Sharp Upward Trend Continues in Toronto Housing Market

The United States is not the only nation experiencing the return of a booming real estate market: Our neighbors to the north are also in the midst of a similarly extended surge in the marketplace, and it is the renewed strength of the Canadian economy that has powered this upward trend in the average price of existing home sales. Our analyses indicate Toronto is perhaps the most salient example highlighting this continued upward trend, particularly since the city’s average home sale price checked in at $1.2 million in the last month, increasing at a rate representing a 28-year high.

After reviewing each category of housing within Toronto’s city limits — including detached homes, condominiums, and townhouses — it is evident that the sharp increase in the average sale price applies more or less equally to the different types of housing. Even with the 33-percent increase in prices across all housing categories encouraging a 15-percent increase in new listings put on the market, the Toronto housing supply still remains limited by any measure.

Although the sudden increase in equity would lead most economists to predict a continued increase in the number of real estate listings — thereby introducing more balance within the market — our research indicates that many homeowners are still somewhat reluctant to cash in on their gains by putting their home on the market. It is somewhat ironic, but here at Tweed Economics we believe this might be the product of the limited housing supply leaving few good options for potential sellers who wish to remain in the city of Toronto.

City officials are looking at the limited supply of real estate as an issue that may need to be addressed through some sort of government intervention. Throughout our many years working in similar markets in which limited supply issues can be overcome with off-market expertise, intervention by government entities — despite wholly good intentions — all too often leads to unintended consequences that only exacerbate an existing issue or create new, more complex issues.

Various city officials have intimated potential steps they might take to intervene, citing the current lack of affordable housing as a deterrent for first-time homebuyers who wish to live and work in Toronto. This is certainly problematic, and city officials are right to be concerned about a continued lack of supply preventing potential buyers from entering the real estate market. Without first identifying the precipitating factors and understanding how each of these factors influences the market, outside intervention will almost certainly lead to a host of newer and more complicated problems for city officials to handle.

As Toronto city officials discuss the possibility of implementing a vacant-home tax or a foreign-buyers levy in the hopes of reducing real estate speculation, it’s worth pointing out that it is typically ideal to simply allow the market to self-correct. With home values continuing to soar in Toronto, it seems likely that potential sellers in the city will ultimately decide to take advantage of a strong marketplace rather than standing on the sidelines as others reap the rewards of the sharp rise in home equity.

References:

https://www.theglobeandmail.com/real-estate/greater-toronto-area-faces-looming-jump-in-housing-prices-royal-lepage/article33589023

https://www.bloomberg.com/news/articles/2017-04-05/toronto-home-prices-jump-33-in-march-as-market-tightens

 

Trump’s Win Could Spark US Housing Boom, Says Yale Economist

 

Yale economist Robert Shiller believes that Donald Trump’s surprise presidential win could prove a “turning point” that catalyzes a housing boom in the US. The Nobel laureate further argued that the real estate billionaire’s landmark election indicated a shift in American attitudes toward wealth and conspicuous consumption and away from modesty and prudence.

“We used to be more into modest living,” Shiller told CNBC, with regard to the post-Recession years. “Now people are thinking, ‘[that] doesn’t work.’ You know? You have to live big-league and you’re on your way.”

While the data aren’t there to support his cultural observations, Shiller noted that such excitement and attitudes could be seen at Trump rallies and in the stock markets, which rallied following the news of Trump’s win. Indeed, there is an emerging belief that Trump’s administration may usher in preoccupation with big living and materialism, and an aspirational culture reminiscent of the 1980s, according to CNBC.com.

Shiller speculated these attitudinal changes could, in turn, stimulate spending in the housing market: “Trump is a real estate man, right? He talks about living big, living large. I can imagine that this will boost housing demand as well, among at least those who are excited by Trump,” he said to CNBC.

Shiller’s statements came on the same day that the S&P CoreLogic Case-Shiller data came out, revealing that the 20-city property values index had risen 5.1% year-over-year in October 2016, with each of the cities seeing year-on-year gains. The Case-Shiller U.S. National Home Price Index soared by 5.6% during the same month, marking the highest margin of growth since 2014. US home prices have risen steadily due to increasing demand, higher employment, and rising incomes.

“I think we’re at a turning point. The numbers that we’re reporting today are October, before the Trump election, and everything looks different now,” the eponymous Shiller told Bloomberg Television. “There might be a Trump boom coming.”

