Canada's Housing Bubble

Mar 04, 2010 Terrence Belford theglobeandmail.com

Roots of current supply problems lie in decisions made many monrths ago

The stats for January’s new high-rise and low-rise sales are out and, as with so much else in life, there are two sides to the story.

For high-rise condos, it was good times. According to RealNet Canada Inc., there were 1,017 sales of newly built high-rise homes in January, making it the best January for the industry in the past five years. But for newly built low-rise homes, it was the exact opposite. Sales were 1,145 homes, which if you discount last year – when we were in the middle of a global recession – was the lowest in five years.

Even more troubling, the inventory of unsold low-rise housing in the Greater Toronto Area slipped once again to stand at just 7,283 homes, about one-third of what we usually have on hand at the start of the year.

So on the high-rise side, and for resale homes, high demand is pushing prices up. On low-rise, a lack of supply is driving prices up. Opposite ends of the spectrum, but the result is the same.

At the end of January, the average price of a new condo was $407,885, up from $388,289 a year earlier and a jump of $9,710 from the end of December. That means about half of an entire year’s price rise was posted in a single month.

For new low-rise, single-family homes, the average price in the GTA was $474,035 at the end of January, up $14,462 from the month before and $34,436 from the same month a year earlier: 42 per cent of the total annual increase was recorded in a single month.

What does all this mean for the future? I truly wish I knew.

What is clear, though, is that the supply of single-family homes is a crucial factor. How did it drop so low so fast?

Jason Attard, vice-president sales and marketing for Aspen Ridge Homes in Concord, Ont., can offer some insight. The group of companies he works for develops land and builds high-rise condos and low-rise subdivisions. He has a front-row seat to almost all aspects of the industry.

The supply shortage is complicated, he says. Its roots lie in the global recession, which started in the early fall of 2008. Unsure of how long it would last, but certain that people would not put buying a new home high on their priority lists, developers and builders stopped seeking municipal approval for new projects.

It now takes at least a year to gain those approvals, Mr. Attard says. When demand for new single-family homes began to return this past summer, builders were still unsure what the future held, so many focused on releasing new phases of existing projects instead of applying to build new ones.

When it came time last fall and this winter to think about applying for new projects, many builders were still undecided whether to risk the very large amounts of money it takes to get a project off the ground.

The cost of fees associated with applications for subdivisions has tripled over the past half decade, Mr. Attard says. Municipal development charges have risen about 137 per cent over the past decade. The cost of building new homes to code and to energy-efficiency standards has risen 20 per cent.

At the same time, regional governments allocate new housing starts on a municipality-by-municipality basis. Their priority is intensification, says Mr. Attard.

“That means if you come in with an application for 100 new single-family homes and there is an application for a 100-unit condo, then the condo gets top priority,” he says.

The upshot is that many traditional home builders are rethinking whether they want to continue in the low-rise business, and are starting the shift to condo development as a safeguard against an uncertain future.

The only gleam of hope for affordable single-family housing is the extension of existing subway lines into the 905 calling area, Mr. Attard suggests. The availability of reliable public transit will open up new lands for development. Then again, by the time that happens, the move toward intensification may dictate condos rather than low-rise.

I think the only thing we can count on is a spring in which all forms of housing continue to leapfrog up in price.

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I owe you all an apology.

Last week, I suggested the new Harmonized Sales Tax will apply to resale homes over $400,000. It will not. Yes, it was a dumb mistake.

On the other hand, judging from the number of e-mails I received from early Friday morning on, people are indeed reading this column.

The Globe’s celebrated former Ottawa columnist George Bain once suggested that writing columns like this was akin to wetting yourself in a blue serge suit: You got a nice warm feeling and nobody noticed.

If the number of people who let me know I was dead wrong is any measure, he was wrong.