Stop, drop, and roll. The average price-per-square-foot (PSF) for Toronto is up 32.50% since one year ago, with downtown Toronto hitting almost $800/sqft on average. Following up on our post from two weeks ago that discussed how crazy the Toronto condo market is right now, we are excited to share some thoughts from Mark McLean, the new Broker of Record with Property.ca, our affiliated licensed brokerage, and an experienced mind on the matter of real estate.
Toronto prices fit a world-class market
It may be high time to start looking at Toronto as a world-class market. Last September we released a report comparing condo affordability on a global scale, in which the data revealed the average PSF for Toronto was roughly $500, while cities like New York and Paris were up over $1,500/sqft. Now, as Toronto prices sail towards the $1,000/sqft mark, it seems safe to say that Toronto is reaping the reality of its stature as a world-class city. But for first-time buyers, as well as many established homeowners, it’s hard to see Toronto’s rising real estate prices as something worth celebrating. One thing to remember, however, is that Toronto still has a lot of room for growth and the city remains notably affordable when compared to New York, Paris, or London. If we’re likely heading towards world-class real estate prices, $1,000+/sqft, it’s better to hop aboard now rather than later.
To a certain degree, these prices should be expected. Toronto is Canada’s centre of finance, a major player in the entertainment, education, and healthcare industries, and a vibrant, multi-cultural centre where people from all around the world want to live. The GTA and the Golden Horseshoe have a growing population, twelve million and counting, with most people moving into urban centres and cities. People move to cities for the jobs, the convenience, the culture, and the lifestyle. The rising prices are not the problem, or the enemy, here. Many factors are at play to create this crazy market.
Causes of rising real estate prices in Toronto
Development restrictions are one of the causes of rising prices in Toronto. It’s a slow process with many areas for potential delay. It takes nearly 4 months for someone to gain the permit to build a single detached house. Just imagine how long it can take for a condo developer to gain approval to start building! Adding to the difficulty of development, many neighbourhoods in Toronto uphold the mindset of NIMBYism, or “not in my backyard,” which is both an understandable standpoint for the preservation of neighbourhood character as well as a hindrance to further development. Height restrictions on buildings that allow a three-storey residence to remain where a six-storey building might bolster the number of available homes, disputes over the loss of light blocked by a new tower, or the obstruction of a good view—these are some of the more common results of NIMBYism.
Along with development restrictions, city planning and neighbourhood infrastructure also add to the difficulty of increasing supply. This issue often leads to someone suggesting that developers move into Ontario’s Greenbelt. According to Greenbelt Alliance, “Developers and municipalities have made over 650 requests to take land out of the Greenbelt for development, even though they have access to over 100,000 hectares of land outside the Greenbelt that is ready to develop.” There are areas within the city of Toronto that could be developed first. And although efforts are being made, these undeveloped areas often lack necessary infrastructure or they require massive re-design, such as the Lower Don Lands.
Many Toronto neighbourhoods want higher density. In Queen West, “fast rising real estate prices have diverted record amounts of capital from the city’s economy, forcing the closure of a number of the city’s trendy shops.” But the fast rising prices are merely the symptom of the real problem–the low supply of new homes. People want to live and work in Queen West, without a doubt. As a city, Toronto wants a higher density, a growing population of people from across Canada and abroad. A growing and diverse population is what makes the neighbourhoods of Toronto great.
What can the government do to lower real estate prices?
Foreign investment is also a factor in rising real estate prices, but we think it’s less menacing than many editorials make it out to be. The majority of foreign buyers that we deal with are end-users who have moved to Toronto to work and/or study. However, the statistic that 5% of condos are owned by foreign investors is unrealistically low in our opinion. The problem is with foreign investors who purchase multiple properties. We think implementing a tiered foreign buyer tax, in which investors that purchase multiple Toronto condos are taxed higher, would be a better option. Additionally, a vacancy tax could help to limit the use of properties as investment holdings.
The most difficult part of the problem is government intervention. Should government leave the market alone? Should it increase interest rates? Should it find a workable balance? At a federal level, government intervention is very tricky because the real estate market is not a uniform market from coast to coast. Raising countrywide interest rates to slow the Toronto condo market might negatively impact the purchasing power of homeowners in Calgary or Nova Scotia, even though their respective real estate markets are doing well. How could we slow down Canada’s big cities without toppling the whole country? For now, prices are going up. We expect them to continue rising, at least for the rest of 2017.