We Need to Build More Housing in the Greater Toronto Area
Wednesday March 1, 2017
By Ben Myers, SVP of Market Research and Analytics at Fortress Real Developments
In October of last year I wrote a blog post entitled, “Can Building Luxury Housing Help the Homeless?” Read it here. There was surely some skepticism among many readers about the validity of this theory. The concept has been called filtering, or vacancy chains, or even diffusion by quality tier. The basic concept is based on the simple idea that if you add supply to the marketplace, regardless of the price level that new supply comes in at, it creates vacancies or available properties elsewhere down the price spectrum as people move out of their existing homes and into this new supply. More supply added to the marketplace should translate into less competition for existing units, and fewer bidding wars. There should be less upward price pressure as a result. The impact can be mitigated by the reality that if you build more units, more people may be enticed to move here from outside the region, and some units will be bought for use as a second home or vacation property.
I read a great blog post that touches on this concept and others over the weekend, and wanted to share it again. It is important to highlight that new housing eventually gets old and become the less expensive housing in a marketplace, assuming that city, metro or country continues to build new supply. Read the City Commentary article by Joe Cortright here. It is a very well-written piece.
What I wanted to do is calculate how much cheaper Greater Toronto Area condominium apartments get as they get older – I wanted to test the theory based on local data. I pulled the Urbanation Inc. resale condominium data for the GTA, and looked at the average price on a per-square-foot (psf) basis for the 1,343 condominium buildings that had at least one resale transaction in the fourth quarter of last year. I plotted the data in the scatter chart below, and added a linear trend line.
As expected the value trend line slopes upward as the projects get newer. The oldest condo buildings in the GTA are nearly a half-century old, and half the price of new ones. If you look at the equation for the trend line, it basically shows that a project that registered at the end of December 2016 would have an average unit value of about $618 psf – that is what you’ll need to shell out to get a brand-spanking-new suite. For every year a given project ages, the average price gets about $6.19 psf cheaper. So a project that is 35 years old would be valued at approximately $402 psf on average in the GTA (plug in 35 for “x” and you get the “y” value), and a 50 year old project would be valued at $309 psf – this is basically the entry-level value to get into the GTA condominium ownership market. If we assume this trend will continue into the future, the average project completed in 2026 will sell in the resale market at $680 psf, while the average project in 2116 will be $1,237 psf! I’m guessing it will be much more than that in 100 years as we run out of high-rise development lands in the downtown core, and add 120-storey towers with huge floor premiums, resulting in exponential price growth.
The units built in 2016 will seem like such a bargain in 100 years compared to the newly completed units at that time. If we don’t keep building, affluent buyers will compete with less affluent buyers for the same units and drive up the prices of the overall market. Keep in mind that prices in Paris, New York, and Hong Kong go for $2,500 to $3,500 psf on average today (they’re not building enough housing), we need to keep building or we’ll get to $1,237 psf well before the year 2116!