The headlines are hard to avoid, and by now, the words “Toronto housing crisis” come across as a mere statement of fact, rather than any sort of prognostication. . . .
Unfortunately, while the problem is easy to identify, diagnosing its roots proves dauntingly complex. Though the headlines are unfailingly declarative in their proclamations of causality, the seemingly eclectic disparities between them belie simple conclusions: It’s definitely foreign buyers, but if not, then it’s undoubtedly outdated planning policy. Or maybe interest rates? What about the Greenbelt? Speculation or globalization? Investors or NIMBYs? Is it a bubble, or a realistic reflection of economic clustering across alpha global cities? Whatever it is, it’s certainly overwhelming.
Past the cacophonous discourse, however, the numerous theories explaining Toronto’s crisis of affordability are predicated on a deceptively simple economic model of price determination: supply and demand. . . .
With high rates of immigration, an innovative and flexible economy, and a world-beating livability index, there’s little argument that Canada’s financial capital is—comparatively speaking – in demand, since new housing supply is quickly being absorbed. . . .
Geography and regulation means that supply is inherently scarce and at least somewhat inelastic, while the economics of speculation and the movement of global capital mean that demand for residential property in major cities is rarely an entirely accurate reflection of Toronto-based buyers’ incomes. Land use restrictions, planning regulations, NIMBYism, fiscal policy, and geographic boundaries, can limit the number of units brought to market, driving up prices through lack of supply. Similarly, speculative investment, easy credit, and the safekeeping of foreign capital in relatively stable countries like Canada means that demand can be driven up by factors other than local income and purchasing power, creating unrealistically high prices and distorting the market.
The myriad theories and narratives listed above all converge on these two factors, and the sum of our seemingly unnavigable public discourse is best understood through the lenses of supply-side and demand-side economics:
The Supply Side
In the last year alone, the Canadian Real Estate Association (CREA) reports that the average GTA home price has risen by over 23%. In a regional market already gripped by an affordability crisis, the rise in prices is startling. 2016 also saw a staggering 29,186 new high-rise units and a total of 47,161 new homes sold in the GTA, breaking the previous record that was just set in 2015. Alongside the record sales numbers, it takes little more than a walk through any number of Toronto neighbourhoods to find evidence of a city rapidly densified by new development.
According to supply-side critics, it’s not enough. Echoed by voices throughout the commercial real estate and development industries, supply-side arguments generally point to record shortages of new listings, and the market’s extremely fast absorption of new housing. As Building Industry and Land Development Association (BILD) President Bryan Tuckey recently put it, “[w]e have a shortage of housing supply in the GTA that is approaching crisis levels.”
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A shortage of supply has also been cited by the Toronto Real Estate Board (TREB). According to TREB’s January 2017 figures, a strong increase in residential sales compared to January of 2016 was met with a notable decrease in the volume of listings. Compared to the previous January, the number of listings was approximately halved. For TREB’s Director of Market Analysis Jason Mercer, “[t]hat statistic, on its own, tells us that there is a very serious supply problem in the GTA.” As quoted in the January 2017 report, Mercer adds that “[t]he result will be very strong price growth for all home types again this year.”
While the general argument that it’s too difficult for developers to deliver new homes to the market is practically universal among supply-side critics, the culprits—and preferred solutions—for Toronto and the GTA’s housing shortage sometimes vary.
For starters, geographic and natural boundaries mean that the supply of land is inherently limited. According to some critics, the mountains and water that surround cities like San Francisco and Vancouver play an important role in hampering new supply and keeping prices very high. In Toronto’s case, the major boundaries of geography and nature are Lake Ontario and the Greenbelt. And while all but the most brazen of developers—and Mayoral hopefuls—see the lake as an inherent geographic limit, the same is not true for the Greenbelt.
Enacted by the Province in 2005, the Greenbelt created a protected ring of land where urban development is not permitted. . . .
