Wednesday I wrote an Intro to the City of Toronto Housing Market and yesterday I wrote the Negatives I currently see in the market. If you haven't, you can read those two blog postings here: highrockcapital.ca/pauls-blog.html
Today is Part 3, the Positives. After reading yesterday's blog, reading front page newspapers, reading most major bank economist's reports and some perma-bear real estate bloggers, you might be surprised there are any positives to find at all. Actually, there are quite a few. I won't give away Part 4 for Tuesday (My Conclusions) but suffice to say that the Negatives are more short term in nature (now to 12 months) and the Positives are longer term in nature (12 months till...forever).
This blog will be a lot longer than yesterday's and I will use more charts and less words (at least I intend to).
The blog will focus on supply of housing stock (massively affected by public policy) and demand for housing stock (massively affected by public policy). Given both supply and demand are massively affected by public policy, we need to take a trip back over 10 years ago to figure out what public policy measures came into play and changed everything for the City of Toronto (and surrounding areas) housing market.
First we need to look at how Canada and Toronto are growing their population. Canada is unique amongst the OECD and G8 countries. Canada has the second largest land mass but yet is the most geographically concentrated populations at 82%.
About 80% of the population live in a skinny band within 160kms from the US border. And 17% of the population lives in the City of Toronto. Canada has the fastest growing population in the G8.
The Greenbelt and Places to Grow Acts 2005
The Greenbelt Act was put into place to protect about 1.8mm acres of environmentally sensitive and agricultural land in the Golden Horseshoe from urban development and sprawl. And the Places to Grow Act effectively limited new development with a complicated formula, I couldn't even begin to explain properly. The effect of these two Acts was to "densify" the City and it was entirely intentional. Sure, the Province cares about protecting the lands in the Greenbelt, but there is an ulterior motive to both Acts and they are, at least partially, to blame for what some people think is too rapid a rise in detached and semi-detached home values over the past decade.
Back in the 1970's, when oil was cheap, urban sprawl was popular because the cost of transportation was so inexpensive. Think about those communities to the east and west of the city that developed rapidly. I grew up in Burlington in a pretty good sized 4 bedroom house, on a big lot, with a two car garage etc. Plenty of space for a family of five. Now as oil and transportation costs rose through the 90's and 00's, and the fact that the Province didn't invest in toll roads since the 70's to be able to invest in proper transportation infrastructure, they found themselves in a pickle. Due to fiscal constraints (budget deficits and debt) they could no longer afford to build proper infrastructure to support the urban sprawl. So they passed the Greenbelt and Places to Grow Acts and forced builders and the growing population to move into the City and utilize the existing infrastructure in the City (as bad as we may think it is at times, it still works). So the Province and the City planned migration and densification a decade ago out of necessity. They quite simply could not afford any urban sprawl.
A more cynical view, but I think a complete reality is, densification is way better tax revenue for the City. Think about this -- a developer can put 50 fully-detached homes on a plot of land north of the core. The builder is responsible for putting in roads, sewers, streetlights etc but after the last house is sold, he is gonzo. The City is then left with the cost of maintaining all of that infrastructure, along with garbage pick-up, police, fire, snow removal etc and it all gets paid by 50 property tax payers. OR, the City forces builders to build a 50 story condo tower on a corner in the downtown core (a quarter of a block, if that), and can move in 400 taxpayers on that tiny footprint. Those new condo dwellers are utilizing existing infrastructure. It's all about tax revenue and the utilization of existing infrastructure (because they can't afford to build new infrastructure).
And an anecdotal view I just heard...apparently when Premier Wynn was consulting with Bay St economists behind closed doors, she responded to a question about no new supply of detached housing ever coming on in the City with "I don't give a #$%^& if the is never another single family house built in Toronto again". There you have it.
The Greenbelt map below shows these lightly shaded areas and lines showing the "buildable areas" in the GTA. I have been told that these areas of buildable land are held by about five long term investors (Vic de Zen, Mattamy Homes etc) and they are not sellers as they are well-aware of the public policy dynamic and it's long term effects on house prices. Note - there is obviously no buildable land in the City itself. The land is out Brampton way - hardly the City of Toronto.
Most large cities in North America have some sort of Greenbelt to protect from urban sprawl. Greater Vancouver Area shown here. The City of Vancouver near the top-left...pretty tiny space.
