Toronto Real Estate and Neighbourhoods Blog | Move Smartly

The sales-to-inventory ratio dipped to 23% in September. The general consensus among most industry watchers is that a balanced market occurs when sales-to-inventory levels are between the 15% and 25% range. A ratio above 25% indicates a market that favours sellers and anything below 15% typically favours buyers. This is just the third time since 2000 that we've seen the sales-to-inventory ratio drop below the 25% threshold.

Following the decline in prices last month, most people want to know where prices are heading in Toronto's real estate market. I'll follow up soon with a more detailed analysis of real estate prices for both the GTA and the city of Toronto.

John Pasalis is a sales associate at Prudential Properties Plus in Toronto and a founder of Realosophy. Email John

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Always review purchase agreements with a lawyer

2008-10-06T07:25:03-04:00

Bob Aaron in Legal

A recent decision of the Superior Court of Justice highlights the risks of a buyer failing to close a transaction to buy a new home or condominium from a builder.

Back in March 2003, Siavash Valizadeh signed an agreement to buy a Bay St. condominium, which was to be built as part of the Residences of College Park project. The purchase price was $303,400 and deposits totalling $30,340 were paid.

The agreement set a tentative occupancy date of March 15, 2005, but allowed the developer an extension of up to two years. The document also provided that if the purchaser defaulted, the builder at its option could declare the agreement terminated and forfeit the deposit monies.

The final occupancy date was set for Dec. 8, 2006. By that time, Valizadeh and his wife had moved to Montreal, apparently for employment reasons. He came to Toronto to inspect and take possession of the condominium, but claimed numerous deficiencies made it unfit for occupancy.

By August 2007, the condominium was registered and the builder kept pressing for Valizadeh to complete the final closing.

Over the course of almost a year ending in November 2007, Valizadeh retained three separate real estate lawyers in succession and repeatedly requested extensions of the final closing date. Eventually, the purchaser agreed to pay the builder a $20,000 "reinstatement fee" to keep the deal alive until closing.

When Valizadeh failed to close by Nov. 19, 2007, College Park terminated the transaction and brought legal action to order the agreement at an end, evict the purchaser's tenant, forfeit the deposit money, and to require Valizadeh to pay $150,000 in damages.

The builder's application came before Justice Darla A. Wilson in June.

By this time, Valizadeh had purchased a home in Montreal with a mortgage on it, and as a result was unable to secure a mortgage on the College Park condominium.

Valizadeh's position in court was that he was treated unfairly by the builder's representatives and the agreement was unfair to him.

The judge disagreed. "Valizadeh agreed to purchase a condominium that would not be ready for occupancy for a substantial period of time from the date of the agreement," she wrote. "He chose to enter into the purchase and sale agreement, knowing the occupancy date was not certain.

"He had ample time to review the contents of the agreement with a lawyer after he signed it to familiarize himself with the provisions of it. He must have been aware of his obligations to secure financing for the unit and the change in his personal circumstances is irrelevant. In any event, he was granted numerous extensions by the vendor yet at the end of the day, he was unable to close the transaction because he could not or did not secure the requisite financing."

In ruling against the buyer, the judge wrote that "the (builder's) imposition of an arbitrary `reinstatement fee' of $50,000 reduced to $40,000 then subsequently reduced to $20,000 on a purchaser who was in dire financial straits was inappropriate. It appears that this sum was added on at the whim of the vendor."

The judge ordered that the agreement be terminated, but because the builder could not show any losses, the deposit money (minus court costs) was to be returned to the buyer.

For buyers of new homes and condominiums, there are three lessons to be learned from the case of College Park v. Valizadeh.

The first lesson is that builder purchase agreements should always be reviewed with a real estate lawyer before they become binding.

The second and third lessons are the same as the first. They cannot be repeated often enough.

