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3 perspectives on Toronto’s economy and housing market

Benjamin Tal, Ali Wolf, Pouyan Safapour offer insights at Toronto Where Are We Going?

Pouyan Safapour, the president Devron. (Steve McLean RENX)
CIBC World Markets managing director and deputy chief economist Benjamin Tal

Three different perspectives were offered on the economy and housing at the Toronto Where Are We Going? event presented April 10 by Devron and hosted by journalist and Dragons’ Den host Dianne Buckner at historic Massey Hall.

CIBC World Markets managing director and deputy chief economist Benjamin Tal reiterated many of his comments and insights from the Feb. 27 CBRE Canadian Market Outlook event at the Metro Toronto Convention Centre.

Tal noted Canada continues to experience a housing affordability crisis and he thinks the situation could worsen if there’s not more urgency in trying to solve it. He believes the solution should involve reducing demand and building faster.

“Over the next two to three years, the demand (for housing) will be there but the supply will not be there,” Tal said, adding the best time to buy a house or condominium will likely be during the next year.

The Bank of Canada held its overnight interest rate at five per cent earlier in the day, but Tal believes it had already overshot with interest rates in its zeal to get inflation down to two per cent. He said it should have stopped raising rates once it hit 4.5 per cent.

Tal said surging shelter costs, driven by mortgage interest rate payments rising by 30 per cent over the past two years and rents rising by eight per cent annually, have accounted for one-third of Canada’s inflation.

The inflation rate is already at 1.5 per cent if you exclude interest rates on mortgages -- as other countries do -- according to Tal.
Tal thinks the first interest rate cut will come in July and he would be comfortable with it eventually getting down to three per cent next year. Given the strong fundamentals of the Canadian housing market, Tal said the real estate industry should perform well at that rate.

Zonda’s Ali Wolf

Ali Wolf, chief economist at Zonda. (Steve McLean RENX)
Ali Wolf, chief economist at Zonda. (Steve McLean RENX)

Ali Wolf is the chief economist for Zonda, a consultancy firm that provides data-driven housing market solutions to the homebuilding industry.

Wolf pointed out the Greater Toronto Area (GTA) represents 17.3 per cent of Canada’s population and added 468,000 people from 2017 to 2022, second in North America only to Dallas-Fort Worth, so it has an outsized impact on what happens in the national economy.

Canada’s largest city is a desirable place to live, according to Wolf, because:

  • it’s a global financial centre;
  • it has respected universities and a well-educated workforce;
  • it’s safe;
  • it offers plenty for those interested in food and culture;
  • and it provides lots of things to do.

“On the supply side, we have limited land, we have expensive land and we have very slow development timelines,” Wolf said. “Toronto has the worst development timeline in all of Canada and this has resulted in a housing shortage.”

Canada has the largest housing shortage among G7 countries and much of that is concentrated in Ontario. This has led to home price appreciation and affordability issues.

The home ownership rate is 66.5 per cent in Canada and 65.1 per cent in Toronto, but home prices have increased much more rapidly than incomes and many interested buyers have been priced out of the market.

Developers built an average of 205,762 homes annually in Canada from 2018 to 2022 compared to the historical average of 168,000. Over that same period, Canada’s population grew by an average of over 500,000. That number was well over a million in 2023.

More condos should be delivered in 2024 and 2025, but that number will drop significantly in 2026 and 2027 because there have been fewer construction starts over the past two years due to higher costs, slow government approvals, fluctuating consumer confidence and labour shortages.

“Interest rates right now aren’t only impacting affordability for people who want to buy today, but also future affordability,” said Wolf, who added Toronto now ranks among the 10 least-affordable cities in the world for housing.

Investment in infrastructure also hasn’t kept up with population growth. 

Despite the factors contributing to a volatile housing market, Wolf still believes housing is a “great investment.”

Devron’s Pouyan Safapour

Pouyan Safapour, the president of Toronto-based developer Devron, said the five-year average for GTA condo unit construction starts was 26,381. While immigration and population growth was growing rapidly, that number dropped to 15,891 last year and is forecast to be 11,500 this year.

Canada’s rental vacancy rate is 1.5 per cent and housing can’t be built quickly enough to create more of a balanced market. Another issue is that a majority of the condos being built in the GTA aren’t perceived to be high-quality, according to a new Devron survey of 510 GTA residents who are members of the Angus Reid Forum.

Ninety-three per cent of respondents felt Toronto needs better-built condos and 79 per cent believe most Toronto condo units are cheaply made. 

Fifty-nine per cent felt current condo offerings are lagging compared with other major Canadian cities in terms of interesting and exciting designs, 86 per cent believe Toronto’s skyline lacks captivating architecture and only eight per cent strongly agreed Toronto's condo buildings exhibit unique designs and personalities.

“Our financing structure in Canada requires us to pre-sell first and the incentive to create a good product in the end sort of evaporates,” Safapour explained.

Toronto residents and homebuyers have accepted the status quo because the condo market has been so strong until recently and units were seen as an investment as much as a place to live. If people chose not to buy, someone else would and prices were rising so it made sense to purchase sooner rather than later.

Safapour believes condo developers should take an approach that appeals more to people who will live in the units rather than those who buy and rent them for investment income.

A typical business plan for a Toronto condo would have a 40-storey, 400,000-square-foot building with units averaging 600 square feet. An end-user approach with 750-square-foot units would result in 113 fewer units but $7 million in savings for development charges and $14.2 million for construction costs, Safapour said.

That $21.2 million in savings can be reinvested in the building to make it better and reduce price points for purchasers and risk for developers.

Research by Devron shows approximately 60 per cent of buyers want units larger than 750 square feet. 

Safapour said people live in larger condo units longer, which has the desired effect of creating more respect for the building and a sense of community among residents.

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