From Recession to Recovery to... What?

REALTOR® QUEST 2010

From Recession to Recovery to… What?:
Charting the Housing Market’s
Course in 2010/2011
Presented by: Jason Mercer, Senior Manager of Market Analysis

Proud Sponsor of the Learning Quest 2010 Seminar Series

Part 1: Bubbles – Some Myths
and Realities

Part 2: Market Drivers

Part 3: 2010 / 2011 Outlook

Part4: The Long-Term View

Part 5: TREB Member Resources

Average Price Continues to Rise…BIG TROUBLE???

Average MLS® Selling Price - GTA
500,000
450,000
400,000
350,000
300,000
250,000
200,000
150,000
100,000
50,000
0

Source: Toronto Real Estate Board

Real price is back
where it was in
1989! Must be a
Average MLS® Selling Price - GTA bubble, right?
500,000
450,000 MLS® Average Price (Nominal)

400,000 MLS® Average Price (Inflation Adjusted)
350,000
300,000
250,000
200,000
150,000
100,000
50,000
0


Price is back where
it was in 1989!
Must be a bubble,
Average MLS® Selling Price - GTA right?
500,000

Tough to Make
450,000 MLS® Average Price (Nominal)

400,000 MLS® Average Price (Inflation Adjusted)
350,000
300,000

this Argument
250,000
200,000
150,000
100,000
50,000
- Price on its own tells us nothing
0


What about price-to-income ratios?

Ratio of Average GTA MLS® Price to
Getting close to
Average GTA Household Income the 1989 peak.
5 Evidence of a
bubble?
4.5

4

3.5

3

2.5

Source: TREB; Statistics Canada

What about price-to-income ratios?

Ratio of Average GTA MLS® Price to
Getting close to
Average GTA Household Income the 1989 peak.

Tough to Make
5 Evidence of a
bubble?
4.5

this Argument
4

3.5

3

2.5
- Mortgage Rates Would Have to be Constant


By and Large We Pay for Homes Using a Mortgage

Average 5-Year Fixed Mortgage Rate: Historic & Forecast
22%

17%

12%

7%

2%

Source: Statistics Canada

Mortgage Principal and Interest a better indicator

Average Principal and Interest Payment (P&I)
Inflation Adjusted (2009 Dollars)
60,000

50,000
GTA Real P&I
40,000

30,000

20,000

10,000
NOTE: Assumes 20 per cent down payment and a mortgage amortized
over 25 years using the average 5-year fixed mortgage rate.
0
1959
1962
1965

1971
1974
1977

1986
1989
1992

2001
2004
1953
1956

1968

1980
1983

1995
1998

2007
Source: Toronto Real Estate Board, Statistics Canada


60,000

50,000 GTA Real P&I

40,000 Can Real P&I
30,000

20,000

10,000
0
1959
1962
1965

1971
1974
1977

1986
1989
1992

2001
2004
1953
1956

1968

1980
1983

1995
1998

2007


60,000
GTA Real P&I
50,000
Can Real P&I
40,000
GVA Real P&I
30,000

20,000

10,000
0
1959
1962
1965

1971
1974
1977

1986
1989
1992

2001
2004
1953
1956

1968

1980
1983

1995
1998

2007

Income – The Final Piece of the Puzzle

Toronto CMA Average Household Income
$100,000

$90,000

$80,000

$70,000

$60,000

$50,000

Source: Statistics Canada; TREB Estimates and Forecast

Share of Income Used for Mortgage Principal & Interest

Mortgage Principal & Interest
as Share of Average Household Income
50%
45%
GTA
40%
35%
30%
25%
20%
NOTE: P&I calculation assumes 20 per cent down payment and a mortgage amortized over 25 years using the
15% average 5-year fixed mortgage rate. Average household income based on the Census of Canada and the
Statistics Canada Labour Force Survey.
10%



50%
45% GTA
40%
Canada
35%
30%
25%
20%
10%



50%
GTA
45%
Vancouver
40%
35% Canada
30%
25%
20%
10%


Affordability: Share of Income Used for Housing Payments

TREB Affordability Indicator
Share of Average Household Income Used for Mortgage Principal and Interest,
Property Taxes and Utilities on the Averaged Priced GTA Resale Home

55% NOTE: P&I calculation assumes 20 per cent down payment and a
mortgage amortized over 25 years using the average 5-year fixed
50% mortgage rate. Average household income based on the Census of
Canada and the Statistics Canada Labour Force Survey.