Bob Aaron is a sole practitioner at the law firm of Aaron & Aaron in Toronto. Bob specializes in the areas of real estate, corporate and commercial law, estates and wills and landlord/tenant law. His Title Page column appears Saturdays in The Toronto Star and weekly on Move Smartly. E-mail bob@aaron.ca

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Toronto Real Estate Prices Drop 6% in September

2008-10-03T23:55:00-04:00

John Pasalis in Toronto Real Estate News

The average price for a home in the city of Toronto dropped 6% in September, the sharpest price decline we've seen in over ten years.

The average sale price dropped to $393,647 from the September 2007 average of $420,182. During the first half of September prices were relatively flat compared to last year which means that the entire decline in September occurred in the last two weeks of the month. I suspect that the negative economic outlook due to the financial turmoil in the US was certainly a factor in this decline. It will be interesting to see how US markets react over the next month as Treasury Secretary Henry Paulson puts the $700B bailout into action.

Prices remained virtually flat in the 905 region and prices in the Greater Toronto area dropped by 3%

Sales in the GTA were down just 6% to 6,424 in September, a moderate decline when compared to the 14% drop in sales year to date.

It's interesting to note the striking difference in sales and price declines between the city of Toronto and the 905 region. Prices dropped 6% in the city of Toronto while remaining flat in the 905 area. Sales declined by just 3% in the 905 area compared to an 11% drop in the city of Toronto. These results are consistent with a trend we've been seeing between these two regions for most of 2008.

The Toronto Real Estate Board has long argued that the city of Toronto land transfer tax would impact real estate sales in the city. I was a little reluctant to accept this assumption at first but the sales data for this year is showing some significant differences between the two regions.

What are your thoughts? Do you think the city of Toronto Land Transfer tax has impacted sales in the city of Toronto? If not, how would you explain the significant difference in sales and prices between the two regions?

You can read TREB's complete press realease here.

Download September's Market Watch report here.

John Pasalis is a sales associate at Prudential Properties Plus in Toronto and a founder of Realosophy. Email John

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Media Roundup - October 3rd, 2008

2008-10-03T11:51:00-04:00

Media Roundup

Real Estate News

Housing market could soften more but not crash: CIBC (Globe and Mail)

Canadian house prices seen easing, not slumping (Reuters)

No trigger for a Canadian house price crash: CIBC economist (CBC)

Housing sales slow as market sags in Canada (Globe and Mail)

Mortgage rates climb as squeeze tightens (Globe and Mail)

What's the best strategy as mortgage rates rise? (Globe and Mail)

Prudent Canada won't experience a U.S.-style housing collapse (Vancouver Sun)

Economist Sees Modest Correction for Canadian Housing Market in Near Future (CEP News)

Canada's Existing Home Sales Continue to Retreat From Record 2007 Levels (CEP News)

High-end home sales slow (Toronto Star)

US Real Estate News

U.S. foreclosure filings soar (Globe and Mail)

U.S. home prices continue to fall (Globe and Mail)

US home prices plunge record 16.3 pct in July -S&P (Reuters)

Economic News

Worried about Ontario's future (Welland Tribune)

Canada Will Feel U.S. Problems, But Won't Suffer as Much, U.S. Investment Guru Says (CEP News)

Urban Planning and Neighbourhoods

TEDCO to be replaced by two new companies (Toronto Business Times)

Toronto mayor wins praise for new development agencies (Globe and Mail)

Regional Canadian Real Estate News

Home-price slide in double digits (Calgary Herald)

Saskatoon real estate: Week in review (September 22-26, 2008) (Saskatoon Online)

Real Estate Sales Higher Than Expected in Edmonton (Edmonton Real Estate Blog)

Sales Have Flushing Sound (Yatter Matters)

House prices drop below 2007 levels (Vancouver Condo Info)

Real Estate Glossary: W (Montreal Real Estate Blog)

So You Want to Be a Landlord

2008-10-01T09:07:31-04:00

John Pasalis in Real Estate Trends

CEP News interviewed me several weeks ago for a story about a home buyer who decided to purchase a house with a rental unit as a way to spend a little more for his home than he qualified for without the rental income.

