There has been much speculation about the cause of high prices in the Greater Toronto area residential Real Estate market.
The first question is, what are the major factors driving supply and demand.
Demand is being driven by extremely low interest rates and approximately 120,000 newly arrived immigrants choosing Greater Toronto as their home annually.
The collapse of the Alberta (oil based) economy has driven 200,000 people out of work. Many of these newly unemployed people, and many immigrants that would normally choose Alberta as their new home, are likely migrating to the Greater Toronto Area and compounding the problem of overheated demand.
Both factors, extremely low interest rates and large numbers of new residents, have been occurring for several years and are expected to continue in the foreseeable future.
Turning to Supply, it is limited by the number of new homes and condominiums that Toronto Area Developers are permitted to build.
The Ontario Government has restricted the amount of land being permitted to be developed with the Oak Ridges Moraine Act, 2001.
The protected land creates a barrier for residential Real Estate development that contains the expansion of the GTA from Brampton to Oshawa.
Higher demand for Real Estate, in an environment of constant or limited supply, puts upward pressure on prices.
Another important factor impacting the price of homes and condominiums is the cost of taxes on preconstruction houses and condominiums.
Taxes on new houses and condominiums include HST, Education Levies, Park Levies, Development Charges, Section 37 charges, Ontario Land Transfer Taxes, and in some cases Toronto Land Transfer Tax.
Greater Toronto purchasers of new houses and condominiums are paying an alarming 15% to 20% in additional taxes.
For example, that means at least $150,000 of a $1M new house and $75,000 of a $500,000 new condominium is tax.
So the major factors effecting the high price of Toronto Area Real Estate are:
An imbalance in the number of new immigrants emigrating versus the number of new immigrants that the Greater Toronto Area can comfortably absorb;
The Oak Ridges Moraine Act limiting the availability of land for residential development; and
The massive, aggregate tax of 15% to 20% on new houses and condominiums.
So what is the solution?
Common sense would be to address the number of new immigrants coming to the GTA, to eliminate the HST on new homes and condos, eliminate Section 37 charges, and to eliminate the City of Toronto Land Transfer Tax.
Due to the obvious economic benefits that new immigrants bring, and a lack of Political “will” to reduce taxes, I do not expect any of these options to be utilized.
The obvious, and more palatable solution to the Politicians, is to increase supply.
Supply can be increased by:
1) Governments increasing investment in infrastructure that would enable more land to be developed into residential;
2) The Planning Departments adopting a policy to allow greater density on proposed low and high rise residential Developments (where possible);
3) Developers proposing denser low rise property types like back to back semi-detached houses (drastically reducing the amount of land needed), detached singles that are easily converted by a new owner to duplexes and triplexes, and investment properties like four plexes, and six plexes, as a few examples;
4) Commercial Developers should have a second look at box malls and strip plazas, and reacting to the changing landscape of retail sales, redeveloping commercial properties in key locations to have a residential high rise component;
5) The Planning Department being more flexible with downtown industrial and commercial zoned land being rezoned to residential;
6) The Planning Department taking a more balanced approach in respecting the land rights of land owners and the taxpayers who will buy new homes and condos in the free market versus NIMBY neighbours who are against local Development; and
7) Land Developers and the Planning Department should work together to create more super projects like Downtown Markham. We could create the downtown North York that Mel Lastman championed in Aurora, Newmarket, Stouffville, or Milton. (I met with the CEO of Greenland Canada and his company is interested in providing huge neighbourhood improvements for their super projects to a level that has never been seen before.)
The solution is not to create a punitive tax on foreign investors.
As a Broker who sells multiple condo towers and low rise projects for Developers, I can tell you that about 2% to 3% of new home and condo sales in the GTA are to authentic overseas buyers who do not have status or a financial stake in Canada.
The reason new home Real Estate Brokerages know this is because we require identification from Purchasers, and those who are authentic overseas buyers are required to submit a significantly larger deposit.
Mayor Tory has stated publicly that he is aware that taxing foreign investors is not a solution that will yield any meaningful results.
The Toronto Area Baby Boomers are the wealthiest generation ever, in large part, due to the current high cost of Real Estate.
The vast majority of the middle class would credit Real Estate as their largest investment.
This is good news for some.
However our current generation of twenty-somethings will be the first generation of children since the beginning of the Industrial Revolution, that will have a lower standard of living than their parents.
They will struggle to afford down payments for their homes, and likely live in much smaller spaces than they grew up in, due to the high cost of Toronto Area Real Estate.
The recent CMHC changes and the reduction of the 35 year amortization make it more difficult for first time buyers to buy.
Real Estate ownership and investment is the gateway to personal wealth and financial security for average Ontario residents.
Any punitive tax measures on local Ontario residents show a lack of understanding, and respect, for tax paying Real Estate buyers and sellers.
The government should not pick groups like first time buyers and the hard working, successful middle class and stop them from their opportunity to attain financial security.
An approach focused on increasing supply is the only way to respect Ontario residents’ ability to buy, sell, and invest in local Real Estate.