There are land constraints in most cities and those with the most, will see the highest population growth, densification and home price appreciation. Land constraints come in two forms: 1) physical (bodies of water, mountains) as we can see in Toronto, Vancouver and New York (if we showed the map) and 2) public policy (The Greenbelt and Places to Grow Acts).
Condos "Going Up"
With land constraints being enforced by public policy and the obvious physical constraints, the City can only grow upwards. That means condos. As mentioned, there is no land to build in the City, only part of a block for condo developments. Note how Condo New Starts in the City completely dwarf Single Family in the lower chart:
How many times have you heard people over the last 30 years say that Condos are in a bubble? It ain't a bubble. There is demand from aging baby boomers and from millennials...the two fastest growing demographics for the next 30 years. Ryerson Professor Frank Clayton wrote a paper August 2016 titled "Will GTA Homebuyers Really Give Up Ground-Related Homes For Apartments?" In his paper, he states that 82% would favour ground-related single detached homes vs apartments. I don't think it matters what they would prefer...they don't have a choice...there is a finite supply of ground-related homes in the City and no supply coming. Think about other major international cities in the world...New York, Paris, London, Boston, Rome etc. How many Detached homes exist in any of those cities? Zero. Multi-level living is the norm. Raising a family in any of those cities means doing so in a 3 bedroom flat, walking or taking the elevator down to the the park across the street to kick a soccer ball or ride a bike with your kids. It is a fact of life in the fastest growing country in the G8 and the fastest growing city.
So if there are more Condos going up and no new Detached homes being built, what do you think has happened and, will continue to happen, to the price spread between Detached and Condos in the City? Widen it shall. See the table below and see what has happened over the last 20 years in Toronto. The Detached-Condo spread has gone from $102,000 in May 1997 to $939,040 May 2017. When land constraints exist with fast growing population, along with public policy to limit single family construction and force densification, the spread has to widen. Can it widen more? Absolutely. Look at the average selling price of a Manhattan Brownstone vs a Coop. The data only went back 6 years but look at the gap in blue...from $4.6mm to $7.8mm differential. The public policy puts land, especially Detached Homes, at a serious premium. And keep in mind when looking at home price appreciation - it is actually nowhere near as substantial as reported. Think about the small and large renos that most homeowners do that naturally add value to the home price. It is not all capital gains.
Toronto a World-Class City?
What we do know, is that Canada is the fastest growing country by population in the G8 and Toronto is the fastest growing city in Canada, and likely the fastest growing city in the G8/Developed World. Census Canada data comes out every 5 years and is not stellar but the City (proper) grew from 2011 to 2016 by 116,511 people to 2,731,571. That is 23,302 per year. Census data estimates that household formation occurs with 2.4 people per household. That creates household formation of about 9,700 per year looking for a place to live. And that is just the City. In the GTA, the numbers according to Census data are growth in population by over 100,000 per year and that is increasing due to increased immigration. I think it is fair to say Toronto (and arguably Vancouver) are International, World-Class Cities. If so, we shouldn't compare property values in Toronto to homes in Halifax or Edmonton or Calgary. We should compare them to other International, fast-growing cities.
What does U$1mm buy you around the world?
The table above shows how much square footage you can buy for U$1mm around the world. Monaco is the most expensive at 183 sq ft while Beijing is the least expensive of those shown at 624 sq ft. Vancouver at 730 sq ft and Toronto at 820 sq ft seem cheap internationally.and don't even make it near the Top 10 on this expensive/value scale.
And shown another way, is Home Price to Income levels around the globe
Starting with the cheapest on the far left we see Montreal, then Melbourne and then Toronto. Check out those international cities...Stockholm, Paris, Rio...really? Yes sir. What has happened is that densification has occurred in all of these international cities long ago and it is just starting to happen in Canada over the past decade. One could argue that Toronto (and Vancouver last year and now it is Montreal's turn) are simply playing catch-up, especially with the big move we had over the past year. Anyone want to take bets on when the Province of Quebec and City of Montreal step in with their own measures?