45%
40%
35%
30%
25%

Source: Toronto Real Estate Board Data and Calculation; Statistics Canada

Affordability Can Be Broken Down by District

Affordability Can Be Broken Down by District

?

Affordability: Share of Income Used for Housing Payments


55%
What if we assumed 20 per cent down payment and a
NOTE: P&I calculation assumes that the GDS Ratio
50% had to remain at 32%, income based on the Census of
mortgage rate. Average household with the average

45% home price having to adjust to make up for
changes in interest rates, income etc.?
40%
35%
30%
25%


Concept of Justified Price…Suggests No Bubble Right Now

Actual GTA MLS® Price vs.
Average Price Justified by Constant 32% GDS Ratio
$500,000
$450,000 Actual GTA Average MLS® Price
$400,000
$350,000
$300,000
$250,000
$200,000
$150,000
$100,000

Source: TREB, Statistics Canada

Concept of Justified Price…Suggests No Bubble Right Now

$500,000 LTT
Justified Average MLS® Price Assuming a Constant GDS Ratio
$450,000 of 32 Per cent
$350,000
$300,000 Bubble
$250,000
$200,000
$150,000
$100,000


Components of Affordability

? ? ? ?
Mortgage
Rates
Hhld
Income
Taxes &
Utilities
Average
Price

Economic Recovery is Underway in Canada

Canadian Real GDP, Monthly
Month-Over-Month Per Cent Change
0.8%

0.4%

0.0%

-0.4%

-0.8%

-1.2%


GDP Growth Will Continue in 2010

Canadian Real GDP, Quarterly
Annualized Quarter-Over-Quarter Per Cent Change
8%
6%
4%
2%
0%
-2%
-4%
-6%
-8%

Source: Statistics Canada; Bank of Canada Baseline Forecast

Components of GDP Growth

FACT: More than 60 per cent of Canadian
GDP is accounted for by personal
expenditure

Consumer Price Growth Hovering at BoC Target

Canadian Consumer Price Index (CPI)
Year-Over-Year Per Cent Change
4%
3%
2%
1%
0%
CPI Annual Per Cent Change
-1%
Core CPI (Bank of Canada) Annual Per Cent Change
-2%


Bank of Canada Will Increase the Overnight Rate

Bank of Canada
Target for the Overnight Lending Rate
6%

5%

4%

3%

2%
1%

0%

Source: Bank of Canada; TREB Forecast

Slope of Yield Curve Changing

Canadian Government of Canada Bill/Bond Yield Curve
Spot and Derived Forward Rates
4.50%
4.00%
3.50%
Bill/Bond Yield

3.00%
2.50%
2.00%
1.50% Spot (May 5, 2010)
1.00% December 2010 Forward Curve
0.50% December 2011 Forward Curve
0.00%

Source: Bank of Canada; TREB Forward Rate Calculations

Variable and Fixed Mortgage Rates Will Increase
Disproportionately

Prime Rate and 5-Year Fixed Mortgage Rate
Historic and 2010 Forecast
9
8
7
6
Per Cent

5
4
3
Average 5-Year Fixed Mortgage Rate
2 Prime Rate
1
0
Jul-00

Jul-01

Jul-03

Jul-04

Jul-06

Jul-08

Jul-09

Jul-11
Jul-02

Jul-05

Jul-07

Jul-10
Jan-00

Jan-02

Jan-03

Jan-05

Jan-07

Jan-08

Jan-10

Jan-11
Jan-01

Jan-04

Jan-06

Jan-09
Source: Bank of Canada; TREB Forecast

Rates Will Still Be Very, Very Low Historically

Average 5-Year Fixed Mortgage Rate: Historic & Forecast
22%

17%

12%

7%

2%

Source: Statistics Canada; TREB Forecast


Mortgage
Rates
? ? ?
Hhld
Income
Taxes &
Utilities
Average
Price

GTA Employment Will Improve in 2010 & 2011

Toronto CMA Employment
Actual and Annual Per Cent Change
3,050 4%

Employment Annual Per cent Change
3,000 3%
Actual Employment (,000s)

