Given the current state of the housing market and the myriad of potential solutions that have surfaced in government and in the media, we reached out to some industry professionals to get their opinion on various strategies. The first person we caught up with was well known analyst Ben Myers, Senior VP, Market Research & Analytics, Fortress Real Developments. See what he had to say about cooling the GTA’s housing market!
Newinhomes.com (NIH): Is a foreign buyers tax a good idea? Why or why not?
Ben Myers (BM): I don’t think it is a good idea on new housing, I wouldn’t oppose a small tax on resale ground-oriented units. I’ve used the analogy that a foreign buyers tax is like putting a Band-Aid on a stab wound. It would help, but it wouldn’t fundamentally address the problem, which in this case is a lack of supply. When you have inelastic supply (unresponsive), a sharply upward sloping supply curve, any increase in demand is going to result in much higher prices, and we’re seeing that with the 50% annual decrease in resale listings via TREB and the 50% decrease in unsold supply in the new housing market per Altus data.
NIH: Is the rapid price growth driven primarily by a supply and demand issue or is there more at play?
BM: Those are the only two factors at play, house prices are determined by supply and demand, period.
High demand can come from domestic investors, foreign buyers, young people with a fear of missing out, move-up buyers motivated by low-interest rates, or builders looking to renovate and flip the property. A lack of supply for new homes can be a symptom of land-use constraints, borders such as water, mountains or a greenbelt, a construction labour shortage, a credit crunch that impacts construction financing, slow planning approvals, or higher building material costs. For resale supply perhaps owners are living longer and choosing not to “move down,” some don’t want to sell because there is nothing out there to buy, some owners don’t want to pay realtor commissions and land transfer taxes, so they stay put. In some instances, units are demolished to make way for a new mall or sports facility, or perhaps a bunch of suites are bought by suburbanites as their downtown crash pad.
There is definitely some speculative demand in the GTA market right now, but there is also a big undersupply. Even though we’ve delivered a similar number of new units in recent years in comparison to the long-run average, based on my back of the envelope calculation, we’re building 30% less square footage than 15 years ago, and a lot fewer bedrooms. In addition, the spatial allocation of those units, either downtown high-rise units or outer suburban single-family homes isn’t satisfying the need for larger condominiums outside of downtown Toronto or needed ground-oriented supply in the inner suburbs where there is significant employment.
NIH: Is it time to give up the dream of owning a detached home in the suburbs?
BM: A couple years ago I declared that the American Dream is dead, that without significant financial assistance, only the most affluent young buyers would be able to afford a single-detached home in the future. As the Growth Plan pushes municipalities to approve higher density product, the single-detached house is going the way of the Dodo bird. There are less than 400 new single-detached houses available for sale in the GTA, at an average price of $1.47 million according to Altus data. CMHC numbers show that the average price of a completed and ready to move in new single-detached house in the Toronto CMA is being offered at $1.81 million.
Unfortunately, a lot of people will not have a property ladder long enough to reach a single-detached house.
NIH: Would you say a capital gains tax hike is a good idea? Why or why not?
BM: I wouldn’t be opposed to a capital gains tax hike on owners of non-principal residences if they hold the unit for less than three years. We want to eliminate short-term speculative purchasers, but maintain a healthy stock of privately-held rental homes and condominiums. We want to ensure that both home prices and rents are stable, and there is a variety of home types available to rent when an individual or family is looking to move to a new area.
NIH: What would a larger required down payment do to the market?
BM: Requiring a larger down payment would create even greater inequality in the marketplace, and it would eliminate more first-time buyers from the opportunity to purchase a home. Saving for a down payment is the biggest hurdle for young buyers. A recent survey by Genworth and Environics showed that 35% of first-time buyers in Toronto and 40% in Vancouver relied upon a loan or gift from a friend or relative in order to come up with the required down payment they need to purchase a home.
Prices in the Toronto market are not skyrocketing because of too much first-time buyer demand.
NIH: Do you have any recommendations for first-time buyers?
BM: I always tell first-time buyers to buy what they can afford, buy something you can see yourself living in for five years, and most of all, temper your expectations. Too many young people think they should step into a home that is similar to the one their parents currently live in! Forgetting their parents didn’t start out in that home, and they most likely bought in a very different GTA than the GTA that exists today. Personally, I’m a fan of new homes, no bidding wars, no work to be done (I’m not handy whatsoever), and they typically have higher ceilings, which is better for a 6’6’ guy.
NIH: How involved should the government (all levels) be when it comes to cooling the market?
BM: There is too much at stake to ignore the housing market, and all levels of government can do their part to ensure the market is stable and doesn’t experience price volatility. There needs to be greater investment in infrastructure to build highways, sewers, and especially rapid transit. Funds must be made available for social housing, affordable housing projects, assisted living, and seniors housing to ensure we’re taking care of the most vulnerable in our society, but we must also have enough new market-rate housing as well: stacked townhouses, row, mid-rise, high-rise, and single-detached.
NIH: If it was your call, what would you do to gently cool the market?
BM: I would require anyone buying a resale property which isn’t their primary residence to put down at least a 40% down payment, or add a flipping tax on buyers that hold the property for less than two years. One of those two would deter speculators.
I spoke at a MacQuarie housing roundtable event recently, and Shawn Hildebrand of Urbanation suggested a “luxury buyers tax” that adds an additional land transfer tax to homes above a certain threshold, perhaps $1.5 or $2 million. A back-door approach to targeting foreign investors that park money in luxury real estate.
Lastly, I think the blind bidding system needs to go in Toronto, you should be able to see what everyone is bidding and what their conditions are. Purchases should be done online “auction style” on a certain date, no bully bids, no sending offers back for higher bids, complete transparency so no one overpays by thousands of dollars for a home and sets an unrealistic new value benchmark.
A big thanks goes out to Ben Myers for sharing his two cents on market cooling strategies for the GTA. Check out Ben’s latest Market Manuscript for a more in depth analysis of the housing market! Stay tuned for another Q&A with a well known industry professional.