The housing markets in Toronto and Vancouver are poised for major long-term price growth as booming demand and inadequate supply overwhelm recent policy efforts to cool those markets, according to a new report from economist Benjamin Tal.
Mr. Tal, deputy chief economist at CIBC World Markets Inc., said home sales in Canada's two most expensive cities will flatten or even soften in the next year but the slowdown will be limited by strong demand.
"If you think those cities are unaffordable now, just wait," Mr. Tal said in an interview. "I think that from a long-term perspective, everything we are doing is temporary. The fundamentals are way too strong offsetting all of that."
Canada's banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), recently announced new mortgage stress-testing rules that make it harder to qualify for new mortgages, and the provincial governments of British Columbia and Ontario have introduced new measures to cool housing markets in and around Vancouver and Toronto. But none of those factors will do much over the long term to slow the forces pushing prices higher in both cities, Mr. Tal argues.
"Those fundamentals not only will prevent a dramatic decline, but will lead to a strong increase from a long-term perspective over the next five to 10 years," he said. "If you're an investor or if you think of housing from a long-term perspective, all the fundamentals point to even a tighter market."
Mr. Tal's report, scheduled to be released on Tuesday, says future demand for new housing is being underestimated by policy makers, while supply is growing more slowly than anticipated – particularly in the Toronto region.
The report predicts that the new mortgage stress-testing rules announced in October will prove to be just a speed bump in housing-market demand in Vancouver and Toronto. That's because many people will find ways around the rule changes by extending the amortization period on their mortgage to reduce payments, by opting for variable-rate mortgages or by using exceptions allowed for people with significant assets, Mr. Tal said.
Others will turn to non-bank lenders because they are not covered by OSFI's banking regulations. The report said a record-high 10 per cent of new mortgages in Ontario are now being provided by private lenders – primarily mortgage-investment corporations – according to Teranet mortgage data.
Mr. Tal predicts that percentage will grow in the next year as mainstream banks turn down more people because of the new rules.
While the report predicts that 10 per cent to 15 per cent of mortgage applications will be affected by the new rules, it forecasts a drop of just 5 per cent to 7 per cent in the value of new mortgages written next year because many applicants will find ways around the rules.
"In the past, borrowers have seen tremendous ability to adjust to new situations, and we doubt that things will be different this time," the report says.
Mr. Tal says Ontario's Places to Grow Act, which sets out land-use planning and development rules for the Toronto region up to 2031, is running seven to 10 years behind schedule in terms of the anticipated release of land for development, so supply cannot keep up with demand. He adds that the delays could increase as the province makes adjustments to the density rules in the plan, potentially delaying project approvals further.
Of the 338,000 hectares of land in the Toronto region covered by the plan, the report says 16,000 are vacant land where housing development could still occur and only 3,000 hectares, or 23 per cent of that land, are at the stage in which development applications are in process.
"The other 77 per cent is not remotely close to being designated or approved," the report says. "And at this rate, much of that land will take years to find its way to the market."
The report predicts the supply gap will widen further because the land first released for use was "low-hanging fruit" that was ready for development when the growth plan was implemented. Some of the land already had construction projects launched.
The report also argues that policy makers are underestimating the long-term housing demand in Toronto and Vancouver from new immigrants and non-permanent residents, primarily students and foreign workers.
Housing demand would also be higher if more young adults could afford to move out on their own. The share of people 20 to 35 who live with their parents climbed to 35 per cent in 2016 from 33 per cent in 2011.