CAUTION! More Unaffordable Times Ahead

Published on 5th April 2018

Over the long weekend, I made sure that I took a day off and made some time for myself to get some rest and relaxation. However, I somehow ended up a bit bored (admittedly, the life of an entrepreneur – always thinking about the business!) and started looking for something to do.

Long Weekend Reading – I decided to do some light reading, and by light reading, I mean picking up the Canada Mortgage and Housing Corporation’s (CMHC) 225-page report titled “Examining Escalating House Prices in Large Canadian Metropolitan Centres”. Perhaps you’re thinking that watching a movie would have been a better way to rest and relax. Not to worry, I did that after my nap (which was induced by this lengthy report). Luckily for you though, I have summarized the key points of this long report for you here in this week’s Insight Article.

Reading these government-issued reports is always interesting because they are written by a highly skilled team of mathematicians who actually use the calculus they learned in University to make a living. One of the charts that I stumbled upon midway through the report was rather interesting and I wanted to share it with you. I’ve highlighted this before in previous Insight Articles, but let’s take a closer look at this topic here.

Density Rankings – Given its rapid growth, Toronto is poised to become a major metropolitan city. The chart below from the CMHC report compares our density per square kilometre to other major cities.

Check out the table below. We are ranked #144 out of 281 metropolitan cities. We’re essentially right in the middle of it all. New York and Tokyo are 4 and 10 times, respectively, more dense than Toronto.

Population density is measured by the number of people confined to a defined area of land. The less land there is, the more people each square kilometre must hold. When a city runs out of land and must build vertically to accommodate (i.e., condos), density increases because we have living spaces stacked on top of each other instead of everybody spreading out and owning a piece of land.

Surrounded by Green – You might be thinking, well in Toronto we have a lot of land to develop. But in reality, do we actually? Unfortunately, an abundance of build-able land is not the case. Toronto is actually landlocked, even though we are in the great country of Canada where there is supposedly plenty of land to go around.

In the map below that highlights the Ontario Greenbelt, Toronto is in the centre surrounded by all of the other metropolitan cities of the Golden Horseshoe. As you can see, the Greenbelt is highly restrictive and we are slowly running out of land because you cannot build on top of the protected Greenbelt lands.

The Golden Horseshoe is surrounded by the world’s largest Greenbelt and Lake Ontario. This is exactly why intensification in the city centres has been the priority of the government in the last few years.

The Greenbelt was first introduced in 2005 by the McGuinty government. The two maps below of the Golden Horseshoe are dated 12 years apart, 2005 vs 2017. The map on the left depicts the density in 2005. Meanwhile, the map on the right illustrates the density in 2017. It has only been 12 years since the Greenbelt was put into place but look at how much of the land within the Greenbelt has been developed in this short period of time. This then begs the question: At this rate, how much more build-able land will be left in the years to come?

Make Room, More People Coming! We are projected to increase our population almost 50% in the next 22 years to 9.4 million people from 6.6 million people, according to our own government. The graph below highlights this statistic.

The Affordability Factor – Over the last 12 years, average real estate prices have increased faster than the average income. So the hopes of saving faster than the price of real estate growth in the coming years could be like fighting an uphill battle unless you are doubling your income every few years.

I find it best to evaluate prices and trends from an affordability standpoint because for real estate, as much as there are speculators in the market, the majority of people living in these properties are local (regardless of whether they own or rent).

The following two charts are a great representation of Canada as a whole when it comes to affordability. In the first chart, you can see the Top 10 MOST AFFORDABLE cities in Canada with a price-to-income ratio as low as 4. This means that if you worked 4 years in that city, you could potentially pay off your house in full.


source: Zoocasa

In the next chart below, we can see the Top 10 LEAST AFFORDABLE cities. As illustrated below, Toronto ranks 3rd in Canada on this index, with average house prices at 19 times the median income!


source: Zoocasa

As of January 1st, the OFSI stress test has made it so that most lenders will allow you to buy a property approximately 5 to 6 times your gross income. This number used to be 7 to 8.

I’d also like to point out that the median income of $39,560 in Toronto, as outlined in the chart above, is the middle income class in this city, not average. Median income means that half of the population has less than the above-stated income while the other half has more.

With property prices for a single person at 19 times the median income, combined with only being able to afford a mortgage 6 times your income, you better be in the top 5% of income earners in Toronto to even dream of owning a property by yourself.

For 2+ people looking to buy a place together, at least there is a better chance at 8 times the median income (as per the above chart). However, the cruel fact is that half of the people in this category are no longer able to purchase the average home thanks to the OFSI mortgage changes mentioned above. This is exactly why the market for properties sub $800,000 is so hot right now. Perhaps this is the last chance for people to actually own a property!

MACRO Level Views – Now let’s zoom out of Canada and look at our city from a global perspective. The chart below uses a different metric for measuring income (average, not median). It ranks every city in the world based on average income-to-average prices. You can see that Vancouver stands at #30 for most unaffordable, globally speaking. Toronto just broke into the top 100’s recently at #99.


source: Numbeo

Although Toronto may not be affordable to half of the people in the city, Toronto is still very affordable relative to the other major metropolitan cities around the world. For anyone looking to immigrate to Toronto for a better lifestyle, our city is still very much attractive to the outsider looking in.

Circling back to that density chart that I was telling you about in the CMHC report, Toronto is still not considered to be very dense as it stands right now. However, the Golden Horseshoe is running out of build-able land. Toronto, being in the heart of this region, will be forced to intensify its density over the coming years. This will ultimately drive prices up.

Since the inception of the Greenbelt in 2005, the population has been growing and the prices have continued to increase but our supply, unfortunately, has not increased at the same levels. By taking a look at the chart below, you can see that the only feasible new homes being built have been multi-family homes (i.e., condos) as of late.

The Wrap – With the price of a single-family home (freehold detaches, semis and towns) significantly increasing and the lack of land to build on, we can only turn to multi-family homes (i.e., condos) to find affordable housing for everyone. This has been the reason for the recent surge in condo demand and pricing. With the current pace of growth, Toronto might eventually crack the list for Top 20 most unaffordable cities in the world.

The best time to buy was yesterday. The next best time to buy is today. There really is no better time to buy than now. If you’re sitting on the sidelines right now and just waiting it out, then you really need to ask yourself why. All of these indicators, stats and analyses done by researchers all point to worse times to come from an affordability standpoint. Buy a condo today if this is what you can afford now, because I can almost foresee that these won’t be getting any more affordable in the coming weeks, months and years.

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