CBI BLOGHousing

Can we build our way out of a housing bubble?

By April 18, 2017 No Comments

With housing prices in the Greater Toronto Area (GTA) continuing to soar, policy makers are house hunting for solutions. Ministers Morneau and Sousa and Mayor John Tory meet today to discuss options to cool the Toronto housing market, and next week we can expect to see measures introduced in the provincial budget.

In addition to these events, Ontario will soon introduce a revised “Growth Plan” for the Greater Golden Horseshoe Region which outlines how the province can sustainably plan regional growth over the next few decades. The revised Growth Plan could encourage the building of more housing supply in places where we need it.

Discussions around the GTA’s skyrocketing real estate market often bring up the supply-side of the why-are-houses-so-darn-expensive debate. But suggesting that a lack of housing supply is responsible for current runaway prices and housing bubble distracts from the urgency to address demand pressures.

We are building enough homes – that’s not the problem

The latest census numbers show that the GTA population is not growing fast enough to justify housing prices. The graph below from Maclean’s shows the disconnect. The Toronto CMA population grew by the smallest number of people of any census period in decades.

Source: Screen captured from Maclean’s article. Census figures show that population and housing prices are less closely associated then they have been in over 4 decades.

For years, housing construction has kept pace with population growth in the GTA. According to Toronto-Dominion, relative to population growth, there are a record number of new units under construction in the GTA.

In fact, new housing construction per population growth for the GTA is greater than for Canada as a whole. (See graph below.) BMO has concurred with this analysis in a report released in February: “We would remind that housing starts in Toronto and Vancouver have been chugging along at almost 70,000 units per year recently, an all-time high…”

Graph taken from TD Economics, The Heat is On, March 2017.

 Flying off the shelves

Ryerson CBI’s recent report In High Demand found that Ontario is building enough homes to shelter our growing population. However, in a housing bubble, not even substantial new supply can keep up with speculative demand. Exceptionally strong demand is drawing down inventory, for both re-sale homes and new construction. TREB data shows that while new listings have remained steady over time, active listings are at record lows. (See figure below).
Houses and condos are flying off the shelves, with listings gobbled up by demand faster than new listings can be replenished. This departure between sales and inventory illustrates strong demand factors at play, as this Huffington Post video “How Toronto Inflated a Housing Bubble” cleverly illustrates.

Source: TREB data used in graph from In High Demand

 Cool it!

It’s clear that we are building enough housing to serve the population of our region. But demand pressures continue to drive down active listings and drive up prices and expectations that prices will increase. In the immediate term, therefore, it is necessary that our policy-makers introduce measures that change these expectations. Recent news coverage suggests this might already be starting to happen as the GTA heads into a busy spring market and sellers race to list their homes in anticipation that the Ontario budget will introduce market-cooling policies.

Experts have suggested a number of key policies most effective at addressing speculative demand and changing expectations, including a tax on out-of-country investment, a speculation or “flipping” tax, a progressive capital gains tax or a progressive property surtax that reconnects the housing market to the labour market.

House the population, don’t feed speculation

Near-term action should focus on cooling demand and other affordability interventions. Housing supply takes time to come online, and without addressing the demand factors that inflate the housing bubble, more housing stock could serve to feed the speculative market.

For the longer term, we must plan to build supply to house our population, not feed speculation. While data shows that there is sufficient quantitative housing supply, there is a lack of suitable and affordable housing for a range of families: home buyers face the choice of living in a small highrise condo units or “driving till they qualify” to the suburban fringes where most family-sized houses are being constructed, often dearth of schools, transit and other services.

What’s needed is more “missing middle” housing supply, for both buyers and renters. These housing options include multi-unit homes such as townhouses, stacked flats or midrise buildings that are generally more affordable than semi- or single-detached houses. These types of homes are also closer to jobs, amenities and transit, and are appropriate for a range of family sizes, and can be targeted at end-users instead of investors.

Unfortunately, factors such as outdated zoning, approvals processes, community opposition to density, and infrastructure upgrade costs often make missing middle housing cost-prohibitive for homebuilders. It’s much more cost effective to build out or build high. Strategic implementation of the Growth Plan, therefore, requires a package of policy, finance, and regulatory solutions to reduce barriers and make it feasible for municipalities to plan for intensification and cost-competitive for developers to build missing middle housing.

Source: CBI and Ontario Home Builders Association joint report Suburbs on Track.

Governments can also leverage existing municipal assets –including those owned by agencies, boards and commissions such as the TTC or TCHC lands – for affordable market and rental housing. The public sector could also partner with developers to build affordable rental housing that would offset market housing costs. Regent Park, Alexandra Park or Lawrence Heights are great models of leveraging TCHC lands.

The same should be done for other public assets, including building housing around TTC and GO stations. The province is already spending over $16 billion dollars upgrading the GO system, so ensuring this investment requires intensification around these transit hubs only makes sense.

While a vacant property tax on some estimated 65,000 empty homes in Toronto can provide much needed rental inventory, there are other ways to add gentle density to established neighbourhoods that are still low-rise and reflect the character of the neighbourhood. These options include semis, triplexes, townhouses, laneway housing or even secondary suites.

It’s also important to note that many of these so-called “stable neighbourhoods” actually show declining populations as they age and gentrify, and more population is actually helpful to support local businesses and pay for services. Municipal governments can work to solve the zoning and technical barriers that prevent adding this type of low-rise housing supply to the mix.

We need to stop debating about whether to address supply or demand, because we need to do both. Ontario can’t build its way out of the immediate housing bubble, but we can plan our way to affordability and build the right supply for a growing and sustainable region.