Essay On Why Is Real Estate So Expensive

Why is Toronto Real Estate so expensive?

Toronto, like Vancouver, Montreal, New York, and other metropolitans in North America, is a city of the modern 21st century, attracting migrants, urban developers, city planners, technological giants, and businesses. Then, it’s natural that space within the city for residence and future construction projects of office buildings and other infrastructure will hit somewhat of a peak and what’re experiencing right now is precisely that.

What’s the current sit-rep?

Toronto is an expensive place to live given the standards of living, closeness to what is essentially a business and investment capital within Canada, and the scenic cityscape. The monthly rent of a one-bedroom apartment in Toronto will run you about 1,550 dollars a month which is less than the monthly rent in Vancouver (1,870 dollars) but equally higher than in Montreal (1,300 dollars).

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This indicates that while costs in Toronto are certainly high, within Canada as a whole they’re quite average. The likely trend for the future, however, involves rising prices of condos, homes, and rental property due to basic supply side and demand side factors. These long-term trends stem from rising demand for residential and investment property alongside decreasing supply as costs of building materials like glass, cement machinery, and land continue to rise and rental property or resales continue to fall.

Let’s explore how these factors are individually affecting real estate prices in Toronto.

On the demand side…

Demand for real estate and rental property in Toronto has been largely a function of demographic changes which include migration to the city by millennials from smaller towns looking for employment opportunities in this big city which is also increasingly playing host to international immigrants looking for the same thing.

This is further supported by the fact that jobs, employment, and private investment by technological giants and businesses are at an all-time high. Infrastructural development on the Eastern side of Toronto, especially, has attracted several major players in the industry like Google. Also, rising interest rates for mortgages have pushed some people into the rental market which has expected consequences in terms of rising rent rates.

As we noted in our analytical essay titled “Is the Toronto Real Estate Market Going to Crash?” housing demand, according to some estimates, has risen at twice the pace that supply has in Toronto. Resale listings in the city have fallen by 15% over the past year since the second quarter of 2017. Moreover, prices of apartments and condos have risen by 30% in some segments of the market and we can easily expect another 10% to 15% rise – at least – over this year. Other features of the essay illustrated some of the points below.

Conducive customer environment

Toronto, as an urban city in a developed country, has access to quite a few varieties of goods and services which allow its inhabitants to generally enjoy a higher standard of living and material wealth. These services range from entertainment in the form of theatre and movies, restaurants, and essentials like schools, hospitals, and shopping districts. This versatile assortment of amenities, when concentrated in this singular hotspot of a city landscape, causes people to wish to situate their residence here.

This then means that the increased demand to live in this very concentrated downtown area where services and quality products are available at a hand’s length, will definitively lead to higher prices.

Public Transportation facilities

Living closer to a subway station has obvious and observable merits and hence people want to live near subway lines even in Toronto and property that fulfils this criteria is usually quite more expensive compared to similar real estate in other areas. In this sense, it’s sort of a trade-off as if you choose to not invest in an expensive property near public transit systems, you’d have to purchase a car and regularly pay for fuel. This then means that you have a choice to make.

Development of lower-end neighborhoods

The causes cited for gentrification often include the fact that developers target neighborhoods with lower incomes and living standards to cheaply buy land or property there and construct high-end lavish homes, condos, or apartment complexes there. This then drives up the price of the property and rent in the entire neighborhood as the location appears more developed and ‘posh’.

This sort of investment then deprives the lower-income families of what was or could’ve been their residence.

Increased external and internal immigration

Canada’s population increased to 37 million in the second quarter of 2018 growing by 506,000 over the past year, which, as noted by economists Robert Kavcic and Doug Porter, will continue to have an upward pressure on prices in the Toronto real estate market.

A major chunk of this growth is fueled by immigration, according to BMO economists. 380,000 people moved to Canada in the last year, which is a record high for the country. Much of this immigration has been fueled by Canada’s liberal policy towards replacing its rather aging population.

