HOT, HOT HOUSES Forget all those conspiracy theories about

what's behind the crazy Toronto real estate market. Here are
the real reasons why house prices are soaring - and why
they'll stay high.
Friday, July 15, 1988
MICHAEL SALTER
MICHAEL SALTER
By MICHAEL SALTER
Absolutely everyone from cab drivers to chief executives has a story about Toronto's crazy

housing market. Did you hear about the little bungalow in Don Mills that went for $445,000?
How about the professional couple - he's a professor, she's a school teacher - who sold their
spacious house in Calgary, moved to Toronto and discovered they couldn't afford to buy a
thing? A town house near Bayview Avenue sold for $127,000 in 1985; it's now worth

$290,000. A plumber sold a three-acre parcel of land in the suburbs that he bought for

peanuts and retired to his native Greece, a multimillionaire. How about the affluent couples
who stormed a sales centre north of the city - they actually ran through muddy fields - for
the chance to buy "estate homes" costing up to $900,000?

What everyone is asking is, How high can it go? The average price of a house is $150,000 in
Vancouver, $100,000 in Calgary, $95,000 in Halifax; in Toronto, it's $225,000 - the most

expensive in Canada. Prices in Toronto have doubled since the current boom began in 1986,
yet houses are still selling. Politicians and tenants' groups have declared a housing

"affordability crisis" - again - and have called for a tax on speculators' profits to cool down
the frenzy. Dark words are muttered about how foreign money is to blame. Or yuppies.
In fact, the price explosion has occurred for simpler reasons. Mortgage rates are low.

Ontario's economy is superheated. Construction costs alone have risen 35% in the past

three years. Ottawa's $100,000 lifetime capital gains exemption has facilitated the game of
flipping a property for quick profit. Last October's stock market collapse resulted in a
stampede away from shares and into real estate.

And, to make matters worse, land is in short supply. Builders and developers point the

finger at provincial and municipal governments, which refuse to let them pave over prime
southern Ontario farmland as fast as they'd like. The industry has constructed more than
80,000 new houses and 30,000 condominium units since the start of 1985 A a record-

shattering number that still doesn't satisfy the hordes of panicky would-be buyers. (During

that time, 155,000 resale houses also changed hands.) Because it takes an average of three
years from the time a developer first seeks a zoning change until a bulldozer breaks earth
for a subdivision, the city is facing a classic supply-and-demand squeeze.

Plenty of subdivisions are on the boards, but because new homes just can't be built fast

enough - and because the industry senses that Toronto home-buyers are willing to pay a

premium - prices rise at every step of the house-building process. Landowners push up the
price of the raw land they sell to developers. The developer obtains the necessary

government approvals, subdivides the land and installs roads, sewers, water pipes, hydro

and gas lines. The developer then sells serviced lots to whichever home-building company is
willing to pay the most. The builder then pays a premium for materials and labor, again

because of demand, and sells his houses to the public, passing on all the increased costs
and adding in his considero able profit.

The biggest winners in this game have been the companies that both develop raw land and

build houses. They've raked in fantastic wealth by charging the going rate for homes they're
building on land they bought a few years ago for bargain prices. The cost of a serviced lot,

which is the industry's barometer of market demand - or the price home-buyers will tolerate
- has tripled in five years.

No one can resist the lure of profit. Even Ontariois provincial government, despite its

professed concern about the need for affordable housing, set a record last spring when it
auctioned off public land in suburban Scarborough for $4,000 per foot of frontage. That

makes the cost of a 40-foot lot $160,000 - before you build the house. "I could buy a lot in
the same area for $50,000 five years ago," says Henry Stolp, president of Penta Stolp
Corp., a local house and condominium builder. "Everyone feels the market is entering

uncharted waters. It's never been this high, and the rate of change is scary." TORONTO'S

SURGING REAL ESTATE MARKET reflects a fundamental and permanent change in the city's
status in relation to the rest of Canada. In the early 1960s, Toronto, with a population of

less than two million, was Hogtown, a provincial city that vied with Montreal for recognition
as Canada's main business centre. But within the past 15 years, it has become Canada's

undisputed financial and commercial capital, a seat of concentrated corporate power and
growing political influence. Toronto's dominance continues to grow, while Montreal,

Winnipeg, Calgary and Vancouver are declining in relative importance. That is why,

notwithstanding cyclical slumps, the value of the city's homes, and its commercial and
industrial properties, will continue to escalate over the long term.

