The Root of Toronto’s Housing Crisis
Soaring home prices. Bidding wars. Foreign buyers. Protests to lobby the government to take actions to increase purchasing power. Welcome to Toronto’s Housing Crisis. Is there a crisis here? Do we need more taxes or government intervention on interest rates? Can this continue? All great questions that have been answered many times in the media just in the last week or two. Let’s take a closer look at some of these questions.
First, and foremost, the idea of implementing a foreign buyer tax to follow in the footsteps of British Columbia seems to be gaining momentum. The media has ran with this and now the public is up in arms as to why Ontario has not followed suit. Foreign investors make up less than 5% of our property purchases here. Sure, it may be a good idea to tax them, but will that really do anything to curb the soaring prices? When has addressing 5% of any problem resulted in a great solution?
Soaring home prices. Remember a few months ago when the government stepped in to implement new measures to curb the price hikes? They stated they needed to bring in new measures to mortgage rules to slow down the housing market and bring some stability to price points. They adjusted the ratios used to qualify homebuyers for financing through CMHC insured mortgages. Everyone figured this was what was required to solve the issue of foreign buyers that are driving up pricing in the GTA. Great plan right? Wrong! Foreign investors do not qualify for high ratio mortgages to start with. They need to put down about 35-40%, and thus the new rules make them exempt from the adjusted ratios. These are only applicable to people that are putting down less than 20%. Who was affected by the new rules? First-time, Canadian home buyers of course. So, in the government’s wisdom, and efforts to bring in measures to make housing affordable, the new rules further reduced the purchasing power of young Canadians.
Now don’t get me wrong. I’m not saying that we do not have a problem with the housing market and double digit price increases. We sure do. And we need to address it sooner rather than later. The solution is not in “trial and error” techniques. The solution is not going to be found in a dark room with people grasping at straws. To find the solution you need to get to the root of the problem. What is the root of the housing market’s problem?
The root of the problem is that the Toronto Housing Market is out of it’s equilibrium. This has been the case for the past nine years, and the problem is getting worse. The root of the problem is not foreign buyers, or mortgage qualification ratios. The root of the problem is basic economics … supply vs demand. To fix the problem, we need an intersection of the demand and supply curves. To understand the issues the market is facing we first need to analyze supply and demand. Inventory of housing is, and has been, at historic lows. In the 80s and 90’s, even into the 2000’s, housing starts were keeping the market balanced. Supply was being increased to meet demand. It was around 2005 when the economists started screaming about Toronto having too much inventory, and how this was creating a bubble that would burst. “The market is not sustainable” they said. The government heeded their advice and put the brakes on developers, making it harder for them to attain financing to fund projects. In around 2008, housing starts were pretty much halted due to the “bubble theories”. Now, these same “experts” are saying Toronto does not have enough inventory and this has created a bubble that will burst. A measure to determine supply is referred to as “months of inventory”. A balanced market, or market equilibrium, takes place when Months of Inventory is between three and four. As of right now, Toronto’s Months of Inventory hovers around one month. What this means is that if no more homes come on the market, then in one month there will be nothing available to purchase.
Let’s shift gears and look at hamburgers for a minute. You own a Burger place in an office building that has 250 employees. You sell each burger for $10. You prepare 30 hamburgers. The 250 employees know that you do not have enough and if they want one of your burgers, they have to jump the gun and get in quick or they need to outbid the person beside them for that burger. You could make more burgers so everyone has one, but you’re limited to making 30. Now let’s complicate this a bit more. The buildings adjacent to yours have another 10 employees that are hungry and want to walk over to your restaurant. 260 starving employees race over, and all of the sudden you have a bidding war. The starving employees with the best offer end up with the burgers right? The market price for the burger has not changed from $10. However, people are offering $15 or more so that they get one. How do you fix this problem? If the government was lobbied to address this issue, they would want to impose a tax on the people coming over from adjacent buildings right? Would the tax on the 10 people do anything to solve the issue here? The solution is to have more burgers! Toronto needs more hamburgers!
Okay, so a bit of a stretch but if you look at how many people move in to the GTA area each year, it amounts to about 80,000. That’s 80,000 NEW people coming in. Most of these people strive to buy a home within four years. Now take a look at how many houses sell on the Toronto Real Estate Board each year, and that number is around 105,000 on average. If we have limited housing starts, where are the people selling their homes going to move to? Toronto needs more housing starts. The root of the problem is inventory. The solution is not going to be found in mortgage rules or foreign buyer taxes. The solution is to be found in increased housing starts. This goes further to increase employment, revenue for cities and towns, and will bring some stability to pricing.
When all is said and done, we don’t need to follow in BC’s footsteps. All that is much-a-do about nothing. Let’s address the elephant in the room and start lobbying the government for an increase in housing construction. Let’s work towards a solution that will actually make a difference rather than dance around the issue.
Asif Khan, Sales Representative, Owner, ABR
RE/MAX Prime Properties, Brokerage