As we know -- because here's the data -- this is the current state of affairs:
The GTA condo market is in a state of economic lockdown. The math doesn’t make economic sense from both the demand side (investors) and the supply side (developers), leaving the market at a standstill.
The above excerpt is from a recent CIBC Capital Markets article by Benjamin Tal (CIBC) and Shawn Hildebrant (Urbanation). And what it ultimately means is that the supply of new condominiums in the GTA is falling and will continue to fall for the foreseeable future. Below are two charts, from the same article, that show that.
Because of this, I actually think that, if you need or want a place to live, right now is a near ideal time to buy a condominium, especially if it's from developer inventory (in an already completed project) or it's a resale. Of course, most people won't want to do this because they'd rather buy when most other people in the market want to buy. This is how markets tend to go.
It has been a while since the GTA has gone through one of these real estate cycles, but it is typical: developers are prone to both over-building and under-building. It simply takes too long to build a building, and so it is natural for there to be moments when supply and demand don't exactly line up.
Pre-selling condominiums is -- in theory only -- supposed to protect against too much overbuilding. But as we have spoken about many times before, it can be challenging for end users to buy a new home so far in advance. And so the new condominium market has come to rely on investors who want to buy early and then either sell later or rent later.
According to the above article (and MLS data), the share of newly completed condominiums used as rentals reached a peak of 34% in 2023. So a third of new condos. My gut tells me that the actual number is much higher. Many rentals never reach MLS. Overall, I think it's very safe to assume that the majority of new condominiums are owned by investors.
But right now, fewer investors want to own condominiums, which is why the number of resale listings has spiked this year:
This is, again, why I think right now is an excellent time to buy a condo. You know, be greedy when others... Regardless, this inventory will need to get absorbed and that will ultimately happen. Some of it will go to end users and some of it will go to investors who can make sense of the rental math and/or want to take a long view on Toronto. But if more goes to the former, we will be losing a lot of new rental housing.
At the same time, while all of this is going on, construction starts are likely going to remain depressed (chart 3 above). It's impossible to know how long this lasts, but at some point we will reach a moment in the cycle where we are under-building new housing. Maybe we're already there. Development simply can't turn on fast enough when demand spikes. There will almost always be a lag.
So, since the majority of new condominiums have been serving as new rental housing, there's a strong case to be made that at some point we will run into a potentially severe shortage of rentals. Condo investors are sometimes vilified in the media, but we will soon find out what happens when you take a big chunk of them out of the housing market.
Here's an interesting, though not shocking, chart from a recent Globe and Mail article talking about "Canada's dysfunctional housing market." What is noteworthy is that Toronto is dead last when it comes to the number of new 3+ bedroom homes built between 2016 and 2011.
According to this report (2023) from the Centre for Cities, the UK has a backlog of about 4.3 million homes. This is in comparison to other Western European countries for the period from 1955 to 2015.
Said differently, these 4.3 million homes are effectively missing from the UK's national housing market because it failed to build and deliver at the same rate as some other rich countries.
Peterborough, for example, is a census metropolitan area with somewhere around 130,000 people. And yet, based on this data, it is building more family-sized homes than Toronto.
Why this is not surprising is that the vast majority of new homes now built in Toronto are high-density and built out of reinforced concrete. This means that they are relatively expensive on a per square foot basis.
In fact, you could argue that mid-rise housing -- the exact high-density type that is supposed to be most attractive to families -- is the most expensive to build. What this means is that if you're building a 3+ bedroom home in this way, it's not going to be affordable to most.
It also means that people are going to go shopping elsewhere: Ottawa, York, Simcoe, Durham, and so on. The expected market outcome is decentralization. But in my mind, this raises an important question: Is this what people really want?
This is a great debate. And many will argue that grade-related suburban housing is exactly what people want. What we are seeing is a result of raw consumer preference.
However, the costs are so skewed in favor of low-rise housing, that I think it's hard to say with absolute certainty the degree in which this is true. What if higher-density 3+ bedroom homes were the cheaper option? My bet is that we would see a lot more centralization.
The development charge rate for a 2+ bedroom apartment in the City of Toronto is currently $80,690 per unit (effective June 6, 2024). As development charges work, this is supposed to pay for the growth-related impacts of adding a 2+ bedroom apartment in the city.
However, the above chart suggests that there are also impacts to not building that 2 or 3 bedroom apartment in an already developed area next to existing infrastructure. It means the home goes somewhere else (further away) or doesn't get built at all.
Both of these outcomes also have costs.
The report also argues that this housing shortage started not at the end of the post-war period, but at the beginning of it in the 1940s.
So what do they propose? The following:
Increase housing supply where new homes are needed. More homes are built in Wakefield than Oxford. Building in places with fewer jobs won’t fix prosperous cities’ housing crises.
Planning reform to introduce a new flexible zoning system that would allow builders to build if they follow the rules, while maintaining special protections for National Parks, Conservation Areas etc.
Zoning of land in walkable distances around train stations in the green belt for suburban living and with protected green space, which would provide 1.8 to 2.1 million homes.
Increase the use of permitted development rights to cut the red tape that makes it hard to build upward extensions or infill developments.
Stop subsidising home ownership. Despite Right to Buy, home ownership as a share of private housing has fallen in every city since 1981. The Government should stop subsidising ownership, tax housing wealth increases by abolishing the Capital Gains Tax exemption for primary residences and treat owning and renting equally.
None of these proposed solutions should come as a surprise. We know that housing follows money/jobs. And we know that if we want more of it, we need to remove the barriers to building it, especially around higher-order transit.
Image: Bloomberg
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