Toronto is at the epicentre of Canada's remarkable economic performance. In three of the

past five years, Canada's gross national product has grown faster than that of most other
developed nations, including the United States, Japan and West Germany. Ontario's

supercharged economy is responsible for much of this remarkable boom. Ontario has the
second-fastest rate of job creation in Canada and the United States, after California's.

Because people are flooding in for a piece of the action, it has the third-highest rate of

population growth, after California and Florida. Ontario's population grew by 167,000 last
year, and the Metro Toronto region acts like a magnet for thousands of migrants from
elsewhere in Canada and overseas. The population of what planners call the "greater

Toronto commuter shed," stretching from Burlington in the west to Barrie in the north and
Oshawa to the east, is approaching four million people.

Residents of this huge, rich, expensive urban conglomeration have taken somewhat
hopefully to calling their city "world class." But the price of being world class is

"Manhattanization" Torontonians are getting a taste of the housing problems of the world's
major cities.

The city's brutally high house prices make searching for shelter a dissonant experience, a

clash of economics and expectations. To get what they want, thousands of house-hunters

are moving farther and farther afield. Dorothy Smout, a 25-year-old office supervisor, and
her husband, Brian, a 33-year-old draftsman, went looking for their first home in 1984.
They couldn't go higher than $100,000, and what they saw for that price disappointed

them. "The lots were small, so were the houses, and the quality wasn't that great," says

Dorothy. They eventually settled in Barrie, a town of 50,000 located 100 kilometres north of
Toronto, where they bought a new bungalow for only $70,000. It takes the Smouts about
an hour to commute by car to their jobs in the Toronto suburb of Etobicoke, a reasonable
drive by Toronto standards.

When the real estate market took off in 1986, the Smouts found that by staying in Barrie

they could afford a much bigger house. They sold the bungalow for $128,000 in early 1987

and for $200,000 bought a four- bedroom, two-story home on a lot that's just under a halfacre. The highway traffic gets worse each year, but they have no regrets. "If we hadn't
bought in Barrie," says Dorothy, "we could never have afforded the bigger house."

Faced with an immediate drop in their standard of living, people in other cities have come to
dread a transfer to Toronto. "It's getting tougher for companies to persuade people to come
here," says Bruce Atyeo, executive vice-president of ERS Ltd., a Toronto relocation services
company. "Particularly for mid-level employees, the material lifestyle often isn't as good as
where they lived before. And if they want the same size house, they have to spend much
more time commuting."

To help cushion the shock of Toronto housing costs, companies have doubled the mortgage
subsidies they offer. Until recently, many employers would pay the extra interest on a

mortgage that was up to $50,000 larger than the one the employee had on a similar-sized
house before moving. Now the maximum is between $80,000 and $100,000, Atyeo says.

Of course it all depends on where you move from. Consider what happened to Ansel Holder
and Morten Friis, both of whom work for the Royal Bank of Canada. Holder, the bank's

personnel manager for Ontario, moved to Toronto earlier this year from Montreal. He paid
$100,000 more for a four- bedroom house in Toronto that's farther from work than the
house he had in Montreal.

Friis's tale is completely different. A senior manager, he returned to Toronto last spring from
a two-year stint in London, England. He had a house in Surrey, south of London, and

travelled an hour by train each morning to his job in the City. "House prices are higher or
lower depending on how good the train connections are to the City," Friis says. "They say
that when the Chunnel is completed, people will be commuting to London from France."

When Friis got back to Canada, he was able to buy a mid-Toronto home for $100,000 less

than the cost of his Surrey house, and his commuting time is down to less than 30 minutes.
Housing horror stories - the two-hour commutes in Tokyo, the half- million-dollar

apartments in Manhattan - are little comfort to Torontonians. What rankles is the knowledge
that the price spiral only got started in the early 1970s; an invidious two-class system has
sprung up of the comfortably off - those who bought houses about 15 years ago for less
than $50,000 - and the house-poor who didn't get into the market until the s. Before the
spiral, prices were relatively stable for long periods.

