Assessing the GTHA's Housing Market

Four days a week I try to go for a walk in the morning. My route takes me around my neighbourhood and sometimes into nearby neighbourhoods and downtown. I am always surprised to see the number of houses for sale and the rapidity with which they are sold. Recently in Worth Reading I've shared a couple of articles about the housing market, including the banks' roles in inflating prices.

As much as it would nice to blame our hot housing market on the banks I think it is a far more complex picture with many contributing factors. Housing prices in the Greater Toronto Area, and perhaps the Greater Toronto-Hamilton Area have been on a steady increase now for decades. Things are hardly uniform across this vast region. Housing prices in Thorold are not growing at the same pace of inner Toronto, but they are all related.

I first started to notice the housing prices spiking around the time of the American financial crisis in 2007-2008. With the global economy in a tailspin Canada became a safe investment spot. As a safe harbour money poured into the Canadian economy, especially in the real estate sector. Foreign investors, like Canadians, are eager to pitch their savings into real estate investments. This ranges from maintaining and fixing up a house to improve its worth, or buying the house in the first place, or speculating in the market. For a huge proportion of Canadians use their homes as their retirement funds and nest eggs. Distortions in the housing market therefore has a tremendous impact on our economy and lives.

I've spent a lot of time wondering if we are in a housing bubble. Lately I have come to the conclusion that we are not in a bubble, but a hot market under a lot of pressure. Some of this comes natural supply and demand issues. The GTHA adds, if I recall correctly, 200000 new residents every year. That's a new Brampton every three years, a new Toronto every ten. This creates a tremendous amount of demand on the market. There are thousands of people across the GTHA interested in acquiring a home and coupled with the investment opportunity real estate presents in this region the demand remains high.

On the other side is supply. Much of the cheap land has already been gobbled up by real estate development. In the next couple of years Brampton will build its last house, Mississauga is essentially fully developed at this stage. York Region is straining to keep pace with the development. Legislation such as the Green Belt and development restrictions is hindering growth in other places but the simple truth is the GTHA is likely falling well short of the demand in housing, especially where it is demanded. The city of Toronto must extensively rezone the city to encourage mixed medium development, but encounters significant resistance. It is a time consuming process. Add in the time for planning, financing and construction and it is easy to see why supply is constrained.

Supply is also constrained due to the foolish decisions made by suburban governments decades previous. Some areas of the GTHA are difficult to redevelop and increase density, even if zoning permitted it. The street grid and neighbourhood configuration would have to be completely changed to accommodate medium or high density.

Then there are more social causes for the rising prices and other issues. Homeowners reasonably expect a good return on investment for their properties. As long as they are not financially compelled to sell they can patiently wait for the higher price. The house down the street sold for $350000, perhaps I can sell mine for $400000. Ten years late the number is creeping up to $600000. Retirees or families need to get a return on their properties so they can afford a new property somewhere else.

This hot housing market will only correct under a few conditions. One, supply increases. Somehow we get more housing on the market or socially change the way we view housing, i.e. include more roommates for long-term investments. Two, demand decreases, which is highly unlikely given basic population trends. However, I will say that as the Baby Boomers retire there could be significant disruption in the housing market if there isn't a smooth transition. Three, the price overshoots the ability for the market to bear. If a house goes up for sale and no one is willing to pay the price it will inevitably begin to fall down which, on a broad enough scale will begin to deflate prices.

Everyone is tied to the housing market in some way because we all need places to live. I think it will be increasingly important for residents of the GTHA to be aware of the shifts occurring in their area and across the region and be prepared to respond to them.