Now both of those last two charts compare downtown apartments. If we look at the City of Toronto and compare it to other International Cities, it gets even better when you compare data on single family homes. The fact is, most of these other large international cities do not have Detached Homes, period. The best you can get in London or Manhattan is a Brownstone (that is 1-3 families per Brownstone). Stating the obvious here but a Brownstone style home has no driveway, front yard, backyard, etc and you can probably hear your neighbours on each side and the constant hum of traffic day and night. Big city living, I suppose. If we take Manhattan or London, sure you would be living in the City and your commute would be about 20-30mins by subway. But in Toronto, you can live even closer to the downtown core than in Manhattan or London and your commute would be the same or less. But, you get a fully-detached house with two-car parking, front and back yards, quiet neighbourhood etc. Ask anyone here on an expat package what they think of the standard of living in a large Toronto house, on a large lot, in a leafy neighbourhood and commuting a whopping 6kms (11 minutes) to the office downtown. You always get the same answer - "unreal and cheap". Land is at a premium.
Now I am not for a second comparing Toronto to Manhattan or London real estate on an outright basis, yet, but you can see the trend developing and it makes more sense to compare Toronto to these two cities (and some other international ones) than Edmonton. Just playing catch-up on an international basis perhaps?
Debt Service Ratio
I showed yesterday that a clear and distinct negative exists in the fact that Canadian consumers are rather levered right now at all-time highs around 160-170% of Personal Disposable Income. That is not a great stat, to be clear. However, the cost of servicing that debt is still in-line and the cost of paying interest-only, like on a HELOC (Home Equity Line of Credit) is the cheapest it has ever been.
The obvious problem with relying on this level of debt service remaining cheap forever hit home the past week when Bank of Canada (and other central bank) officials all talked in unison about raising rates. No doubt a clear and present danger. The only positive one can pull from that would be that, like the Fed in the USA, they make a policy error by raising rates too quickly, the economy (and housing in Canada) get hit hard and ...rates fall and the central bankers follow with interest rate cuts. And that is really reaching for a positive.
And without doubt, lower rates/mortgages have driven house prices to some degree too; not unlike any other asset (bonds, stocks, commodities). Homes, the same as any other asset class, are all about "carry". Carry being...what can you borrow money at to invest in an asset and what sort of return can you expect that asset to produce. In the chart below - GVA home price at the top, then GTA, then Canada and Calgary on top of eachother. 5yr Mortgage rate on the bottom. The correlation probably makes sense but 2005 when prices started to accelerate, was also when the Greenbelt and Places to Grow Acts came into being.
More Public Policy
Last April, the Province of Ontario passed a 15% foreign buyer's tax on the Greater Golden Horseshoe area homes. I have two main problems with this:
So let's have a look at price appreciation of some asset classes.
And keep in mind that the Detached home owner probably did a renovation or two (or maybe a complete gut job for $1mm) to get that price appreciation. I didn't make assumptions and calculate it but if you assume $500,000 of reno's over 20 year for a detached Toronto house, you wouldn't be far off and the CAGR would drop to 7.7%. Does that seem excessive to you? Not to mention all of the associated costs with home ownership - property taxes, land transfer tax, real estate commissions, etc. Not sure I get it.
Also note that when comparing a primary residence investment to a single stock or an entire investment portfolio, there are significant tax differences - the former is exempt from capital gains tax while the latter are subject to capital gains tax.
Shouldn't the Province do something about Royal Bank stock? Maybe step in and put a ceiling in place on Canadian Bank stocks so they can't rise any further and more people could then afford to buy some?
Back to Some TREB Data
Not a lot of positives in the TREB data, as shown yesterday and mentioned above, but a couple of ratios to look at anyway:
Looking at City of Toronto Detached Home Prices to Active Listings and Sales show that Price has already come off pretty hard in the month of May vs Active Listings and Sales. Again, June's TREB data comes out next week so we shall see when it arrives.
What Happened in Vancouver?
Given Vancouver enacted a similar public policy on foreign buyer's tax a year ago, and Vancouver and Toronto share similar land constraint issues (both public policy Greenbelts and physical constraints), it probably makes sense to look at what has happened to house prices over the past year in the Greater Vancouver Area (GVA) to try to forecast what might happen in Toronto.
Here is what it shows:
The one catch here, on the negative side for Toronto, is that GVA Listings were coming off since 2012's peak. Toronto would need to see a similar decline in Active Listings before it could possibly see Price increases back to the peak April 2017. Could that take a year? Sure could.
Ok that is it for the Positives on the Toronto housing market. Sorry, wrote way more than I thought I would (and I had even more research I stripped out).
Have a great Canada Day Weekend and tune in Tuesday for my conclusions on this topic.
NB. This data was collected from CMHC, StatsCan, NBF, CIBC, Province of Ontario, TREB, Ryerson University.