Income is one of the most important factors banks look at when qualifying you for a mortgage. If you decide to purchase a home with a legal rental unit, lenders will typically take that rental income into account when qualifying you for a mortgage. The additional income usually means that you can spend more on your home.

Even if you’re not looking to spend more on your home, buying a house with a rental unit is a great way to pay down your mortgage faster. The additional income can cut the life of your mortgage in half.

If you are thinking of buying a house with a rental unit, here are a few things you should consider:

Fire Retrofit

You may come across a lot of listings that have the following in their description:

Agent and seller do not warrant the retrofit status of the rental unit

This means that the rental unit probably doesn’t comply with the current fire code, a common problem among homes with rental units. The most common problem with units that don’t comply is that they do not have two exits. If the rental unit you are looking at does not have two exits keep an eye out for places where you might be able to add a second exit. A large window may make for a good second exit for the unit.

Legality

Most houses with rental units in the city of Toronto are not legal. By legal I mean to say that the house is registered as a single family dwelling not a multi-family dwelling. This would happen if the renovations to convert the single family house into a two or three unit house were never approved by the city. As far as the city is concerned the home should not be used as a multi unit dwelling. If the rental unit is not legal your lender may not take the rental income into account when qualifying you for a mortgage.

Research your competition

Invest some time to research comparable rentals in the area. First see what other homeowners in the area are charging for their rental units. You can do this by looking up rentals on Craigslist, myhood.ca or viewit.ca. You also want to see what larger apartment buildings are charging in your area. Do their apartments include heat and hydro? Do they include parking? In what condition are the units in? Are there a lot of vacant units in the area? All of these questions will help you come up with a good estimate for the rental income you might receive should you decide to buy the house.

Be Prepared For a Little Noise

No matter how much soundproofing you put between the units, you’ll never be able to eliminate all of the noise between them. The noise might make you feel like a renter in your own home but the additional income will leave you far better off in the long term.

Update the Unit

You’ll be able to find a better tenant faster if the unit looks clean and well kept. Updates don’t always have to be expensive. You may want to rip out the old carpet and replace it with laminate flooring. Instead of replacing the kitchen you can easily paint the cabinets and replace the hardware to give it a great new look.

Wait for the Right Tenant

Don’t rush to rent your apartment. Once your tenant is living there it can be hard to evict them out should you have problems with them. You can weed out most nightmare tenants with a thorough application process. If you have a good feeling about the applicant and they pass your application process then you’ve probably found the right person.

Be Thorough When Reviewing Applications

All potential tenants should fill out an application. Make sure to follow up with their references which includes their previous landlords. Check their ID and ask them for a current pay stub, not an employment letter. Pay stubs are a little harder to forge. You are checking to see if this potential tenant can actually afford to pay the rent each month. Here are a few red flags to watch out for when reviewing their application:

A tenant who has a history of staying at apartments for under a year is not a good sign.
If the applicant is a student ensure their parent cosigns the lease and have the parent fill out the same application. Go through the same steps with the parent as you would with any otehr applicant. You want to make sure that the parent’s income can support the rent should their child fall short several months.
When you call their current landlord ask them if they have had any issues regarding noise or non-payment of rent. Also ask them if the tenant has caused any damage to the unit or to the building.
Tenants who have caused problems at their current apartment may not be willing to give their current landlord as a reference. I had one such applicant fraudulently give me their friend’s name and phone number under the contact information for their current landlord. The fact that the friend didn’t know the first thing about real estate or property management made it pretty clear to me that the person on the phone was not their current landlord. If you have doubts as to whether or not the person you are talking to is actually the applicant’s current landlord ask them several specific questions to see how they react. Do they own the building or do they work for a property management company? What’s their company name? How long have they worked at or owned the building? How many units are in the building? The average friend may not be ready to answer these kinds of questions.
Do they have a steady job? Do they switch jobs every few months?

You can use Rent Check to check your applicant's credit history.

Here's a copy of a sample residential rental application.

