Canada's Condominium Magazine
Toronto’s housing market is not a normally functioning market. Legislation-driven land constraints suggest that we are in a classic case of market failure. The invisible hand, that enigmatic force mentioned by enlightenment economist Adam Smith, whereby self-interest is somehow transformed into public good, will not work in Toronto. These are the arresting opening thoughts in a new analysis by the always interesting Benjamin Tal at CIBC. Never mind wasting time speculating about how “bubbly” the Toronto housing market is. Instead, find the optimal policy mix to prevent a “full-blown affordability crisis.” And these must be GTA-specific policies, not blunt instrument national ones.
Could one of these policies be a foreign buyers tax, to raise that subject once more? Tal says it will slow activity “at the margin,” but should not be seen as the ultimate solution.
What is really needed is to “drastically change” the role of rental activity in the city’s housing mix. People need to rent more, he argues, and the market needs to realign to make that possible. Crucial to that is the need for more purpose-built rental units, and rising rents are beginning to make that more appealing to builders. With some incentives thrown in by municipalities, purpose-built rental “could be the difference between an affordable and an unaffordable GTA housing market.”
As many will have seen in a recent CBC Toronto news series on renting in this city, many tenants, especially those who have chosen to rent condos, have been subjected to massive and seemingly arbitrary rent hikes of hundreds of dollars a month by their landlords. This has left a lot of renters feeling vulnerable and helpless, but it doesn’t need to be that way, according to Tal.
It’s becoming clear that the condo market can no longer be the only option available to renters. The new wave of renters will need the stability of long-term renting and that’s where purpose-built developments enter the picture.
Condo prices took off in 2016, Tal shows, rising by 16 per cent in the fourth quarter of the year. The reason was land prices. Not only do low-rise builders have difficulty finding lots on which to build in the city, but high-rise developers do as well. Many ranked the difficulty at eight out of ten, Tal says. As a result, the city is actually under-supplied with condos. Surging demand, which led to 27,217 new condo sales in the GTA last year, is not being met with a similar increase in supply. New launches of condo projects were down 6 per cent last year, and inventories fell by half to a ten-year low. Tal believes the 905 market will overtake Toronto in 2017 in terms of condo sales, because of lack of suitable lots in the city.
What should Toronto be doing? Shelving proposed amendments to the intensification and density targets is one thing, for Tal believes that these policies are driving home price inflation. As for foreign buyers, there are not enough of them in Toronto that taxing them would be a “game changer.”
The real solution, the source of real and lasting change, is for municipalities to rethink the role of rental in the mix. He sees the fact that more than half of all leases signed in 2016 were for apartments with rents higher than the average ($2.75 per square foot) as a sign that young families are more accepting of the rental option.
The condo market, he argues, can no longer be the only option available to renters, who want the long-term stability that only purpose-built apartments can provide. A sign of this shift can be seen in the numbers: two years ago there were 2,000 rental apartments under construction, while today there are more than 5,000. As of the fourth quarter of 2016, there were 28,000 purpose-built apartments under construction in Toronto, Tal says.
Rent on purpose-built apartments can easily go above $3.00 per square foot, which makes them attractive to publicly traded companies and to institutional investors, according to Tal. If municipalities get involved, as developers want them to, by expediting approvals and taking other pro-development measures, there will be even more rental apartments built, something we need, according to Tal, to avert that full-blown affordability crisis. The market will eventually be tested, he says, and interest rates will eventually rise. What we do between now and then will determine how well the region faces the test.