This article was written by Chris Kapches, President and CEO of Chestnut Park Real Estate Limited, Brokerage.
There appears to be a worldwide lack of inventory in desirable cities throughout the world. Of Course, with dwindling supplies, prices continue to increase in the cities, even though sales in the same regions are declining. They’re declining because there are simply insufficient numbers of properties for buyers to purchase.
Consider these divergent examples. Lisbon is Portugal’s historic capital. It was only a few years ago that the city served as a poster child for Europe’s debt crisis. Along with Italy, Greece and Spain, Portugal teetered on the verge of economic collapse. Only ten years later Lisbon is in the robust midst of a real estate revival, fueled to some degree by Portugal’s policy of granting “golden visas” allowing anyone investing E500,000 or more to reside in that country.
Lisbon is now plagued by a lack of affordable housing. As new luxury condominiums are built, and historic properties are renovated and gentrified, more people from all over Europe are moving to Lisbon, resulting in a housing shortage and in turn, dramatically increases real estate prices. The rental situation is just as dire. Longtime tenants are being evicted, with few if any housing alternatives. Rents have increased seven-fold. Evicted tenants are forced to return to the countryside surrounding Lisbon, often living with family.
Laguna Beach, California
Southern California is caught in a supply squeeze. The situation is the same in San Diego, Ventura County, Orange County, and Island Empire. Average sale prices are increasing by 10 percent or more. Listed properties remain on the market for 16 days or less. Inventory levels have decreased by as much as 24 percent year-over-year.
Invariably when inventories decline, the availability of rental units also declines, and prices rise. In Orange County rentals start at $3,100 for 657 square feet, a one-bedroom apartment.
Local industry watchers claim that the demand in Southern California has been fueled by a slowdown in building. Building activity has declined by 25 to 30 percent in the last 12 years. Following the 2008 recession builders became apprehensive and cautious in their outlook. Builders are accelerating their building schedules now, but it will be a number of years before there is sufficient supply to meet demand, if ever.
Closer to home we have Muskoka and the City of Toronto. Muskoka is about 200 kilometres north of Toronto and is renowned worldwide for its luxurious recreational properties. The region is centred around three beautiful lakes, Lake Muskoka, Lake Rosseau and Lake Joseph, with Port Carling acting as the hub. Supply is so low that sales are, on a year-over-year basis, off by almost 40 percent.
The reason for the supply shortage in Muskoka, and in all cottage-country in southern Ontario, is twofold: demographics and land supply. A lot of cottages in Muskoka are owned by boomers. They have their piece if paradise and they are in no rush to give it up. Secondly, there are few vacant lots in Muskoka were new cottages can be built. Land supply is finite, and unlike urban centers where you can build vertically, that option is not available in Muskoka.
Lastly, the City of Toronto is also experiencing a supply shortage, particularly in some of Toronto’s’ most sought-after neighbourhoods, like Riverdale, Leslieville, and the Beaches in the east, and Roncesvalles and the Junction in the west. Toronto has become a world-class city. It has sound banking institutions, there are world-class schools, entertainment, relatively good transportation, a reliable political system, not to mention continued reliance on the rule of law.
The Toronto resale market was side-tracked by the implementation of the 15 percent foreign buyer tax last May, but it has recovered and is beginning to demonstrate the supply and price themes that we see in Lisbon, Southern California and Muskoka. The average sale price for all properties is currently about $860,000. Detached, single-family properties are selling for more than $ 1,400,000 and semi-detached properties for over $1,000,000.
The cause for the supply shortage is due to legislative restrictions, and the fact that over 100,000 people immigrate to the greater Toronto area every year. Legislatively we simply have too much red tape: the green belt restrictions, the sizeable construction levies, and the rigid zoning by-laws that restrict flexible building models.
At the end of the day what Lisbon, Southern California, Muskoka and the City of Toronto demonstrate is that desirable cities and regions will attract buyers. People simply want to live and own in these communities. For various reasons supply has not kept pace with demand. This means the sale prices will remain high, depriving many buyers of ever owning real estate in these centers. Unfortunately renting becomes just as difficult as buying. World class cities and regions do have their “dark side”, at least as far as the housing market is concerned.