Earlier this week I connected with a Ryerson student doing a piece on Toronto’s condo rental market. She emailed me and asked if I would mind answering a few questions. Here are my responses.
Generally speaking, why is Toronto continuing to see such a rapid increase in the number of condos in development?
A lot of what we’re seeing is policy driven. It stems from the Places to Grow Act and the continued push towards intensification. It actually mirrors a similar boom we saw in the 70s. In both cases, it was policy driven and the market responded.
The other factor is a growing consumer preference for more walkable and urban neighborhoods. People are sick of long commutes and so we’re seeing a return to city centers and downtowns. This is happening across all demographic segments, though Millennials and Baby Boomers seem like particularly strong ones.
Is that boom, and the consequent rush by developers to create new units for rapid sale, affecting the quality of design and accessibility in new condo developments in Toronto?
When you have a hot market, you’re going to get lots of people rushing in and trying to make money. Whether it’s real estate, tech or some other industry, it’s to be expected. And I’m sure it impacted some projects negatively. But that market is gone in Toronto.
Earlier this week I connected with a Ryerson student doing a piece on Toronto’s condo rental market. She emailed me and asked if I would mind answering a few questions. Here are my responses.
Generally speaking, why is Toronto continuing to see such a rapid increase in the number of condos in development?
A lot of what we’re seeing is policy driven. It stems from the Places to Grow Act and the continued push towards intensification. It actually mirrors a similar boom we saw in the 70s. In both cases, it was policy driven and the market responded.
The other factor is a growing consumer preference for more walkable and urban neighborhoods. People are sick of long commutes and so we’re seeing a return to city centers and downtowns. This is happening across all demographic segments, though Millennials and Baby Boomers seem like particularly strong ones.
Is that boom, and the consequent rush by developers to create new units for rapid sale, affecting the quality of design and accessibility in new condo developments in Toronto?
When you have a hot market, you’re going to get lots of people rushing in and trying to make money. Whether it’s real estate, tech or some other industry, it’s to be expected. And I’m sure it impacted some projects negatively. But that market is gone in Toronto.
And regardless of the pace of development, there will always be varying degrees of quality across builders. The unfortunate thing for consumers is that it’s not always easy to tell which is which.
One of the things we’re trying to do (at TAS) is integrate consumer education more into our sales and marketing programs. Mechanical equipment, as one example, isn’t the most exciting thing to to talk about, but we want consumers to know what they’re buying into.
Prices are rising (you could buy a house outside the city for the price of some of Toronto’s tiny bachelor units, if I’m not mistaken…) - So what is making condo ownership so desirable in spite of the high cost relative to space?
Again, it’s being driven a lot by lifestyle. People want walkable communities, they want to be close to amenities and they want to drive less. And they’re willing to give up space for that.
When considering and comparing the cost of a home, I think it’s important to consider some of the indirect costs, such as transportation costs, travel times, quality life and so on.
Sure a home in the suburbs may be a lot cheaper, but what’s my total, all-in, cost? If you need to own 2 cars and you spend 2 hours commuting everyday, there’s a real cost to that. If you place a big value on your time (as I do), the cost equation isn’t so skewed all of a sudden.
Are more people choosing to live in rental condos instead of buying, because of the inaccessible cost? If so - why are we still seeing so many new ‘rental condo units’ being built, rather than purpose-built apartment units?
Condos are being built because, in most cases, it’s the highest-and-best use for the land. It’s the most profitable. And investors have been more than willing to step up and fill the rental needs of the market. But with the condo market now coming down from record levels, I wouldn’t be surprised if we start seeing more purpose-built apartments.
Would you say that the majority of condo rentals on the market are owned by foreign investors who depend on building management to liaise with renters? If so, why are they choosing to buy units in Toronto?
I have no idea. It’s even hard to tell how many units are just investor owned, let alone local versus foreign. Because there are tax implications if you don’t owner occupy a unit, buyers have an incentive not to disclose. Overall, I find it problematic that the marketplace is so opaque. I wish there was a way to bring perfect information.
