This real estate analyst says there will only be one rate increase this year

With a full year ahead of us, we turned to one of the most reliable real estate analysts in the Greater Toronto Area, Ben Myers, President of Bullpen Research & Consulting Inc., to learn more about what’s in the cards for 2019. We touch on rising rates, the stress test, the rental market, soaring home prices, and more. 

Newinhomes.com (NIH): Do you think interest rates will continue to climb this year? Why or why not?

Ben Myers (BM): Several economists calling for two or three hikes in 2019, but I think we’ll only see one increase. There are major tailwinds like record-high immigration and record-low unemployment, but the oil price slump, uncertainty south of the border, stock market volatility, flat ownership housing markets and the decline in spin-off spending that results from fewer resale transactions, will probably keep the Bank of Canada cautious in 2019.

NIH: At the end of last year, some Mattamy execs said it would do a lot of good if the mortgage stress test was reduced or fully repealed. What do you think?

BM: Combined with the recent rate hikes, I think the stress test as it is currently configured is too punitive. The reduction in mortgage credit availability has reduced ownership housing too much, which has led to a spike in rental rates. In a number of my consulting assignments for clients, I’ve encountered rent per-square-foot in Toronto-area condos jumping 20% annually, and the rental rates for single-family homes in certain neighbourhoods in suburban municipalities have risen as much as 25% in 2018. The stress test is hurting the most vulnerable rental households, as potential first-time buyers that should be moving up or supporting new construction are staying put, reducing rental supply.

A think at the very least a reduction of 50 basis points, make it your mortgage rate plus 1.5% points. Monitor the results and see if it brings better balance to the rate of change of rental rates versus house prices.

Without a change in the stress test, rental demand will continue to top rental supply, leading to continued rental inflation. My firm, Bullpen Consulting, and Rentals.ca have forecast rent growth on vacated units of 11% in the City of Toronto this year.
 
NIH: What else do you think needs to be done in order to cool the rental market?

BM: The only way to prevent rental rates from rising dramatically is to add new supply. The Liberal government has already committed to increasing immigration, and I think the turmoil in the United States is resulting in students choosing our universities over American ones. It is clear from the recent data that top tech talent is coming to Toronto too. These factors will continue to put upward pressure on rental rates.

There are lots of incentives that can be provided to developers to encourage purpose-built rental construction and boost supply. Additionally, leasing public land for new rental development, like the West Don Lands project by Dream/Tricon/Kilmer should be the new model moving forward.

NIH: Are there any government policies or regulations you'd like to see implemented this year?

BM: There are a few existing policies that should be changed. The maximum annual increase under rent control should be changed to 5%, this will prevent rent gouging, but encourage landlords to continue to maintain and service their properties properly, while encouraging investment by pre-construction buyers and build-to-rent developers.

The non-resident homebuyers tax on new homes should be changed. Make the tax payable on the sale of the unit by the non-resident/foreign buyer, instead of at closing. This will encourage investment in the pre-construction market, and add more rental supply. A key to this tax change would be to monitor these units to ensure they are being rented out and not kept vacant.

NIH: Throughout 2018, condos were the most affordable housing type across the GTHA. Do you think this trend will continue through 2019?

BM: No doubt, but they’re not that affordable anymore for a first-time buyer. As empty-nester baby boomers continue to stay in their four- and five-bedroom homes, interest rates rise, population growth remains high, and new ground-oriented housing supply grinds to a halt due to slumping new single-family home sales, we aren’t likely to see any major decline in the value of freehold properties to any level that would be considered more affordable than the much smaller condo apartment product.

NIH: As the average price of a detached home remains above $1 million, is it time for more families to embrace a high-density lifestyle?

BM: They don’t have a choice if they want to live in the GTA, you either pay up or move out. Developers are now adding family-friendly common amenities to their new projects: there are kid play areas, lego rooms, and video game stations. There are still concerns by parents about high condo fees, the lack of storage, expensive parking, safety on balconies, long elevator rides, and especially affordable and accessible daycare options.

We need our government to add more affordable downtown daycare facilities. My hope is to see many of these vacant retail spaces converted to daycare space (I work above one now at my Kingston Road office). As online shopping thrives, we clearly don’t need as many storefronts.
 
NIH: What media headlines do you think will define the industry this year?

BM: The media will continue to focus on lower home sales, both for new and resale housing. I don’t think there will be enough attention paid to the continued spike in rental rates.

NIH: Do you have any advice for those looking to buy a new home in 2019?

BM: I tend to say the same things every time: buy what you can afford, buy where you can see yourself living for five or more years, buy what you like, not what you think will improve the “resale value,” do your own research, and use an experienced realtor and mortgage broker.
 
We extend a big thank you to Ben Myers for taking the time to talk to us about what to expect and what he’d like to see happen in the housing market in 2019.