Record Condo Sales Mask Low-Rise Shortage

The times that we are living in are "usually uncertain" according to both Mark Carney, CEO of Bank of Canada, and Ben Bernanke, Chairman of Federal Reserve Bank in the U.S.  So if these times are so uncertain, why are we breaking records in the GTA for new home sales and condominium sales?  At the RealNet Conference held on Friday, January 20, 2012, for 300 of GTA's top builders and financiers, George M. Carras revealed that 2011 saw the second best new home sales in the GTA ever with 45,926 total sales, second only to sales of approximately 54,000 new homes several years ago prior to the last recession.  Of those sales, over 28,000 were high-rise condominiums, breaking an all time record in the GTA.

Behind the euphoria of these numbers, however, is the stark reality of dwindling land supply, a shortage of single family homes and a dramatic increase in the cost of purchasing single family homes in the GTA. 

Inventory for low-rise homes is at an all time record low of only 4 months with record land prices being achieved for low-rise and high-rise sales.  The figure of 17,460 new low-rise sales was the third lowest on record.

The average price for a new low-rise home was $545,000, clearly not an entry level number even with low interest rates.  Even though average new condominium prices have dropped 2% to $434,000, this was only achieved by reducing the average size of units by 52 sq. ft. in 2011 and over 100 sq. ft. since 2010.  I am not certain people are getting smaller as well to fit into these tiny units which are not being built to accommodate families but merely singles and 2-income couples.  Notwithstanding the significant price differentials between condominiums and low-rise housing, there still remains very little demand by families for condominium units. 

The provincial government's efforts over the last few years to reverse land sprawl and intensify existing urban areas has clearly been achieved by the reversal of the split between new low-rise and high-rise sales.  Ten years ago, the split was 75:25.  Now, it is 35:65 for low-rise/condominium.

Although the state of the housing industry appears to be healthy with great demand and low interest rates to finance acquisitions, there is a dramatic reduction in choice for new home purchasers and families in particular.  Commuting times are being extended dramatically given the lack of new housing in the GTA with people purchasing further afield in order to be able to afford the housing they require. 

In addition to the government's policies of intensification, increasing red tape and massive indirect taxes included in the purchase price are rendering both low-rise and high-rise units unattainable for many lower or middle income purchasers.  When taking into account development charges, building permit fees, parkland dedication fees, HST and a myriad of other municipal and provincial charges, at least $100,000 is being paid out on account of taxes.

The good news is the development industry has managed to deal with numerous regulatory and tax obstacles in their way to date by switching to an investor driven high-rise market.  However, with the lack of available choices and increasing costs, it would only take interest rates to move a couple of points to really render the market very vulnerable.  The last thing we want to do is end up in a country where people have their children living with them into their 30's ("bambalinos" as they are called in Italy) because they cannot afford housing, something which is common in Europe.

As well, it was noted at the conference that land costs are rising dramatically with the potential for increasing construction costs definitely a potential.  With those 2 significant cost components rising, when added to the already high cost of taxes, the ability of the marketplace to absorb price increases, whether high-rise or low-rise, will become questionable.

Both the economists and the statisticians at the conference were of the view that a breather in the marketplace is critical to ensure that land costs do not get out of hand and affordability is still maintained.  But to do that, the government needs to participate in the process as well in respect of the taxes it applies, the red tape it creates, and the services it creates, particularly infrastructure and roads.

So as I have said before in previous blogs, the word for 2012 is "caution".