TOM FENNELL August 15 1988


TOM FENNELL August 15 1988



The crowd of 400 buyers shouted, pushed and pleaded. The nervous developer called in police to restore order, but, by the end of the day, that frantic scene in April over the purchase of 341 condominiums on the north edge of Toronto had become another angry flare-up in the struggle over affordable housing. In Greater Vancouver, Montreal and Toronto, home to nearly 10 million Canadians, the story is repeated over and over: for more and more young people, buying an acceptable first home is all but impossible. Said Vancouver secretary Laurie Bean, 33, who, along with her husband, Roger, 30, a carpenter, is now house hunting: “You can’t even get a junk box for under $120,000 in Vancouver.”

Gift: With the exception of a few cities, including Halifax and Regina, housing costs are rising at an alarming rate. Spokesmen for the Canadian Real Estate Association say that the average price of a home in 24 cities across the country was $136,115 in May—up by 16 per cent over the previous year. Leading Toronto housing analyst Frank Clayton said that almost one-third of the 1.25 million potential home buyers living in 10 major urban areas across Canada—but mainly in Toronto and Vancouver— cannot even afford a modest house. He added, “The dream of a singlefamily home is gone for many, many, people.” In fact, some industry analysts say that 25 per cent of all potential new homeowners will need a financial gift or a low-interest loan from a wealthy relative to help them buy a home.

Nightmare: In Montreal, where

prices have risen by a striking 36 per cent over the past two years, even such high-income earners as dentist Andrew Hasegawa, 27, have been forced to live with their parents to accumulate enough money for a down payment. Said Hasegawa: “I stayed at home to save, save, save.” And many others in Montreal are in a similar situation. Declared Guy Lapointe, president of the Montreal Real Estate Board: “For $70,000 you would only get a condominium in the boonies.” In Toronto, where prices

have doubled in just four years to an average of $232,999, the dream of home ownership has become a nightmare for many people.

Further aggravating the situation is the fact that, according to the Canadian Home Builders Association, mortgage payments on an average-price house consume 27 per cent of an average family’s income—up six per cent in just three years. But that 27-per-cent figure is only an average for the entire country. In reality, many families are paying far more—as James Mason, 31, and his wife, Juliet, 27, of the Toronto suburb of Scarborough are now doing. They have a combined income of $50,000 and took out two mortgages to finance their $117,500 townhouse in the far reaches of Toronto’s eastern suburbs. Their mortgage payments are now $1,200 a monthmore than one-third of their take-home pay. And they are even forgoing children. Said Juliet Mason: “If we had a child, we would not be able to afford this house.”

Influx: Prices are being propelled higher by a combination of forces. Because mortgage interest rates have remained low as incomes increased, more people had—until recently—been bidding on a constantly shrinking supply of affordable homes, driving prices up. And Canada’s major cities— Toronto, Montreal and Vancouver—have run out of cheap land for new housing developments. As well, there has been a dramatic influx of new residents, both Canadian and foreign, into Vancouver « and Toronto. As a result, many analysts now say that a two-tiered society is emerging in Canada— those with houses and those without. And industry observers are divided over where housing prices are headed. Clayton says that

prices will level off over the next three years and then climb with the inflation rate. But others say that first-time home seekers may eventually succeed in finding more affordable housing because the great housing-price boom is about to climax in a round of interest rate increases and a major price drop. Said Andrew Willman, president of Toronto-based financial consultants Noram Capital Management Inc.: “There are some tough times ahead.”

But currently, less tangible forces are also pushing real estate prices up. Some experts on the Toronto housing market predict that property values there will continue to rise indefinitely to so-called world-class levels, equal to those in cities such as London, New York, Tokyo and Hong Kong (page 30). Robert Donat, president of the Toronto real estate mar-

keting firm Trillion Management Corp., said that would add almost another $100,000 to a 750-square-foot Toronto condominium, which now sells for about $168,000.

