Toronto’s (lack of a) supply problem

The most frequently provided rationales for Toronto’s ‘will only go’ up housing market usually focus on three main points: Toronto’s strong economy, population growth and record low interests.  Each argument is a conversation onto itself, so let’s review this one argument at a time and begin with Toronto’s strong economy.  We’ll focus on the strong economy in comparison to the average cost of housing.  To do this we need to understand:

  • How much people in Toronto are making?
  • How much people can afford to spend on housing?
  • How many homes there are?
  • And how much those homes cost?

Quick Stats

Median household income: $65,829
Purchasing power of median income: $350,000-400,000 mortgage + down payment
Number of dwellings in Toronto: 1,112,930
Median home cost in Toronto: $700,000 (as of June, 2018)

The numbers show that the average household can not afford the average home in this city.  Having removed so many potential home buyers from purchasing anything other than one-bedroom condos, lets review how many people can afford a median priced home to try and explain the balance between supply and demand in the city.  Market experts quoted in virtually every housing article say that supply can not keep up with demand, so trying to calculate the demand only makes sense.

Calculating the raw numbers

The City of Toronto had 2,731,571 residents at the time of the 2016 census.  The same census reported that Ontario had 13,448,494 people with 10,157,280 Ontarians reporting an income.  Of those 10 million income earners, 957,080 individuals make over $100,000 per year.  Now it’s important to note that earlier we referred to household income, while we are now showing individual incomes so it’s not exactly apples to apples.  Many households have more than one income earner, making these individual income earner numbers imperfect but still helpful.

The city of Toronto has roughly 20% of the province’s population, so if we carry that forward with respect to a percentage of income earners over $100,000, Toronto would have 194,396 high income earners.  With Toronto being the financial hub of the nation, let alone province, it is realistic to think Toronto might have a larger percentage of high income earners.  Rather than risk under estimating, let’s round up and say the city has 250,000 individuals making over $100,000.

If there are 1,112,930 dwellings in Toronto, the median home cost of $700,000 means there are 556,465 homes equal to or greater than that number.  But with only 250,000 people (being generous) earning $100,000 or more we are not even meeting half of the supply.  With the new stress testing in place, many of these income earners could also struggle to afford a $700,000 home without significant down payment help.

This post has a lot of numbers, many firm thanks to the census and real estate data, but some have been estimated or calculated in the paragraphs above to reach conclusions.  Nevertheless, it seems to me we have a gap of at least 300,000 purchasers to keep up with the top half of all supply.

I appreciate that not all the city’s homes are for sale at any time, but it is equally true that not all residents of the city are trying to buy a home at one time.  So where is the money coming from to afford these high home prices because despite the strong economy, it is not coming from Toronto’s employed population.  It’s not even coming from those who would be defined as high income earners.

Next we’ll discuss whether or not population growth is the answer.

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