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As autumn unfolds, after the summer doldrums that typically ensnare the Toronto real estate market where the heat lures us outside to celebrate summer (and bypass the effort it takes to drive around looking at real estate in sweaty humidity) - what most everyone is wondering is whether the autumn market has more demand than supply, or if we're suffering for an exhaustion move. Although there are many factors that influenced the massive price gains Toronto real estate experienced over the past decade, perhaps the greatest is the wild, ongoing mismatch between supply and demand. Recognizing the pressing need for balance in the market, all three levels of Government took policy interventions to control the market. However, in this post - which is an excerpt from my Summer 2018 Toronto Real Estate Forecast - I'm going to delve deeper into the issue of supply versus demand for Toronto Real Estate.
Is Policy Enough To Reign In The Market?
No question, the market pulled back substantially over the last year after our Governments intervened with Ontario's Fair Housing Plan and Canada’s New Mortgage Stress Test. To give you a sense of the impact of the mortgage stress test, before its introduction one typically could borrow 7 times your income as a mortgage. Now it's 5 times your income regardless whether you have 5% or 50% down. This is a drastic change, considering up until February 1st, 2018 CIBC was offering foreign buyers and international students an uninsured mortgage without income verification provided their down payment was more than 35% of the purchase price. So while these new policy measures have done much to limit the borrowing power of all property buyers and owners - while Canada Revenue Agency Implemented New Reporting Rules To Discourage Fraudulent Real Estate Activity - and a 15% Foreign Buyer Tax was implemented to stem the flood of global capital - home prices are still high, which doesn’t help the affordability problem.
That’s in part because - as I mentioned in Part One of my forecast - the government interventions only addressed the demand side of the equation. To truly bring balance to the Toronto real estate market, one needs a recalibration between supply and demand, whereas the measures last year really only addressed the demand side of the equation. As long as there continues to be a shortage of supply in the GTA, it will continue to put pressure on prices, pretty much assuring the neighbourhoods located within the original City of Toronto ongoing value escalations.
A recent report from CMHC, “Gap Between Housing Supply And Demand Largest In Toronto And Vancouver: CMHC” outlines the persistence of supply problems in Toronto. This story from the Globe and Mail, “Ontario Needs An Evidence-Based Strategy To Expand Housing Supply” takes a cautious approach to the market slowdown, suggesting that it is a dangerous assumption to think that the Government measures have gone far enough to stabilize the market. Rather, the issue of supply based on data around the economic drivers that funnel demand needs to be addressed.
A common theme for noted CIBC economist Benjamin Tal has always been that in order to truly introduce stability to the market, you need a comprehensive solution that addresses both supply and demand. In this article, he cites stringent development policy as one of the greatest pressures on affordability in Toronto. He says, “We’re using demand tools to fight supply issues. “It is lagging way behind.” The solution to the supply crunch may reside with Municipal and Provincial Governments, and it isn’t about taxation or lending policy; rather it is about being proactive with policy combined with the easing up of fees associated with building to promote the introduction of new supply into the marketplace.
Development Costs (And How They Discourage New Supply and Create Higher Consumer Costs)
It’s the economic chain of events. The cost of new development is prohibitive in Toronto. The bureaucratic red tape notwithstanding, the sheer cost of the fees on development and construction material are substantial. These costs are passed on to the consumer, of course. But these costs have risen dramatically since 2013. Here's my own post called The Pitfalls Of Permit Fees And Toronto Real Estate.
A new study from CD Howe outlines the barriers that preclude building supply, mainly the widening gap of the cost of building new housing and its market price. The study looked at several pricey, supply-constrained cities in Canada and found that fees and extra costs added 20 percent to the cost of housing in the Greater Toronto Area (or $70,000). These extra costs come in the form of property taxes, utility costs and building permits. In fact, from 2007 to 2016 buyers in Canada’s highest priced cities (among them Toronto) paid an extra $229 000 due to development fees, while the prices of home doubled during that same time period.
Courtesy of BlogTO: 'Toronto Rank One Of The Least Affordable Cities In The World'
The study clearly demonstrates the problem, but the report authors clearly delineate a solution: “While land-use policies can generate important benefits, most studies find that the cost of higher housing prices imposed by housing regulation typically outweighs the benefits. Municipalities and provinces across Canada can take steps to reduce the economic cost of restrictions on new building... Municipal governments and provinces should enable more housing construction by taking steps such as easing restrictions on developing agricultural land, simplifying and updating zoning bylaws, and reducing development charges”. The study’s authors draw an interesting parallel as well. Homebuyers usually can’t pay for an entire home purchase in one payment, which is why they get mortgages and pay them down over the tenure of homeownership. The municipalities are requiring builders to pay towards municipal infrastructure immediately, rather than spreading it over time. These costs are then directly passed on to the consumer, as builders pay their municipal bills.
