As we approach the end of 2019, we reached out to real estate consultant and analyst, Ben Myers, President of Bullpen Research & Consulting Inc., to get a clear picture of the state of the Greater Toronto Area’s housing market, and what we can expect in the near future.
Newinhomes.com (NIH): How will the new short-term rental regulations in Toronto affect the housing market?
Ben Myers (BM): I hope it returns the 5,500 units it supposedly took out of the long-term rental market, however, call me skeptical. I believe a bunch of the units will continue to be run as illegal Airbnbs, some will be converted to executive-stay short-term furnished rentals, and unfortunately some will be kept vacant. The other concern I have is that a number of pre-con brokers were actively promoting Airbnb to their new condo investor clients as the economics of holding and renting has deteriorated. So there is concern that the changes could negatively impact investors’ decision to buy a new condominium and ultimately reduce housing supply.
RBC economics’ recent report showed the Toronto CMA market is 9,100 units short of having a 3% vacancy rate, which is the vacancy threshold needed to reach a balanced market. So even if every one of these units is returned the rental market, it still wouldn't result in a decline in the rental rate. It could slow growth, which hit 16% annually for purpose-built rentals in October per Rentals.ca data, so there is a long way to go for the change to have any meaningful impact on affordability.
NIH: Your predictions on per square foot prices have been pretty accurate over the years. What do you foresee for the GTA's new housing and resale markets over the next 5 years? What do you think psf prices will average in downtown Toronto in 2024?
BM: I don't expect to see the same level of rapid price appreciation that we've experienced in the market over the last three years. Part of the reason that price growth has spiked is a rise in construction costs, development charges, and land prices - this cost-push inflation is passed on to consumers. Additionally, and likely more importantly, there has been an undersupply of resale units that can be traced back to the poor pre-construction sales from late 2012 through the end of 2014, which ultimately gets felt in the resale market on a four-year lag. Resale price growth over the next few years will be muted as more high-rise completions are expected, this supply is under construction and the result of booming pre-construction condo sales in 2016 and 2017.
The average price of popular new condo floor plans in the City of Toronto in October 2019 was approximately $1,275 per-square-foot (psf) and with growth of 3% a year, prices would hit $1,475 psf in 2024. I wouldn't be surprised to see annual average growth of 4%, which would get you to $1,625 psf in five years in Toronto.
NIH: As the price gap closes between new single-family homes and new condos in the GTA, do you think we'll ever see both housing types average around the same price? Or will people just put off buying and save for slightly longer in order to buy a single-family home?
BM: I'm not sure we'll ever see the price of an average unsold new condominium exceed the price of the average single-family home in the Greater Toronto Area. Part of the reason we're seeing the two numbers diverge over the last couple years is the price correction in the single-family new home and resale markets scared away a lot of purchasers, in addition to the stress test making it harder for prospective buyers to qualify for a mortgage on these larger homes. In late 2018, and into 2019, developers have focused on smaller and more affordable singles, semis and row product at their sites.
The higher prices for new unsold condominiums is a result of more luxury developments in Yorkville, and large end-user targeted suites along the Waterfront and in high-design projects in downtown west. Secondly, developers tend to raise their prices substantially once they’ve hit their 70% pre-sale target that lenders typically require to qualify for construction financing, they set pricing above market as they feel confident in their ability to sell this remaining supply over the two to five years before occupancy. Altus Group noted that there are 92 projects in the GTA over 70% sold that are in pre-construction. This is a lot of successful projects, more than typical, and many of them have set pricing above market.
NIH: What do you think would be the most effective approach to fighting the GTA's affordability crisis?
BM: One of the best ways to improve affordability is through more supply, and if you want to jump start supply, we need to continue to invest in transit so we move more people all over the Greater Toronto Area, get people out of their cars and reduce commuting times.
There has been a mad rush to upzone sites along the new Eglinton LRT line, tons of high-rise projects are being proposed that never would have been proposed without this transit. More transit means much more supply and the unlocking of areas that never would have supported a mid-rise development, let alone a multi-phased, mixed-use, high-rise apartment site.
We need to allow more missing middle, more laneway suites, more tiny homes. If we can figure out how to build with less expensive materials with no underground parking, that will help to keep the price of new supply down. We need to reject the NIMBYs, which ultimately cost this region thousands of units, as they complain about shadows, congestion, character, property values, and “low-income renters,” resulting in many floors getting chopped off of new buildings.
We need to invest in affordable housing projects, social housing projects, rent geared-to-income projects, co-living sites, more student dorms. We need to ease development charges in non-prime locations to make the numbers work in areas like north Etobicoke and central Scarborough. Politicians need to stop hiding behind the word livability as their crutch word to justify keeping new people out of neighbourhoods.
NIH: Do you think the City of Toronto's goal of building all new homes to net-zero standards by 2030 is realistic?
BM: To be honest, I'm not sure what's required to get a net-zero home and how expensive it is to achieve that goal. Ultimately being as green as possible is an ambitious and lofty goal, but my concern is always how much it will cost. We keep adding more and more costs onto new housing, and then complain about it being expensive!
NIH: What are some good signs that 2020 will be a strong year for Toronto real estate?
BM: Canada just hit an all-time high in terms of population growth at 531,000 in 2019, nearly half of that growth is in Ontario, and about a quarter of it is in the Toronto Census Metropolitan Area - there will be no lack of shelter demand in our market. Secondly, there doesn't seem to be much discussion around interest rate hikes in 2020 and the recent Altus Group forecast calls for more single-family new home sales in the GTA, more new condominium apartment sales, and higher renovation spending. I think they’ll be right on all three fronts.
I believe that investors still fundamentally believe in Toronto, and the long-term value of real estate in the city. Investors still love these “class A” condo buildings in the downtown core, and I think they will continue to seek out assets with quality developers for long-term holds.
NIH: What's your greatest concern heading into 2020?
BM: I'm always concerned about the global economy, you never know when a Black Swan event will disrupt the domestic markets. As I mentioned in the previous question, investors believe in Toronto, but they can be easily spooked by global uncertainty.
Secondly, I’m concerned about government intervention and the discussion about reinstating rent control on new buildings, which could be very detrimental to pre-construction and again put a damper on the rental apartment construction boom. I recently posted on Twitter that just 2.4% of all apartments (condominium and rental tenure) don't have rent control, but our politicians continue to push this failed policy that only ends up hurting supply and new tenants in the long run. Rent control can only work if they cap the annual increases at 5% to 7%, not 1% to 2%. Politicians need to stop listening to the vocal minority, and start reading up on economics.
We extend a big thank you to Ben Myers for taking the time to share his thoughts and expertise on the housing market’s present and future!