Real estate market correction coming

Toronto's real estate market is overdue for a “moderate correction” according to the TD Bank which is predicting home prices should slip 10 to 15%.

“The excessive pricing of Canadian housing in relation to fundamentals is now clearly correcting,” says TD Bank economist Grant Bishop. “We expect a moderate correction in prices over the coming year.”

The TD bank is predicting a “downward correction of 10 per cent in monthly average prices, followed by several years of stagnation of price growth,” especially since many Canadian families have large debts which is hampering their ability to borrow more.

Other Canadian economists also believe the Canadian real estate market is overvalued, with estimates varying between 25% and 40%. The Canadian Real Estate Association (CREA) downgraded their estimates in August as sharp declines in home sales made it clear it was becoming a bear market (a bear market means buyers are hibernating and waiting it out).

Seasonally adjusted national home sales were down 6.8% in July compared with June. On a year-over-year basis, Canada's sales activity was down by 30% compared with July 2009. Home sales have declined for three months in a row.

“The market went up faster than most people have expected and it’s going down more quickly than we had anticipated,” says Sal Guatieri, a BMO Capital Markets senior economist.

The average price of homes sold in July was $330,351, only 1% higher than a year earlier. If more potential buyers hold back prices might begin to dip, sparking a price drop as the market recorrects itself.

“The combination of tighter mortgage insurance rules, a modest back up in borrowing costs, and the HST have delivered a hammer blow to sales,” says Doug Porter, deputy chief economist for BMO Capital Markets.

CREA is warning there will be more dismal sales numbers in the future.

Housing starts down in July

Canada Mortgage and Housing Corp. reports there has been a 1.6% decline in the annual rate for housing starts in July, a drop of 3,100. Most notable was huge drops in single urban starts which is down 11.3%, with the biggest drop in British Columbia with a 14.8% drop.

Rural starts were also down.

Atlantic Canada however is seeing a boom, up 37.7% in a region which typically has less demand for new homes.

The annual rate for June was 192,300. In July it dropped to 189,200.

Powering your Home soon to become More Expensive

If you think your electricity bill is high now, wait a couple years. Electricity rates are set to skyrocket between now and 2015 for multiple reasons.

#1. Ontario Hydro's Debt

Ontario residents are being forced to pay off decades of debt incurred by the old Ontario Hydro during the 1980s and 1990s. Most of the debt is from building big expensive nuclear plants that went waaaaaaay over budget. And I am not talking like 10% over budget, I am talking like 400 to 800% over budget. The extra cost was incurred during the building process because the nuclear plants were built in remote locations, which made it more difficult to get supply trucks to carrying everything from wet cement, steel girders, etc. A lot of the time construction crews stood around waiting for the trucks to arrive, getting paid while waiting for materials to arrive (the same thing occurs when building / repairing a road, which is why you so often see crews just standing around waiting).

#2. Electricity isn't Cheap

Regardless of how electricity is made, it isn't cheap. There's always a huge financial cost. For decades now the province of Ontario has been subsidizing the cost of electricity by 50% or more. The 6.5 cents per kWh you pay is only half of the 13 cents it costs Ontario Hydro to make it.

#3. Exporting Excess Electricity No More

It used to be Ontario had extra electricity to go around so Ontario Hydro would sell it to Quebec, Manitoba and even across the border to the United States. Selling it would make up part of the price, but now we have a shortage of electricity and exporting it is no longer wise or profitable.

#4. New $4 billion Power Lines

The Ontario Power Authority estimates Ontario needs to spend $4 billion on new high-voltage transmission lines over the next 10-15 years. This will add more to the cost of electricity in Ontario.

#5. Coal-Burning Plants being Shut Down

Ontario is set to phase out coal-burning plants over the next couple of years as more wind and solar projects come online. Coal isn't cheap, but it is cheaper than other options available. Shutting down coal plants however will single-handedly cut Ontario's CO2 production by 35% once they've all been phased out.

#6. Fixing Old Nuclear Plants

Old and aging nuclear plants need to be shut down periodically, cleaned, repaired and retrofitted. This is a very expensive process, but its a necessity to keep them running perfectly and within safety limits.

#7. Toronto Expected to Pay Extra

There is a plan in the works to scrap building a big major power line into Toronto. This extra power line would allow extra power to be brought into Toronto and would keep electricity rates in Toronto stable by increasing the amount available. With that power line being scrapped Torontonians will have a shortage of electricity and will be either facing brownouts or see their electricity rates go up (and the people who can't afford the higher rates will have to find ways to cut back on their usage).

Now why am I so worried about all this...?

Truth be told I don't think I use that much electricity. True, I do leave the AC on all the time, but beyond that I just have my computer, a TV, a fridge, a freezer, a microwave and a few small appliances like my alarm clock. If I was forced to be frugal I don't think the TV or microwave need to be plugged in all the time, and the AC could certainly be turned off more often or even permanently.

Thus in my mind, switching to a solar panel/wind turbine with a battery backup system is not only practical, but cheaper. I know enough about the topic that I could do it on a budget (as per someone equipping a cottage up north) rather than the big expensive $30,000 ones that some people install... because they want their solar panels to be top-of-the-line and have excess power to be fed back into the grid...

Myself, I'd rather cut myself off from the grid. Your property taxes are much lower when you are off the grid and its worth it in my mind to be completely independent. The cost of buying all the necessary equipment and battery storage is offset at a faster rate because you're no longer paying taxes just for being attached to the grid.

