Bosley Realestate

How The Demand For Low-Rise Housing Is Fueling Toronto Real Estate Prices

October 11th, 2016 | Real Estate

If you're actively engaged in the Toronto real estate market, one soon realizes you don't have to be an economist to determine that the depth and strength of the gully between supply and demand is fundamentally characterizing the incredible upward movement of property values.

However, as the market steams ahead, there's also an interesting subtext at play which is essentially furthering the wedge between supply and demand. What is it? It's the expressed appetite for 'ground-oriented' housing (i.e. detached, semi-detached and townhouses) versus the high-rise condominium. And to complicate matters even further, it appears many of the policies and initiatives that may have been intended to help support affordability in a city where it is eroding quickly are actually having the opposite effect.

This isn't the first time I've written about this issue. I first touched on the relationship between high rise and low rise in a January 2015 blog called - High-Rise Versus Low-Rise: The Toronto Real Estate Price Gap - and discussed the complications that arise when this relationship becomes severely unbalanced. Recently, a rash of reports suggests that this phenomenon is beginning to wield a material impact on the market itself.

 

 

What Buyers Want

If the ratio between supply and demand weren't constrained enough already, all signs are now pointing to a growing preference for ground-oriented housing (i.e. semi-detached and townhouses), which has become yet another factor that is pushing home prices even higher.

Due to a scarcity of land, development has favoured higher density housing, like condominiums, with the province of Ontario backing these initiatives with favourable incentives for builders. This is in part to make “best use" of the available land, to be sensitive to environmental integrity, and to reduce urban sprawl. The hope too is that higher density housing can help put the brakes on a market where affordability is in runaway mode.

The problem is that... it’s not really working.

A recent study from Ryerson University shows that slightly more Millennials (who comprise a major portion of this buying segment) indicate that while they're willing to buy a condominium, the preference for a low-rise option is very close behind, far closer than the available stock would reflect:

• Of the homes sold in Toronto last year, 66 per cent were low rise, compared with only 34 per cent condos.
• Detached home prices rose 12 percent, year-over-year, while condo prices rose a comparatively meager 5 percent.
• Detached and Semi-Detached comprised only 27 per cent of housing starts last year, which marks a sharp drop from 40 per cent in 2009, as condominium starts continue to climb.

What's important to note, is that the most recent Toronto Real Estate Board statistics for the month of September confirm the same problematic trends are yet further exacerbated, where low-rise housing increased in value over 20% this past calendar year, while condominiums increased just over 9%. The gap is becoming substantial between these two housing forms.

 

*Source: TREB Market Watch Report September 2016

 

Buyers are clearly communicating their appetite for low-rise housing, both in surveys (like the above, conducted by Ryerson) and in the voracity of the bidding wars that are now a rite of passage in the quest to secure a freehold residence in the City of Toronto. This fervent desire is serving to elevate the scarcity of available stock and drive prices up... and so the vicious cycle continues!

Here is an article from the Globe and Mail called "Lack Of Supply Driving GTA House Price Surge" that explains the Ryerson study and puts into context the market dynamics.

Complimenting the Globe's report, here is a blog from BrandonDonnelly.com called "Urban Migration, Household Type, And Housing Supply", which has some great stats, charts and observations on this trend.

 

 

The Solution?

A new report from CIBC Capital Markets called “The GTA Housing Market: Is There Logic Behind The Madness?” deconstructs, analyzes and offers insights on some of the factors that are driving the frenzy in the Toronto market, specifically about low interest rates, policy driven densification plans, land shortages and a steely mindset around home ownership from potential homebuyers.

The expectation is that interest rates will remain low in the immediate future. In his research note, Benjamin Tal, Deputy Chief Economist at CIBC World Markets, writes, “the future of housing in the GTA will be shaped by the ability of these factors to adjust.” In other words: the onus falls to policy and public perception to improve affordability.

They suggest that land development policies (i.e. like the Places To Grow Act) is counter-productive to progress in some ways, because of its lack of focus on ground-oriented housing, and the way in which it is so heavily laden with lengthy process and bureaucratic red tape that movement forward is hampered. Tal suggests that a string of government-related development fees are also prohibitive. Fyi, I'll be writing about this in an upcoming blog post.

 

 

In addition to trying to correct these issues, Tal suggests that lending policy for mortgages needs to be more stringent, which can in part help counter the price escalation caused by low interest rates. If low interest rates means that more people can borrow more money to buy more house - which effectively jacks prices up in the cycle - the idea is that if the criteria for borrowing becomes more difficult, it could cool the market while removing high-risk borrowers from the fringe.

As it turns out, the federal government has heeded some of Tal's recommendations. Just last week, the government introduced new policies surrounding mortgage lending that, while aimed at high ratio buyers, will have resounding effects for all Canadian homebuyers. I wrote about this in my post called A New Mortgage Rule For Canadians And How It Will Impact Borrowers.

One of Tal’s points I find interesting is that “home buyer mentalities are a barrier to change”. What he means is that homeownership is viewed not only as a means of shelter, or even as an investment, but as a major (if not essential) accomplishment.  Home ownership is coveted, whereby renting a dwelling is considered less desirable. We’ve touched on what home ownership represents to us in our recent blog called “Maslow’s Hierarchy Of Needs And Toronto Real Estate For Sellers”. (I'll soon be posting our follow-up piece on Maslow's hierarchy of needs as it applies to buyers"- stay tuned!)

Ergo, people are still seeking home ownership versus renting, seemingly at any cost, which is pushing prices up even more. Although there is the perception that the rental market is tight in Toronto, data shows that in actual fact the inclination towards renting did not rise in the way that one would trend-wise, as housing prices are falling beyond the soft limits of affordability for many.  The time may be coming for some to re-set their expectations around housing, which is a common occurrence in major metropolitan centers, like New York and London, for instance.

 

 

Tal says, “GTA’s rental market can be characterized as a twilight zone of home prices that require a higher propensity to rent and a homeownership mentality that is slow to change.”  There has been a slight shift in this attitude, which means that the rental market will get tighter. Tal believes that in addition to more latitude with ground-oriented housing, there needs to be policy focus on supporting purpose-built housing (i.e. more rental units), which will help shift the market even more. Read my exploration of this topic in my blog about the arrival of the luxury rental high rise called "A Shift In Toronto Real Estate Property Investors Should Note".

And here's an article from the Huffington Post called “Get Used To Renting, CIBC Tells Torontonians”, which expands on Tal’s research notes.

Is this frenzied market leaving you spinning and wondering what your next move should be? In addition to decades of experience and a thorough understanding of the economics behind the market, we offer patience, emotional support and smart review of all of your options to make sure you find your best housing match for today and tomorrow too.

Have questions? Please know we're here to help!!

 

~ Steven and the urbaneer team

Steven Fudge, Sales Representative
& The Innovative Urbaneer Team
Bosley Real Estate Ltd., Brokerage - (416) 322-8000

 • We're here to earn your trust, then your business •

 

**Like what you've read? Consider signing up in the box below to receive our FREE monthly e-newsletter on housing, culture and design including our love for unique urban homes and other Toronto real estate!

**Love Canadian Housing? Check out Steve's Student Mentorship site called Houseporn.ca which focuses on architecture, landscape, design, product and real estate in Canada!

Subscribe To Our Free Monthly Newsletter