The root causes of the home prices in Toronto are explored in the first bi-annual report of 2017 released by Fortress Real Developments. The report discusses in depth some reasons for Toronto’s high prices, including demand, urban containment policies, and the impacts of intervention and investment.

Demand not coming from foreign buyers

People love a scapegoat, and foreign buyers filled that role in 2016. There was a lot of support for the foreign buyer tax in Vancouver and plenty of people believe that Toronto should adopt a similar policy, given that it’s now the hottest market in the country.

“[People] find it a lot easier to blame a foreign buyer than their own neighbour,” says Ben Meyers, senior vice-president of market research and analytics at Fortress. There’s certainly a lot of foreign capital flowing in but “the straight foreign buyer that is buying units is not a huge portion of the marketplace based on all the information anecdotally and tracked by some of the [real estate] boards out there.”

Instead, the report indicates that “much of the demand for residential accommodation in Canada is coming from immigration, which Scotiabank Economics notes was ‘at least 300,000 [people] in 2016,’” the report states. Immigration has trended upward since the late 1990s, and Ottawa confirmed that their target for 2017 will stay at 300,000, in addition to the recent census data indicating that immigration is only expected to grow in the years to come.

Satisfying the demand

There’s also been a lot of talk about supply and demand, and the Fortress report states that there was a 12,000 unit gap between new homes launched in 2016 and sales. However, Meyers clarifies that it’s not just creating homes that’s an issue; it’s the delay in getting people into them. Nearly one-third of developers believe it will take them five years or longer to get approvals on suburban single-family housing developments.

“We have an inelastic market, which means it’s unresponsive. So when we increase demand, there’s only so much supply that we can add to the marketplace,” Meyers says. “In the GTA, obviously, there’s constraints to the land that can be brought online – delays, infrastructure, the Places to Grow Act, the Greenbelt – obviously we’re restricted slightly in the number of new units that we can bring out on the low rise side of things. On the high-rise side of things, obviously you’ve got to get it approved, you’ve got to get it pre-sold, and then you’re looking at 28-30 months of construction. There’s quite a lag to respond to increased demand in the marketplace so it translates into new home prices.”

Urban containment policies

Fortress’s report claims that nearly 60 per cent of developers believe urban containment policies like the Greenbelt and the Places to Grow Act are responsible for high new home prices.

The report, however, also revealed that 60 per cent of Canadians are not willing to trade a longer commute for a larger home, meaning that a lot of people aren’t willing to travel further to a city centre if that’s where they work, even if that means getting more home for their money further away. Meyers, however, doesn’t see the problem being people who want to stay in urban areas, because they're going to stay regardless of prices or the small size of the homes. He’s much more interested in the people who are willing to commute, but aren’t even finding what they want elsewhere.

“If they don’t have that option, well they’re going to join the party of overbidding for centrally-located properties or they’re going to move completely out of the grid of Toronto.” Or rent, he says, adding that we’ve started to see major increases in rents as well, which only fuels investors coming into the marketplace – prices are going up 25-30 per cent, they see rents going up 10 per cent, translating to a fantastic opportunity.

The conversation about building into Ontario’s Greenbelt, about 800,000 hectares of protected land that borders the Greater Golden Horseshoe area surrounding Lake Ontario, isn’t an option, at least for now. Ontario Premier Kathleen Wynne has said that the province won’t reduce the Greenbelt lands in order to solve supply issues, and that the government is actually committed to expanding the Greenbelt.

Intervention

The Vancouver housing market definitely cooled after the implementation of the 15 per cent tax on foreign home buyers (although experts note that the market had been showing signs of slowing down for months beforehand). Such efforts are generally supported by the public, in spite of the fact that data shows that foreign buyers aren’t the reason why home prices are going up.

“Every level of government is vividly aware of the house price situation in this country, and it appears they would rather orchestrate a mild house price correction via a proactive market intervention than witness a large correction due to failure to implement policies intended to curtail appreciation,” the report reads.

But, Meyers notes in the report, part of the decline in both sales and prices in Vancouver was because domestic buyers' and sellers' expectations of the outcome: “Don’t misconstrue the impact of the tax with buyers’ and sellers’ opinions of the future impact of the tax! . . . in reality, the tax made houses slightly less expensive for rich people and did very little for affordability in the marketplace.”

“It’s hard to see where you think the market would go without the intervention,” he says. “It was interesting that developers and the general public were in favour of the new mortgage rules, making sure people are not overleveraged, that they could handle greater increases in interest rates, and that was a big concern with developers was what happens when interest rates go up, are people going to be able to afford the unit. So that was one they view as a positive. Unfortunately, it creates these unintended consequences.”

Consequences might include people turning away from regulated lenders, and making things difficult for people to buy a home while affordability and home prices remain unchanged.

“Evidence from other jurisdictions that have imposed new taxes or other measures to stem foreign purchases, including Australia, New Zealand, and the U.K., have not experienced a notable sustained falloff in demand or prices,” according to Scotiabank economist Adrienne Warren in the report. CMHC CEO Evan Siddall mentions that Hong Kong actually experienced an increase in foreign buyers activity following the introduction of a stamp duty (tax placed on legal documents in the transfer of assets). “The only impact may be psychological: a reduction in extrapolated expectations, or ‘froth,’ because people believed the tax would work,” he says.

Investment

In a survey that Fortress conducted last spring, results revealed an increase in investor activity. But, Meyers notes, an investor who's in the game for the long haul can have an overall positive impact on a housing market, as opposed to a short term speculator, who helps drive prices higher.

Another unintended consequence that Meyers said he hadn’t thought of is that since it’s become more difficult for a home buyer to qualify for the home that they want, maybe they’ll decide to wait and rent while they continue to save for the 20 per cent down payment. An investor sees that people are renting for longer and that rents are increasing, and decide to buy some of these homes that they normally would’ve been competing against use they’re not competing against a first-time buyer.

“It’s this kind of opportunity for people that have that big down payment – investors and foreign buyers or a domestic buyer with foreign backing to go in and buy those homes. So we’ve seen a decent increase in the number of freehold units rented – obviously there’s always been a big component of investors in the high-rise condo market, but now we’re seeing a much bigger number of freehold units being rented every single year, so that tells you the number of investors in that marketplace is increasing.”

When it comes to investors – and many other aspects of various housing markets, for that example – governments and real estate boards don’t have answers because they don’t have data.

But that may be about to change, as federal finance minister Bill Morneau announced that a total of $300 million is planned be spent over the next 10 years on gathering housing market data, $39.9 million of which is earmarked for Statistics Canada’s foreign buyer study, as well as info on homeowner demographics and mortgages.

The Fortress forecast calls for resale prices to increase by 5.3 per cent in Canada in 2017, while the consensus is forecasting growth of 2.4 per cent. “No one is calling for double-digit price growth in 2017, and there are no notable economists calling for a major decline in house prices nationally,” the report states.

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