The TOcore plan could hurt first-time buyers

There’ve been some big changes in the housing market recently; the stress test is impacting sales, there’s a development charge rebate for rental projects, interest rates are rising, foreign buyers are dropping off, the TOcore plan is making waves, and the typically busy April was slow this year.

To get an expert’s perspective on some of these market factors, we reached out to Ben Myers, President of Bullpen Research & Consulting Inc., and picked his brain on a few of these hot topics.

Newinhomes.com (NIH): The CREA recently blamed the mortgage stress test for lower home sales. What’s your opinion of the stress test and its effects so far?

Ben Myers (BM): I’m not sure it had to be as punitive as it was. The southwestern Ontario market had already cooled from its bubble, and almost all of the rest of the country (outside of Vancouver and Victoria) was relatively stable. However, rates are now rising and many Canadians have never experienced a rising interest rate environment and may not have properly prepared themselves for an increase in mortgage carry costs, and this forces them to do so.

NIH: So should buyers be worried about the rising interest rates?

BM: I expect the Bank of Canada to move very slowly when raising the overnight rate to give Canadians ample time to adjust to higher interest payments. Generally speaking, the BOC doesn’t raise rates unless the economy is doing well and we’re in an inflationary environment. From forecasts I’ve seen, there seems to be a consensus that the domestic economy will not be as strong in 2018 as it was last year.  

NIH: Do you think the drop in foreign buyer activity will actually impact the GTA market?

BM: No. There were approximately 14,000 new condo sales in the second half of 2017 after the non-resident speculation tax was implemented, more than all of 2013 when there was no tax. There is foreign capital in the market, as Canadians with international ties buy property with family or business funds, but the pure offshore buyer was, and still is, a small part of the market. I don’t think it’s having a noticeable impact on average values.

NIH: Do you think the development charge rebate will stimulate the creation of more rental units?

BM: It might. I’ve already worked on four rental apartment studies and there seems to still be interest in rental despite the implementation of rent control. Perhaps some developers/investors that were having trouble making the numbers work will be swayed by the DC rebates.  

NIH: Minto recently announced the north phase of Minto Westside will be rental. Should purchasers be happy, concerned, or indifferent?

BM: As an investor, it isn’t good for your investment because you’re now competing with a purpose-built rental and all those additional units. There is more security of tenure with a rental, as the unit won’t be sold out from under a tenant, so if the units are similar, the prospective renter is likely to choose a full rental building over a leased condo.  

NIH: The TOcore plan requires residential developments with 80+ units to have 40% of the units be two- and three-bedrooms. What do you think of this plan?

BM: It is well intentioned, but will have unintended consequences in the market. If the preconstruction demand is not there for larger units, a developer will have to discount those suites and raise the price of the smaller units to offset the decrease in overall revenue, which hurts first-time buyers, and lowers investor interest. With fewer investors you’ll get fewer units in projects, and with fewer units and fewer investors you’ll get fewer rental units.

Part of this same plan requires a percentage of the three-bedroom units to be at least 1,076 square feet. With downtown condo units trending toward $1,100 per square foot, the end-selling price would be $1.184 million for a unit that big. That unit would cost around $5,900 a month in carrying costs (mortgage, condo fees, taxes, and insurance), and that’s excluding parking and a locker. You can still get a townhouse with 500 to 700 more square feet and two parking spaces close to a subway in the City of Toronto for much less.

In theory, when fees and other costs are added to a developer proforma, they’ll look to achieve the same profit by paying less for land. However, there are very few distressed sellers in this market, many land owners purchased these properties 20 to 30 years ago and are happy to hold onto them until they get their price. I don’t see a huge downward adjustment in land prices.

You’re likely to get a lot of really small two-bedroom and three-bedroom units that are not suitable for families, while the larger units will be targeted at affluent move-down buyers in the luxury market.

If developers can’t launch the mix of units that is ideal for maximizing profit and absorption, you’ve increased their risk, which will translate into higher prices to compensate for the risk, or much less supply as developers choose not to build.

NIH: Average prices and sales of new homes in the GTA dropped in April 2017. How do you think the summer market will shape up?

BM: I expect the market to remain relatively tame. A lot of high-rise product launched last year, and development companies have their hands full. The market has cooled a bit, so there is no incentive to rush their projects to market, they’ll wait until they have all their ducks in a row.

The suburban low-rise market will likely stay cool, the buyers are predominately move-up purchasers from the resale market, so until we see several months of rising prices for singles, semis and townhouses, the market will remain flat.

Unlike individual sellers in the resale market, developers are reluctant to lower the prices of their homes when market conditions change for fear of upsetting past purchasers and incentivizing purchasers to wait even longer for prices to fall. It’s a much slower process for pricing and demand to realign and I expect it may be 2019 before that happens.

We extend a big thank you to Ben Myers for taking the time to share his expertise on the current state of the housing market!