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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