Clayton Hurlburt, 85, is a repository of Toronto's housing history since the turn of the

century. He took over the family construction business in the late 1920s from his father,

who had been building homes in Toronto before the First World War. "Dad was selling sixroom semidetached houses - inexpensive homes - in Toronto's east end for $3,300 in

1912," Hurlburt says. In the early 1930s, Hurlburt built bungalows and semis in North

Toronto for $5,500; two-story detached homes cost $6,000 to $8,000. When the Great

Depression hit, land and housing costs collapsed and stayed down throughout the Second
World War. After the war, Hurlburt built rows of small bungalows in the Leaside area of

Toronto. The new houses cost as little as $5,600 - less than double what they had fetched
40 years earlier. The slow rise in prices reflected the marginal increases in salaries and
consumer costs.

But when Canada's economy started booming, prices headed up rapidly. The bungalows

Hurlburt built in 1953 cost $14,000 and he finished his career in 1965 building two-story
detached homes priced in the mid-$20,000 range.

Then, in the mid-1960s, the Toronto skyline began to blossom with building cranes. The

new City Hall opened in 1965, followed by the Toronto-Dominion Centre in 1967, the city's

first modern skyscraper. "Those buildings were significant milestones," says William Dimma,
deputy chairman of Royal LePage Ltd. "The city was moving away from its manufacturing

base and was coming into its own as a major financial and commercial centre. Construction
in the downtown core was suddenly torrential."

House prices jumped along with everything else, rising by 40% between 1965 and 1968 to

an average price of $30,000. But the single most important factor was the so-called bulge in
the snake - the baby boom. By the early 1970s, when the first boomers entered their prime

home-buying years, demand skyrocketed. Prices soared 75% during the hot 1973-1975
market, settled back and then headed up again in the late s.
As the increases in house prices began to regularly outstrip the rate of inflation, a

fundamental shift took place in people's attitude to property. A generation ago when you
sold a house, you didn't necessarily get much more than you'd paid for it; you were

satisfied simply that it had retained its value. "People saw a house as a home. They bought

it and lived there with their families and one day had a mortgage-burning party," says Irwin
Steinberg, a Toronto real estate lawyer with the firm Steinberg, Friedman. "House prices

were stable in relation to incomes, so there was no concern about being priced out of the
market."

Today, the reverse is true. Every upward spiral causes a stampede of buyers desperate to
get into real estate before prices move out of reach. And because large houses appreciate
faster than small ones, "there's a tendency to move up and take on as big a mortgage as

you can afford because then you'll gain more," says Steinberg. "Residential real estate has
become a commodities market. That's why there are so many investors and speculators
involved."

Owning a house is now the investment of choice for most of the middle class. Because

inflation has outpaced wage gains for most of the decade, salary earners feel they can gain
ground only by possessing property. The equity in a house provides - tax free - a major
portion of most people's retirement nest egg. And the more adventurous are borrowing

against the increased equity of their homes and using the money to invest, often in other
properties. DURING EACH BOOM, THE ARGUMENT IS made that the upward spiral must

eventually end because beyond a certain point the market will shut out first-time buyers
who don't have enough for a down payment and deter move- up buyers who can't carry

larger mortgages. But this has not happened. Instead, buyers simply readjust the definition
of how much they can afford to pay. "The average family buying the average-priced house

in the Toronto area has to pay about 35% of its gross income for a mortgage," says housing
economist Frank Clayton, president of Clayton Research Associates. "In most other
metropolitan areas of Canada, the average is 18% to 23%."

Conventional lending institutions haven't kept up with the trend. The banks and big trust
companies generally won't look at you if the sum of the principal, interest, taxes and

heating payments on the home you want exceeds 30% of your gross family income. "In the

past four months I've turned a dozen people away because prices are rising faster than their
ability to save up for a down payment," says a loan officer at the Toronto-Dominion Bank.
If you can't rustle up the $50,000 you need for a down payment on the average Toronto
house, plenty of mortgage brokers will help you find creative ways to reduce the down
payment to 10% or even less. Take your pick: second mortgages, vendor-take-back

mortgages, high-ratio mortgages, personal loans or expensive money from private

investors. "A lot of young couples are spending between 40% and 50% of their gross

income on housing," says Steinberg, "and sometimes it's as high as 60%. They know they
should stay in their apartment for a few more years, but they're afraid they'll never get a
house."