Sign a Lease

Make sure you sign a lease with your tenant. Your lease will clearly outline what your tenant is obligated to pay for the unit and what’s included in the price. Is heat, hydro, cable, internet, parking included? You want to make sure all the details are clear. You can pick up a standard lease from Dye & Durham.

Know the law

Bookmark the Landlord and Tenant Board's website. It has a lot of useful information including answers to many common questions that are of concern to landlords. If you are having problems with your tenant document everything and take action immediately. Don’t let problems drag on for months.

Be a good landlord

Take your tenants concerns seriously and address their work requests in a timely fashion. Work hard to keep your tenants happy. It will pay off in the long run.

John Pasalis is a sales associate at Prudential Properties Plus in Toronto and a founder of Realosophy. Email John

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Brother messes up with email scam

2008-09-29T07:35:37-04:00

Bob Aaron in Legal

Back in 1998, brothers Faheem, Shaun and Narool Samad decided to purchase a house in Toronto for the three of them and their parents to occupy. At the time, they signed an agreement that set out the terms of the ownership, use, occupation and eventual sale of their interests.

Things seemed to be operating smoothly until Shaun became involved in what is known as a "Nigerian letter scam" in 2001. He was duped into thinking that there was unclaimed money in a bank account in Nigeria, which he and any partners he recruited could claim.

Shaun pitched the scheme to his "circle of influence," and eventually raised more than $700,000, which was transferred to the engineers of the scam.

The following year Shaun realized he had been defrauded. He met with a lawyer who advised him he was potentially liable to civil lawsuits by some of the individuals he had recruited into the Nigerian "investment."

Shaun's one-third interest in the house was his only major asset. In order to protect it from being attacked by creditors whose investments he had personally guaranteed, Shaun sold it back to his two brothers in 2003 for $60,000.

After the title transfer, Shaun remained in the house. He continued to pay $500 a month as his share of the property expenses to his brother Faheem, who eventually became the sole owner. He stopped making payments in February 2005, but continued to live in the house.

The relationship between the brothers deteriorated. Eventually, Faheem sued Shaun to evict him from the house and force him to pay "rent" for occupying the house starting in February 2005. Shaun refused to leave, claiming he was still a part owner of the house.

When the case got to court, Shaun claimed that there was a secret, oral agreement that he would still be entitled to a one-third ownership. The $60,000 proceeds, he said, was not for the sale of the home but was instead a loan to put him back on his feet financially, and to pay back some of his creditors in the Nigerian scam.

He testified that the release, which gave up his claims to the house, was a fabrication designed to dupe creditors into thinking that he no longer had any interest in the property.

Justice Todd Archibald presided over a three-day trial in June. After hearing the evidence, the judge wrote in his decision that Shaun was "very sophisticated, intelligent and resourceful," and "crafty and clever," but that his evidence was "not remotely credible or believable."

The judge noted that Shaun "admitted, several times on the stand, that he removed his name from the title and entered into the oral agreement in order to defraud his creditors in the Nigerian scheme."

An important part of the judge's decision dealt with the doctrine of clean hands. That doctrine, Archibald noted, would not allow the court to enforce an oral contract that Shaun "clearly entered into for the purpose of defrauding his creditors."

"In light of the defendant's fraudulent conduct," the judge wrote, Shaun's "fabrication" of the paperwork "in order to defraud his creditors would prevent me from ...(ruling) in his favour...I do, however, conclude that the defendant sold his interest in the house."

The judge ordered Shaun to pay his brother $20,500 in rent and $5,000 in costs. As well, he was ordered to vacate the house.

Three lessons are apparent from the Samad brothers case:

If you're ever involved in a lawsuit, make sure you come to court with clean hands. Courts tend to have no sympathy for litigants who admit fraud.

If an ownership interest in a house is going to be held in trust by a third party, make sure the arrangement is fully documented.

Never get involved in a scheme to obtain money. There is no pot of gold at the end of the email rainbow.

