Value, Scarcity, and Massification in Canadian City Centres

Published April 3, 2018 by Real Estate Leads

Land is a finite resource, and beyond that big picture perspective we know that real estate is inherently scarce in the world, and increasingly so. This scarcity is augmented by increasing numbers of urbanized countries, with the fact society dictates that people need to be close to a major city in order to work. Add municipal controls, land restrictions, and more and things are what they are today, and particularly so in large urban centres in Canada and the United States.

The relevance of this and how it permeates the way real estate agents must both compete and prioritize when prospecting clients will need no explanation for any of you who’ve been in the business for any amount of time. Our online real estate lead generator helps you be even more competitive in this regard. There’s only so much of the pie to go around, for both home buyers and real estate professionals.

This explains why Canadian real estate continues to hold value so well. Most of the livable, tradeable stuff, is in urban centres and is fairly scarce. Those that owned, sold, and built real estate were able to acquire a solid amount of private wealth, but this of course made possible by deteriorating public wealth. Most often this is balanced by an oversupply, which enables the local economy to ‘catch up.’

Going back a while, prices across Canada (not just in major markets), increased 69.31% from 2001 to 2008, which was one of the speediest rises in history. This was followed by a three year stagnated-prices period in real terms. From 2012 to 2017, Canadians saw prices climb another 39%, another massive upswing and definitely indicative of an unappealing trend. Developers will argue this is due to under-building that’s caused by supply constraints and lack of changed city zoning bylaws for new housing.

That’s just simply not the case. It’s more that they began burning supply.

Burning Up Supply

Consider Toronto. It’s a place with huge immigration inflows, and other factors that many would have you believe that the city has a scarce supply of housing. Yes, it does feel that way. the city added 188,450 new households between 2006 and 2011. During that time, however, the CMHC only tracked 160,195 new completions. Since more homes were formed than built, upward pressure on prices is expected. A good amount of the previously un-utilized housing was now being used, making vacancies more scarce.

Looking at the same numbers from 2011 to 2016, a very different trend becomes clear. According to Statistics Canada, 146,200 homes formed during that period but CMHC data shows 175,825 new completions. Almost 30,000 more homes were created than homes formed, which of course added to the housing supply. That wouldn’t make you think that pricing pressure would actually increase, and inventory available become more scarce, but that’s exactly what happened.

What we can understand from this is that the construction of extra supply had almost no impact on easing prices, nor was it even sold for predatory increases. It just simply wasn’t available.

Foreign Buyers And Vacant Homes

Two interesting trends occurred right around this same time frame – the rise of foreign buyers, and an increase in vacant homes. According to the CMHC, non-residents owned 2.7% of all homes in 2017, which worked out to a 35% jump from 2014. According to the CMHC, 8.48% of new condos were sold to non-residents between 2011 and 2015. From 2016 to 2017, that increased to 11.65% of new Toronto condos.

This process where developers increase their offerings overseas, despite significant domestic demand, is known as massification, and it’s a method employed by luxury brands to create artificial scarcity. Here again we see evidence of the need for the Federal Government to enact legislation similar to that in Australia and New Zealand that puts constraints on the mass-purchasing power of non-resident buyers.

It’s in the best interests of Canadians and those of us who have invested in careers putting those peoples in homes for families.

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