Government Policy Causes Shortage of New Houses – And Resulting Sky-High Prices

I have made a number of previous posts about a hot topic here in the GTA – rising house prices. If you browse through past blog entries, you will read that a decade ago I chose to ignore the experts who said our housing market was about to follow the US into a “crash”, and bought a house in Mississauga for our family. As we all know, instead of crashing, the market dramatically appreciated, to where we are today.

As I have previously pointed out, if I had waited to buy until the (long) predicted crash occurred, I would still be waiting. The long-predicted crash never came. Instead of buying at $350,000 or even $500,000 – I would be paying $1,250,000-$1,500,000 today.

And that would simply be the financial cost to delaying our house purchase. During those 10 years our family has changed as we have aged, and our daughter has grown. These changes were tracked by our housing. A swing set and trampoline were added to our back yard, trees were decorated with Christmas lights, paint colors changed. We now have a dog roaming the grounds. A good portion of our memories would have been different – perhaps missing – if we had not bought a house when we did.

In retrospect, the purchase decision that I anguished over ten years ago has turned out to be one of the best financial decisions of my life. And the other aspects of life we might have missed – these make the decision to buy a decade ago a “no-brainer”.

But what about now? After this incredible run-up in house prices, are we about to “crash”?

Some economists think so. But then some economists have been calling for a “crash” for over 10 years.

I literally laughed out loud when I read this article a few weeks ago in the Financial Post, “The Housing Bubble Has Burst”. You can read it here:

Here, we have economist David Mandani of Capital Economics, making bold predictions about Toronto housing. It is not the first time, he regularly provides his opinion. In every case I have ever seen, his opinion is “doom and gloom”. In cased you missed it, in another Financial Post article from 2015, he was predicting the (same) crash. You can read it here:

As you will see, Mr Mandani has been predicting a crash since at least 2011. I guess if he keeps predicting it long enough, he might actually be correct. But as you can read, in 2011 he was calling for a 25% price reduction in prices. In order to be correct, and house prices decline 25% from 2011 levels … what would house prices have to drop in 2017? 50%? 60%? (That would be quite a crash indeed, Mr Mandani …)

What frustrates me about news stories like this is who they quote. It is easy for economists to make predictions – we readers must decide what their predictions are worth.

What I always look for when I read economic predictions about real estate, is where the economist is located. Mr Mandani’s employer, Capital Economics, operates from the UK. In most articles where he is quoted, Mr Mandani will simply be responding to a report he read, or a blanket statistic that was just released. He has no “eyes and ears on the ground” here in Toronto. They are not even in Canada!

What value or worth would my opinion be of real estate in New Delhi, Oahu, Melbourne, London England? I do not live there. I do not work there. The best I could offer is to read some recent reports and study some recent statistics – all compiled by others. If the reports I choose to read and the statistics I choose to review have any real value, they will be generated by people who actually live and work locally.

In contrast to Mr Mandani, I enjoy reading the opinion of Benjamin Tal, a local economist who I believe to be the best in the business. He consistently offers insights on real estate that others miss – in particular relating to condos, often a bellweather of future events. While he is not as focused on real estate, Douglas Porter also regularly provides opinion that I greatly value. Mr Porter is – again – located here, not far away, 7 hours by plane.

As Mr Benjamin Tal so often mentions, supply of local housing is a major factor in the recent run-up of GTA house prices. It did not get as much attention, there was an another recent article in Financial Post (a blog post actually) – quoting the supply of new housing that was coming onto market. It quotes statistics from members of BILD – a local association of home builders that operate here in the GTA. They make no bold predictions about where the housing market is going – they simply offer statistics as to how many houses of different varieties are currently for sale.

You can read the piece for yourself here:

The article’s title chose to highlight pricing, but what I found interesting when I read the article were the numbers of new homes for sale today, versus 10 years ago. BILD states that there were 534 new detached houses for sale last month, versus 12,242 in January 2007. For anyone not wishing to live in a high-rise (young families with kids?) – BILD states that there are 1524 ground level housing units for sale in the GTA, versus 18,400 in January 2007.

Isn’t it interesting that with a population of 5,925,000 – 800,000 higher than a decade before – we have less than 5% of the previous supply of new detached housing, and less than 10% of previous supply of new “ground-oriented” housing? Isn’t it basic economics that when supply of something is constricted, it drives up prices? It seems to me that supplying 535 new detached houses to a population of nearly 6 million is simply rediculous – how could prices NOT skyrocket?

So if they are not building “ground-oriented” housing, what are the builders building? Why condos, of course! Everyone wants to live in a condo! Especially young families!

The article quotes the Executive Director of BILD Bryan Tuckey, as to why they build so many condos, starving the supply of new housing people might actually want to buy:
“Our industry is implementing provincial policy by building more condominium apartments and less ground-oriented housing,” Tuckey said. “A decade ago condominiums represented just 42 per cent of available inventory compared to 88 per cent in 2017.”

Anyone still wondering why GTA house prices are so high? If so, rather than read the words of some foreign economist, why not look for your nearest condo construction crane – or just simply ask your MPP.

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