Tamsin McMahon – The Globe and Mail

For many first-time home buyers, condominiums have been the easiest way to get a foothold into the housing market, a pit stop on the way to a dream home.

But a flood of new high-rise condos and fierce bidding wars for urban detached houses has caused a widening gulf between the price of condos and houses, which last year reached a record high.

Comment: And as condos continue to be created, increasing supply, while houses become scarcer as a percentage of total housing stock, that gap will only ever widen. Houses are not being built, condos are. Thus the number of condos as a total share of all housing units, will continue to increase. If there are 100 housing units and half are houses, but you add 10 condos to the mix every year, in 10 years you have 150 condos to 50 houses. The share of condos rose from 50% to 75%. As demand stays steady, or increases, for houses, prices will continue to be pushed up. Condos will also rise, but the supply is not as restricted, keeping price increases lower. Rare things cost more than common things, simple as that.

In December the average price gap between a condo and a single-family house in the resale market of Canada’s four major cities, Vancouver, Calgary, Toronto and Montreal, hit $320,000, according to data from Brookfield RPS prepared for The Globe and Mail. It has more than doubled in the past decade as the average resale price of a house in urban centres grew 90%, while the price of a condo grew by just 48%.

Comment: Economics 101.

The discrepancy is starkest in Vancouver, where the average resale house price has shot up 120% since 2005 to $1.1-million, while condo prices have risen by 50%. The gap is smaller, but growing, in markets like Toronto and Calgary.

The causes are predictable. The supply of new listings for urban houses, has followed “an almost uninterrupted downward trend” for several years, said Shaun Hildebrand, senior vice-president of condo research firm Urbanation. That has been driven partly by a lack of newly built homes in urban centres and also by the fact that existing homeowners have been hesitant to sell in case there’s nothing to buy.

On the other hand are the rising number of new condo developments, driven in large part by a push among policy makers to boost density and curb urban sprawl.

Comment: Supply of one product decreases while it increases for another product. Provided demand stays steady, prices will rise for the product with the lower supply.

But the price gap has profound implications, both for new buyers trying to find their way into the housing market without breaking the bank and for cities struggling to find the right mix of affordable housing.

Comment: Cities don’t have much say in what housing is built, developers and consumers do.

Increasingly, the price gap between houses and condos reflects the fact that the two appeal to entirely different buyers, with investor-owned condos mainly serving the rental market as young families bid up the prices of detached homes. Even Calgary, which traditionally has had plenty of room to sprawl, has seen the shift toward condo buildings featuring bachelor units and no parking.

Comment: Not necessarily. There are a lot of people buying or renting condos who would rather have a house. Some choose condos because they want that lifestyle, but others don’t have a choice – for financial or other reasons.

The glut of new rental housing has convinced many potential condo buyers to rent instead, driving down the demand for condos.

Comment: Not in Toronto. There is no “glut” of rental housing. Vacancy rates are in the 1% in the 416, which is about as low as it is possible to go. As fast as condos are built and offered for rent, tenants take them. The problem is that we have at least 35,000-40,000 new households created in Toronto every year, but are only building 30,000-35,000 new housing units. Demand continues to outstrip supply, keeping upward pressure on rentals as well as purchases. Condos, houses, apartments – all feel the same demand pressure.

“There isn’t that same sense of urgency as there once was to get into marketplace because the costs are actually comparatively lower to rent than to buy,” said Mr. Hildebrand.

Comment: Not in Toronto. Not when simple 1-bedroom condos can fetch $1,800/month downtown for tiny 500sf units. Bigger ones with parking and a view are over $2,000. That is NOT inexpensive.

Meanwhile, the trend toward basement rental suites has made it easier for home buyers to afford the massive mortgages on their houses, while also competing directly with condos on the rental market.

Comment: No, that is a completely different market. They people renting $1,900/month condos are not the same group that is renting the $800-1,000 basement.

Despite a trend toward high-density city living, for many Canadians the ideal home is still the detached house, which is why the prospect of losing out on a dream house has become a far more emotional than missing out on a great condo, said Cory Raven, managing broker at Re/Max in Vancouver. The chances that a similar unit in the same building will eventually hit the market are pretty good, while the chance of finding the same renovated house nearby great parks and schools is slim to none.

Comment: Great point.

Some industry officials say the slowdown in condo prices has been good for the market because it has driven out speculative investors looking to buy pre-construction units and then flip them a year later for a huge profit. Today’s condo investors are more often looking to make their money long-term on rental income rather than price appreciation.

Comment: What slowdown in condo prices? In Toronto, resale condos rose almost 4% in price in 2014 and sales were up 14%. New condo prices rose 3.6% last year. All that combined with a record 20,809 new condo completions in 2014. There is no slump of any sort in Toronto condos, none.

