CMHC identifies Toronto's vulnerabilities

According to a report released by the Canada Mortgage and Housing Corporation, Toronto is among the country’s vulnerable housing markets.

“Where we continue to detect strong evidence of vulnerability is in overvaluation,” said Dana Senagama, principal of market analysis for the GTA at CMHC. “For instance, prices have started to slow, in terms of growth rates, following the foreign buyer tax and OSFI [Office of the Superintendent of Financial Institutions] changes that came at the beginning of the year, but there’s insufficient evidence of the persistence of the kind of changes we’re seeing and the intensity for us to conclude that overvaluation is not a problem.

“We’re still seeing price growth across different sectors of the housing market that are not in line with economic fundamentals, such as income growth and population growth, and that’s why we still continue to detect strong evidence of overvaluation.”

The Housing Market Assessment report for Q2 2018 focused on all of the nation’s markets, but found interminably low housing supply in the Toronto region has contributed immensely to rising unaffordability.

“Things take a lot of time to come onto market,” said Senagama. “Because of that, even with some changes we’re seeing, which are really to curtail demand, we see fundamentals at play like strong employment and immigration. These are demand drivers, but supply cannot respond, so no matter what you’re seeing in the market, if supply can’t meet demand you’re always going to see price growth. It might just shift from low-rise to high-rise, as we’re seeing, and that’s why the condo market is very tight.”

The rental vacancy rate in Toronto is 1%, but it drops to 0.7% for condo rentals. The dearth of purpose-built rental buildings has made condo investors indispensable, however, new mortgage lending rules have put single-family homes out of reach for many and redirected them to the condo market, where fierce competition has broken out between investors and end-users vying for the limited supply.

“The condo market has acted as the de facto accommodation supplier, but you have a case where investors buy condos to rent out and end users are also buying that product to live in, and now you have these two competing forces vying for the same product,” said Senagama. “That is creating competition and driving prices higher.”

Plaza Corp.’s Senior Vice President Scott McLellan explained that builders are doing their best to curb escalating housing costs, but too many factors beyond their control impede any progress they make.

“The reason products aren’t coming to market is because of the red tape,” said McLellan. “It takes way too long. There’s too much government involved and it’s leading to delays. The longer you wait for product to get built and wait for approvals, the construction costs go up. A lot of issues out there are based on the fact that the process is way too slow.”

Adding to the problem is the dissolution of the Ontario Municipal Board, which succoured the intensification initiatives. But fewer units translate to higher price points.

“Without an OMB anymore, it’s going to make things even more difficult,” said McLellan. “In areas where there should be more density, because you’re on a subway line or Places to Grow dictates it, we lose the OMB and that will have the supply chain reduced even more.”

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