Development of Toronto’s Tech. Industry

One of the major reasons for this demographic transition within Toronto is the economic and technological developments taking place in the region. That led to the creation of 28,900 jobs in the Greater Toronto Area last year alone. That’s more technological jobs than Seattle, San Francisco, and Washington saw created if aggregated in terms of last year.

This commercial competitiveness over space is likely to worsen as Alphabet, Google’s parent company takes up the task of transforming Toronto’s East Waterfront into an apparent smart city with a creative mix of residential, and commercial recreational spaces. This, as one can expect, will lead to a hike further in demand for office spaces but has the potential to increase the supply of office spaces as well, though likely they’ll be prioritized for companies and small businesses best conducive or otherwise affiliated to Google.

The mortgage stress test on the rental market

The stress test involves banks subjecting lenders’ availability to repay a loan to either an interest rate that is two percent higher or greater than the five percent benchmark rate published by the Bank of Canada. This automatically reduces the supply of loans and money in the market available for the purchase of residential real estate. In practice, it was estimated that this measure led to a fall in consumers’ purchasing power by 20% which resulted in these consumers being pushed into the rental market.

This caused a surge in demand for the latter and has been a contributory influence on the rising prices.

On the supply side…

Increasing regulation by the government alongside government intervention to increase interest rates is discouraging urban developers from planning more construction projects and landlords from putting up their properties to be rented. This is because such red tape measures by the government are causing the feasibility and profitability of newer projects in real estate to decline.

Canada Mortgage and Housing Corp. notes that several new homes starting construction fell in August of 2018. The annualized rate of construction reportedly declined starkly to approximately under 201,000 units from 206,000 units back in July 2017. This fall is significantly surprising because economists were predicting that the production of new homes in terms of the annualized construction rate would rise to 210,000 units which is the opposite of what happened.

Increasing costs of starting projects

In Canada and other parts of North America, finance for real estate is usually devised from real estate developers preselling 75% of condos in any apartment complex sometime through the initial stages of the project. However, this practice prevents developers and contractors from potentially moving too fast and discourages investment in multiple projects at once due to the risks that stem consequently.

Also, another option for developers to finance construction projects is loans. However, the Bank of Canada raised its benchmark interest rate to 1.5% in July in 2018. All things considered, this is a relatively low benchmark rate of interest compared to other economies, not just in North America but all around the world. However, the risen interest rate caused the liabilities or repayments on taken loans for developers to shoot up which now had to factor in this additional cost into their project. This made using loans for purchasing capital building materials like labor, machinery, cement, and glass more expensive, decreasing the supply of real estate in the market.

Following these trends quite precisely and thoroughly, CIBC economist summarised the changes and the impacts of the policy arrangements best: “A more sluggish pace to homebuilding is in line with our expectation that higher interest rates and tighter lending standards turn this former stalwart of growth into a drag on the economy.”

Regulation over the rental market

Rental inflation in Toronto has been recorded at an average rate of 3% to 5%, speaking in historical terms. However, this trend was thrashed last year which instead saw a huge rise in rental prices which can likely be attributed to two particular reasons.

Firstly, the government introduced a mortgage stress test on household mortgage loans which prevented a lot of families from taking out loans to purchase homes. Such a higher cost of mortgage or house loans pushes people into the real estate market and causes demand for said houses to increase. This, however, is much more a demand-side phenomenon and is hence discussed further below.

Secondly, regulation over tenets and landlord rental arrangements, especially the “Fair Housing Plan” introduced by the government, were theoretically aimed at better living conditions and were ethical pieces of legislation in theory. However, its consequences weren’t as ideal as expected. If laws are implemented that ease the judicial and legal treatment of tenets who break leases alongside making rent increases even more controlled and sparse, then potential landlords would simply be discouraged from putting out their properties to be rented as they may be discouraged by the involved hassle and lack of property rights over their owned house.

This causes supply in the market of rental property to decline, pushing up rent prices.