With respect to why they choose to buy in Toronto, there are a bunch of reasons. Real estate has been a phenomenal investment in Toronto over the past decade and that’s attracted a lot of investor attention. There are also segments that just want capital preservation in a safe and stable country. Even without great returns, that’s a valuable proposition for some foreigners. And of course, Toronto is a great city. Talent wants to live here and that’s important.
Generally speaking, is there a certain LOCAL demographic (ie, boomers, post-boomers) that are investing in condos for the purposes of renting them out? What makes that investment so desirable?
Again, there isn’t great data on this.
What I will add to the investor topic is that, despite the fact that investors often get a lot of flack, they do serve two important needs in the marketplace for both developers and consumers. The first one we’ve already talked about. Investors provide rental housing in Toronto at a time when few, new, purpose-built rental apartments are being constructed.
The second one is that investors help to get projects under construction and built. I’ve heard one developer refer to them as providing a kind of short-term financing. Because consumers don’t always want to commit to a unit that might be built 4-5 years out, developers rely on investors to buy pre-sale units so that the project can get underway. Once construction is complete, these units then often get sold to end users who are now ready to commit and move in.
According to Salvador Dalí and Margaret Thatcher I’m a loser and a failure. I came across these quotes on Tumblr (via goingurban) this morning:
"A man of forty who still rides the metro is a loser." -Salvador Dalí
"A man who, beyond the age of twenty-six, finds himself on a bus can count himself as a failure." -Margaret Thatcher
Now as much as I like dislike buses (and prefer the train varietal), I’ve made it pretty clear that I’m a believer in mass transit.
If anything, I think these quotes show how much the world has changed, although perhaps only in certain geographies. Depending on where you live (I’m thinking Los Angeles or, maybe, Oklahoma City), it probably still sucks not to have a car.
We recently started a Lunch & Learn program at TAS. I did the first one on electronic road pricing and followed-up with the blog post below. Let me know what you think. It’s also cross-posted here on TAS’s website.
The case is essentially about traffic congestion in Hong Kong and a decision to either build more road (a bypass road running adjacent to the harbour: The Central-Wan Chai Bypass) or implement an Electronic Road Pricing (ERP) system, similar to what was implemented in Singapore in the 70s and in London in 2003.
What this graph plots is the marginal cost of products and services with a fixed capacity. An example of a product or service with a fixed capacity would be a road. Roads can only handle a certain amount of drivers before it becomes unusable (gridlock). What this graph tells us is that once you reach that capacity—variable k in the graph—the marginal cost goes from zero to basically infinity.
In laymen terms, it’s telling us that at 4am when nobody is on the road, the cost—to society, to productivity levels, and so on—of adding each one additional driver is basically zero. But, as soon as you hit capacity, at say 830am, and traffic is at a standstill, the cost shoots way, way up!
So how do you solve this problem? Well, you price congestion. This invariably removes or forces drivers to other times of day and makes it so that demand for the road drops below the available supply. Then the road is able to function as it’s intended to. I don’t know about you, but this makes a ton of sense to me. What good are roads if they’re clogged with traffic?
What I’d like to do now is bring the discussion back to Toronto. For those of you with an interest in transit, you’re probably aware that Metrolinx has a “Big Move” transit and infrastructure plan that’s going to cost the region $2 billion a year to implement. I view this as investment in our region and so I think it’s absolutely the right move.
However, the billion dollar question is, where is the money going to come from? Earlier this year Metrolinx proposed 4 main revenue tools. They are:
- A 1% sales tax (estimated to raise $1.3 billion annually) - A business parking levy (estimated to raise $350 million annually) - A $0.05 fuel and gasoline tax (estimated to raise $330 million annually) - And a 15% increase in development charges (estimated to raise $100 million annually)
What I would suggest is that there should be a road pricing plan in this list in addition to—or instead of—some of the items listed above. Taxes are just taxes. And they discourage consumption depending on the elasticity of the demand for those items.
