A different way of looking at housing supply
By Newinhomes on Apr 27, 2018
Even when the Greater Toronto Area (GTA) housing market is calming down it seems hot. New single-family home sales in March 2018 dropped 77% compared to the same period last year, but the benchmark price is still more than $1.2 million.
It’s important to remember that there are ups and downs, so investing in real estate is still a risk, even in a market like the GTA. There are many factors impacting the resale and new home markets, but did you know they can affect each other?
Supply fluctuations
Currently, there are only four months of new home supply in the Greater Toronto Area (GTA). Ideally, inventory levels are around nine to 12 months.
Building Industry and Land Development Association (BILD) CEO and President David Wilkes said in a recent Toronto Star article, “In order to get approvals for a new project, developers have to navigate layers of government regulation. On the municipal level alone, they go through 15 major approval steps to complete a townhouse complex or a single-family home, and nine major steps for a highrise building.”
At the moment, the demand is there and developers are having a difficult time bringing new units to market. So supply is low. Due to lack of choice, this could cause some people to look to the resale market for more options.
If sales activity slows in the new home market, but new units are still making their way through the pipeline, we’ll see price growth moderate because supply and demand will be more balanced. Once buyers start realizing the new home market has greater supply and prices are more affordable, sales activity will pick up again.
Bidding wars
The above scenario outlines a strong demand in the resale market (which is also currently struggling from low supply). What happens when supply doesn’t meet demand in the resale market? Bidding wars. In 2016 and 2017, we saw homes selling for hundreds of thousands above asking.
One of the benefits of the new home market is that there are no bidding wars, so if the resale market ends up in that situation again, it will cause some buyers to choose to buy preconstruction.
It’s all about supply and demand. Without a doubt there’s a strong demand to live in Ontario because the population continues to rise, which means more homes need to be built.
The root of the problem seems to lie (or be tangled) in the red tape that trips up builders and developers when it comes to bringing more supply to market.
If the new housing market could maintain a healthy level of supply, there would be no need for prices to rise so quickly, no need for buyers who want to buy new to turn to resale, which could prevent the entire cycle outlined above from happening.
“It’s time to make housing a priority in the GTA and look for solutions to end unnecessary, costly red tape and bring new homes to market faster,” said Wilkes. “The lead-up to elections is the perfect time to talk about this, and other housing issues, with your candidate for public office.”
