Experts have been throwing out recommendations left, right, and center for ways to prevent Toronto’s housing market from becoming the next Vancouver. In a CIBC report released on Monday called “The GTA Housing Market: Is There Logic Behind the Madness?” CIBC economist Benjamin Tal and researcher Katherine Judge take a detailed look at the Greater Toronto Area (GTA) housing market and determine the factors that will seal its fate.
Low mortgage interest rates contribute to rising home prices, but rates alone don’t tell the whole story. The main impact of the current historically low rates, Tal writes, is that they prevent the “behavioral adjustment” process that usually takes place when home prices rise so quickly. In other words, low interest rates cause an “affordability mirage” where borrowers think that they can afford more than their income would dictate over the life of the loan.
“To the naked eye, things are still okay. Debt-service ratios are not climbing, mortgage delinquency rates are near record low and older Torontonians, in fact, have accelerated their debt payments. But behind the scenes, we are starting to see some cracks,” Tal writes. “For new mortgages, amortization periods are starting to rise, mortgage qualification criteria are becoming a bit more flexible, and there is some evidence of increased borrowing to finance down payments. A lot of this activity is happening in a less or non-regulated space. This has resulted in a transfer of risk from the regulated segment of the market to the unregulated segment.”
This less regulated segment of the market that they speak of is private lending, and Tal claims that information obtained from the mortgage registry for the province of Ontario shows that the private lending industry has increased its share of the mortgage market to 6 per cent, which means that more people who may not qualify for a mortgage from traditional lenders are still finding ways to secure financing to buy a home, thereby putting the housing market at risk. The report lays out the recommendation that mortgage lending standards need to be tightened even further than what the government has already done.
“For the country as a whole, minimum down payments should rise to more than 10% for properties valued between $500k and $1 million. The qualification rate on the five-year fixed rate loan (accounting for more than 30% of originations) should be raised to be closer to the qualification rates of mortgages with shorter terms. Debt service qualification ratios should be more enforceable and regulators should monitor developments in the subprime and alternative lending space more closely.” They are careful to point out, though, that these measures would only help at the margins, and not even tighter lending regulations would be a “game changer” for the GTA. The report also states that these regulations should be applied to the country as a whole, a measure that many people – experts and borrowers alike – feel would do a disservice to home buyers in other housing markets in Canada, which are much more balanced and affordable.
With fewer people able to buy homes, more people will rent, something that Tal thinks needs to be encouraged. If incentives are in place for people to rent, the thinking goes, demand for homes will be quelled and home prices will fall to more affordable levels. In fact, the rental market may already be changing to support this, with turnover rates on a decline. Current levels are “at 5.5%—notably below the 7% seen in 2012. These two important developments (more expensive rentals and reduced turnover rate) might be early signs of a market starting to adjust to the price reality of the GTA, with renters taking a longer-term view not seen before in the region.”
They recommend that purpose-built properties “should play an increasingly important role in advancing the adjustment process the market desperately needs,” and that municipalities should provide tax incentives for those developments. This would not only increase supply and lower rents, but ensure the flexibility of the rental supply. Tal suggests that “municipalities should also incentivize purpose-built projects to allocate a larger share to larger units, to accommodate young families and the growing share of seniors in the rental market.”
Land regulation has been one of the issues that’s been criticized the most when it comes to addressing housing supply, most notably Ontario’s Greenbelt Plan and the Places to Grow Act, both of which govern the types of development that’s allowed to take place in the 2 million acres of land surrounding the GTA, as well as a guide for land development, resource management, the investment of public dollars, and policy – including density and intensification targets. Land owners are in no rush to sell, either, since the value of the land increases as the housing situation gets more dire. And even when land is sold for development, Tal explains that “bureaucracy” is a contributing factor to why it takes so long for land to even be able to be developed.
“At any point in time, municipalities are required to maintain a minimum three-year supply of serviced and readily serviceable land. The reality is that most GTA municipalities are not monitoring the adequacy of their short-term supply. It is reasonable to assume that most fall short of this requirement. Currently, it is estimated that for ground-oriented projects it takes more than five years to complete the land acquisition and development process and in many cases even longer.”
Given that the Ontario government released plans to expand the Greenbelt itself earlier this year and that the Places to Grow Plan is focused on sustainability, there’s little chance of being able to build into the area anytime soon, which is why the aforementioned changes to the rental market and lending criteria are seen as being more necessary.
And what to do about the foreign buyer problem? In Toronto, foreign buyers aren’t thought to be as much of a contributing factor to fast-rising home prices as they have been in Vancouver, but since Vancouver implemented an additional 15 per cent land transfer tax on all foreign buyers, some people are speculating that investors might look further afield to Toronto. Tal urges the government nip foreign investment in Toronto in the bud as opposed to waiting to see how it will continue to affect the market. In a report from May of this year, Tal suggested a flipping tax on foreign buyers, and an empty unit tax is also suggested. Another idea is to limit foreign buyers to new property as opposed to resale, similar to one of the existing regulations in Australia.
Of all of these recommendations, those pertaining to the rental market are at the top of the list.
“By far, the most effective demand adjustment must come from the rental market,” Tal writes. “The current propensity to rent in the GTA is still too low given the affordability issue facing the region. Recent figures suggest that we might be in the early stages of change on that front as we expect the propensity to rent to rise in the coming years. That added rental demand should be accommodated increasingly by the purpose-built segment of the market. That adjustment is crucial for the future health of the GTA’s housing market. With interest rates unlikely to rise materially anytime soon, there is enough time for that adjustment to unfold. In fact, developments in the rental market in the coming years will determine the nature and severity of the adjustment in the region’s housing market when it is eventually tested.”

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