To cope with high costs, it's become standard practice for house-poor owners to build and
rent out a self-contained apartment. The many bylaws against basement apartments go

unheeded and largely unenforced; the authorities know they are an economic necessity.
Still, there are only so many financing techniques, just as there's a limit to the penury

home-owners can endure. For many Torontonians, the North American dream of home

ownership has already faded, and they've joined the ranks of renters, probably for good.
Those intent on owning will find themselves forced to think small.

The trend to tiny is already well under way. Condominium apartments were nonexistent 15
years ago. When they first appeared, they were beneath notice for all but the desperate,

and in the late 1970s many builders took a bath when their stock of condo apartments went
unsold. Condos, along with town houses, are now about the only decent digs that many
first-time buyers who want to live near the city can afford.

Those who earn a modest salary and desire a detached starter home can find no-frills

models for about $160,000 within a 50-kilometre radius of the city. The subdivisions are

crowded, and street parking is virtually impossible because the houses are crammed onto

30-to 35-foot-wide lots. The homes measure at least 1,200 square feet - the same size as
starter bungalows built in the 1950s and s - although some builders count the garage as
part of the home's square footage. But because the lots are smaller, the houses must be

built on two floors instead of one, resulting in a cramped interior layout. Commuters willing

to travel 100 or more kilometres to Toronto from towns such as Kitchener and Peterborough
can buy starter homes for $125,000. If people want to pay less for housing that's close to
the city, the death of the gold-plated suburb that's been favored for decades by home-

buyers and tax-hungry municipalities - rows of large single-family homes on wide streets
with sidewalks - is inevitable.

The Toronto Home Builders' Association (THBA) recently held a brainstorming session with
100 housing experts to come up with solutions to the affordable housing shortage. They
estimated that, using the most efficient construction techniques and space-saving land-

planning methods, the private sector could still build a $100,000 home within Metropolitan
Toronto's boundaries: a one-bedroom, 670-square-foot bungalow with no garage. A two-

story, three-bedroom home measuring 1,910 square feet would cost $123,000. "If people

want less-expensive housing, their expectations will have to change," says Gord Thompson,
the THBA's president. "The style of subdivision that evolved in the 1960s and 1970s - the

good times, when money was no object - is no longer appropriate." The THBA is currently
negotiating with a developer to build a demonstration project of about 250 bargainbasement houses.

The pressure for subdivisions with a greater variety of medium-density housing styles -

smaller detached homes on smaller lots, semis, town houses and low-rise condo apartment
buildings - can only get stronger. Last May, the Ontario government introduced legislative
changes asking municipalities to increase the amount of affordable housing in new

developments. And builders constantly lobby municipalities to change their planning

principles and permit homes to be built on top of stores, the conversion of old industrial
buildings, even homes within industrial areas.

There are, of course, a few contrarians. They argue that Toronto's real estate bubble is
bound to burst. They predict that house prices will decline substantially when Ontario's

automobile-dependent economy takes a tumble early in the next decade because of the

looming overcapacity crunch. They conjure a continent-wide real estate collapse because of
the same demographic trend that's fueled housing fever for so long: As the baby boomers

sprout gray hair they'll no longer drive the market, and they haven't had enough children to
sustain demand.

These lonely voices are largely lost in the clamor for property titles. Long-range

conjecturing means little to the tens of thousands of home- owning commuters struggling

along Toronto roads that are clogged with more and more traffic each year. They work in a
diversified economy that is not as prone, they think, to boom-bust cycles as other areas in
Canada. They know that the city is booming and that thousands of people who are now

forced to rent would happily leap into the housing market if prices started to fall - thereby
guaranteeing that prices will never fall very far. Demographics and economic cycles be
damned. They know that owning property in Toronto is the best bet going. TORONTO:

$280,000 A 2,000-square-foot detached brick house built at the turn of the century, with
three bedrooms, one bath on a 20x94-foot lot LONDON: $325,000 Basement-level two-

bedroom apartment with patio in chic Belgravia, 750 square feet, with up-to-date kitchen,
one bath, no garage HALIFAX: $319,000 3,284-square-foot home, three bedrooms, three

baths, laundry and family rooms, central vacuum, garage with electronic door NEW YORK:
$325,000 750-square-foot co-op apartment on Upper East Side in a 20-story pre-war
building, two bedrooms, two baths, with view windows on two sides MONTPELLIER,

Southern France: $300,000 Five-bedroom, three baths, 1,950-square-foot villa with double
garage, large garden and pool, 15 minutes from the sea

LITTLE HOUSE IN THE SUBURBS: Why you can't go home again

Built by the tycoon E.P. Taylor, Don Mills, Toronto's first big postwar suburban development,
won widespread recognition as a shining example of a planned community, complete with
shopping, schools, parks and a mix of single-family homes and low-rise apartments. In the

summer of 1954, my parents, who were both then 25 years old, joined the first wave of
Don Mills home-owners. With one toddler and a second infant on the way, they moved from
a ground-floor apartment in downtown Toronto to a tract home on Berkinshaw Crescent, a
distant 16 kilometres to the northeast. Now considered a mid-Toronto address, at the time
Don Mills was in the boonies, surrounded by fields and bad roads.
The bungalow my parents bought for $13,500 was an architecturally bland brick box,

measuring about 1,200 square feet. It had three bedrooms, one bathroom, a kitchen, a

combined living and dining room, an unfinished basement and a carport. There were no

curbs or sidewalks, runoff flowed through an open ditch, and Bell Canada didn't install the
phone lines for months. But our lot was spacious (about 55 feet wide and 120 feet deep)

and behind the house, a tiny stream flowed through the grass. This was the s dream: My

father drove downtown every day while Mom stayed home and took care of the children, the
house and the garden.

The evergreen shrubs my parents planted out front are mature now but little else about the
house has changed. In 35 years, it has never had a major overhaul. They sold it in 1959,

when I was five, for $16,500. The house last changed hands in 1974 for $58,000. If it were
on the market today it would fetch about $280,000, according to Les Holst, a broker with
Homelife"Realty Land Inc. (Renovated homes in the area have been selling for between

$330,000 and $370,000.) High prices have changed the composition of the neighborhood.

When my parents bought here, the average cost of new bungalows was three to four times

the average household income of $4,000. Today, houses in the area cost six to seven times

the average household income of about $45,000 - and that's without considering the impact
of higher personal taxes and mortgage rates and the need for a bigger down payment.

Young couples, unless they are affluent professionals earning a household income of about
$100,000, can't afford a house in Don Mills these days; the hordes of children I remember
playing in the street have disappeared.

"There haven't been many children on the street for years," says the man who lives in my
parents' old house with his wife and daughter. "A lot of the people here are older working
couples and retirees. It's pretty quiet." The man, a provincial civil servant, can't afford to
buy; the house is rented.

WHERE THE MONEY GOES

Between 1985 and 1988, the cost of a typical new condominium town house in the Toronto
area has risen 81%. The cost of land has become the biggest component of the selling price
and builders' dollar profits hae more than doubled 1985 SALE PRICE: $93,900 Cost % of
total Land $29,100 31 Construction (labor,material) $43,700 36
$15,900 17 Builder's profit $5,200 6 1987 sale price: $169,900 % increase Cost %
of total Since 1985 Land $80,500 47 177 Construction $57,000 34 30 "Soft" costs

$21,200 12 33 Builder's profit $11,200 7 115 on a 20-foot-wide lot in

Scarborough; figures are a local builder's estimate

including marketing, advertising, sales centre, builder's realtor fees, model homes, aftersales service
KEEPING UP IS HARD TO DO
Increases in house prices have outstripped growth in income. In 1980, an average-income
Toronto family spent 33% of income on carrying costs of their home. In 1987, they spent
39% % change % change % change % change % change +52 +116 +116 -19 +81
Average gross Cost of Down payment Five-year Monthly household house (25% of value)
mortgage carrying income rate charges Fall 1980 $30,524 $94,250 $23,563 14.25% $843
Fall 1987 $46,410 $204,000 $51,000 11.5% $1,526 Detached 2-story 2,000-square-foot
house in Brampton