2018 started off with quite the annoyance. The stress-test. Ugh, I hated that name and I will always hate it. I also hate what they did because it doesn’t make (some) sense. Overall the objective of this Government was to create a false sense of security that the housing market can become affordable. They also did this to create a soft landing in our market. Objectives met?

Kind of, sort of, not really.

Toronto prices will not become affordable and I don’t care what anyone says. What’s affordable, anyways? Who defines affordability in a world-class city? The words “affordable” don’t even refer to rent as we all know what has happened to rents after the stress-test, don’t we? That’s right. Completely unaffordable now. Unintended consequence, anyone? You betcha!

When I think of the words affordable I think of things like vacations, cars, and material items. Not a house. To me, a house should be affordable for those buying it. but it should not be measured based on the average income – and that’s how we get into the mess thinking that “Hey! If the average Torontonian makes X, we should TRY and manipulate the market by making house prices Y”. Sure, let’s try that. Fail.

Did they create a soft landing? Sort of. I’ve always said there is no such thing as a CANADA-wide housing market and frankly I don’t even think we should compare Toronto as a whole. You guys are the experts – so you tell me – are prices lower, higher, or the same where you work? I bet you if I ask ten top Realtors in ten areas of the city, they will each tell me a variation of the story. The fact is, OVERALL, buyers have shifted down the property ladder to get what is affordable. That is – condos! Condos have done the best because we’re seeing a huge continuing influx of investors now competing with buyers who are looking at  getting “in”. I dare you – find me a condo in Toronto that’s supported with 20% down at today’s rents. It’s impossible. Yet, investors are buying them because they believe the cash-flow loss per month will be eclipsed by the capital appreciation over time. It’s a sucker’s bet, but it has worked, for now. So while condo prices have gone bananas, these four developers feel it’ll be more stable in 2019 and they kind of have to take a break, don’t they?

 

Over the course of the year, buyers adjusted and adapted to the new normal. How? We have seen a major upswing of non-traditional lenders doing deals today that the banks would’ve over the last few years, easily. There’s also been a huge surge to private money (that market is up by 50% by some accounts). That means private lenders are lending to people who are strapped OR who can’t afford their lifestyle and need to tap into their equity. Too bad these poor people don’t live in Canada because if they had, they would’ve refinanced themselves out of debt two or three times by now AND had equity.

 

As the year winds down our bond market has seen the lowest yields since March. In my previous email it was the lowest since September. https://ca.investing.com/rates-bonds/canada-5-year-bond-yield is the best indicator of rate movement. I expect 2019 to start off with lower rates than what we have available today. How much? Anybody’s guess. I asked one major bank VP of pricing and risk and he told me “The bond market is not the only thing we look for”. Right, because profits are important, too. It simply has to happen so going variable at this time is a safe bet in my opinion. What will the Bank of Canada do with the Prime Rate then? Again, anybody’s guess. It all depends on: Trump, China, Nafta/USMCA/tea leaves. Some say we’re closer to a recession than we have ever been Some say we are full steam ahead. I say – don’t buy a house just based on rates, buy what you can afford today and in the future 3-5 year and you’ll be fine.