Shiller also hastened to add that he was merely “wondering” about rather than forecasting a boom, given the uncertainty surrounding Trump’s policy positions.

Trump campaigned successfully on an economic platform of lower taxes, deregulation, and massive investment in infrastructure, all of which spurred palpable excitement among investors. The Dow rose 14.4% in 2016 whereas the S&P grew by 10.8%. That being said, Shiller warned that like Coolidge, Trump may preside over a short-lived era of American prosperity which ends badly. 

References:

https://www.bloomberg.com/news/articles/2016-12-27/trump-win-could-usher-in-boom-for-u-s-housing-says-shiller

http://www.cnbc.com/2016/12/21/americans-want-to-live-big-in-trump-era-nobel-prize-winner-says.html

https://www.bloomberg.com/news/articles/2016-12-27/home-prices-in-20-u-s-cities-increased-5-1-in-october

http://www.newsmax.com/Finance/Economy/robert-shiller-donald-trump-living-large/2016/12/24/id/765471/

Chinese Interest in US CRE Grows Following Trump Election

Trump’s election and pro-growth rhetoric are sparking heightened investment interest in US commercial real estate (CRE), especially as expectations of dollar appreciation grow. Much of the increased demand for dollar-denominated assets, particularly in commercial real estate, has come from China where the yuan has depreciated and economic growth has been slowing.

“(Investors) are seeing the U.S.commercial real estate marketplace as really standing out on a global basis,” said Hessam Nadji, CEO of Marcus and Millichap, to CNBC. “It’s not being overbuilt; it’s been very well balanced in this particular cycle in terms of loans that are not going up, the leverage that was very well balanced. They’re at much lower risk at this stage of recovery than we’ve seen in the past.”

The dollar appreciated considerably following Trump’s win, hitting eight-year highs against the yuan, leading to a flurry of speculation regarding US commercial real estate. Much of the foreign investment in US commercial real estate has been directed toward major metropolitan hubs including New York, Los Angeles (where Chinese developer Greenland has over $1 billion invested), San Francisco, and Chicago.

“The expectation is inflation will go up, job growth will improve and therefore commercial real estate becomes a better hedge in that scenario on a longer-term basis,” Nadji added.

In all, Chinese investment in foreign real estate reached $16.1 billion in the first half of 2016, double the figure from the same period in 2015. Investors at the recently-concluded 3rd Real Estate Globalization and Overseas Investment Summit in Beijing discussed growing opportunities in overseas investment. Henry Zou, founder of the Henry Global Consulting Group, encouraged attendees to prepare for stronger Sino-US ties in 2017,  anticipating that the Bilateral Investment Treaty between the world’s two largest economies would be ratified.

However, such overseas investment may be hampered by a Chinese government wary of massive capital outflows. In late November, China’s National Development and Reform Commission, The People’s Bank of China, The Ministry of Commerce and The State Administration of Foreign Exchange issued a statement warning of higher scrutiny of outbound investment. They are expected to pass stricter controls for foreign investments exceeding $10 billion, and for property deals by state-owned firms exceeding $1 billion, according to the Wall Street Journal.

Such regulatory controls may make it more difficult for Chinese firms to make large-scale real estate deals in the US, and may also hurt in-progress development projects that rely on Chinese capital.

References:

www.forbes.com/sites/elyrazin/2016/12/22/5-commercial-real-estate-trends-to-watch-in-2017/3/#6ce4fcee6b4e

http://www.forbes.com/sites/kenrapoza/2016/12/05/what-chinas-capital-controls-mean-for-global-real-estate/#44ca965041e5

http://therealdeal.com/2016/11/29/big-chinese-investors-rethink-some-us-real-estate-bets/

http://www.wsj.com/articles/chinese-developers-reassess-u-s-projects-1480435760

http://www.cnbc.com/2016/12/22/chinese-money-moving-to-us-commercial-property.html

http://www.globaltimes.cn/content/1022358.shtml

US Luxury Homes Sales Rise Against Expectations

Against the expectations of observers, the higher-end of the real estate market has reported continued gains as sales of luxury homes rise, even as housing starts have grown to accommodated entry-level buyers. The Wall Street Journal has cited a survey by John Burns Real Estate Consulting showing that homes sales above $600,000 have risen in 37 of 43 counties, across 16 states.

