Have the Government's Good Intentions Led to Higher Prices in Toronto?

It made a lot of sense ten years ago. It appeareded as though the government was acting responsibly, but good intentions may have led to some negative consequences for those looking to buy real estate in Toronto.

If you recall, around 2004 the provincial government put in a policy that would discourage sprawl and encourage density. This provincial policy claimed that there can be no more development in the greenbelt surrounding the GTA. All development would need to be done inside the GTA or outside of it. Such policies had very good intentions behind them. A greenbelt would protect the farmland around the city and the surrounding area. So, if there were ever a failure in an external food supply from an outside country or another part of Canada, Toronto could still grow their own food to feed their population. Furthermore, it pushed developers to take up land that was previously a parking lot or an industrial land site, clean it up, and make it useful again.

From an environmental point of view, densification made the city more efficient. A better use of space and a protected greenbelt.  From a money point of view, the new policy allowed the city to collect more tax dollars. If an area that has 10,000 Torontonians had a number of new condos that added another 10,000 residents, then you would double your tax dollar revenues. There's no guarantee the province or city would spend the money wisely, but it would be there. It would put more stress on existing infrastructure, but it would be less expensive than building new roads and new water supplies in a brand new area. Simply put, it would not be cost effective to build more low rise housing.

It all sounds good and noble, but one of the results of this policy has led to a very distintive housing trend, partially a result of the greenbelt policy and partially policies of densification at the city level. Because the province and city encourage densification, developers build more high rise condos. The low rise supply of homes, like  houses or condo townhouses, are built less because developers make more money selling high rise condominiums (more units on a smaller piece of land).

So, if we look at the average price of high rise condo at the end of 2014, it would be $454,406. For a low rise condo or freehold house at the end of 2014, the price has shot up to $705,813. That's a $251,337 gap. It's the largest gap there has ever been between high rise and low rise homes, and that gap will continue to grow. In the late nineties, 40 % of the new construction was condominium. Now, it is over 80%. The supply of high rises keeps on growing. The supply of houses and low rise condos grows very little, far below the demand for it.

So, what does that mean? It means houses and low rise condos will likely become more valuable as time marches on. It also means for those folks who buy a condo in a high rise as a starter home will have a tougher time moving up.

It would appear the solution would be to get rid of the green belt policy implemented by the Ontario government, and let the developers build on the green belt. They will have more land to build low rise homes. The cost of losing the green belt would allow for lower Toronto home prices, at least for the short term. Of course, this would be poor urban planning. We still need to protect our food supply, and densification still allows for better uses of space and a fiscally responsible approach to city building.

I believe there are two solutions needed for the government to help remedy this situation. First, the government may need to insist that developers build more units that are suitable to growing families. Currently, we see condos getting smaller and built for couples or singles. There's little room to move up. If you want to keep families in the city, then you need to have more three bedroom condo units with amenities that appeal to children or couples or singles who want bigger spaces as they age and make more money. Second, we need better transit from Oshawa to Hamilton. If there is a desire for low rise homes, then we need to be able to move people to where the stock of houses and low rise condos are affordable to many people. We need a regional transit system like they have in big cites like Paris and London and New York that will take you from downtown Toronto quickly to Hamilton and Durham region. We can't keep thinking that Toronto functions as a separate entity from it's neigbhouring cities and town.  Some of this is happening already with improved GO transit coming to Hamilton, but it has to take place a lot faster and a lot more extensively. 

Transit will be the key thing all levels of government will need to focus on for the decades ahead. Toronto will very likely be an expensive city to live, where the downtown core will be pricey, but we need access to a wide variety of home price points and options that will accomodate the city we are becoming, not one that we were twenty years ago.

                               

Do House and Condo Prices Rise and Fall in Tandem?

I love the Olympics, and when they're on, I'll pretty much watch any thing when I have the time. I even found myself watching the women's synchronized diving this weekend where Canada snapped up their first medal.

What was so impressive about these synchronized divers are their ability to move exactly in step on the diving board, twist and turn at the same height in the air, and land at the same time with an almost equal splash. Really, I don't know how they do it. Amazing.

The whole thing has led me to think about the concept of synchronicity and timing in real estate. Often buyers and sellers of Toronto look to the media for guidance on how to enter and exit the market. Right now, the media is awash with talk of the Toronto real estate market cooling off or even crashing. Of course, for ever article or TV segment announcing a crash, there is an equalizing article the next day saying every thing is just fine and dandy. 

But I'm not here today to call out TV,  newspapers and some blogs on how they use real estate for more ratings and readers. I would, however, like to point out one assumption that gets made over and over again. And this assumption is all about synchronicity. Like the bronze medal divers, many articles and stories assume that condos and houses rise and fall in tandem, like two divers springing up and tumbling down together to the pool. But do they? Or, the bigger question, will they?

From a macro perspective, the short answer is yes. If there was a sudden rise in unemployment, for example, or a huge spike in interest rates, houses and condos would both be hit hard and would likely slow down or even fall in value.  The change in value would be different, though, depending on where you live in the city and just want kind of condo or house you live in.  To see the effects from the macro perspective, all we have to do is look south the the U.S. where the entire country lost value in their homes, albeit the effect varied widely from state to state. 

From a more local perspective, I think condos and houses do not move in tandem at all. We would certainly not receive a bronze medal for synchronicity, that's for sure. As I've mentioned in many previous blogs, there are very few homes that are currently under construction in the GTA, but our population is increasing. So, there are more homebuyers, but very few houses being built. A pretty good recipe for an increase in the value of houses over the long term based on simple supply and demand data. As for condos, there many condos being built.  And the really, there needs to be. There is a huge rental demand and a huge buyer demand. Supply is keeping up with demand, though some say exceeding it. So, on local level, houses and condos are not moving in sync at all. Houses are set up to increase more in value than condos. 

Now, this is a  HUGE generalization. There are better condos than house and better condo locations then house locations. There are certain condos that I would say are better investments than houses. But, all in all, condos do not increase in value as much as houses do across the GTA. 

Does that mean every one should rush out and buy a house? Absolutely not! Some houses require a lot of renovations off the top that could really put a dent in your budget, and houses require a lot more labour - namely shoveling snow, cutting grass and cleaning out your eavestroughs.  You really have to dig deep and figure out if you're a house person or a condo person. I mean, in the end, you have to live there or be the landlord. I would never buy a house if you're a condo person. I would be the right condo!