At face value, the Greenbelt poses an obvious limitation to new housing supply. Limiting greenfield development—which is cheaper and in many cases more easily profitable than urban infill—can therefore impact affordability. According to some critics—like Ryerson’s David Amborski and economist Russell Matthews—the GTA’s relatively aggressive ‘smart growth’ policies constitute over-regulation. As Amborski pointed out in a debate last Fall, the most drastic price inflation tends to come in metropolitan areas where strict land use restrictions have been imposed. (In the Toronto region, meanwhile, the regions surrounding the Greenbelt are experiencing aggressive “leapfrog” greenfield development).
At heart, it’s a fairly straight-forward free market argument. Regulation controls the market, and de-regulation sets if free, ostensibly allowing a more natural equilibrium between supply and demand. . . .
In Toronto, there are many different approaches to development, but the industry as a whole is still driven more by basic economic incentives than long-term sustainability and good planning principles. If developers could continue to make money building sprawling lots of McMansions throughout the Oak Ridges Moraine, many of them would. On balance, the fact that ground-related housing starts in the 905 are declining may be a very good thing.
However, there’s much more to supply-side arguments than the Greenbelt. Many—if not most—supply-side critics continue to support Greenbelt legislation, . . .
The Demand Side
In contrast to the supply-side arguments, there’s also good reason to believe that inflated demand is the primary cause of Toronto’s housing woes. According to BMO economist Robert Kavcic, breaking down the recent CREA pricing data is a good starting point for understanding the market’s distortion. While the value of detached GTA houses increased by 26%, condos appreciated by a staggering 19%. “The latter is pretty good evidence that supply-side fundamentals have been left in the dust,” Kavcic argues, as quoted by the CBC.
From the supply side, the price appreciation of condominiums is certainly surprising. For detached homes, the sharp increase in prices is much more understandable, since we aren’t producing new land. Particularly in the 416, the supply of single-family homes is already effectively capped, notwithstanding new laneway housing. Since it’s impossible to increase the supply of Forest Hill or Kingsway homes, it makes sense that the existing stock would rise relatively sharply—albeit probably quite not at the rate of 23% per year—in price and become unaffordable to all but the wealthiest buyers.
Indeed, it’s a trend that’s regularly played out across leading global cities. Just as very few families can afford a three-storey brownstone in Park Slope, Brooklyn, or a row house in Central London, the expectation of continued affordability in Toronto’s detached market is unrealistic. Regardless of whether the market is currently overheated, the long-term trajectory of Toronto’s growth will make higher density housing the norm.
By contrast, the continuing infusion of condominium supply makes the 19% price growth—not far behind the appreciation of ground-related homes—much more surprising. . . .
Increasingly, new housing market analyses are coming to diagnose the GTA’S recent price growth as unsustainable, with the latest quarterly report by TD Bank echoing much of the BMO viewpoint expressed by Kavcic. Among the banks, the view that Toronto’s housing market has entered ‘bubble’ territory is becoming orthodox.
Despite the Federal Government’s freshly increased mortgage insurance premiums—which come into effect today—historically low interest rates continue to make borrowing attractive. . . .
The issue of foreign buyers adds another layer of complexity to the equation. Prior to Vancouver’s contentious and highly publicized introduction of a 15% foreign purchaser tax in August of 2016, the debate about the influence—and preponderance—of international investment reached a fever pitch.
Proponents of the tax argued that it would calm a speculative and overheated market distorted by the stashing of global capital in the supposed safe haven of Canadian real estate. Diagnosing a similar phenomenon in London (U.K.), the Guardian’s architecture and design critic Oliver Wainwright memorably described London’s “silos of luxury safe-deposit boxes in the sky.” Was the same thing happening in Vancouver?
Meanwhile, opponents of the tax cited closeted xenophobia, while also arguing that the relatively unclear definition of ‘foreign buyer’ could impact purchasers who did not wish to merely store their wealth. With the safety, livability, openness, and strong universities in Toronto and Vancouver often cited as reasons for foreign interest, not all buyers were necessarily in it for the safe-deposit box. Complicating matters further, the exact proportion of foreign investment in both the Toronto and Vancouver markets also remains somewhat unclear.
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