How the rising loonie affects real estate

As a mortgage broker I have been asked very frequently in the last couple of months how I think the rising loonie (Canadian dollar) that has reached 80 cents vis-a-vis the US dollar (USD) will affect the real estate market in Toronto.

Well, the 10 percent rise in the loonie since May technically means that the economy is robust and that some of that positivity should rub off on real estate and send prices rising if one was only looking at locals buying for personal use.

However, since April property sales and prices in the Toronto region have fallen, mainly due to the 16 point plan implemented by the Ontario government in April to cool sales and prices by clamping down on international buyers and local speculators.

The rise of the loonie, even if it reaches 83.33 cents to the USD in the short term as predicted by the topnotch Paris based firm Day by Day SAS , will have a limited uplifting effect on the real estate market in Toronto.

Already prices in Toronto have toppled by 15% and more from their highs in April of this year. This has not escaped the foreign buyers’ attentions who have to pay a 15% tax if they wish to buy property in the Greater Golden Horseshoe(GGH) area- this means Toronto and  the surrounding southern Ontario region. However, most of these buyers usually have their money in USD accounts, so they will enter the market only when prices drop another 10% so as to bring the Toronto prices in line with what they were in April in USD terms. As this happens negative sentiment will lead the downward spiral to overshoot and prices might fall even further than expected.

Also the Bank of Canada recently raised the prime rate prompting higher variable mortgage rates. Besides this, the Canada 5 year bond yield has gone up by a meteoric 80% rise since May! 5 year fixed mortgages, which are dependent on this 5 year rate have shot up quite substantially as well to the 3% region or higher from 2.5%. This also will affect the property prices and should send them reeling as new buyers grapple with the notion of higher monthly payments.

So this potent combination of the 16 point plan of April, higher interest rates and yields has in the short term tamed the Toronto real estate market that had seen a runaway increase which by March of this year had reached over 37% from last year. Though prices have fallen since, the year on year rise is still in the double digits. The rise of the loonie is overshadowed by the aforementioned developments.

For the time being the sellers’ market in Toronto has turned into a buyers’ market with homes selling at more or less the listing prices without any bidding wars, which is a good sign for local buyers, but they need more respite. Prices need to go down a bit more.

But will this last? The long term outlook – 9 months or more- is that the loonie will ease which will jack up prices as foreign buyers and local speculators jump in. However should interest rates rise, which seems to be the scenario currently, the lower loonie will have to vie with higher interest rates which will act as a headwind and stabilize prices followed by single digit increases rather than the double digit ones of the past two years.

In short, for the time being, the rising (or declining) loonie cannot contend with government regulation nor interest rates and yields. Its power to decide the direction of the real estate market is very limited at this point.








Source: http://www.canadianrealestatemagazine.ca/news/how-the-rising-loonie-affects-real-estate-228975.aspx