2,950
2,900 2%
2,850 1%
2,800 0%
2,750 Annual Per Cent Change
2,700 -1%
GTA Average Employment
2,650 -2%

Source: Statistics Canada, TREB Forecast

GTA Unemployment Will Be Above Average in 2010

Toronto CMA Unemployment Rate
(Seasonally Adjusted)
11%
10%
9%
8%
7%
6%
5%


Earnings Will Trend Upward

Toronto CMA Average Weekly Earnings
(Seasonally Adjusted)
$900
$880
$860
$840
$820
$800
$780
$760
$740


Household Income Growth Picking Up in 2011

Toronto CMA Average Household Income

$100,000

$90,000

$80,000

$70,000

$60,000

$50,000

Source: Statistics Canada; TREB Estimates and Forecast


Mortgage
Rates
Hhld
Income
Up
Slowly
? ?
Taxes &
Utilities
Average
Price


Mortgage
Rates
Hhld
Income
Up
Slowly
Taxes &
Utilities
?
Average
Price

MLS® Sales Remaining Strong but Edging Lower

TREB MLS® Annualized Sales/Listings Trend:
Historic & Forecast
100%
Sales/Listings Trend (Annualized)

190,000 MLS Sales
90%

Sales-to-New Listings Ratio
170,000
80%
150,000 70%
130,000 60%
110,000 50%
90,000 40%
70,000 30%
50,000 20%


More Home Owners Will List

Historic & Forecast

MLS Sales 100%

190,000
MLS New Listings 90%

170,000 Sales-to-New Listings Ratio
80%
150,000 70%
130,000 60%
110,000 50%
90,000 40%
70,000 30%
50,000 20%


Market Conditions Not as Tight in 2010

Historic & Forecast

MLS Sales 100%

190,000
MLS New Listings 90%

170,000 Sales-to-New Listings Ratio
80%
150,000 70%
130,000 60%
110,000 50%
90,000 40%
70,000 30%
50,000 20%


After Very Strong Price Growth in 2009 & Q1 2010

TREB MLS® Average Price Trend: Historic & Forecast
450,000

400,000

350,000

300,000

250,000

200,000


…the Average Price Trend Will Flatten

TREB MLS® Average Price Trend: Historic & Forecast
450,000

400,000

350,000

300,000

250,000

200,000



Mortgage Hhld Taxes & Average
Rates Income Utilities Price
Up Up Up Up
Slowly Slowly

The Cost of Home Ownership Will Rise


55% NOTE: P&I calculation assumes 20 per cent down payment and a
50% mortgage rate. Average household income based on the Census of

45%

40%

35%

30%

25%


Average Price and Justified Price Will Move In Line

$500,000
Justified Average MLS® Price Assuming a Constant GDS Ratio
$450,000 of 32 Per cent
$350,000
$300,000
$250,000
$200,000
$150,000
$100,000


Immigration Drives Population Growth

GTA Most Diverse Metropolitan Area in the World

Share of Foreign-Born Population
in Major Metropolitan Areas
Toronto
Vancouver
Miami
Los Angeles
Sydney
Melbourne
New York City
Montreal
Washington DC

0% 10% 20% 30% 40% 50%
Source: Adapted from Statistics Canada, 2006 Census Analysis Series

Sustained Population Growth is Projected

Toronto CMA Population
Historic and Projected
10,000,000

8,000,000

6,000,000

4,000,000
Historic Toronto CMA Population
2,000,000
Projected Toronto CMA Publication

0

Source: Statistics Canada, Ontario Ministry of Finance Projection

MLS® Sales Will Follow Population Trend – Long Term

GTA MLS® Sales
Historic and Projected
140,000
120,000
100,000
80,000
Actual Existing Home Sales
60,000
Historic Trend
40,000
Long-Term Sales Projection
20,000
0

Source: Statistics Canada, Ontario Ministry of Finance Projection

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