A new study from BILD, shows that government charges are far outpacing inflation, which contributes directly to an affordability crisis. Government fees on a new, single-detached home in the Greater Toronto Area was approximately $186,300, or 22 per cent of the price of an average home; for new condos the costs tallied to $121,300, or about 23.6 per cent of the cost of a new unit. (And it may get even more costly, as The Globe And Mail wrote about in "Planned Hikes In Development Charges Rile Toronto-Area Condo Industry").
The study also shows that prices peak during times when developers are up against intensification and densification target when trying to get building permits. There is also a disconnect between the public and the Government in terms of creating supply. Many studies and anecdotal evidence suggest that homebuyers still very much want detached housing with backyards (“Toronto-Area Millennials Want Their Own Backyards, Report Says”), but urban planners are favouring higher density housing. While the market in theory receives supply, it can create an additional dimension of supply/demand issues, and can create additional price pressure on some market segments. I’ve talked about this in the past in High-Rise/Low-Rise: The Toronto Real Estate Price Gap.
There's also a barrier between developers and the City. While one of the most efficient ways to solve Toronto's supply issue would be to increase the number of low-rise apartment buildings in existing residential areas, city planners and councillors are often opposed to this and what it will mean for the fabric of a neighbourhood - particularly aesthetically speaking. In response, Toronto-based architecture firm Batay-Csorba Architects (BCA) proposed a solution, which was submitted to the Globe and Mail ("How To Remake Toronto’s Old Neighbourhoods: Low But Dense"). The plans and renderings are for low-rise, multi-unit apartments that will better "maintain the visual rhythm and scale of the street." Where there was once a single lot with two semi-detached single-family properties, BCA created a hypothetical (and stunning!) multi-unit property that could house 5 families, with private courtyards and terraces! The designs were picked up and praised by other media outlets, including blogTO: "This Could Be Toronto's Home Of The Future".
Lessons Learned from Vancouver
We can learn a lot from pricey Vancouver, where local and Provincial Governments have stepped in to assist with affordability, slightly before Toronto. The benefit is that we can examine the success and failures of their policies, because they face similar problems with supply and high housing prices. While the BC Government did include an affordable housing plan as part of their intent to assist with the affordability crisis in their 2018 budget, what is actually happening in the marketplace is that Government-imposed fees are crushingly expensive. Homebuyers can expect to shell out on average $250,000 for taxes and housing related fees (property tax, vacant home tax, building permit fee, development permit fee, speculation tax, property transfer tax, and GST, among others) when purchasing a new one-bedroom plus den condo. In relation to housing prices in Vancouver, that’s 26 per cent of the average purchase price of that condo. Click here to read “Housing Fees And Taxes Account For 26 Per Cent Of New Vancouver Condo Costs: Study”. The author of the study referred to in this article says that “Instead of implementing more taxes… the government should focus on creating more supply to meet demand”.
Courtesy of Global News: 'Canadian Housing Price Trend ‘Very Similar’ To U.S. Just Before The Crash: National Bank'
Toronto, like Vancouver, is in the same boat with prohibitive building costs and stringent development policies. Check out “High Housing Prices Blight Lives – And Widen The Inequality Gap” and “Mayors Are Ignoring The One Easy Fix That Can Cool Runaway Housing Markets”. In my opinion, this is the crux of the issue. Toronto lacks a sufficient supply of housing - in particular product for the middle segment of buyers who are seeking to climb the property ladder to raise their kids for the next ten to twenty years. While Buyers may covet the antiquated Canadian Dream of owning a detached housing, which has propelled many to argue the protected greenfields surrounding the GTA should be rezoned for development, I don't believe Buyers truly desire ubiquitous detached stick frame boxes defaced with plastic gingerbread ornamentation situated in the farthest fringes of auto-reliant placelessness. Ideally they want a detached house in a convenient amenity-rich urban village setting in proximity to their work but, given its cost prohibitive, they'll take a higher-density human-scale dwellings with the least time consuming commute. While the detached house is certainly coveted as a status marker, it may only be for our lack of well-constructed soundproof alternatives. I think our city Government needs to change our existing zoning, development approvals processes, and permit fees to allow more as-of-right higher density multi-unit low and midrise housing in our existing city neighbourhoods. Much like Vancouver, Toronto lacks urban planning policies that allow for a variety of residential product. In fact, Vancouver approved laneway housing, while Toronto is still struggling with silly obstacles. I mean,seriously? We need a richer array of product, including infill townhouse complexes on existing single family lots. This Vancouver article called "Higher Taxes No Solution To Vancouver's Real Estate Crunch, Says Study" shares insights which could well apply to Toronto. I applaud James Tansey, an associate professor at UBC's Centre For Social Innovation & Impact Investing, who said "You can house six families on a single-family lot if it is done well and not impact the character (of the streetscape) - and bring more social life to the community.