However, I would argue that a well executed road pricing model should be considered not as a tax, but instead as an incredibly accurate way to price roads according to actual usage patterns and costs incurred. Think of it like time-of-use utility billing. Do you think of high-peak utility billing as a tax or as simply the price to use the service when demand is the highest?
The benefits of a road pricing system would be numerous:
- We’d get a consistent revenue stream for transit investment in the region (instead of having to rely on government hand outs) - We’d be helping to decouple transit building from the political process (because Metrolinx would now make its own money) - We’d eliminate traffic congestion (yes, it can be done) - We’d increase productivity levels across the region (people will actually be able to get around) And we’d be reducing our impact on the environment by encouraging alternate forms of transportation
This is an incredible list of benefits. However, I think one of the challenges with implementing electronic road pricing is that it’s often misunderstood. People just view it as a tax. Hopefully by looking at the economics behind it all, it has become clearer that it’s actually a bit more nuanced than that.
And regardless of the pace of development, there will always be varying degrees of quality across builders. The unfortunate thing for consumers is that it’s not always easy to tell which is which.
One of the things we’re trying to do (at TAS) is integrate consumer education more into our sales and marketing programs. Mechanical equipment, as one example, isn’t the most exciting thing to to talk about, but we want consumers to know what they’re buying into.
Prices are rising (you could buy a house outside the city for the price of some of Toronto’s tiny bachelor units, if I’m not mistaken…) - So what is making condo ownership so desirable in spite of the high cost relative to space?
Again, it’s being driven a lot by lifestyle. People want walkable communities, they want to be close to amenities and they want to drive less. And they’re willing to give up space for that.
When considering and comparing the cost of a home, I think it’s important to consider some of the indirect costs, such as transportation costs, travel times, quality life and so on.
Sure a home in the suburbs may be a lot cheaper, but what’s my total, all-in, cost? If you need to own 2 cars and you spend 2 hours commuting everyday, there’s a real cost to that. If you place a big value on your time (as I do), the cost equation isn’t so skewed all of a sudden.
Are more people choosing to live in rental condos instead of buying, because of the inaccessible cost? If so - why are we still seeing so many new ‘rental condo units’ being built, rather than purpose-built apartment units?
Condos are being built because, in most cases, it’s the highest-and-best use for the land. It’s the most profitable. And investors have been more than willing to step up and fill the rental needs of the market. But with the condo market now coming down from record levels, I wouldn’t be surprised if we start seeing more purpose-built apartments.
Would you say that the majority of condo rentals on the market are owned by foreign investors who depend on building management to liaise with renters? If so, why are they choosing to buy units in Toronto?
I have no idea. It’s even hard to tell how many units are just investor owned, let alone local versus foreign. Because there are tax implications if you don’t owner occupy a unit, buyers have an incentive not to disclose. Overall, I find it problematic that the marketplace is so opaque. I wish there was a way to bring perfect information.
With respect to why they choose to buy in Toronto, there are a bunch of reasons. Real estate has been a phenomenal investment in Toronto over the past decade and that’s attracted a lot of investor attention. There are also segments that just want capital preservation in a safe and stable country. Even without great returns, that’s a valuable proposition for some foreigners. And of course, Toronto is a great city. Talent wants to live here and that’s important.
Generally speaking, is there a certain LOCAL demographic (ie, boomers, post-boomers) that are investing in condos for the purposes of renting them out? What makes that investment so desirable?
Again, there isn’t great data on this.
What I will add to the investor topic is that, despite the fact that investors often get a lot of flack, they do serve two important needs in the marketplace for both developers and consumers. The first one we’ve already talked about. Investors provide rental housing in Toronto at a time when few, new, purpose-built rental apartments are being constructed.