Scouting: The runaway boom in Toronto prices has also created exaggerated expectations for real estate profits elsewhere in Canada, and speculators are now scouting the country for bargain properties (page 32). As they do, prices inevitably climb. Michael Geller, president of Vancouver development consultants Michael Geller and Associates Ltd., says that many Toronto property

speculators are now turning their attention to Vancouver, which they consider to be still undervalued. And last week, real estate agents in Atlantic Canada were calling for dramatic increases in property prices as development of the Hibernia oilfield was guaranteed by an infusion of federal funds to finance the project.

Canada’s urban housing market is tracking an international trend toward higher and higher prices. In Tokyo, one of the world’s most overheated real estate markets, a 1,200square-foot detached home located within 16 km of the city centre costs an average of $4.9 million. In Paris, a 1,300-square-foot, two-bedroom condominium sells for an average $381,600, up from $152,640 in just five years. Soaring London house prices have jumped by 24 per cent in the past year, pushing the average price of a London condominium to $324,000. And in always-expensive Manhattan, an ordinary two-bedroom condominium or co-op apartment within 20 minutes of midtown by subway ranges from $211,050 to $331,650.

Stunning: Many Canadians who are concerned that those stunning prices will also wash over Canada are still scrambling to get into the real estate market (page 33). And that struggle is forcing many young couples to make difficult sacrifices. Vancouver’s Roger and Laurie Bean are now saving money by renovating their rented home in return for a 9 discount on their $650 2 rent. When that is done, the couple plans to buy and renovate their own run-down home. Said Laurie Bean: “We are going to get the oldest, crummiest house we can get for the least amount of money.” Others, including Jamie Haig, 31, and his wife, Brigitte, 33, owners of a small Vancouver furniture store, simply stopped looking when the only houses they could afford were located an hour from downtown Vancouver. Said Jamie Haig: “We have given up the dream of owning a house in Vancouver. If we want to buy, we will have to move our jobs out of the city.”

The housing crisis is also forcing many first-time buyers to turn to

their parents for help. Ronald Webb, a 25-year-old administrator with the giant computer company, Wang Canada Ltd., and his wife, Adele, 26, purchased a new three-bedroom home in Stroud, 80 km north of Toronto, last September for $105,000. They moved in with her parents to save for their down payment and they say that they plan to remain there until their home is finished in November. For couples in their age group, that situation would have been almost unheard of a mere decade ago. Said Adele Webb: “Living at home again is difficult. Some days are great, some days are driving me nuts.” Similarly, veterinarian John Birch, 26, and his wife, Lisa, 27, a nurse, whose combined yearly income exceeds $65,000, borrowed $20,000 from her father last March to buy a threebedroom semidetached home in Scarborough for $173,500.

Plunged: But waiting for a better deal in a hot market can be disastrous for first-time buyers.

James and Juliet Mason had a chance to purchase a three-bedroom detached house in Scarborough in the summer of 1986 for $98,000. They said that they thought the price was too high and waited. When they finally plunged into the market last October, they were forced to settle for a 12-year-old, threebedroom townhouse in the more distant Toronto suburb of Pickering for $117,500.

At the same time, speculators who buy houses and who do not plan to live in them drive prices up as they flip their purchases in the exploding marketplace (page 29). In Toronto, Martin Atkins, president of Martin Atkins Ltd.

Real Estate, which specializes in the sale and marketing of condominiums, said that between 30 per cent and 50 per cent of Toronto condominium projects are sold to investors who are

buying merely for speculative purposes.

And there is a perception, particularly in Toronto and Vancouver, that wealthy, recently arrived immigrants from Hong Kong are inflating the market. Said Haig: “Chinese buyers are taking over. They are driving up housing prices.” Although there are no available statistics to support such claims, one Vancouver real estate company estimates that a large number of the 1,333 houses sold in the first six months of this year in Vancouver went to Chinese buyers. And real estate agent Betty Sung of Vancouver says that 70 per cent of her clientele is made up of buyers from Hong Kong, who often spend $600,000 on a new home in Vancouver’s best neighborhoods. In Toronto,

realtors estimate that Hong Kong money is flooding into the city at the rate of $1 billion to $2 billion annually and that it is expected to be well above that rate by the end of 1988. Most of that money is moving into the city’s robust residential real estate sector—in particular, condominiums. Said Harvey Kaufman, director of the Toronto real estate firm Norman Hill and Associates Ltd.: “They are buying condos left, right and centre.”

