I suppose fifty-some-odd comments in two days can’t be wrong; this is a topic that requires further discussion.
There were some incredibly insightful comments, and a lot of great ideas thrown around.
Today, I want to look at potential reasons for the lack of supply in our market.
A lot of these points were raised in the comments section of Monday’s blog, but let me throw a couple of my own ideas out there, and then we’ll open the topic to discussion…
It would seem from the comments on Monday’s blog that perhaps I was able to fill a giant need for those who are tired of reading the same-old, same-old, and wanted something “refreshing,” as one reader put it.
As you might assume, I don’t always read the comments. Some are incredibly insightful, and some are monkeys throwing their own feces around.
But there were a few people that commended me for actually adding some data to the conversation about rising real estate prices, and the causes.
Others thanked me for not speculating as most of the media, and frankly most real estate agents and economists, have always done.
Then one or two people actually had the balls to suggest my article was worthless, because I didn’t provide reasons for the lack of supply, and increase in demand.
Sorry. I was busy changing a stranger’s flat tire. And rescuing an old lady’s cat from a tree. And pouring soup at the local shelter…
I honestly don’t know what is a larger cause of the rapid increase in Toronto housing prices: the lack of supply, or the increase in demand.
Every time I waver one way, I draw back to the centre, and then look at arguments for the other side.
Either way, today, I want to look at the lack of supply in Toronto’s market, and try to figure out reasons why supply is down, among other things, 31.9% in July, year-over-year.
In case you missed Monday’s blog, or if you’re in need of a refresher, here’s what has happened to supply in the past three years, as we look through the first seven months of the year:
Now let’s start the discussion as to why inventory is down.
Big reasons, and small reasons.
Direct reasons, and cause-and-effect.
All is welcome…
1) Fewer Housing Starts & Completions
This has to be the first reason on anybody’s list, no question about it.
And I asked my colleague, Ben Rabidoux, for the following chart:
Look where we are right now – at a 6-year low for housing completions.
Now we almost want to dig into why, for all of our “whys.”
We want to know why the supply of housing in Toronto is down, but when we establish that a reason is the decrease in housing completions, we’ll also want to know why that is as well.
Why are housing completions down?
This is the fun part – all our our reasons are linked in one way or another.
Point #5 on our list – about transaction costs, is a reason why there’s less “flipping” in Toronto. And less flipping means that there are fewer home-builders and renovators building on spec, and thus they are seeking to build for end-users, who aren’t putting the property back on the market.
Point #2 on our list – about rentals, shows that “completions” aren’t really completions, if they’re rentals.
And so on, and so on, as you’ll see below…
2) More Rentals
This isn’t something we’ve discussed before, but consider the cause and effect of more “investors” buying pre-construction.
All of those “housing starts” and “housing completions” are meaningless in terms of sales. When we talk about “active listings” as we did on Monday, we’re talking about properties available for sale. So if a lot of these pre-construction condos, and even houses (a lot more in 905) are being bought by speculators or investors, who in turn rent them out, then to even look at “housing completions” in the first place is useless.
What good is a “completion” if the property is not going to be offered for sale?
3) Less Inventory From The Baby-Boomers
I don’t have concrete data to prove this, so anecdotal evidence will have to suffice.
So consider the three options that Baby-Boomers have when they reach 65-years-old:
a) Sell their house, and buy a condo
b) Sell their house, and buy a smaller house
c) Sell their house, and rent
d) Grit their teeth, and stay where they are
Only option “c” represents a net increase in supply, and I think that option represents a very small percentage of what Boomers are doing.
I’ve worked with a lot of downsizing Baby-Boomers, and so far, I have yet to find the seller who opted to rent.
Most of the Boomers want to keep their money in the real estate market in some way, shape, or form.
And some of my clients have told me, “If I sold my house for $1,500,000, I wouldn’t have the slightest idea what to do with it.” So instead, they buy – whether to live in, invest, or for their kids.
I’ve had a lot of Baby-Boomers sell their house for $1-2 Million, and then turn around and buy for half the price.
I can recall one Boomer who sold for $1,600,000, then bought a $750,000 house that was up for sale, where young buyers were also vying for it. So for anybody that thinks, “Baby-Boomers will sell their house, and move on,” tell that to the young 20-somethings trying to get into the market, that were beat out by my 60-somethings.
As for option “d,” there was a great illustration of this by a reader on Monday’s blog who gave us the following:
The Boomers simply aren’t giving us the supply that we had expected.
And when they do sell their big family home and decide to rent, which is the only way we get a net increase in inventory, they help all three of their kids buy condos…
4) Prices In The Suburbs
Somebody on yesterday’s blog hit the nail on the head when they said that prices are rising outside of Toronto.
Again, we’re looking for reasons why supply is down, whether it’s a direct reason, or a cause-and-effect.
Consider that over the past half-decade, there’s been a lot of movement outside the city by residents looking for bigger, better, and cheaper.
I’ve personally helped a dozen people move from Toronto to Mississauga, Oakville, or out east to Ajax/Oshawa. These people made those moves because the real estate was cheaper, and thus we increased our supply here in Toronto.