“We’re okay with prices in the condo market not climbing as fast as low-rise because it adds some stability into the marketplace,” said Paul Golini Jr., executive vice-president of Empire Communities, which builds both low-rise and high-rise developments in Southern Ontario. “If the price of condos were increasing exponentially, then the land would be increasing exponentially. It’s easy to get caught in that vicious circle of price increases.”

Yet in the rush to encourage urban intensification, cities like Toronto are now struggling to find the right mix of affordable housing to serve an influx of new residents from other provinces or countries.

Comment: While I feel for those priced out of the market, there isn’t really any struggle to find affordable housing. Developers are having no problem selling their product, so there is no incentive to lower prices. Land is expensive, labour and material costs keep rising, demand is not wavering. There is no downward pressure at all. But for the city stepping in and buying units to rent out or resell at below-market rates, there is no real way to create affordable housing.

“One could reasonably make the case that some of the [policy] incentives in place have taken us too far in terms of the shrinking diversity of housing choices,” said Toronto-Dominion Bank deputy chief economist Derek Burleton.

Comment: I don’t get this “lack of housing options” stuff we have been hearing of late. It is the exact opposite. With all the building of late, from 350sf bachelor condos to multi-level luxury units, low-rise buildings and townhouses, to infill properties and detached homes in the 905… there is a ton of housing choice out there. Rent a condo, rent an apartment, a basement of main floor of a house. There is probably more different housing options today than there have ever been in Toronto history.

He worries policy makers are focusing too much on development around existing transit corridors, rather than building a more comprehensive transit system that could help unlock new land on which to build a better mix of housing.

By encouraging more high-rise projects, cities haven’t necessarily succeeded in stopping suburban sprawl. In some cases, they have only pushed it farther away.

Comment: Give us an example.

The fastest-growing communities in Canada, according to the latest Statistics Canada census, are far-flung suburbs like Milton and Stouffville, Ont. as well as Squamish, B.C., which sit nearly an hour outside their respective urban cores of Toronto and Vancouver. They have been growing at a far faster rate than the cities they serve as young families move further afield in search of affordable detached homes.

Comment: Which has to do with the low supply and high demand of detached freehold houses. It really has nothing to do with condos downtown.

“There’s a little catchphrase that we came up with in the industry: Drive until you qualify,” Mr. Golini said. “You’re driving further away from the city core until you hit the number that allows you to qualify for that price.”

Comment: Yup, or shrink the condo until you qualify, if you want to live downtown. Depends on what you want.

But some say the tide is slowly turning. Builders are increasingly turning away from purely high-rise condo developments and toward mid-rise and townhouse developments in a bid to create more affordable family-friendly housing in the urban core. Changes to Ontario’s building code last month legalizing six-storey wood-frame buildings, which are cheaper than steel and concrete, should also help add mix of new, more affordable low-rise housing.

Comment: Which can be put on main arterial streets, like Queen and Dundas, where 60-storey condos cannot go. It is infill housing, but affordable, in smaller neighbourhood-friendly buildings.

In some cases condo dwellers are choosing to move up within the condo market rather than fighting bidding wars for houses in the city. The demand for bigger condos is helping drive up the price of units in older buildings in Toronto, which have traditionally traded at a discount to new builds, Mr. Hildebrand said.

At Yonge and Eglinton, in the heart of Toronto’s uptown, Menkes Developments Ltd. is building its first condo project directed to young families. In the Eglinton, which is slated to open in 2018, at least 10% of the units will be family-friendly three-bedrooms and the building will also have a dedicated playroom for kids.

Some buyers are now looking at condos as a long-term family home rather than a stop on the way to a detached house, said developer Alan Menkes. But the shift is happening slowly.

Comment: As did the shift from the suburbs to city living. But it will happen. Condos will become the new family home through the simple economics of supply and demand. More people move here, thus there will be more families. The number of houses will not increase, but the number of condos will. And soon we will be like New York or Paris, where kids living in high-rises will be the norm.

“We’re going to try to do more family condominiums, but the market is going to determine what we can build,” he said. “We don’t want to build things that the market doesn’t want.”

Comment: Which is why the city cannot force developers to build 3-bedroom condos. Let the market speak, builders will create what buyers want.

Even for the younger generation of home buyers trend toward settling down in a condo has been painstakingly slow, meaning the gap between condo and houses is destined to only get bigger in the coming years.

“There is a generation that finds it completely normal to live in a condo and not have any aspiration to buy a home,” Re/Max’s Mr. Raven says. “But they still have parents who they’ve got to go to dinner with on Sunday and those parents are telling them: ‘You have to buy a house, you have to buy a house.'”

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Contact Laurin Jeffrey for more information – 416-388-1960

Laurin Jeffrey is a Toronto real estate agent with Century 21 Regal Realty.
He did not write these articles, he just reproduces them here for people who
are interested in Toronto real estate. He does not work for any builders.
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