The real problem in the GTA is not enough new houses

Terrence Belford – Globe and Mail

There may be a perfect price storm brewing in the Toronto real estate market. Especially affected will be both new and resale homes – all those detached and semi-detached houses and townhouses families look for. Federal Finance Minister Jim Flaherty suggested the possibility when he announced changes to residential mortgages in mid-February. But he took only small steps toward reducing demand.

Mr. Flaherty’s most significant move was to say that from mid-April on anyone seeking a mortgage at a rock-bottom variable rate had to prove they could afford payments on a five-year fixed-rate mortgage. Truth be told, for the past three or four months many lenders had already demanded that people looking for variable-rate mortgages qualify for the higher three-year fixed-rate ones, mortgage brokers say.

Brokers have also been advising clients that even if they get a variable-rate mortgage, they should make payments at the three-year fixed-rate level. That advice serves two goals: It pays down the mortgage faster and cushions borrowers against anticipated increases in interest rates.

Mr. Flaherty ignored the real problem, which in the GTA is the supply of houses.

There’s no point in marginally reducing demand if the supply is not there. Continued high demand coupled with extraordinarily low supply mean prices will shoot up faster than dandelions after a spring rain.

Let me explain. Normally we would go into a new year with anywhere between 20,000 and 22,000 new homes in the GTA waiting for buyers. This year, there are just 7,400, according to RealNet Canada Inc., which tracks the market. This means anyone looking for a new family home has an extraordinarily small supply to choose from. But if you need a home, with mortgage rates still at historic lows, it continues to seem a great time to buy.

So, you look at resales, which is exactly what a record number of buyers did in the first six weeks of this year. Jason Mercer, the Toronto Real Estate Board’s senior manager of market analysis, says the period between Jan. 1 and Feb. 15 set a new record – 8,464 resale home change hand, up a whopping 81 per cent from last year.

Listings were up 15 per cent as well; that number was 6,212. As people saw the prices their neighbours were getting, they decided to join the rush, sell and move up, down or sideways.

The result? Resale house prices in the GTA rose 18 per cent from the same period last year. The average resale price is now $417,915, which incidentally puts them solidly above the $400,000 ceiling for exemption from the Harmonized Sales Tax (HST), due to come into effect July 1.

So the result of the small supply of new houses is huge pressure on resales and therefore a likely continuation of big price jumps.

“I think for the next six months at least the resale market will be the strongest game in town,” says Cam Forbes, director of operations and a broker at Royal LePage Real Estate Services Inc. “Mid-year will be the telling point; I don’t know if demand will continue at this level. “But if it does then the situation will indeed be worrisome.”

Mr. Forbes and Mr. Mercer suggest that if interest rates rise as predicted – perhaps to the 5 per cent level – that will take some people out of the market, and yet the ones most affected are likely to be the young just starting careers whose chief interest is small, affordable downtown condos, not houses anyway.

The HST may also have an effect since, it will effectively drive up the price of all housing over that $400,000 mark.

But what the GTA really needs is a healthy supply of new low-rise homes and that rests largely in the hands of municipal politicians not builders.

The whole lengthy process of getting approval for new developments came almost full stop last spring in the wake of the global recession. Builders shelved plans for new developments until they could see signs that the GTA was starting to recover. By summer when demand came back strong they had lost half a year.

At the same time, local municipalities had started rethinking whether they indeed wanted new subdivisions, and for those already in the works, they boosted development charges, which have become a handy back-door way of raising municipal revenues without much public outcry.

As Stephen Dupuis, president of BILD, the home builders’ association, points out, between 2001 and 2009, municipal charges on new development rose by 134 per cent, which is about four times greater than house prices rose during the same period.

It is indeed a gloomy picture. But unless we start focusing on the issues of supply and affordability, the GTA could be headed for trouble.

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

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