In several major cities across the globe, activists have been lobbying their governments to limit the use of home-sharing platforms because private landlords are putting their units on Airbnb instead of leasing them to local residents. Many tourists and short-term visitors are choosing to use Airbnb instead of hotels, and this is reducing the stock of rental supply in these cities, which were already severely supply constrained.
In several of my rental studies for clients this year, I’ve come across buildings where the average rental rate increased by 15 to 20 per cent annually on a per-square-foot basis. These findings indicate that the Greater Toronto Area (GTA) market is in desperate need of new apartment supply. In a recent television interview, condominium data tracking firm Urbanation Inc indicated that 2019 could be a record year for apartment completions in the GTA, but despite the influx of new units, they still anticipate rent growth of five per cent annually. In the November National Rent Report by Rentals.ca, its forecast calls for 11 per cent rental growth in the City of Toronto this year.
With tougher mortgage rules, higher interest rates, high immigration levels, low unemployment, and inadequate new rental supply, should municipalities ban Airbnb or take other measures to increase housing supply?
Funny thing is, banning Airbnb might actually reduce housing supply! Depending on your source of data, new condo prices in the GTA increased by almost 35 per cent in 2017 and another 15 per cent in 2018. Because of this huge price inflation, a pre-construction condo investor that runs their cash flow projection based on five per cent annual rent growth over the next four years, may still find themselves in the black during their first year of ownership. I’ve spoken to a number of investors and brokers that are only buying pre-construction units to list on Airbnb because of this potential future cash flow shortfall. They’re betting on Airbnb despite proposed legislation in Toronto that would prevent Airbnb use on properties that are not the owner’s principal residence.
In the absence of Airbnb, many of these investors would not have purchased these units, and without investors supporting new projects, there just isn’t enough end-users out there buying $1,000 per-square-foot units that won’t complete for four years and require a 20 per cent down payment. These units would never get built, and subsequently never sold by investors to locals (after being listed on Airbnb for three or four years).
Perhaps this theory is a bit of a stretch, but there are several factors driving up the cost of new condominiums that are forcing investors that love to purchase hard assets to consider new ways to extract value from their real estate holdings.
There is certainly no reason to believe that new condo prices will come down anytime soon either. Land owners with prime development sites are holding out for top dollar, with nearly 70,000 apartments in the process of being built in the GTA, construction costs have risen drastically, municipalities are increasing development charges and other fees they levy on developers for infrastructure upgrades and new parks, and there is a backlog of proposed developments seeking approval (time is money).
Time will certainly tell us what will happen to new condo prices, and if Airbnb ultimately adds or subtracts from housing supply, but there is no doubt that Toronto needs more condo apartments, more rental apartments and more housing supply overall. The region is falling victim to its own success, as more people want to come here than we have homes for. Hopefully, all levels of government keep their promise to make the necessary changes to the speed of planning approvals, building permits, and the registration process, to bring housing supply to market as quickly as possible. If they do this, we can continue to welcome new residents with open arms, and welcome visitors to our hotels and our ample supply of Airbnbs.