff, who helps oversee C$7 billion in assets at Cambridge Global Asset Management unit of CI Investments Inc., in a Sept. 13 interview. “It’s just people seeing rates starting to go up and they rush to get the deal done. It isn’t indicative of an improving market.”
The sales pop, driven by wealthy foreign investors and Canadians jumping in to the market before expected mortgage rate increases, is at odds with Canada’s sluggish growth. Fueled by consumers carrying record levels of personal debt and a high unemployment rate, there’s growing concern that the housing decline when it comes will be harder than the “soft landing” predicted by Bank of Canada Governor Stephen Poloz and Scotiabank Chief Executive Officer Richard Waugh.
Purchases of multimillion-dollar luxury properties on the west coast and condo units in Toronto’s 260 towers helped drive debt-to-household income to a record level in the second quarter. Mortgage borrowing rose 1.7 percent to C$1.11 trillion, according to Statistics Canada, and debt such as mortgages and credit cards increased to 163.4 percent of disposable income, compared with a revised 162.1 percent in the prior three-month period. That’s among the highest in the world and compares with 91.9 percent in the U.S., down from a record 112.7 percent in 2009.
“Household debt will be so high it’s going to constrain consumption,” Julien Reynaud, desk economist for Canada at the International Monetary Fund, said at the Bloomberg Canadian fixed-income conference in New York Sept. 12.
Canadian Finance Minister Jim Flaherty said he’s “comfortable” with the residential housing market in the spring and summer season and isn’t planning to add additional measures to curb borrowing.
“The market has calmed down,” he said during a Sept. 18 press conference in Brampton, Ontario. “It doesn’t mean that we would not intervene again. It just means that it’s not something that is necessarily due now.”
Home buying slowed last year after regulators tightened borrowing qualification standards. It has picked up again as consumers take advantage of historically low mortgage rates.
The government shortened amortizations in July 2012 to 25 years from 30 years as benchmark interest rates continue to be anchored at 1 percent in the longest pause since the 1950s. The Office of the Superintendent of Financial Institutions also introduced tougher standards for lenders.
The result of the efforts was short-lived. In August last year, home sales slipped 14 percent across the country led by Vancouver’s 31 percent dip, according to data from local real estate boards. The total values of August, 2012 purchases was 24 percent lower than this year’s C$8.2 billion.
In comparison, Toronto residential real estate sales last month rose 21 percent from a year ago, according to the Toronto Real Estate Board, or TREB, and Vancouver existing home sales surged 53 percent, said that city’s board.
“Last year it was three months of complete darkness -- it was bizarre -- and it was because of the new mortgage rules that came in,” Cliff Barron, the top grossing realtor at the 80-person office of Sutton Group Realty Services Ltd. in Mississauga, said in a phone interview.
Barron sells about 60 homes a year, he said. Last year, from June through August he sold only three. So far in 2013 he sold 40 homes, including a C$450,000 house in Milton, a Toronto suburb, that 41 clients visited in three days, the most he’s ever had.
Foreign investors also are heating up the residential market with purchases often far in excess of what many Canadians can afford. The 6,434-square-foot (598 square-meters) penthouse condo the Middle Eastern investor bought has a leather bound oak front door and its own gym.
The hotel is in Coal Harbor, a community in one of Canada’s most expensive home-buying areas. The property is one block north of a street that residents in the 19th century called Blueblood Alley for its wealthy mansion-owners.
“Vancouver has been fueled tremendously in the last couple of years by high-end wealthy Chinese and Hong Kong buyers,” Malcolm Hasman, the luxury real estate agent who brokered the sale of the Fairmont penthouse unit to the Middle Eastern client, said in a Sept. 16 phone interview. This year probably will be Hasman’s third-highest in sales, after 2012 and 2007, with more than C$200 million in luxury real estate sold, he said.
“There’s more money around today than there’s ever been in the high-end market. And where’s it coming in from? The Middle East, China, Asia.”