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Move Smartly Blogger on Globe and Mail Live Chat

2008-09-26T09:16:06-04:00

Realosophy Team in Realosophy News

John Pasalis, our resident real estate blogger, will be participating in a live chat on the Globe and Mail website today, Friday September 26th at 1pm. You can submit your questions to the Globe now or join in the chat at 1pm.

John will be speaking to growing concerns about Toronto's real estate market, as well as sharing some insights into recent market developments in Toronto's neighbourhoods.

We hope that you will be able to join John on Friday.

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Media Roundup - September 26th 2008

2008-09-26T07:23:00-04:00

Media Roundup

Real Estate News

There are no shortage of opinions when it comes to Canada's real estate market. Here's a look at the Bulls and the Bears in the news this week.

The Bulls

Why the housing market is not set to melt down (Globe and Mail)

Canadian Real Estate Softening, Not Headed for U.S.-Style Collapse, Economist Says (CEP News)

Harper Says Canada's Housing Industry Not at Risk (Bloomberg)

U.S.-style meltdown won't happen here: Harper (CTV)

The Bears

Merrill Lynch's Wolf Sees Meltdown for Canadian Housing Market (Bloomberg)

Canada's housing bubble could soon burst: Merrill Lynch (Canada.com)

Housing market at risk, economist warns (Globe and Mail)

Don't count out housing crash in Canada: Merrill (Financial Post)

US Real Estate News

Bailout talks in disarray (CNN)

Why Paulson is wrong (FT.com)

Economic News

Canada 'not immune' from U.S. fallout: Carney (Financial Post)

Canada's Economy to Benefit from U.S. Bailout Plan, Says CIBC's Rubin (CEP News)

Canadian Finance Minister Wants U.S. Bailout Package to Succeed (CEP News)

Financial Crisis Puts World Markets at Critical Juncture, BOC Governor Says (CEP News)

Toronto’s Real Estate Market - Bubble or Boom?

2008-09-25T08:55:49-04:00

John Pasalis in Toronto Real Estate News

Toronto’s real estate bubble in the late 1980’s left a grave mark on the city. Those who didn’t lose money in the bubble probably knew someone who did.

We saw the lingering effects of the last bubble in 2002 when after just five years of modest price appreciation in Toronto’s real estate market (2.61% to 6.64% annually) fears of another real estate bubble loomed in the minds of many Toronto home owners and buyers. Six years later the fear of a repeat of the early 1990's real estate crash continues to be on the minds of many Torontonians.

In a previous post (see: Toronto Real Estate Market is balanced: UBC Study) I discussed how several prominent economists are in agreement that Toronto real estate prices are balanced. But many of our readers remain skeptical. They remain convinced that we are in the middle of a real estate bubble similar to the late 1980’s that is just waiting to pop.

Today I’ll highlight some of the key differences between Toronto’s current real estate market and the market in the late 1980’s.

What’s a bubble?

It is characterized by rapid increases in valuations of real property such as housing until they reach unsustainable levels relative to incomes and other economic elements.
Wikipedia

Real estate markets appreciate and depreciate naturally as the economy expands and contracts. As the economy grows, wages rise and unemployment falls we expect to see an increase in the demand for real estate and a corresponding increase in prices. As our economy contracts, wages fall and unemployment rises we expect to see a decrease in demand for real estate along with a decline in prices.

Unlike the gradual appreciation in property values we expect to see during strong economic times, bubbles are characterized by rapid and significant increases in property values.

The following chart shows the annual appreciation in house values in Toronto from 1975 to 2007.

The late 1980’s real estate boom occurred over the span of five years with an average annual appreciation in value of 22%. During this period, houses appreciated from $102,318 in 1984 to $273,698 in 1989, a 167% increase in just five years.

Following this unprecedented growth, prices came crashing down in 1990 and continued to decline for six out of the seven following years.

Looking at the current appreciation in Toronto’s real estate market we can see that that the rise in prices is not nearly as rapid or as sizeable as the late 1980’s. Real estate prices have been on the rise for the past eleven years in Toronto - twelve if we include 2008 - increasing an average of 6% a year. During this period, houses appreciated from $198,150 in 1996 to $376,236 in 2007, a 90% increase in eleven years.