But as time has gone on, that real estate has also increased in value, some of it more than Toronto.
Remember earlier in the year when York Region was the hottest real estate in the Golden Horseshoe?
And if you look at the average sale price in York Region this past July, you’ll see it’s $953,639, whereas Toronto’s is only $690,103. Yes, Toronto is home to many, many condos, and all those $300K units add up when you’re taking an “average.” But if you’re thinking about escaping to York Region, you’re not breaking the bank.
And what of condos?
Here’s an interview with Lanterra CEO Barry Fenton where he says that condo prices in Toronto are up 7%, but condo prices outside Toronto are up 11%.
5) Higher Acquisition Costs For Developers
From the video above, you’ll also watch Mr. Fenton discuss how much building is going on outside the city, rather than in the core, as the acquisition cost of real estate is getting too high for developers to turn a profit.
There’s another interview he did with BNN in December of 2015 where he talked about a piece of land on which he was outbid.
(Video won’t work when I embed here, but it still plays on my December 2015 blog which you can see HERE)
Mr. Fenton says he bid “something like” $330 Million for an office tower on the northeast corner of Yonge & Bloor, but was outbid by $30 Million with an unconditional offer.
Ironic, considering that house and condo buyers are routinely outbid by higher and/or unconditional offers, and the very developers that are creating this real estate for us are also outbid!
But the point is, if Lanterra and other developers can’t acquire property as easily as they have over the past two decades, then they won’t be able to build and complete at the same rate. And alas, inventory levels will decrease…
6) No Land To Build
To follow up on the point above, Mr. Fenton mentioned that he was looking to acquire “an office tower” for $330,000,000.
An office tower.
This is what condo development is coming to?
Once upon a time, you’d buy a parking lot, and throw up a 40-storey tower.
Now developers are buying entire OFFICE BUILDINGS to tear down and build condos in their place?
There’s just no land to build on anymore!
Remember the article in BlogTO from 2011 called, “That Time When Toronto Was A City Of Parking Lots“?
A lot has changed since this was what Toronto looked like:
In that city, there was not only lots of land on which to build, but developers didn’t have to fight each other for it.
In that city, you can see how population growth is not a problem.
But today’s Toronto is completely maxed out.
After we used up all the space on the ground on which to build, we started to look to the sky.
And now developers can’t find room in the sky, or can’t afford to build in the sky?
Is it any wonder that supply is down?
7) Transaction Costs
A friend of mine told me that this was “the elephant in the room,” but please, don’t let it be! I’m quite transparent about the transaction costs – the acquisition costs, and disposition costs, associated with real estate, the least of which is my own fee for service.
The big two costs are Realtor fees and land transfer tax, but don’t discount the small fees either.
Legal fees on the purchase and sale can cost $3,000, which is a lot if you’re selling for $300,000 and buying for $600,000.
And don’t act like you won’t paint, renovate, redecorate, or buy new furniture. People always forget that moving from a 1-bedroom condo to a 3-bedroom house means they have to spend a ton of money on furniture.
But yes, the big fees should be discussed.
Let’s say you’re selling your $400,000 condo, and buying a $1,000,000 house.
The 5%+HST on the sale is $22,600, or list with a cheaper agent, but you’re still paying over $15,000.
Land transfer tax on that $1,000,000 house is $33,200.
So to move from a $400,000 condo to a $1,000,000 house is going to cost you in the area of $55,000, and that’s before legal fees, before cleaning, painting, and updating the new place, and before furnishing your new $1,000,000 house.
Surely there are one, two, or ten thousand people out there that have realized this, and decided to stay put?
8) Being “Stuck” In Your Starter Home
I think a lot of you can relate to this.
You bought your house for $400,000, with dreams of one day buying a larger house, in the same area or different, for $1,000,000.
Your house is now worth $850,000, and that represents a ton of equity that you can use toward purchasing the new home.
But that new home, which was $1,000,000 when you bought, is now $1,800,000.
All you’ve done is create equity that can be used as a larger down payment along with a much, much larger mortgage.
This has caused some home-owners to renovate and expand, and it’s also created a legion of market bears who are holding on and waiting for the crash.
But that logic gets you nowhere. That’s what we call “Christy Clark Thinking.”
Christy Clark, of course, wants to “make housing more affordable for the middle class,” and thus has effectively banned foreign investment in Vancouver by instituting her insane 15% tax.
I read one economist (for the life of me, I can’t find the article) who said that if housing was really going to be “affordable” for the middle class, it would have to drop somewhere in the neighbourhood of 60-70% in value.
If that happened, there would be a massive depression, and nobody would be thinking about buying larger homes.
So those who are “stuck” in their starter homes are in the same Catch-22.
They can’t hope and prey that the $1.8M home of their dreams drops in value, because then so too would their own $850,000 semi.
Okay, I’m over 2,000 words and it’s nearly 2:00am so I have to wrap this up.
But I encourage you (not that you need it…) to comment on the eight points above, or share your own.
Because if I had more time, and the ability to be brief (not happening…) I could come up with a few others for this list.