The Toronto Housing Market: Is it a bubble, or is it straightforward demand and supply?
The 2007 – 2008 financial crisis which began in the United States and spread across various economies in the world devastated the U.S properties market. When the housing bubble bursts, the property prices came tumbling leading to lose of investment for both individuals and organizations. The resulting foreclosures left many families and financial institutions in economic limbo. With memories of the calamitous events still fresh in the minds of many investors, the precipitous rise property prices is currently being witnessed across the border in Toronto Canada. This essay discusses the looming crisis in the Toronto property market following record breaking levels of demand and supply. Towards this end, the paper will seek to determine whether the current situation in Toronto housing market is as a result of an economic bubble or straightforward interplay between supply and demand.
Toronto Housing Market: Current State of Affairs
The demand for properties within the Greater Toronto Area has skyrocketed over the past three years. This is despite the fact that property prices have shot up. The rent for the few rental properties available in the area have soared. Consequently, many residents of the city are increasingly finding it difficult to stay in the city. The Greater Toronto Area is slowly becoming a gentrified area where only the rich can afford to live to high cost of living instigated by high property prices (Novakovic, n.pag). To the skeptics, the ballooning of housing prices in Toronto is reminiscent of the events preceding the devastating bursting of the U.S housing bubble. It would seem Toronto’s housing sector is on the edge of a deep economic cliff. Skeptics of the longevity and stability of the rising housing prices hold that the bubble is on the brink of bursting and when the prices finally stumble, it will set the city of a severe financial crisis as witnessed elsewhere in the region.
A Case of Complex Interplay between Supply and Demand
The rising property prices and demand in the Greater Toronto Area is as a result of complex interplay between demand and supply. Citing reports released by the Canadian Real Estate Association (CREA), Stefan Novakovic notes that property prices in the area has risen by close to 25 percent in 2016. However, more alarming is the fact that property sales have increased by record number during the same period. This shows that the demand for properties has increased exponentially despite an increase in prices and supply. Despite the increase in supply, there is still high level of shortages in supply of housing units in the industry. The numbers of new property listings are dwindling while the few new properties released into the market are fast being sold to a seemingly hungry population of buyers and renters (n.pag). The industry is essentially struggling to meet the ever increasing demand for properties, which explains the ever skyrocketing prices.
The shortage in supply is as a result of numerous factors which converge to constrict the conveyor belt for new properties. One such factor is the government legislations that have designated key areas in the Greater Toronto Area as special areas. These laws restrict the density of properties within designated areas thereby shifting the supply curve to the left in defiance of the law of supply. Ordinarily, the rise in properties prices would have led to increased supply. However, the supply curve is shifting to the left due to low units added into the market as a result of strict regulations. Regulations leave much of the new properties to be constructed in the already crowded city core. Areas such as the Greenbelt area established by the Places to Grow Act of 2005 have been reserved for environmental conservation purposes. Moreover, the presence of Lake Ontario so close to the Toronto inhibits the expansion of the city into the surrounding (Novakovic n.apg). Therefore, property developers have to contend with an increasing diminishing land area where they can develop properties. Essentially, property developers are finding it difficult to deliver new units into the market to meet the demand. This paradoxically happens at a time when the supply has also increased. The seemingly short supply of housing units has increased prices. The bureaucracy and the inherent limited nature of land as a resource lead to inelasticity of supply of properties in Toronto (Lovewell 20). The inelasticity is exacerbated by the geographical proximity of the Greater Toronto Area to geographical features such as Lake Ontario and surrounding mountainous region. These areas have been earmarked for environmental conservation.
Figure 1: The effects of legislations on the Toronto housing supply cruve
The increasing demand for properties has also led to shortage of supply. The surge in demand has been influenced by both internal and external factors. Canada, in general, has favorable immigrant laws and Toronto is no exception. Combined with foreign students, immigrants have contributed to the upsurge in demand. The stable Canadian economy is producing individuals with disposable income and the property market is the preferred investment destination. They have been boosted by the lenient mortgage premium and regulations in the liberalized Canadian economy (Novakovic n.pag). Foreign investors are swarming the Toronto property market. The surge in foreign investors into the property market in Toronto is partly driven by an unlikely source: restrictions on property investment by foreigners in Vancouver. Studies have shown that there is an indirect correlation between demands in the two cities following the introduction of the restrictive tax on foreigners in Vancouver. While Toronto has recorded historic demand figures, Vancouver’s demand has decreased (Gordon n.pag; Novakovic, n.pag). These economic and social factors and foreign investors cause demand curve to shift to the right despite the rising prices.
Figure 2: Shift in demand curve in demand for Toronto housing sector due to influence of economic and social factors.
Figure 3: Property demand in Toronto, Vancouver and other markets before and after the introduction of tax on foreign property investors
Source: Novakovic. Available at: http://urbantoronto.ca/news/2017/03/torontos-housing-crisis-problem-supply-or-demand
The property market in Toronto is currently experience remarkable growth. The suppliers are currently struggling to meet the ever burgeoning demand for properties. This has led to unfrequented increase in property prices and values across the Greater Toronto Area. The core of the Toronto is increased becoming a zone for the most affluent in the Torontonian society. Paradoxically, the supply of properties into the market has increased as evidenced by the record number of sales recorded in 2015 and 2016. The looming housing crisis in Toronto has been caused by internal and external factors, some of which are historical in nature.
Land is for developing new properties is increasingly diminishing within the Greater Toronto. The presence of geographical features such as Lake Ontario and mountains constricts the ability to expand construction of new housing units to the surrounding areas beyond the designated boundaries. With local and federal governments committed to environment conservation, land for expansion of the city’s skyline is restricted to the designated areas. With the economy of Canada growing steadily, the per capita spending by Canadians will continue to rise steadily to feed the growing demand for real estate properties. The rise in property values in the area will therefore continue to rise as the influence by foreign investors is not significant. The exponential increase in property values and demand and a diminishing supply can be offset through strategic decisions that are aimed at balancing environmental conservation needs and economic growth.
Gordon, Josh. Housing Price Lunacy Moves East. Vancity Condo Guide, 18 May 2017. Web.
Lovewell, Mark. “Chapter 3: Elasticity.” In Understanding Economics: A Contemporary Perspective. McGraw-Hill Ryerson Ltd, 2015.
Novakovic, Stefan. Toronto’s Housing Crisis: A Problem of Supply or Demand? Urban Toronto, 17 March 2017. Web.