Real Estate Prices and GDP

Canada’s Gross Domestic Product (GDP) is a measure of our country’s national income and output and is one of the key measures used to gauge the strength of our economy. GDP is an important measure when looking at the real estate market because we expect to see a high correlation between GDP and real estate prices. The idea here is that as our country’s economy and income grows, so should real estate prices. The following chart shows Canada’s GDP and Toronto real estate prices from 1974.

You’ll see that real estate prices in Toronto have followed GDP relatively closely, with the exception of the period leading up to and just following the 1980’s real estate bubble. Here real estate prices began to deviate from GDP in 1986 and peaked in 1989. Even though prices fell significantly from 1990 to 1994, they still appeared to be overvalued relative to GDP. By 1996 our economy had finally caught up to real estate prices.

Economic Factors

The crash in Toronto’s real estate market in the early 1990’s was made worse by a struggling Canadian economy.

High inflation in the late 1980’s led the Bank of Canada to raise interest rates as a way to reduce inflationary pressure. Interest rates rose as high as 14% in 1990 before the Bank of Canada started to ease their stand on high interest rates.

High interest rates had a couple of different effects on Toronto’s real estate market. First, the higher costs of bowering made real estate less affordable. By the time the Bank of Canada decided to lower interest rates the downward spiral in our economy and in the real estate market had already started.

High interest rates also made it more expensive for Canadian businesses to operate. In January 1989 the Canada-US free trade agreement was put in place. With interest rates in Canada running higher than in the US, the higher costs of borrowing made it difficult for many Canadian companies to compete with their US competitors. The problem was made worse by a high Canadian dollar which drove up the cost of Canadian exports. The result was a rise in personal and corporate bankruptcies and a rise in Canada’s unemployment rate starting in 1990, just as the real estate bubble burst.

All of these negative economic factors contributed to the slowdown in Toronto’s real estate market in the early 1990’s.

How are things different today?

Unlike the late 1980’s, Toronto’s current real estate market cannot be characterized as a bubble. Bubbles in any industry have rapid increases in value much like the Toronto real estate bubble in the late 1980’s and the tech bubble of the late 1990’s, see below.

Wikipedia

The appreciation in Toronto’s real estate prices has not been rapid. Prices have risen gradually over the span of twelve years.

Furthermore, economists are in agreement that the appreciation in value in Toronto’s real estate market is justified given current economic conditions. The same cannot be said for many west coast Canadian cities.

Will Toronto Real Estate Prices Fall?

Even though Toronto is not experiencing a real estate bubble, that doesn’t mean we’re in the clear.

CIBC Senior Economist Benjamin Tal recently noted that any slowdown in Ontario’s real estate market would not reflect an overvaluation in the market but rather a slowing economy in Ontario that is probably already in a recession. Tal forecasted a 5% drop in real estate prices in Ontario.

Another factor that may impact Toronto’s economy and real estate market is the recent and rapid decline in US Financial Markets. The combined size of the financial institutions that have failed is unprecedented, as is the US Government’s proposed $700B bail out. Nobody really knows what impact, if any, this fall out is going to have on our economy. CIBC Chief Economist Jeff Rubin suggests that Canada’s economy would benefit from the proposed $700B bailout package.

Is Now a Good Time to Buy Real Estate in Toronto?

Potential home buyers should focus on the real issues that may impact Toronto’s real estate market, namely our economy. Is your job or your partner’s job at risk given the slowdown in Ontario’s economy and the collapse in financial markets in the US? If you answered yes you may want to think twice before buying in this market.

If you decide that you want to purchase a house, make sure to buy a house that you can live in for at least five years. You want to give yourself time to build some equity and to recover from a potential short term decline in prices due to our slowing economy.

John Pasalis is a sales associate at Prudential Properties Plus in Toronto and a founder of Realosophy. Email John

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