Recently Toronto has proposed a creative solution to the scarcity of land for new housing: laneway development. Click here to read " Policy On Laneway Housing In Toronto Clears Important Hurdle". If this does end up going through, there will be new supply added to the market, which is much-needed. However, like so many things around supply and demand, it isn't quite as straightforward as that. Again, just look to Vancouver who is also proposing a similar program. This story from the Globe and Mail "Developers Say Vancouver’s Housing Density Plan Won’t Address The ‘Missing Middle" discusses the proposal of a new program in Vancouver intended to make creative use of existing detached housing, relatively low-density neighbourhoods to acheive their target of adding 10,000 units of additional ground-level housing units. This means building in laneways, and developing low-rise multi-unit buildings and townhouses. The idea, of course, is that introducing more supply to the market will alleviate price pressure. However, critics of this program suggest that simply adding supply won't do anything to actually help people afford these housing prices, because it only addresses the gap between supply and demand; there is no help to bridge the gap between average income in Vancouver and current housing prices, which really is the measure of affordability. As this article states, the median income in Vancouver is just over $61,000 a year. That means that the average household would need 11 years worth of income just to afford a home. With sky-high development costs in this proposed development program, development is going to cost close to $500,000 per unit. They aren't buying up land, so this is strictly about development fees. So, really- these homes aren't affordable- they are more affordable than others, yes- but still out of reach for most. Like other pricey cities, Vancouver is shutting out the "middle" segment of Buyers.
So how long will it take to see new government policies being introduced that can be effectively implemented to create enough rental and market housing to close the gap between supply and demand? My estimate is ten to twenty years at the earliest. Until then, the housing which offers the trifecta of a desirable location, on trend style and condition, and intelligently designed space plans, will be purchased by the Buyers with the most money. And the shelter which is most lacking will be affordable at best to the middle class, providing they can scrape enough of a down payment to get onto the property ladder. Whereas just two generations ago the working class earned a living wage sufficient to buy a modest residence in Toronto, the gap between incomes and property prices today makes it economically impossible. Unfortunately, housing in Toronto is no longer a right, but for the privileged segment who can afford it. This is part of the issue, for when government interventions restrict mortgage borrowing and increase taxes, they're most detrimental to those who need housing the most. The entrepreneurs, consultants and self-employed with lower or irregular incomes; the cash-poor equity-rich investors; and the middle class who make good 'but not great' incomes are negatively affected, while those people with professional occupations, substantial savings and large down payments are afforded greater opportunity to thrive and leverage any downturn ripple effects of the intervention. As I'm witnessing in the neighbourhood wrapping the City Centre's Financial District, is that the 'well to do' are competing in bidding wars for the best residences in Triple AAA locations while the marginalized middle income owners in the suburbs had to slash ten to twenty per cent off their asking prices this past year. It looks like the market is recovering across the GTA, but that doesn't take the sting out of inadequate government policies that hurt the people who need housing the most, whether that be rental or ownership opportunities. I shared this in a recent mini-rant on how our 3 levels of government both lure us into homeownership as a means to placate a population thru debt serfdom while soaking us for huge sums of money in Why Does Homeownership Remain A Priority For Canadians, Despite The High Costs?
With affordability continuing to be a challenge in Toronto, there is a sense that some of these Government policies are a start towards levying change into the market in time, but more work needs to be done to assist homebuyers today. Similarly, solutions need to be more comprehensive in order to implement real change, not just single-issue strategies.
If you enjoyed this post, here's some other Urbaneer blogs you may enjoy:
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