Day of reckoning beckons for Toronto housing market
The hottest housing market in the world is facing a reckoning.
Toronto-area land prices have gotten so high that developers are struggling to build new homes that people can afford. Buyers are no longer lining up, despite discounts and incentives.
The cost of land has nearly tripled in some areas the past five years, according to Altus Group Ltd. It now accounts for roughly half the price of a new home. In 2011, it was a little more than a third.
"It's a real turn," said Peter Comyns of PMA Brethour Realty Group. In June, it took Comyns just two days to find 200 buyers for yet-to-be-built homes in a Toronto suburb. Two weeks ago, 50 were available. His team sold about 12.
A convergence of factors - government rules aimed at reshaping Ontario's housing market, tougher mortgage guidelines, a shortage of land - is pushing against the housing bubble in the Toronto area, where new-home prices have risen since 2009.
One result is pinched supply. About 2,600 new homes were available for purchase in the Toronto area at the end of September, close to a record low and down from about 15,000 a decade ago.
Under Ontario's new growth plan, 17,200 hectares (42,500 acres) are available for residential construction - much less than the 100,000 hectares the province says there are, according to Malone Given Parsons Ltd., a development consultant based in Markham, Ontario.
"There's just no land for development," said Matthew Cory, a principal at the firm. "And the pieces that are available are struggling to get to development because of lengthy and complicated policies."
Making houses sprout from undeveloped land is also taking longer as government efforts to shape communities bear fruit. Builders are scrambling to comply with a revamped regional plan called 'Places to Grow' that prioritises denser properties around transportation hubs. That's in addition to the usual responsibilities, such as rezoning and connecting tracts to infrastructure like roads, power and water, and winning approval from city councils.
As supply dwindled, prices rose and mortgage regulation tightened. That has led to Canadians buying fewer new homes.
Transactions for new houses and townhomes this September was less than a third of what it was a year ago at 352 deals, according to the Building Industry and Land Development Association in Toronto. Supply is only going to shrink more, according to Canada's housing agency.
The 2019 forecast calls for as few as 66,100 houses to break ground, 13pc lower than in 2017. Prices remain escalated at C$1.2m ($785,000) for new detached homes and townhouses, sliding 6.6pc from August but still 21pc above last year, the building industry association said.
With all the troubles in Canada's housing, developers are shifting business to US states including Florida and Texas.
About one-third of business for Toronto-based Mattamy Homes Ltd, Canada's largest residential builder, now comes from the US and it is growing quicker than the Canadian market. The company aims to drive US growth twice as fast as in Canada, including expanding to three new US markets in the next few years.
Empire Communities, another large developer, announced its latest US project after entering the country last year, and plans to expand further in Texas. Both builders are building more condominium towers in the Toronto area rather than houses or townhomes.
Freeing up land
Ontario Finance Minister Charles Sousa said in an interview that he's spoken with developers making the move south. He said the government responded by freeing up land sites and by shortening the process time for some approvals.
The new reality has been acknowledged by the government housing agency. In a speech last month, Michel Tremblay, a Canada Mortgage & Housing Corp senior vice president, said that "the dream of homeownership may be fading for many Canadians".
He suggested long-term renting instead.
"Who's going to win and who's going to lose?'' said Mike Czestochowski, a broker at CBRE Ltd in Toronto.
"The landowner's going to win; the government's going to win through fees. And the loser is our kids when they have to buy a house. Prices will continue to climb. Unless they change things," he concluded.
Enginering a Soft Landing
Canadian home sales climbed for a third straight month in October, the longest string of increases in more than a year.
The number of transactions rose 0.9pc nationally from September, the Canadian Real Estate Association said Wednesday in Ottawa. In Toronto, the country's largest market, transactions were up 2.5pc on the month. They also rose in Vancouver.
Canadian policy makers have sought to engineer a soft landing for Canada's housing market, amid worries about runaway prices in cities such as Toronto and Vancouver, and the data suggest it may be working.
Toronto real estate, still among the world's most overvalued, is recovering after a slowdown that saw sales plummet in June to the lowest level since 2010.
New mortgage measures which take effect in January, "will likely influence some home buyers to purchase before the stress test comes into effect, especially in Canada's pricier housing markets," CREA President Andrew Peck said in a statement.
In Vancouver, Canada's second-largest housing market, sales rose 0.2pc and in the nearby Fraser Valley they climbed by 3.6pc.
Additonal reporting by Greg Quinn and Erik Hertzberg