The housing markets in Toronto and Vancouver are poised for significant long-term cost growth as flourishing demand and insufficient supply overwhelm recent policy efforts to cool those markets, according to a new report by economist Benjamin Tal.
Mr. Tal, deputy chief economist at CIBC World Markets Inc., said home sales in Canada’s two most expensive cities will flatten or even soften in the next year but the downturn is going to be restricted by strong demand.
“If you believe those cities are unaffordable today, just wait,” Mr. Tal said in an interview. “I think that by a long-term outlook, everything we’re doing is temporary. The principles are way too powerful offsetting all that.”
Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), recently announced new mortgage stress-testing rules which make it more difficult to qualify for new mortgages, and the provincial governments of British Columbia and Ontario have introduced new measures to cool home markets in and around Vancouver and Toronto. However, none of these factors will do much over the long term to impede down the forces pushing prices higher in the two cities, Mr. Tal claims.
“Those principles not only will stop a dramatic decline, but will result in a strong increase from a long-term outlook during the next five to ten years,” he said. “If you are an investor or if you consider home from a long-term standpoint, all of the fundamentals point to a slumping market.”
Mr. Tal’s report, scheduled to be published on Tuesday, says future demand for new housing has been underestimated by policy makers, while supply is growing more slowly than expected — especially in the Toronto area.
The report forecasts that the new mortgage stress-testing rules announced in October will prove to be only a speed bump in housing-market requirement in Vancouver and Toronto. That’s because lots of people would find ways around the rule changes by extending the amortization period in their mortgage to reduce payments, by choosing variable-rate mortgages or using exceptions allowed for those who have substantial assets, Mr. Tal said.
Others will turn to non-bank lenders since they’re not insured by OSFI’s banking regulations. The report stated a record-high 10 percent of new mortgages in Ontario are currently being supplied by private creditors — mostly mortgage-investment corporations — based on Teranet mortgage data.
Mr. Tal forecasts that percentage will increase in the next year as mainstream banks turn down more individuals due to the new rules.
While the report forecasts that 10 percent to 15 percent of mortgage programs will be impacted by the new rules, it forecasts a fall of just 5 per cent to 7 per cent in the value of new mortgages written annually since most applicants will find ways around the rules.
“In the past, borrowers have seen enormous ability to adapt to new conditions, and we doubt that things will be different this time,” the report states.
Mr. Tal says Ontario’s Places to Grow Act, which sets out land-use preparation and development rules for the Toronto area up to 2031, is running seven to ten years behind schedule concerning the expected release of land for growth, so supply can’t keep up with demand. He adds that the flaws could increase as the state makes alterations to the density principles in the plan, possibly delaying project approvals further.
Of the 338,000 hectares of land in the Toronto area covered by the plan, the report states 16,000 are vacant land where housing development could happen and just 3,000 hectares, or 23 percent of the land, are in the stage where development applications are in process.
“The other 77 percent isn’t remotely close to being approved or designated,” the report states. “And at this rate, much of the land will take years to find its way into the marketplace.”
The report forecasts the distribution gap will widen further since the land introduced for use was “low-hanging fruit” which was prepared for development once the expansion plan was implemented. Some of the land had building projects launched.
The report also asserts that policy makers are underestimating the long-term home requirement in Toronto and Vancouver from new immigrants and non-permanent residents, primarily students and foreign workers.
Housing demand would also be greater if more young adults could afford to move out by themselves. The share of individuals 20 to 35 who reside with their parents increased to 35 percent in 2016 from 33 percent in 2011.
Courtesy: The Globe And Mail