Toronto condo sales slowing

While I write this I am listening to "Eye of the Tiger" by the band Survivor... more commonly known as the song during Rocky Balboa's infamous montage videos...



Oddly enough I find it metaphorical for Toronto's slumping condominium market which seems to be gearing down as sales start to slow.

New condo sales have slumped 8% to 4,991 sales in the second quarter of 2010, compared with 5,415 in the first quarter. This is the first time since 1994 that 2nd quarter sales have slumped compared to the first.

“We were expecting sales to be stronger in the second quarter, but it looks like the market is softening,” says Ben Myers, the VP of condo market research firm Urbanation Inc. Urbanation expects new condo sales to continue to slump for the rest of 2010.

Compared to 2009 sales are down dramatically. (Although it should be noted 2009 was a record year for the 1st and 4th quarters with respect to condo sales.)

However there is another problem... the market is becoming flooded with condos. Another 12,000 condo completions are expected by the end of 2010. There will be roughly an extra 2,000 condos that will go unsold.

“That’s an absolutely huge number and a lot of product coming on to the market all at once,” says Myers.

Furthermore the condos that are being purchased are mostly by investors and speculators who are hoping to flip them for a profit once the condo is finished, which means the market of new condos will be even more flooded.

Toronto has 272 condo projects currently active, all looking for buyers in Toronto's real estate market. Except these buyers are being cautious and looking for deals. Another 20 new condo projects are expected during the 3rd quarter, which will flood the market even more.

The problem however is that with so many condo projects and not enough buyers many projects end up with delayed completions because the money isn't flowing in fast enough.

Anybody investing in a new condo now should expect deflation of the value, not flipping it for more. The average price for a new condo in Toronto is $529 per square foot. A few years ago it was $639 per square foot, which shows prices are coming down dramatically.

In contrast its much cheaper to buy an older condo in Toronto. A mere $369 per square foot. The resale market is very strong right now, with the 2nd quarter of 2010 posting record sales of 5,076.

My advice for people buying condos? Keep your chin up and keep trying to find a deal. With the market slumping now is a good time to buy a condo for less. Keep looking until you find a deal which is perfect.

"Let me tell you something you already know. The world ain't all sunshine and rainbows. It is a very mean and nasty place and it will beat you to your knees and keep you there permanently if you let it. You, me, or nobody is gonna hit as hard as life. But it ain't how hard you hit; it's about how hard you can get hit, and keep moving forward. How much you can take, and keep moving forward. That's how winning is done. Now, if you know what you're worth, then go out and get what you're worth. But you gotta be willing to take the hit, and not pointing fingers saying you ain't where you are because of him, or her, or anybody. Cowards do that and that ain't you. You're better than that!" - Rocky Balboa.

CREA shuts down 1 cent MLS listings

In May Dawson Pereira launched a brokerage service touting “one cent” listings on the Multiple Listing Service. A former ReMax agent he was charging $600 to list property in the database, but if the home was sold within 10 days he refunded $599.99.

Excited people looking to save on the costs of listing in the MLS database started pouring in and his business was booming.

But on July 23rd the Toronto Real Estate Board and the Canadian Real Estate Association shut him down, saying he was in violation of regulations.

“I didn’t realize I was breaking any rules. I was just offering people an alternative, but they gave me a major hard time,” says Pereira. He was just one of many discount companies because CREA was accused of restricting competition by the federal Competition Bureau.

Except shutting him down implies they're just doing more of the same: Restricting competition. Their regulations appear to have been designed to prevent competition.

One of the regulations he violated was listing clients' contact info on the MLS website, allowing buyers to contact sellers directly without going through an agent... this is a big no-no according to CREA who makes their money off agent fees.

“They basically want everyone to contact an agent first so they can make their commission, but that doesn’t save the consumer anything,” said Pereira, who has been forced to terminate all listings and give refunds to existing customers.

The Competition Bureau this year managed to CREA to change some of its rules, but one of the rules CREA refused to change was regarding the seller's contact info appearing on the MLS websites.

That one regulation is now the subject of a court case between the Competition Commissioner Melanie Aitken and CREA.

“CREA’s rules were amended to clarify that a seller’s contact information can be included in the Realtor only (private) remarks section of a listing,” says CREA lawyer Catherine McKenna. “This means that a Realtor may direct buyers’ agents to contact the seller directly for appointments if the seller instructs the Realtor to this effect in writing.”

That means the seller’s name is still allowed on the MLS, but in a section accessible only to agents. (Which means CREA still gets a commission.)

This doesn't help sellers at all, says Georgetown resident David Fraser. He signed up with Pereira. Fraser says he could have saved $15,000+ in commissions on his home which was listed for $337,000. “The MLS has a lot more reach, but it doesn’t do you any good if no one can contact you directly,” says Fraser.

Pereira is also in trouble with CREA for using their MLS and REALTOR trademarks incorrectly. His websites 1centMLSlisting.com and savetherealtorfees.com contained the words MLS and Realtor, but did not include their logos. Apparently they're also upset because the word "Realtor" appears in lower case in his domain name.

Pereira thinks the so-called changes in the real estate business may be an illusion. I agree, they made a few minor changes to keep the Competition Bureau happy, but they're still restricting the competition.

Its a bit like slowing down 10 kmph while speeding, but you're still doing 110 kmph anyway.

If sellers can save money by avoiding realtor fees and selling privately I say more power to them. There is no law saying they have to go through a realtor. Only CREA regulations require that and those regulations stifle competition in what is essentially a monopoly for Canadian home listings.