Fractured: Although the surge in housing prices is making existing homeowners wealthy, some analysts say that if it continues, Canadians living in major urban centres will be fractured into two sectors—those who have been locked out of home ownership and must rent, and those who own houses that are doubling in value every five or six years. And financial entrepreneurs in British Columbia have already started to market investment programs that allow senior citizens whose homes are paid for to tap their new wealth (page 31). In British Columbia the Canadian Homelncome Corp., through a oneyear-old program called the Canadian Homelncome Plan, backed by Seaboard Life Insurance Co. of Vancouver, makes loans to retired people against their homes. The corporation will recover any outstanding money from the estate when the house is sold.

Mushroom: For

homeowners who have seen their houses mushroom in value over the past decade, retirement may come earlier and be far more rewarding. As a result, cities including Nelson, B.C., and Kingston, Ont.— where real estate is comparatively cheap —have become retirement havens for people who are selling high-priced homes in “ larger cities and then x buying cheaper resiI dences in less-volatile

markets. Said Nelson Mayor Gerald Rotering: “We have many people selling their houses in Ontario and moving here.” And Dale Ennis, director of Toronto-based Investors Association of Canada, said that because wages are generally running behind the inflation rate, many people are turning to their home equity as a way of financing other investments or purchases.

Most analysts predict that housing prices will continue to move up at historic rates—in Toronto, prices have increased by 11 per cent annually over the past 20 years, and nationally, in major markets, fivefold since 1972. But other industry observers say that real estate prices cannot continue rising without a downturn, as happened in Alberta seven years ago (page 28). Noram’s Willman is now warning his clients against heavy investments in real estate. He added, “My most optimistic view is that over the next five years, real estate in Canada could drop by 50 per cent.”

Ripe: Willman says that the economy, saddled by huge government and consumer debt, cannot continue to expand as it has. He believes that personal and commercial bankruptcy will hit the economy if a major recession occurs, and that, in turn, will bring down property values.

He also argues that Toronto is particularly ripe for a fall because many people have gone deeply into debt to purchase their homes.

And, Willman adds, housing prices have risen so high—and so rapidly—that an investment in real estate must now be considered “highly speculative.”

He also says that housing prices have grown much faster than incomes, which have been running below the rate of inflation. As a result, he said, “people

are sinking deeper and deeper into debt to speculate on something that they cannot afford.”

In fact, Willman says that the high cost of housing may actually aggravate a future recession because so many financial institutions, particularly trust companies, have mortgaged thousands of Canadian homes. If homeowners can no longer support high mortgages, he said, defaults

could drag down some major Canadian financial houses. And other analysts say that by the early 1990s, Canada’s so-called babyboom generation will finally be housed, and, as a result, the demand for housing will lessen and prices will come down. But, unlike their parents, who bought large homes to accommodate large families, they will have smaller families and require less room. As a result, the value of large, costly homes may fall as the new generation rejects them. The Investors Association’s Ennis says that by 1989, people should cut their debts and, especially, retire as much of their mortgage as they can. g With Willman, Ennis ^ adds that a severe 2 round of inflation could drive up interest rates and mortgage costs. He declared, “People may find that they will be walking away from their homes, unable to pay for what they thought was a great investment.” Fantasy: But other housing analysts say that housing prices will repeat historic trends and will continue to be a profitable investment. In the short term, though, they predict a levelling off of prices, followed by increases roughly matching the rate of inflation. Housing analyst Clayton said that prices will only come down sharply if there is a repeat of the 1981 recession. To cut prices dramatically, he said that the economy would have to slump and immigration to Canada’s major urban centres would have to slow— two things that he says he does not foresee happening. But without a dramatic downturn in house prices, the dream of home ownership for millions of Canadians will remain just that— a fantasy.

-TOM FENNELL with DIANE LUCKOW in Vancouver, JOHN DALY and D’ARCY JENISH in Toronto and correspondents’ reports