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"Real Estate Wealth Insights" Columnists

Greg Placidi Chief Investment Officer & Portfolio Manager, Equiton Capital
Cliff Fraser Chief Business Development Officer, Equiton Capital
Chris Nickerson Managing Director, Equiton


The sustainability of growth in Canada’s apartment market: Part II

Part II of II: It’s not a question of whether there is a housing affordability issue in major Can...

Part II of II: It’s not a question of whether there is a housing affordability issue in major Canadian cities but, rather, the question is what to do about it. A common belief is that to solve the affordability puzzle, the insufficient and constrained rental supply must be fixed.

Let’s consider the key factors affecting supply, namely construction costs, development regulations, development charges and the slow pace of housing production.

Construction costs

Just as real estate prices have been rising consistently across Canada, so have construction costs.  

This is likely to be exacerbated by the escalating international trade battles. Although not a direct participant in the U.S.-China trade war, Canada’s dollar has been adversely affected due to global growth concerns driving down oil prices as well as prices associated with copper, nickel and zinc.  

A lower Canadian dollar relative to the U.S. dollar translates into higher prices for any building materials and finishings Canadian builders purchase through U.S. manufacturers and suppliers.

Development regulations and charges

In Economics 101, we learned that price equilibrium will be achieved when supply equals demand.  

IMAGE: This graphic illustrates the weak supply response to rising home prices in the Toronto market, compared to some other Canadian cities. (Courtesy Equiton)

This graphic illustrates the weak supply response to rising home prices in the Toronto market, compared to some other Canadian cities. (Courtesy Equiton)

Keeping this in mind, short of stopping all immigration into Canada and/or making children live with their parents until they are 50, the only way to rationally control housing prices is to increase supply.

Quite simply, housing affordability will keep dropping until changes are made to land development regulations in major cities.

In 2017, according to RBC Economics, housing affordability hit its lowest level in 27 years. Several cities, such as Montreal and Edmonton, have managed to bring new housing supply online to balance rising prices. Toronto and Vancouver have not seen any success in their efforts to do so.

“Supply is slow to respond to any change in price and we’re seeing that time and time again,” says the manager, market analysis for Canada Mortgage and Housing Corp. (CMHC), Dana Senagama.

Although high demand and limited supply are the main culprits in these expensive markets, government development charges are also a contributing factor in the cost of homeownership.

According to a May 2018 report from the Building Industry and Land Development Association, government charges, on average, account for almost 22 per cent of the price of an average new home. For a single-detached home, that’s about $186,300.  

These development charges have doubled over a short period of time and appear to be on track to rise even more.

Slow pace of housing production

Yet another piece to the affordability puzzle is, unfortunately, the length of time it takes to add new housing into a region.  

What used to work in the past is no longer effective. Current rules and processes involved in the planning, zoning, approvals, infrastructure and servicing of land to support development struggle to keep up with demand.

For instance, from start to finish it takes approximately 10 years to complete a new low-rise or high-rise project in the GTA.

There are two primary implications of this slow pace of bringing new homes to market. No. 1 is that it compounds the limited inventory in a region that is in high demand, thereby prices remain high.

The second implication is that, due to the current population projections of 9.7 million people in the GTA by 2041, and the significant increase in migration in the GTA region, there is not much relief in sight as far as a solution to our affordability challenges.

Imbalance creates investment opportunities

The demand for apartment rentals is poised for further growth as demand continues to outstrip supply.

With housing prices as high as they are, potential homebuyers are increasingly deterred from making homeownership a reality and, as such, will continue to turn to apartments as an affordable option.

The indisputable supply-demand imbalance continues to be a significant challenge in the housing market. Fortunately for investors in this sector, it is unlikely to change in the foreseeable future.

Read Part I:  Canada’s apartment market: Fundamentals driving demand


Greg Placidi, MBA, CFA, is the Chief Investment Officer & Portfolio Manager, Equiton Capital

Greg is an accomplished investment professional with significant experience managing a wide array of investment portfolios. Over the last 30 years, Greg’s career has centred around global financial services and he has held senior roles in investment management, strategy consulting, insurance, real estate and financial services regulation.

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