Hey guys, Carl Langschmidt here, President of Condos.ca. We’ve been hearing from every direction that Toronto condo prices are going crazy and something needs to be done.
A recent report from the Ryerson City Building Institute released data showing the drastic, demand-side impact of foreign speculation on Toronto real estate and the need for government action. On the other side of the issue, Brad Lamb, a well-known condo developer and broker, published his opinion on why a foreign investor tax might just be the worst thing possible for Ontario. Brad Lamb states that foreign investors “represent a significant percentage of buyers in the purchase of new development condos sold from floor plans.” Without them, new developments would suffer and Toronto’s supply problems would worsen. With all this going on, I felt there were a few things worth considering before jumping to conclusions.
#1 – LESSONS FROM VANCOUVER
It’s no secret that foreign ownership has impacted the Vancouver real estate market. Last summer, I spent some time scouting downtown Vancouver for an office location for Condos.ca and as I walked from Coal Harbour and Gastown to Yaletown and Kitsilano, the city truly felt like a ghost town compared to Toronto. It was clear to me that Vancouver was being used as a “land bank” for wealthy foreign investors who didn’t live there. If we can learn anything from Vancouver it’s that zero checks and balances benefit only the very few who exploit the market, typically real estate developers and agents who sell to foreign investors.
#2 – HOW MUCH FOREIGN INVESTMENT DO WE NEED?
There is a lot of discrepancy surrounding the actual number of foreign buyers impacting Canadian real estate. Last year, the Canada Mortgage and Housing Corporation (CMHC) estimated foreign buyers comprised only 2.3% of sales in Toronto (laughable to anyone who works in the Toronto condo market). Our talks with sales reps in the trenches indicate it is much higher; some reported as high as 70% foreign ownership at developments like CityPlace.
The Ryerson report indicates that “the long continuous wave of foreign capital, in combination with the recent spike in foreign buying, has created powerful expectational dynamics.” The rising prices, largely foreign buyer driven, are causing domestic buyers to jump into the market as well, which further increases prices and the problem.
On the other side, Brad Lamb believes that without these foreign investors many projects would not be built, it would kill the condo market and potentially create a Canada-wide recession. Personally, I feel this is just fear mongering. But in one dimension Brad is right. Without these foreign investors, some of these projects may not go ahead. Putting pressure on developers, however, may force them to cater to Canadians looking for a home instead of investors seeking to park, launder, or diversify their asset portfolio.
I am not blaming developers for the problem. After all, there have been no regulations, and they have simply sold their inventory to the highest bidder. Interestingly, between 2009 and 2016 pre-construction condos in Toronto cost more per sqft than newly built resale condos. It’s not that local buyers and investors did not exist to support the growth of these new developments, but rather they have steered clear because they struggled to justify the price discrepancy at the time. It’s only now that we have this “supply crisis,” in part accelerated by Vancouver’s 15% foreign buyer tax shifting interest over to Toronto, that we finally need to address the imbalance. It is precisely our lack of regulations that has got us here today. The Condos.ca PSF INDEX reports Toronto condo prices are up 20.45% in the last sixty days alone.
This increase is way beyond what the demand from immigration and population growth would predict, but it is not beyond what unregulated greedy investors have done in other financial markets.
So back to the question of how much foreign investment do we need. The stats show:
a) each year approx. 100K new immigrants arrive in Toronto looking to make this city their home, and
b) each year our entire Toronto condo development industry adds approx. 20K new condo units to the marketplace.
With local demand like this, I will agree with the Ryerson report that foreign real estate speculation is a big cause of this crisis. While Brad accurately recognized that the foreign investor market was relatively contained to homes over $4 Million and pre-construction condos, this is no longer the case. Pre-construction inventory levels have dropped significantly, causing investor demand to spill over into all areas of the resale market. This leaves local buyers competing for homes against wealthy investors looking to stash their cash in our economy because they have little or no faith in theirs.
#3 REGULATIONS AND TAXES DO WORK
Both economists and regular joes can be loosely divided into two camps. Those who think markets should be mostly unregulated and lightly taxed and those who think that markets should be mostly regulated, especially when the public is at risk. One side feels that wealth, competition, and the proliferation of ideas need freedom to grow and natural market forces will govern them. The other side points to history and says, “nuh uh.”
The inconvenient truth for the ‘market freedom’ crowd is that across history periods of lax regulation correspond with speculative bubbles and collapse. The 1910-20s famously saw skyrocketing equity prices caused by speculation, with no regulation to rein it in. That speculation ended very badly. As we are seeing with the current explosion in house prices, the impact of speculation is pushing many middle and working class families beyond their means, leaving them vulnerable to sudden price corrections or even collapse.
Another inconvenient truth is that government regulation hurts the profits of speculators and big-money interests, but doesn’t damage real growth. History has shown this time and time again, and I believe this to be true of the Toronto market.
Finally, the trouble with the champions of unregulated, ‘free market’ systems is that they don’t truly want systems to be free. They have monopolies or lucrative positions and invoke the Free Market Jesus when something threatens their profit. It’s possibly why the CMHC underreports foreign buyers. It’s certainly why Goldman Sachs throws billions of lobbyist dollars at eroding regulation in the financial industry when the great recession is still fresh, and it’s probably why Brad Lamb and other developers may not agree with a foreign buyer tax.
In economics, moral hazard occurs when a person takes risks because another bears the cost of those risks. We see speculative risk-taking happening in our industry, and we don’t want families bearing that cost.