The second one is that investors help to get projects under construction and built. I’ve heard one developer refer to them as providing a kind of short-term financing. Because consumers don’t always want to commit to a unit that might be built 4-5 years out, developers rely on investors to buy pre-sale units so that the project can get underway. Once construction is complete, these units then often get sold to end users who are now ready to commit and move in.
According to Salvador Dalí and Margaret Thatcher I’m a loser and a failure. I came across these quotes on Tumblr (via goingurban) this morning:
"A man of forty who still rides the metro is a loser." -Salvador Dalí
"A man who, beyond the age of twenty-six, finds himself on a bus can count himself as a failure." -Margaret Thatcher
Now as much as I like dislike buses (and prefer the train varietal), I’ve made it pretty clear that I’m a believer in mass transit.
If anything, I think these quotes show how much the world has changed, although perhaps only in certain geographies. Depending on where you live (I’m thinking Los Angeles or, maybe, Oklahoma City), it probably still sucks not to have a car.
We recently started a Lunch & Learn program at TAS. I did the first one on electronic road pricing and followed-up with the blog post below. Let me know what you think. It’s also cross-posted here on TAS’s website.
The case is essentially about traffic congestion in Hong Kong and a decision to either build more road (a bypass road running adjacent to the harbour: The Central-Wan Chai Bypass) or implement an Electronic Road Pricing (ERP) system, similar to what was implemented in Singapore in the 70s and in London in 2003.
What this graph plots is the marginal cost of products and services with a fixed capacity. An example of a product or service with a fixed capacity would be a road. Roads can only handle a certain amount of drivers before it becomes unusable (gridlock). What this graph tells us is that once you reach that capacity—variable k in the graph—the marginal cost goes from zero to basically infinity.
In laymen terms, it’s telling us that at 4am when nobody is on the road, the cost—to society, to productivity levels, and so on—of adding each one additional driver is basically zero. But, as soon as you hit capacity, at say 830am, and traffic is at a standstill, the cost shoots way, way up!
So how do you solve this problem? Well, you price congestion. This invariably removes or forces drivers to other times of day and makes it so that demand for the road drops below the available supply. Then the road is able to function as it’s intended to. I don’t know about you, but this makes a ton of sense to me. What good are roads if they’re clogged with traffic?
What I’d like to do now is bring the discussion back to Toronto. For those of you with an interest in transit, you’re probably aware that Metrolinx has a “Big Move” transit and infrastructure plan that’s going to cost the region $2 billion a year to implement. I view this as investment in our region and so I think it’s absolutely the right move.
However, the billion dollar question is, where is the money going to come from? Earlier this year Metrolinx proposed 4 main revenue tools. They are:
- A 1% sales tax (estimated to raise $1.3 billion annually) - A business parking levy (estimated to raise $350 million annually) - A $0.05 fuel and gasoline tax (estimated to raise $330 million annually) - And a 15% increase in development charges (estimated to raise $100 million annually)
What I would suggest is that there should be a road pricing plan in this list in addition to—or instead of—some of the items listed above. Taxes are just taxes. And they discourage consumption depending on the elasticity of the demand for those items.
However, I would argue that a well executed road pricing model should be considered not as a tax, but instead as an incredibly accurate way to price roads according to actual usage patterns and costs incurred. Think of it like time-of-use utility billing. Do you think of high-peak utility billing as a tax or as simply the price to use the service when demand is the highest?
The benefits of a road pricing system would be numerous:
- We’d get a consistent revenue stream for transit investment in the region (instead of having to rely on government hand outs) - We’d be helping to decouple transit building from the political process (because Metrolinx would now make its own money) - We’d eliminate traffic congestion (yes, it can be done) - We’d increase productivity levels across the region (people will actually be able to get around) And we’d be reducing our impact on the environment by encouraging alternate forms of transportation
This is an incredible list of benefits. However, I think one of the challenges with implementing electronic road pricing is that it’s often misunderstood. People just view it as a tax. Hopefully by looking at the economics behind it all, it has become clearer that it’s actually a bit more nuanced than that.
