Would more rental units make the GTA more affordable?

Ontario regulators should do more to encourage rental construction in the Toronto area in response to the city’s housing affordability crisis, a CIBC economist says.

Benjamin Tal, lead author on a new CIBC Economics report about GTA housing, says provincial and municipal policies should encourage developers to build more family-friendly rental units to help reduce rental prices and cool demand for detached homes.

Provincial government policies have been encouraging new land for condo building over houses, but more renters are needed, the CIBC report says.

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“The issue is that the condo market so far has been built for investors and designed mainly for young people, students, the one-person type unit,” Tal tells Advisor.ca, noting higher condo supply. “[T]he new supply should accommodate for the increased propensity to rent among older people and young families, and for this, you need larger units.”

Demand firm

Even as condo supply has surged, people continue to seek detached or semi-detached homes. Ryerson University’s Centre for Urban Research and Land Development also released a study this week that found most home buyers in the GTA want a detached house or a low-rise home, as opposed to a condo.

“The GTA is in a twilight zone of home prices characterized by a homeownership mentality that is slow to change to the required higher propensity to rent,” the CIBC report says.

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Tal says “purpose-built” rental units are projected to be 18% of total new supply this year in the GTA, but that number should be more like 25% or 30%. Regulators could use incentives like development charges to encourage more rental units, he says, with opportunities for pension funds to invest in the projects.

“Rent control was designed to help tenants, which is fine, but you also have to find a way to encourage supply. Otherwise it’s backfiring,” he says. People will also be nudged into renting because of affordability, he says, with higher supplies keeping rental prices affordable.

Rising house prices

CIBC says detached and semi-detached homes were less than 27% of GTA housing starts last year, falling from 40% in 2009, even as demand has increased. That has helped push up prices for the most sought-after housing.

“[E]vidently, a condo unit is not for everybody. Many priced-out millennials in search of a single-detached house simply take to the highway and start driving away from Toronto, not stopping until they find something that they can afford,” the CIBC report says.

The Ontario government has proposed higher-density requirements for the province’s municipalities, which would make less land available for detached homes.

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CIBC also proposes that the federal government raise the minimum down payment above 10% for homes valued between $500,000 and $1 million. They also suggest hiking the qualification rate for those seeking popular five-year, fixed-rate loans, accounting for over 30% of originations.

Rising amortization periods, and increased borrowing to finance down payments, are supporting home ownership, CIBC says, adding: “Subprime lending is on the rise while the interest rate sensitivity of prime borrowers is elevated.”