Of the markets that were surveyed, luxury home sales grew by 10% in the last 12 months. Third quarter home sales in that price range only grew 5% year over year, however, sales increases were distributed throughout every price category, from the $600,000 to $1.5 million-plus price segments. The $1.1 million to $1.2 million segment experienced a 10% spike in sales, whereas the $1 million to $1.1 million category saw 4% growth. Whereas the luxury home starts priced at $1 million-plus fell precipitously by 41.6% to 1,762 last year, according to the National Association of Home Builders, that number is recovering along with the rest of the real estate market.

Toll Brothers, a US luxury home builder reported revenue growth for the fifth quarter in a row, with orders surging by 20.3% to 1,728 homes in the fourth quarter.

“We are encouraged as we look to FY 2017,” Toll Brothers Chief Executive Douglas Yearley said in a statement. “We are seeing positive demand trends in many regions.”

Higher home prices have also been an encouraging sign for luxury home builders. Toll Brothers reported that average price of homes sold grew to $834,000 during the fourth quarter, up from $789,700 a year earlier. Toll Brothers sold a total of 2,224 homes during that quarter, up from 1,820 a year prior, driving revenue increases of 29.1% to $1.86 billion. The company has forecast that it will build between 1,000 and 1,250 homes at the $750,000 to $780,000 price range during this quarter.

On the other hand, the ultra-high end of the luxury market has grown sluggish, according to Forbes, with the market for $100 million-plus homes softening, marking a reversal of the prevailing trend in recent years. Ultra-luxury home construction in New York and Miami have dwindled This may precipitate a belated focus on affordable and starter home building, given that the high-end market was the first to rebound after the recession.

References:

http://www.constructiondive.com/news/report-us-luxury-home-sales-continue-to-post-gains/432260/

http://www.wsj.com/articles/luxury-home-sales-in-u-s-continue-to-rise-1481292531

http://www.constructiondive.com/news/report-us-luxury-home-sales-continue-to-post-gains/432260/

http://www.cnbc.com/2016/12/06/pricier-home-prices-spark-surge-in-toll-brothers-revenue.html

Chinese 10-Year Sovereign Bond Yield Surges By Record Amount

Yields on Chinese 10-year sovereign bonds soared by a record 22 basis points on Thursday hitting a 16-month high of 3.4%, prompting authorities to halt trading in some futures contracts. 10-year and 5-year government-bond future prices plunged by a record 2% and 1.2% respectively in early trading, leading yields to soar.

The global market selloff was sparked by comments from the Fed signaling a vigorous clip of interest-rate increases for 2017 and a plummeting yuan. While Wednesday’s announcement that the Fed would raise the benchmark policy rate by 0.25% had been foreseen, its promise to introduce three more next year caught many off guard.  Other factors exacerbating the selloff include concerns of frothy asset markets, accelerating capital outflows, and a liquidity crunch.

“The market was not expecting a change,” said Mike Amey, a portfolio manager at Pacific Investment Management Co., regarding Fed’s announcement to the Wall Street Journal. “You can see that in the reaction in the market.”

The Chinese bond selloff is part of a global trend. US Treasuries have also declined amid expectations of interest rate hikes, adding negative pressure to the yuan and making Chinese bonds all the less attractive to investors.. Germany and Australian government bond yields have jumped by 0.062% and 0.2% respectively. UK yields, in contrast, declined slightly on the back of a Bank of England announcement that it would keep interest rates stable.

Bloomberg adds other factors that have reduced the appeal of debt. Both globally and in China, inflation is expected to accelerate, driving up consumer and producer prices. Moreover, the People’s Bank of China has been driving up money-market rates to spur deleveraging. In response, Chinese banks have begun deleveraging and selling off bond holdings as assets have become more expensive to fund. Bond yields, in turn, have been following money-market rates.

Overall, the short-term outlook on global economic growth has brightened since Trump’s election, given expectations of deregulation, lower taxes, and higher spending. This has also encouraged investors to move away from bonds.

References:

http://www.wsj.com/articles/china-halts-trading-in-key-bond-as-panicky-investors-sell-securities-1481803121

https://www.bloomberg.com/news/articles/2016-12-15/china-s-record-bull-run-in-bonds-is-giving-way-to-a-market-rout

http://www.wsj.com/articles/bond-rout-deepens-after-fed-rate-signals-1481794245

http://www.econotimes.com/Chinese-10-year-bonds-yields-highest-since-Nov-2015-post-Fed-hawkish-outlook-heading-towards-350-pct-mark-451758