Hasman declined to disclose his buyer’s identity.
Across the country sales have increased for sixth consecutive months at an average pace of 2.3 percent, the most since January 2011, Canadian Real Estate Association data show. From a year earlier, sales rose 11.1 percent in August, the Ottawa-based group said this week.
The demand for property comes as economic growth slowed to a 1.75 percent annualized pace in the second quarter, including a monthly decline of 0.5 percent in June that was the biggest since the 2009 recession. Growth slowed from 2.2 percent in the first quarter as business investment and energy exports declined. Canada’s economy is forecast to grow 2.3 percent in 2014, compared with a 2.65 percent rate for the U.S., according to a Bloomberg survey of economists.
The jobless rate will stay at about 7 percent through the first quarter of next year, according to a Bloomberg economist forecast, and Canadian banks are passing on higher borrowing costs by increasing their mortgage rates.
Royal Bank of Canada and Toronto-Dominion Bank, the nation’s two largest lenders, raised their five-year rates last month to reflect higher yields in the bond market. The average five-year mortgage rate rose to 5.3 percent on Sept. 4 from 5.1 percent in August, according to the Bank of Canada. Ten-year bond yields spiked to the year’s high on Sept. 10 to 2.82 percent.
The strong housing data is a “dead cat bounce,” said Sadiq Adatia, chief investment officer of Sun Life Global Investments Inc., who manages about C$6.4 billion. “As real estate values drop, and the debt levels continue to be where it’s at and you have the push on the employment side, consumers are going to get worried -- you get a downward spiral with that.”
Prices will drop by 10 to 15 percent in the next few years across the country, according to Adatia, speaking at the Bloomberg Canadian fixed-income conference in New York Sept. 12.
The future holds slower expansion, according to Adrienne Warren, Scotiabank’s senior economist. The recent rise in fixed mortgage rates and unemployment will cool activity in the fourth quarter of this year and into 2014, Warren wrote in a Sept. 11 note to clients.
“Underlying fundamentals are less conducive to a further ramping up in housing activity,” Warren said. “Any pent-up demand from last year’s slowdown has been satisfied with sales now back in line with historical averages.”
The positive results surprised some economists. The Toronto Real Estate Board had forecast 80,000 total housing sales in Toronto this year, a 6.5 percent decline from last year and what would be the steepest dip since the midst of the financial crisis in 2008. So far this year, there have been about 63,066 sales in the country’s largest city.
“We were in the soft-landing camp but, much to our surprise, the numbers came in stronger than we anticipated,” BMO senior economist Sal Guatieri said in a phone interview from his office in Toronto Sept. 10. “The market appears to be brushing off the tougher mortgage rules.” A soft landing is when the rate of economic growth slows but remains high enough to prevent a recession.
Vancouver is the most expensive city to buy a home nation-wide, with an average cost of about C$780,500, higher than in London and New York. The equivalent in Toronto is C$523,147, according to the Canadian Real Estate Association. That compares with New York’s $779,000 average in the second quarter and 438,000 pounds ($702,289) in London in July.
House prices across the country followed the same upward trajectory, rising 2.3 percent last month from the year-ago period, according to the Teranet-National Bank Composite House Price Index. The average cost of a house nation-wide was C$387,147 in August, up 8.1 percent over the same period last year. That’s 33 percent higher than the $258,700 price-tag in the U.S.
“There’s no question that the interest rates of today are sustaining these high prices,” said Bill Binnie, a Vancouver-based broker at Royal LePage, the largest real estate brokerage in Canada by sales, in a Sept. 11 telephone interview from his office. “But we see immigration and the foreign buyers come in, so we have confidence the housing market will be good.” This year’s sales figures across Canada will be better than in 2012, he said.
“Whether housing has even landed at all, well that’s the issue,” Guatieri at BMO in Toronto said. “It’s as if the wheels have barely touched the tarmac before taking off again. When interest rates rise, that’s when the rubber hits the road - - that’s the test.”