May 12, 2016
Toronto is one of the fastest growing urban centres in North America. It has become a global destination welcoming over 85,000 new residents annually. As this growth continues, the booming housing market is still struggling to keep pace with demand. Vacancy rates in the Greater Toronto Area remained under 2% for the past 5 years despite the new condo construction that we see being completed all over the city. The construction industry cannot build fast enough to meet the continued growth in demand for housing in the GTA.
There are a few key factors that are contributing to this growth. Low interest rates are always a driver for real estate markets, but this is more than just low interest rates. The Federal government’s policy on immigration allows for 300,000 new immigrants annually. Toronto is one of the most desired destination in Canada for newcomers. It’s a cultural melting pot with communities from all over the globe represented making it possible for new immigrants to find people in Toronto who come from the same cultural background making assimilation to Canada easier. Toronto has a very strong and diverse labour market, welcoming new immigrants and giving them promise of employment and prosperity. Also with the current low Canadian dollar immigrants can see their money go further when arriving in Toronto in comparison to most of the other Westernized global urban destinations. Of the top 10 cities for housing growth globally, Toronto is one of the most affordable, creating opportunity for upside potential as property values catches up to cities like Vancouver, New York and San Francisco.
Supply and demand are always the main factors driving housing markets. While it may seem that there are lots of new condos being built and supply of housing is increasing, the reality is that the housing market’s new construction has not been able to keep up with the surging demand. In 2005 the Ontario government instituted the Greenbelt Protection Act protecting over 2 million acres of land from development surrounding the Greater Toronto Area. With the constraint of land supply, urban sprawl has been restricted and developers are forced to look at intensification and density to meet the demands of the growing population. Lowrise construction has continued to shrink over the last 10 years and this lack of supply in the lowrise market is the main driver of the massive price increases we see today for single family homes across the GTA. The only affordable option is high rise.
Housing markets have to be reviewed both in terms of home ownership and rental. For the last 10 years there have been less than 8000 new apartment rental units built in Toronto, meanwhile over 190,000 condos were built in that period. Condos have become the new option for the rental market. While vacancy across the GTA is under 2%, in the downtown core vacancy hit a low of 0.5%. Rental rates have continued to grow at approximately 10% per year over the past 4 years.
It’s clear, on the demand side of the equation, that the population growth, high prices of lowrise and low vacancy rates, that housing supply needs to increase. It is projected that over 1 million new residents will arrive in Toronto over the next 10 years maintaining the current trends in population growth. When we look at the supply side we see a different story. While 2016 is expected to see a record number of new completions of condos in the GTA at almost 25,000, a drastic drop-off in completions is expected in 2017, 2018 and 2019. The City of Toronto planning department keeps tracks of new starts in the development industry and while 2012 set a record for the most new starts of condominiums at 29,000, those start numbers dropped to 18,000 in 2013 and then down to 14,000 in 2014. The drop in new starts was not because of a lack of demand – population growth has been consistent over the past 10 years – the housing start reduction in 2013 and 2014 can be attributed to the federal government’s attempt to slow the housing market down in those years by changing the mortgage rules for first time buyers. The goal at the time was to curtail the possibility of a US 2008-type of housing bubble where new home buyers were putting little down payments and taking on big mortgages. While this policy change did not slow down price growth in the housing market (that’s a function of supply and demand), the policy forced the banks to take precaution when considering lending to developers for new projects. The result was a reduction of housing starts to 14,000 at a time when housing formation demanded the construction of over 35,000 new homes annually in the GTA. Since it takes 3-4 years to build a condominium, we won’t see the impact of the 2013-2014 low start numbers until 2017 – 2019. The completions numbers are expected to plummet in those years while demand will actually continue to increase. We can expect to see housing prices and rental rates rise considerably over that period as demand significantly outweighs supply.
For anyone who is considering investing in the Toronto housing market, 2016 will be an opportune time to invest before the impact of the supply shortage is felt. If you are already invested in the Toronto housing market, enjoy the capital appreciation that this supply and demand imbalance will cause over the next 3-4 years. At Cranson Capital Securities, we’ve been doing significant research on other housing markets across North America and we keep coming to the same conclusion, Toronto is the top major urban housing market for investment in North America. We’re continuing to focus on investments in this market both on the rental and development side. We try to create solid, passive investment opportunities for investors to participate in this market.