The GTA Housing Market: A Supply or Demand Problem?
Monday April 24, 2017
By Ben Myers, SVP of Market Research and Analytics at Fortress Real Developments
Last week I wrote about the Ontario government’s Fair Housing Plan, the measures that were introduced to cool the housing market in the Greater Toronto Area (GTA) and other scorching southwestern Ontario markets. The plan introduces 16 measures on both the supply and demand side of the equation.
The debate always comes back to this: Is it a supply or demand problem? By supply we mean, new housing completions (minus demolitions), resale listings (new and active), and unsold inventory in new housing projects (either in pre-construction, under construction or completed projects). We tend to measure demand by population growth and immigration, as well as the things that spur demand like low interest rates, employment growth and opportunities, foreign capital, a fear of missing out (FOMO), a desire for homeownership over rental tenure, the desirability of an area (shopping, entertainment, access to amenities, aesthetics, openness of residents to different races, religions, sexual orientation, political leanings), tax treatment for property and income, traffic, public transit, etc. There are many more factors that impact someone’s decision to move to a specific area.
You might be surprised to hear this, the recent rise in the GTA over the past year is more of a demand problem than a supply problem. You might be saying: What? Ben, why are you always banging the supply drum in the media?
Let me explain, supply and demand do not operate in isolation, they heavily impact each other. The number of active listings in the GTA housing market is low because demand is high. There are speculative purchasers (high demand) in the GTA now because prices are rising so rapidly, they started rising because of a lack of supply. Foreign capital is coming in because they expect demand to exceed supply in the future. Well, you’re probably more confused than ever.
Let’s bring it back to a very straightforward premise, you can cool a market by bringing down demand or increasing supply. The reason I’ve been such a proponent of supply is because that is a much easier solution. It is really just that simple. No charts, no data this time.
You can make it more difficult for prospective buyers to purchase with changes to the mortgage rules, but they still try to buy either cheaper product or in different markets – you’re not really changing demand all that much, you are altering its spatial distribution. You can make it more difficult for foreign buyers to purchase with taxes, but good luck trying to deter foreign capital from making its way into the pockets of their friends, relatives and business associates that are Canadian citizens that use it to buy housing. I’ve supported a flipping tax for properties held for less than 18 months, but that might hurt the renovation sector and investors may hold longer that 18 months (reducing ownership supply) or not buy investment properties at all (reduces rental supply). I don’t think there would be much support for limiting immigration and foreign students. More rules, more regulations, more government involvement just seems like an administrative nightmare.
Of course there are some negative externalities of building more housing, including a strain on roads, transit, and schools. There is also pollution, construction noise, loss of views or sunlight, or loss of farmland. However, the positives far outweigh the negatives, thousands of jobs are creating for architects, engineers, planners, construction workers, Realtors, mortgage brokers, lawyers, bankers, developers, property managers, etc. Plus the spin-off employment when new home buyers purchase small appliances, window coverings, rugs, furniture, and paint. How many jobs do you think are created with these “push-down demand” solutions?
What’s the worst that could happen, we overbuild and prices come down. Isn’t that the goal of the cooling measures to begin with? So we made too many homes for people. Too many people gained access to the GTA, or were able to stay instead of being forced out by high prices.
We can bang our heads against the wall trying to stop the people we don’t want to buy homes from buying homes, or we can just build for the people that we do want to own and rent housing here. Many of the solutions targeting demand are not ill-advised and will help, but they are treating the symptom of the current problem (too much demand), not the actual problem that started 10 years ago. That long-term problem is a lack of supply, and I’ll continue to promote and support a solution aimed at building luxury penthouses, skyscrapers, mid-rise condominiums, rental apartments, laneway homes, seniors residences, ground-oriented housing, social housing, and affordable housing.