How a Shrinking Supply of Serviced Sites is Stoking House Price Increases in the Greater Toronto Area
July 15, 2016
As economists are fond of saying, the price of any commodity or service is the product of the interaction of demand and supply factors. This is true for ground-related homes (defined as single- and semi-detached houses and townhouses) in the Greater Toronto Area (GTA). Much media attention has been devoted to the demand factors contributing to the surging prices of both new and resale ground-related homes, which is occurring throughout the GTA, not just in the City of Toronto. But supply factors have been contributors too. If the supply of housing does not respond to rising demand, the result can only be even higher prices. The way the supply of ground-related homes grows is through the construction of new houses (housing starts).
The table below documents what has been happening in the market for ground-related housing in the GTA since the mid 1990s. Note the following:
- The demand for ground-related homes, as measured by MLS sales through the Toronto Real Estate Board (TREB), has been on an upward trend since the mid 1990s, with the exception of a downward blip at the time of the 2008-2009 recession. MLS sales best represent overall demand in the marketplace since there are many more existing homes sold than new homes in any year.
- In contrast, the construction of new ground-related homes increased only to the year 2002, declined through 2003-2008 and has been flat since.
To put the lack of responsiveness in ground-related housing starts to the rising MLS sales and prices into context:
- The volume of MLS ground-related homes sold jumped by two thirds (or 30,616 homes) between 1996 and 2015 - from 45,701 to 76,317 sales.
- The volume of starts of new ground-related homes at 17,248 units in 2015 was about the same as in 1996 despite the robust growth in overall demand.
Average prices have climbed in response to this imbalance between demand and supply of ground-related homes. The average MLS sales prices for all types of homes jumped from $203,028 to $622,121, more than 200%, between 1995 and 2015. The price increase for ground-related homes was even higher.
So why have the starts of new ground-related homes not responded to the growing demand? I am sure homebuilders and developers have not shunned building more ground-related homes because they did not want to make more money. In my opinion, the lack of market supply response to rising demand has been the result of an inadequate supply of serviced sites on which to build ground-related homes, which worsens with each passing year. The reason for this shortfall is the failure of municipalities to bring serviced sites to the marketplace on a timely basis in sufficient numbers not only to satisfy ongoing demand but to provide a cushion to ensure consumer choice, competition among homebuilders, and allow for future uncertainty.
At first glance, it is hard to fathom why most of the GTA’s 905 regional and local municipalities are not responding to the obvious market need for many more serviced sites to be made available for homebuilding. After all, their streams of revenue from development charges are directly dependent on registering subdivisions and issuing residential building permits – the more ground-related housing construction, the more development charge revenues.
The real culprit is the imbalance between provincial environmental policy objectives relative to other objectives such as providing a range of affordable housing choices since the Liberals returned to office in 2003. Until there is a rejigging of priorities by the current or future governments to significantly expand the supply of serviced sites, upward pressure on the prices of ground-related homes will continue for the foreseeable future.