Preventing a full-blown housing-affordability crisis in the Greater Toronto Area will require GTA-specific policies aimed at increasing the supply of purpose-built rental units, finds a new report by CIBC Capital Markets.
“The GTA housing market is fast approaching a full-blown affordability crisis,” says Benjamin Tal, Deputy Chief Economist, CIBC, who authored the report, GTA Housing – Rent Must be Part of the Solution. “But, its trajectory is not written stone. It’s largely a function of policy. Ottawa’s ability to help here is limited since national policies are too blunt to deal effectively with the GTA market. What is needed are GTA-specific policies.”
High demand, low supply and rising land prices continue to fuel the GTA housing market, and 2016 marked a significant year with the average home price rising 17.3 per cent, the strongest annual increase since the 1980s, the report says.
Condo prices jumped 16 per cent year-over-year in the fourth quarter – the largest gain since 2010 and the rapid acceleration in activity in late 2007 ahead of the introduction of Toronto’s land transfer tax. The trigger appears to be the same as the one that led to the rapid rise in the price of low-rise units – land prices, the report says. “Land for high-rise projects in the GTA is getting scarcer and scarcer,” says Mr. Tal.
He points out that specific policies are necessary because the GTA is not a normally-functioning housing market due to legislation-driven land constraints. Imposing a foreign buyer tax will help slow activity at the margin, but should not be seen as the ultimate solution, he adds.
“A much more effective and long-lasting solution would be to dramatically change the role of rental activity in the city’s housing mix,” he says. “Simply put, the propensity to rent in the GTA must rise, and the market should realign to increase the supply of rental units. Crucial here is the role of purpose-built apartment supply. With some incentives from municipalities, purpose-built rentals could be the difference between an affordable and an unaffordable GTA housing market.”
Mr. Tal says that from conversations with developers it’s clear that expediting the approval process for purpose-built projects can make a significant difference in the final decision. Municipalities can demand in return, increased inclusion ratios. Other ways to promote purpose-built activity is to offer higher intensification rates for purpose-built developments, cut the HST charged on the development, as well as eliminate or reduce development charges, as today the same charge is imposed on both condo and purpose-built projects.
The GTA’s rental market has never been hotter, says Mr. Tal, with average rent up 12 per cent in 2016. As well, the number of leases fell 9 per cent in 2016, reflecting lower supply, partially due to a lower turnover rate. “More renters are staying put as the cost of venturing back out into the open market has risen notably,” Mr. Tal says.
Adding to the price pressure is the growing share of leases signed in the more expensive segment of the rental market. In 2016, no less than 52 per cent of all leases were above the $2.75 per square foot average threshold, up from just 25 per cent in 2015.
“That, along with reduced turnover rates can be seen as signs of increased acceptance of the rental option by young families,” Mr. Tal says. “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.
“The low-hanging fruit (mostly parking lots) is no longer available and builders have to be more creative in finding suitable development lots.”
Contrary to popular perception, the condo market is actually undersupplied, the report says. While 2016 was a record year for condo sales with more than 27,000 new units sold, new condo launches fell 6 per cent and unsold inventories fell 50 per cent to a 10-year low, the report says. Not only that, Mr. Tal notes that the lack of supply in the 416 market is leading to more activity in the 905 market, which is likely to overtake the Toronto market in 2017 for condo sales.
“There is some logic to the madness but we still find it hard to fully explain the surge in prices in 2016 just based on those fundamentals,” Mr. Tal says. “There must be a notable increase in speculative flipping activity contributing to the trend. And that makes it even more urgent for policy makers to intervene.
“The market will eventually be tested when interest rates rise and/or the economy faces its next recession,” he says. “What we do between now and then will determine the ability of the region to face that test. Increased rental propensity and supply of purpose-built apartments must be part of the solution.”
