Paul Morassutti, the vice-chairman of valuation and advisory services, at CBRE. (Image courtesy CBRE)

CBRE Limited vice-chairman Paul Morassutti focused much of his address to a large audience at the Land & Development Conference on the issue of affordable housing.

Despite the success of national and provincial government policies in cooling the housing markets in Vancouver and Toronto, which experienced huge price gains from 2015 through the first half of 2017, Morassutti said the cost of owning a home as a percentage of median household income in those two cities remain at 85 and 66 per cent respectively.

“Pricing in Vancouver today is still much higher than it was before that incredible surge in 2015 and 2016, when prices skyrocketed by 45 per cent,” Morassutti said at the Metro Toronto Convention Centre on May 29. “Increases of that magnitude are never sustainable and rarely rational.

“What’s happening now is a badly needed readjustment, which is obviously better than the alternative, which historically would have meant a crash.

“In the GTA, a similar scenario has played out. But there’s been a lag between the low-rise sector and the high-rise markets. Sales in the low-rise market have fallen dramatically, as have prices. Low-rise sales have plummeted since 2016 while high-rise sales peaked in 2017 and have dropped since then.”

Steep house prices driving high-rise condo sales

An after-tax household income of $211,000 is required to buy a detached house in the Greater Toronto Area (GTA), while it takes $177,000 to purchase a semi-detached home. Meanwhile, the average household income is about $88,000 and the average single income is under $41,000. This is why the high-rise condominium market remains so active.

While high-rise condo sales in the GTA are down approximately 40 per cent over the last year, according to Morassutti, tens of thousands of units are under construction or in the pre-construction stage.

While strong job growth and a benign interest rate environment for the foreseeable future are easing concerns, there’s some uncertainty as to where the condo market is going. Morassutti illustrated that land values are hugely sensitive to changes in condo pricing.

Construction costs are also up approximately 30 per cent over the past three years in the GTA and are expected to continue to rise through 2019. Soft costs have also risen substantially and are now valued at more than 70 per cent of hard costs, largely because of increasing development charges.

While land use restrictions are contributing to housing constraints, and prices have increased due to a lack of supply, Morassutti believes NIMBYism (“not in my back yard”) is interfering with sound housing planning policy as many groups are lobbying to keep densities low in neighbourhoods where they should be higher.

Due to barriers to home ownership, many would-be buyers are in the rental market. And that’s not cheap either. While Morassutti said rents have historically increased at around the rate of inflation, they’ve more than doubled the inflation rate in recent years.

Inclusionary zoning

That brought Morassutti to the topic of inclusionary zoning, where an affordable housing component is mandated in all new developments, which he said is likely coming to the GTA in some form. While he supports the policy and thinks more of it’s needed, he also showed numbers reflecting the challenges of inclusionary zoning price sensitivity and how it can impact developers.

“Inclusionary zoning may very well be sound policy and may very well be warranted, but it has a very real financial impact. Incentives are going to have to be required. I hope that the policies that are currently being developed are aligned with this economic and financial reality because, if they’re not, you will actually end up dissuading development instead of incentivizing it.

“The model can work, but it has to be structured as a win-win for each of the parties.”

Improved public transit needed in Toronto

Toronto has built plenty of high-density office and residential buildings in recent years, and a lot more are on the way, which means a huge influx of residents and workers who rely on public transit. Morassutti said Toronto is the sixth worst city in the world for commute times and, while the Toronto Transit Commission has the second-highest public transit ridership in North America, it’s also the least subsidized.

“Decades of underinvestment in public transit is making it very difficult for the city to support this level of development,” he said.

“The quality of debate surrounding public transit and the political maneuvering and degree of inaction has been nothing less than shameful. If it doesn’t change, the success of this city is going to be choked.”

Industrial market has never been stronger

Morassutti had more positive things to say about the Canadian commercial real estate market.

“Commercial fundamentals at the property level remain incredibly strong across the board, with the exception of Alberta office, which remains mired in uncertainty as to when or even if the energy sector will rebound. Industrial and multi-family remain the star sector performers, with both reflecting a very solid rental upside.

“It’s not an exaggeration to say that we have never seen a stronger market than the 2018 industrial market ever, and it has not slowed down at all thus far in 2019. There are the lowest availability rates we’ve ever tracked and rising rents, and in some cases rising dramatically.

“Add in cap rate compression and a scarcity of available land in Vancouver and Toronto, and the impact on industrial land pricing is obvious.”

Toronto industrial land prices have increased by 23 per cent per year for the last three years, according to Morassutti. Within the GTA, the highest land values are in the 416 area code submarket because of proximity to a large urban population.