Ontario housing market implosion forces low-risk rentals to sell high

The GTA housing market continues to reflect the plight of an overheated market and a waning consumer willingness to risk long-term commitments. Appetite for housing units has been sinking for several years as home prices have risen sharply and buyer indebtedness has grown. This combination, coupled with the decline in apartment construction and high prices for new single-family homes, has been dragging down the market in recent months, with August 2018 already off more than 10 percent from peak levels and July down 6 percent.

Recent data indicate this trend is not slowing; sales activity is stagnant, construction is down and even new condominium units coming on the market are selling far below list price. A surfeit of units has created a post-minority election incentive for realtors to overbook their 2018 listings in order to unload them in time for the 2019 start of the biannual non-refundable home sellers’ tax write-off deadline. Unfortunately, the 2018 tax deadline, along with substantial investor activity in real estate during the January 2018 burst of cash injections out of real estate funds, have encouraged developers to put units on the market earlier than usual to avoid paying the tax. This in turn has sparked new home price increases, with sales in some markets recently accelerating at a pace not seen since 2008.

Roughly two-thirds of Toronto’s population continues to rent apartments and condos, and these are generally viewed as a lower risk alternative to home ownership. Due to the significant cost of new rental supply, a significant portion of this rental supply tends to be sought after short-term tenancy contracts known as ku-pu’s. This substitution of rent for ownership has continued through the retirement crisis—many financially strapped pensioners seeking affordable units that provide immediate access to retirement income are less likely to purchase their first home. The fate of these ku-pu’s has already been intertwined with the housing bubble, as many ku-pu’s experienced pre-2006 prices in 2012, a period in which demand for existing housing jumped to levels not seen in over a decade. At the same time, ku-pu’s and owner-occupied rental units have continued to grow in popularity, spurring construction and the creation of housing for pensioners, children returning home and students. In an effort to reverse the decline in the number of owner-occupied units, local authorities and federal politicians have been touting several efforts to increase the supply of rentals. There is broad agreement on the need to tackle the issue, including by attempting to restrict unscrupulous landlords and regulating rent controls that have resulted in unreasonable restrictions on allowable increases.

Landlords who use subterfuge to manage properties are increasingly challenging regulations and working with governments to address those challenges. Some new rental apartment units are now classified as “social housing” that avoid regulations and are not subject to rent controls. Firms are increasingly leaning on the political system in order to support the creation of micro-units and crowdfunding sites are quickly filling the niche for home sellers with smaller down payments and greater uncertainty of income. High-cost-of-living is a persistent issue throughout most of Canada’s “big cities,” including Toronto. This is being exacerbated by a shortage of supply and new influxes of immigrants. Overall, demographic trends and expensive housing make this a problem that will continue to be a key concern of government for years to come.

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