The Toronto Condo Market Goes Suburban

Toronto has undergone a residential condominium development explosion over the past five years, with another strong quarter in Q3 2017. A recent industry study projects the growth to continue in 2018, given Ontario’s population and economic boom. “Bedrooms in the Sky: Is Toronto Building the Right Condo Supply?”, a study by a joint initiative between the Ryerson City Building Institute and Urbanation, outlines how the growth of condo development does not line up with the demands of the growing number of families, in terms of both condo types and the amount of condos for sale, making Toronto’s bordering cities such as Pickering and Ajax much more attractive options.

Reported by the Altus Group in the Winter 2017 Canadian Real Estate Forum, the total population growth in the former City of Toronto (also known as “Old Toronto,” the zone within the City of Toronto separate from Etobicoke, York, North York, East York and Scarborough) has been soaring in the past decade. During the latest reported time range, 2011–2016, the city’s population jumped by 67,000 (a 24.0% increase from the 2006–2011 range and a startling 2,133% increase from the 2001–2006 range).

Source: Altus Group; Winter 2017 Canadian Real Estate Forum

One group that has grown exponentially during the past decade is the millennial demographic, defined here as those in the age range of 20 to 34, which jumped from a -7,000 decline in 2001–2006 to a growth of 28,000 in 2006–2011 (an approximately 500.0% difference). This trend continued to grow well into 2011–2016, as displayed in the table below, including data from both immigration and aging millennials.

Source: Altus Group; Winter 2017 Canadian Real Estate Forum

The idea that most millennials would prefer to live in the central Toronto market for the sake of convenience was starkly challenged by the significant amount of respondents within the 20 to 34 age range that disagreed with a preference to remain downtown. In a recent FIRM Survey, Altus Group asked respondents whether they had preferences for smaller homes in a downtown location, as opposed to larger homes in the suburbs. The majority of respondents disagreed with living downtown entirely, favouring the attainability of suburban housing — particularly with locations that are closer to public transport with access to downtown where many work. The widely reported office boom in downtown Toronto has bolstered downtown job growth, making the surrounding area an attractive place to live. While the location itself may be appealing, the prices are driving first-time homeowners away from the downtown core.

Source: Altus Group; Winter 2017 Canadian Real Estate Forum

The downtown core was not designed with the nuclear family in mind, instead prioritizing the development of studio, one-bedroom and one-bedroom plus den condo units. Urbanation’s report demonstrated that between 2012 and 2017, approximately 58.0% of condo developments were studio, one-bedroom or one-bedroom plus den options (constructed and pre-constructed developments found similar numbers), whereas pre-1990s development saw that number at approximately 25.0%. According to DBRS financial analyst Wasiq Chughtai, developers in Toronto will likely continue to build the same types of properties in the future, not necessarily focusing on units that cater to families of two or more people. “Toronto just can’t offer affordable space for families,” he stated. “Taller developments are going in a different direction than what families are looking for.”

Millennials who start families and struggle to find the properties they need in Toronto or the downtown core will likely look to suburban cities surrounding Toronto, like Pickering, Ajax, Whitby, Milton and Mississauga, according to DBRS financial analyst Gloria Au. Moreover, these cities have direct lines of access into the Toronto downtown core through the GO Train rail service. Supporting Ms. Au’s point is the Focus on Geography, 2011 Census series by Statistics Canada, which indicates steady family growth in the bordering cities, demonstrating that this trend is already happening. The table below shows these percentage changes of family populations from 2006 to 2011.

Source: Statistics Canada; Focus on Geography Series, 2011 Census — Toronto, Ontario

Affordable housing in downtown Toronto seems unattainable for most people; however, the Canada Mortgage and Housing Corporation has released hopeful 2019 predictions: “The average MLS® price should increase over the forecast horizon, but at a slower rate than in the past four years. The average price should lie between $790,300 and $819,700 in 2017 and between $773,800 and $826,000 by 2019.”1 The average homebuyer may find housing slightly more affordable over the near term, which could keep more families in the downtown region as price increases are beginning to cool off. For many other families, however, the markets remain at an unaffordable level.

Over the past two years, housing prices have increased dramatically. The average selling price for all home types combined was $736,610 in December 2017 (up from $732,533, with a 0.56% increase compared with December 2016). The change was fuelled by striking year-over-year average price increases in semi-detached and condominium apartment market segments. Condo sales are highlighted in this report because it is the property type with the highest percentage change in average monthly sales volume, at 20.0% (1,302 condo sales in January 2016, compared with 1,562 condo sales in December 2017). According to the Toronto Real Estate Board, condo prices have also experienced the sharpest increase, with the average climbing from $386,165 in January 2016 to $503,968 in December 2017, a change of 30.5%. There are several contributing factors. Jamie Feehely, Managing Director of Canadian Structured Finance at DBRS, sees one major factor at play, noting that “the impact of the new tax in Ontario on real estate purchases by foreign individuals severely dented the single-family housing market.” However, “it had little impact on the condo market.”

Source: Zolo Housing Market Research Report.

For new families looking for condominium options, the bordering Toronto neighbourhoods offer a set of more affordable options, with the average prices for two-bedroom options at $441,565, three-bedroom options at $565,924 and general housing prices (encompassing all condo and detached housing options) at $629,826. These neighbourhood options compare favourably to downtown Toronto options across the board, with its average two-bedroom condo prices standing at $656,000, three-bedroom options priced at $691,000 and the average for all housing at $790,000. To put these figures in context, the table above shows the average prices of each border neighbourhood collected from Zolo, a Canadian real estate database, which based the figures off recent listings between December 2017 and February 2018.

From its assessment of condo development trends and millennial preferences, DBRS expects to see more condo growth in the broader Greater Toronto Area (GTA) border cities. It is possible that the demographics of homeowners and renters themselves will shift, as the millennial generation finds property that suits its familial needs, budget and interests. The current urban planning solution seems to be building taller condo developments, thereby alleviating some of the soaring costs in the former City of Toronto area (which consists of Etobicoke, York, North York, East York and Scarborough) with more inventory. Building outward to GTA cities could help the market match its supply with new family demand.

This piece is available on the on the DBRS website.

Follow Stephanie Hughes on Twitter @StephHughes95.

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