What Does Canada's Affordable Housing Plan 2022 Mean For Toronto Real Estate Investors?
Yes, we have a housing crisis in Toronto and if you’ve watched me talk before, you might even feel that I’m starting to sound like a broken record.
But the thing is, people weren’t so sure whether we had a demand or supply issue just a few months back. Now, the Trudeau government is finally admitting that our housing crisis is because of a lack of supply in their latest 2022 federal budget.
But supply is not all the time. Our provincial and municipal governments are now hinting that affordable housing supply needs to meet a specific criteria, and what we’ve been doing in the past just isn’t enough. So in this video, we’ll take a look to see what kind of supply is really needed and then based on this, how you can better steer your investment decisions as a real estate investor in Toronto.
Federal Housing Budget
Let’s take a deeper dive into the Federal budget for 2022 for housing, which is front and centre in Chapter 1. They make it pretty clear that we have a housing supply issue in the first chart of the chapter, stating that Canada has fewer homes per capita compared to the world average.
Honestly, I don’t think the argument is as strong for Canada as a whole. We’re actually in a similar situation in terms of homes per capita compared to the US, but our country’s housing prices as a whole has been increasing much quicker. The bigger difference comes down to the individual cities, and of course, Toronto is where the lack of supply is truly happening. In Toronto, we’re at 360 homes per thousand people, compared to a national average of 424 and a global average of 462. This is the fundamental reason why Toronto real estate prices have been going up so quickly in the past 10 years.
The focus of the federal housing budget is to increase housing supply, which takes up $9 billion out of the $10 billion total budget. After combing through the details, I see two clear objectives:
The government wants to focus on building density and building it quickly, with a $4 billion budget allocated towards a new housing accelerator program, combined with a separate $750 million budget to improve the transit infrastructure for these denser neighbourhoods. It seems like the approach here is to continue to focus on building density in cities, which makes sense.
We’ve seen in the past that people want to live in cities, and it’s not just because of work. They like to be close to entertainment and action, and so as our city starts to open up again, more people are moving back to the city even though they might not need to work in the office five days a week. Then, from an economic standpoint, focusing on densifying cities also makes sense for government spending since the infrastructure will be used by more people, which means a lower infrastructure cost per capita for the city.
The other big focus on the federal front is more affordable housing. Note that this is a big change from what the federal government proposed during the elections, which was to help every Canadian buy a home. The tone has changed drastically, but it’s becoming more realistic and the main focus now is an emphasis on more affordable housing supply, which can mean more affordable buying or, the more likely affordable rentals.
Ontario Housing Bill
Let’s go take a look at the plans from the Ford government. Right around the same time as the federal budget announcement, the Ontario government came up with a new housing bill with the theme, “more homes for everyone.”
We can clearly see that Ontario feels our housing crisis is also primarily caused by a lack of supply, so if you look at their solutions, most of them also have to deal with adding housing supply.
The Ontario government echoes a lot of the stuff that the federal government talks about, including increasing density and multi-generational living, but more specifically, the key is to create more affordable housing units by increasing the variety of housing options, like multi-unit homes.
The problem right now is that you can’t convert many single-family homes into triplexes in Ontario because of zoning rules. This is something that is highlighted in a report prepared by the Housing Affordability Task Force that is specifically looking into getting rid of the red tape to make this possible.
Let’s dive further into Toronto specifically, and here are some quick facts:
- Housing prices are growing four times faster than our incomes
- Rents are growing two times faster than our incomes
- 47% of our Toronto population are currently renters.
At this rate, the sad truth is that it’s going to be extremely hard to bring purchase prices down so that most renters can afford to buy a home since prices are way out of reach for many renters now. And even though rents are growing pretty quickly too, I’d imagine it’s an easier goal to create more affordable rental housing for the renters, which make up half of our population.
Toronto’s Housing Supply Issue
Now let’s look at how our city has been increasing new supply. We’ve actually managed to create a lot of new supply in Toronto, but these have been really limited to the condo market, and other more affordable housing options have actually been on the decline. It’s true that the condo purchase price is cheaper than a duplex or triplex, but that’s because you’re buying one single unit instead of a bundle of two or three.
When you break it up, you’ll see that that two-bedroom condo priced at $850K can be rented out for $2700 per month, whereas a triplex with three, two-bedroom units might cost almost double at $1.6M, but each individual two-bedroom only rents out for $1800 to $2200 per month. So, each unit in that multiplex is actually much more affordable for renters.
Land in Toronto is scarce, and you can definitely make a lot more by selling hundreds of condos on the same plot of land as opposed to handfuls of homes. Basically, under the current situation, the multiplex incentives for big builders just aren’t there.
On the retail investor front, yes, rent yields might be better on a freehold investment, they might get slightly better appreciation and value-add opportunities, but multiplexes just aren’t affordable for many retail investors. Then, once you add in the element of having to put even more money to add secondary suites in a single family home, it just adds even more capital that a lot of retail investors don’t have enough if they are winning to put in the sweat equity.
So, although condos aren’t the best real estate investment out there, they’re currently the only real estate option that many retail investors are limited to.
Toronto’s Housing Supply Developments
The city of Toronto has already progressed a lot since a few years ago. We’ve made it a lot easier to build secondary suites by removing red tape on requirements like parking and allowing all houses and townhomes to build secondary suites, waiving development fees, and gradually easing some zoning requirements.
Toronto has also started to allow for laneway suites and made them easier to build by eliminating parking requirements on them, waiving development fees, and easing on fire requirements.
Next in the pipeline are garden suites, which I have a video to update you on as well. But now that we know the government’s renewed direction is to increase density in existing neighbourhoods and create more affordable rentals, what does this mean for you as a real estate investor in Toronto?
At this point, I think the next easiest thing for the city to do to increase affordable housing in existing neighbourhoods is to remove more of the red tape to allow single family zoning to be more permissive. Right now, even if someone can afford to build a multiplex, you aren’t able to do that in many homes in Toronto because they are zoned as single-family. This should be the fastest and probably cheapest option to create more affordable rental units in our city.
After they deal with the low-hanging fruit, our city might need to encourage more people to convert homes into multiplexes with better incentives. At the moment, big-time developers don’t think it’s worth it, and many retail investors still can’t afford to build them.
If more of these densification initiatives start to roll out, this can mean that we’re going to see a lot more interest in buying single-family homes in Toronto from investors.
What This Means For You
We’ve always been strong believers in the freehold market in Toronto because of the better cash flows and more stable appreciation. Once Toronto’s single-family homes are allowed to be converted into multiplexes, rent yields can rise more quickly, and this just means these type of homes can grow in price at a faster clip compared to other markets.
There’s so much more we can say about our love for Toronto freeholds and, more importantly, where you can get the best growth, rent yields, and value-adding opportunities in Toronto. So if you want to learn more about this, let’s chat.
We can look at your requirements and preferences and then match you up with the best investment property that fits your needs. After we help you buy it, our team also provides renovation guidance, leasing and property management if you need it. Just connect with us if you want to learn more about our services!
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