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Canadian Housing Market Slowly Heating Up Again As New Zoning Ordinances In Toronto Calls For More Multi-Family Homes In The City

OTOS Inc. - Tue May 16, 2023

While a tight and expensive housing market is pricing out much of would-be American buyers, amid low inventory and rising mortgage rates, the Canadian property market is steadily heating up again, with residents in the country’s biggest city - Toronto - calling for more homes to be built in the city, even if it means fewer parking spots or detached homes. 

Following a recent poll by Liaison Strategies for the National Ethnic Press and Media Council of Canada, more than 69 percent of Torontonians have voiced their support for building more multi-family homes in the city, with a mere 7 percent opposed to the idea. 

The poll is the second part of a larger census about the upcoming mayoral race, after current Toronto mayor, John Tory unveiled ambitious zoning plans back in December 2022 that will look to increase the number of multi-family homes in the city. 

With the country’s national population expected to surpass 40 million this year, there’s little secret over whether Toronto will see similar expansion in the coming years as well. 

The city has experienced a mass influx of new residents in the post-pandemic era, driving up prices and flushing out available inventory. 

Across much of the city, voters and single-family buyers are now finding themselves in the midst of a housing crisis, as prices continue to climb on the back of soaring mortgage rates as the central bank continues to hike up interest rates in a race to dampen stubbornly high inflation. 

In the past, many buyers, both domestic and international, took advantage of low borrowing costs and cheap prices, scooping up affordable single-family homes and condo units across the city and hiring property management companies to manage their rental properties.

Even with prices rebounding somewhat since their pandemic slump with the average Toronto home now priced around $1.15 million, according to the latest figures by the Toronto Regional Real Estate Board, new zoning ordinances introduced by Mayor Tory and several opponents, efforts could help bring back potential buyers and investors, to extend more flexible use of residential buildings in and around the city. 

An eye on the Toronto property market 

While Toronto’s once-red-hot property market has cooled somewhat in recent months, the Canadian Real Estate Association said that overall national home sales jumped by 11.3 percent between March and April 2023, as the real estate market started to slowly heat up again. 

A closer look however showed that while more buyers are slowly re-entering the market, renters in Toronto are having a hard time having to deal with sky-high rent prices. Over the last year, average asking rents across Canada have grown by $196, with Toronto seeing an annual rent growth of 22.4%. Average rent in the city hit $2,818 in the first half of the year.

Other research by Toronto-based consulting firm, Urbanisation, revealed average rent for purpose-built rentals is now more than $3,000, marking a record high. 

A mix of factors is driving up prices across the city, as rent prices jump by double digits. The city has in recent years following the pandemic seen a steep influx of new residents moving to the Greater Toronto Area (GTA). 

Local migration and foreign immigration targets mean that a growing number of people are driving up demand for affordable rental units in the city. 

Toronto comes in first place as being the most expensive city to live in for Canadian families, with the average family spending roughly 30.5 percent of their net monthly income on rent. Second is Vancouver, with households spending around 29.8 percent on rent each month. 

On the back of higher rent prices, Statistics Canada revealed that the renter population in the country is growing at 21.5 percent, more than double the 8.4 percent growth rate of homeowners. 

The problem might be the sky-high prices, but an overall shortage and a growing population of residents and renters are putting the local government under pressure to find practical solutions that could see the majority of new purposeful built homes ending in the hands of residents, and not necessarily private investors or hedge fund managers. 

Perhaps the political pull here might fall in favor of mayoral candidates that have posed several suggestions that aim to help solve the city's growing housing shortage. 

On the one side of the spectrum, we could see new zoning ordinances bringing more multi-family homes to the city, eliminating single-family homes, minimizing available parking, and even changing the appearance of some of the city’s most iconic neighborhoods. 

On the other side, however, it would also mean that droves of investors could scoop up rental units, in an already hot market, and leave many in a space where new multi-family units are not necessarily rent-controlled. 

Whoever holds the seat, whether it’s current Mayor Tory, or opposition, Olivia Chow, who launched her campaign in mid-April this year, there’s a lot of work up ahead if they look to bring affordable housing to Toronto buyers and renters in the coming years. 

Changes can bring opportunities 

In the past, developers and hedge fund managers insisted on the future of single-family homes in the GTA. However, as economic indicators started changing, and demand continued to grow, conditions are steadily swinging in the opposite direction as new proposed zoning regulations could soon change the face of Toronto neighborhoods. 

At the end of April 2023, the city council held a public meeting on their Multiplex study, one of the components that make up the City’s Expanding Housing Options in Neighbourhoods (EHON) initiative. 

With the study and EHON, the city aims to permit the erection of residential multiplexes, containing up to four units across the city’s low-rise neighborhoods. This would see purpose-built multi-family duplexes, triplexes, and fourplexes going up in areas that are currently dominated by single-family homes. 

Converting existing areas, and bringing new additions to the city, scattered across several pre-selected neighborhoods, the city could add multiple new homes, as it aims to alleviate some of the pressure currently experienced within the city’s property market. 

Many are on the fence about these proposed initiatives, claiming that they could introduce investors to new opportunities for scooping up affordable units. Investors and hedge fund managers with the cash and influence to pay higher mortgages, in a turbulent economy could only pull would-be buyers even further out of the market. 

There is however the possibility for some of these investors to step down from this sort of buying strategy, especially in times where interest rates continue to escalate, and wider macroeconomic conditions remain largely unstable. 

Instead of throwing their cash into real estate development projects, which could take several more years before the first stone is laid, might just cool down their appetite for new rental opportunities in the city. 

Another factor that investors and hedge fund managers have been weighing in, is that south of the border, and largely across much of North America, more residents are moving to tax-friendly cities and regions, whether it’s within or outside of Canada. 

Many of those that have moved in the post-pandemic real estate market have been relocating to warmer areas such as Florida or Texas, as the states not only offer them better weather conditions, but also increased quality of life, relatively affordable housing, and more attractive tax jurisdictions. 

This would mean that these conditions driven by pent-up demand could leave investors looking elsewhere in different markets, instead of honing in on places such as Toronto. 

Investors are continuously placing their bets in regions that offer more attractive growth opportunities, but at the same time, it does leave many would-be buyers in an extremely competitive market, fueled by ongoing demand, supply shortages, and rising prices. 

There’s a lot of consideration that comes into the eye’s view, even for large-scale institutional investors. Either risk buying into a market priced well-above average on the back of soaring mortgage rates or rather lower exposure and look elsewhere in places that offer both attractive market conditions and forward-looking growth.

The bottom line 

Although real estate remains a long-term investment opportunity for average buyers, real estate investors, or hedge fund managers, wider market conditions often make it hard for many involved players to properly execute their position. 

In a tough economic climate, where interest rates are continuously going up, prices are in flux, and low inventory levels, running the risk at a large-scale, especially for investors could turn into more catastrophic problems that would cost them in the long term. 

However, weighing out different options, whether being a single-family buyer or even an investor could help give a better indication of where the next potential opportunity may present itself, and how relying on older tactics could leave traditional buyers left standing in the dust. 

On the date of publication, Pierre Raymond did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

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