BIG Immigration Targets, SLOW Housing Starts: Implications For Toronto Housing Affordability!
Have you heard the news about housing starts in Toronto slowing down by 52% in January? Declining housing starts would be a major issue for housing affordability, especially with our massive immigration targets.
But is it true? As a spoiler alert, I’d cautiously say that it’s not as bad as it sounds but their overall theme is probably still correct and I’ll be diving into all of this in this video.
Housing Starts Statistics
But it’s still very possible that this January’s number is lower because housing starts are slowing. There are a lot of signs pointing to this. Builders are holding back on construction because their cost of borrowing is now much higher and selling prices have dropped so it’s hard to make a decent profit.
So, even though it’s still too soon to tell from one month of housing starts data, we do definitely need to monitor housing starts trends to make sure it grows in line with our growing population.
But how much new supply would be enough? CMHC tells us that we would need around 3.5 million new housing units by 2030 to meet our rising demand, and the worst part is that we just don’t have enough labour resources to get this done.
That’s pretty scary so let’s fact check this. Our government targets around half a million new immigrants per year and so by 2030, that might be another 3.5 million people coming into Canada. But not every single person will need their own housing unit. On average, each household has two and a half people, which actually means we need 1.4 million new housing units by 2030 or around 200,000 new housing units per year. Based on January‘s adjusted annual housing starts, we’re still OK for now as long as we don’t continue to slow down.
It’s also worth noting that growth by province matter. The influx of immigrants into Ontario has actually been increasing, and if this trend continues, that’s going to put more strain on affordability in Ontario. But if more immigration end up shifting to the prairies, that might end up easing affordability in Ontario.
Obviously, I’m a bit biased choosing to live in Toronto myself and so I feel that Ontario definitely has more of a draw compared to the prairies in the long run, but if you look at the better projected GDP and the lower cost of living, the prairies do have an edge for the next year or two for sure.
Rents, Price, and Supply Trends
I think when it comes down to it, housing starts from condo builders will come if it ends up being profitable and right now, things are stalling because it’s not.
Rents have been climbing but because interest rates have been on a steeper upward trajectory, that’s putting a damper on condo investor demand and selling price. Basically, once interest rates start to stabilize, we will need to continue to see rents rise more to make rent yield good enough to attract condo investors again which will then help builders speed up their pace.
Here is what might happen once interest rates start to stabilize: Rents will lead and prices will follow, and eventually supply will go up, which will then slow down rents and prices. And so if we want stability to come sooner, we need faster ways to create new housing instead of just relying on the big developers.
Currently, 50% of immigrants go to Ontario, with 20% going to the City of Toronto so we’ll need around 20,000 new homes per year to accommodate Toronto’s demand. There’s around 400,000 low-rise homes in Toronto and if one percent of those homes create two new units each year, that’s already 8,000 new units or 40% of the annual supply growth that’s needed. This is why our governments are focussing a lot of attention to boost housing on this front.
What Might Happen To Toronto Freeholds?
If you’ve watched our previous videos, you’ll know our stance. Freehold investment numbers already make sense, so we don’t suspect prices to come down much more as long as interest-rate expectations don’t change much from this point.
Moving forward, we see two likely cases that will benefit freehold investors who are buying these days:
- Freehold prices might stay stable in the short term and so rising rents will mean improving rent yields which is a good thing.
- Better rents might drive more investor demand which means faster appreciation which is also good for investors who buy now.
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