“If I had an hour to solve a problem I’d spend 55 minutes thinking about the problem and 5 minutes thinking about solutions.”— Albert Einstein
The Greater Toronto Area has seen a severe shortage of housing development over the last decade, and we pride ourselves on guiding our clients through complex opportunities exactly like this to invest in profitable developments. We believe that problems exist to be solved, and crafting those solutions requires us to understand the mechanisms that define the challenge in the first place—including our partners.
So why are we, as a province, responding to the issue of land supply by manipulating market demand? Developers are frequently cited as saying that traditionally desirable land is in short supply, while non-profit research covered in our last post suggests that 80% remains. How will developers and investors know when and where to find the best opportunities? That’s why we exist.
Ontario’s Policy for Land Supply Clashes with Consumer Demand Preferences
Frank Clayton, a senior researcher at Ryerson University’s Centre for Urban Research and Land Development, aggregated survey data from numerous sources to determine that home buyers want to acquire low-rise, single detached homes more than any other type of housing unit. This is a problem because Clayton also believes that Ontario’s provincial policy has favoured the development of condo units instead of sought-after detached homes, in direct opposition to prevailing consumer preferences.
Millennials prefer condos slightly more than previous generations, but not nearly enough to outweigh the existing demand for single detached houses. Single detached homes accounted for 66% of all 2015 house sales in the GTA, whereas condos accounted for 34%. Bolstering the market with condos hasn’t curbed demand for detached homes, even with higher urban density targets for regions in and around Toronto. Most cities have balked at meeting the newly proposed density targets anyway, indicating that the central provincial policy does not match population growth projections for the area. We think there are opportunities to match current demand for housing as well as ways to meet the future demand for condos.
The New Mortgage Rules Might Not Curb Demand
We want to explore this as a standalone topic in the near future, but it is worth noting here that the government’s nation-wide changes to the previous mortgage rules were intended to curb demand. The logic follows that if demand falls, then so too will the price of housing on the supply side of the equation, eventually finding equilibrium in the market. But there are still many potential home buyers out there, and they want individual homes sooner than later.
Benjamin Tal, deputy chief economist for CIBC World Markets, has said that Places to Grow “is the number-one reason GTA house prices are rising.“ The legislation may be revisited in the future, but it seems likely that we will see short-term incentives to promote apartments and condos before that happens. Since the government wants to lower housing prices by softening demand as well as increasing urban density targets from around the GTA form 50 people to 80 people per hectare, there is a reasonable expectation that we will see tax incentives to rent apartments and purchase condos instead of buying detached homes. There will be opportunities for profitable long-term investments throughout this transition period, and we cannot wait to explore them.
We have yet to see how this will play out in the long term, and we welcome the chance to solve this puzzle for our clients. Start a conversation with MarshallZehr to discover how you can develop commercial real estate in the GTA profitably within this new landscape.