In late April, Ontario Premier Kathleen Wynne and Ontario Minister of Finance Charles Sousa announced a 16-point Fair Housing Plan to cool the red-hot housing markets in Toronto and southwestern Ontario. A foreign buyers tax, vacant homes tax, and expanded rent control were the most notable measures introduced.
Just imagine Wynne and Sousa in front of a one way mirror with all the potential culprits lined up in front of them: offshore speculators, domestic investors, rental apartment owners, profit-seeking builders, absentee landlords, municipal planning departments, lazy mortgage underwriters, tax-avoiding property scalpers, land hoarding developers, double-ending realtors, a neglectful Canadian Revenue Agency, onerous real estate taxes, exorbitant development charges, organizers of the frenetic real estate seminars, rising employment, population growth, and higher incomes. With everyone whispering in their ears, telling them who is to blame and who isn't, the Ontario government pointed at a bunch of suspects, ignoring two of the biggest ones.
Ontario Finance Minister Charles Sousa, right, delivers the 2017 Ontario budget next to Premier Kathleen Wynne at Queen's Park in Toronto on Thursday April 27, 2017. (Photo: Nathan Denette/CP)
Real estate has often been one of the most speculative asset classes, and anecdotal evidence certainly points to more investor activity over the past year in the Greater Toronto Area (GTA). A recent Realosophy report found there was a big increase in the number of new freehold homes being rented out by their owners. Long-term investors provide much-needed rental supply, which is a positive for any real estate market. However, short-term investors, especially highly leveraged ones keen on flipping a property in three to nine months add volatility to the market, unwanted risk, and the higher probability of a housing market correction. The government should have taken aim at domestic speculators, who likely comprise a much bigger share of the residential resale transactions than foreign buyers.
This would have been a positive step to prevent short-term speculation, but this measure has its limits because it is treating the symptom of the problem, not the actual problem. Speculators buy because prices are rising rapidly and they expect them to continue to rise, they don't buy in stagnant markets. So what caused prices to rise in the first place, and what else has happened over the past year to fuel the bigger boom.
One of the main reasons prices started to rise is a mismatch of supply and demand. Greater Toronto Area developers built 26 per cent less square footage in 2016 compared to 15 years earlier, as smaller condominiums capture a much larger share of total housing completions. Buyers in search of more generously-sized homes are bidding up centrally located properties, moving to the outer suburbs, or moving out of the GTA altogether. Areas like Kitchener, Niagara Falls, Peterborough, and Windsor, are all experiencing increased demand from prospective buyers leaving the GTA for more affordable housing.
It can't just be GTA ex-pats and speculation driving up these smaller communities in Ontario. The reason might just be something much more simple: more people. Statistics Canada estimates provincial population on a quarterly basis, and as of the end of Q1-2017, there were 219,000 more people in Ontario than a year earlier, more than the combined growth of Quebec, Manitoba, Alberta and British Columbia. This massive increase represents the highest level of growth in 15 years, and is twice the level of absolute growth experienced 10 years ago.
It will take a while for developers to ramp up supply in response to the need to house all these extra residents. In Toronto, where the bulk of new supply is high-rise units (which can take three to four years to build), it may not be until 2020 that this demand translates into built product ready to be occupied.
Until we see supply match demand, and house price inflation stabilize, we'll continue to see speculators in the market. Ontario added 80,000 more residents in the first quarter of 2017 (218,893) than the same quarter a year earlier (138,926), and those 16 measure won't be able to address the massively expanded need for housing.
When the cause of high prices is the result of something you want to occur, meaning Ontario is a very desirable place to live and move to, the solution is that much more difficult.
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