Short supply, bad infrastructure blamed for Canada housing bubble

October 5, 2016 5:19 PM EDT

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By Andrea Hopkins

OTTAWA (Reuters) - A shortage of land for development and inadequate infrastructure are fueling the massive spike in Canada's house prices and may undercut the government's efforts to stabilize the market, according to developers and realtors.

Supply is especially acute in the frothiest markets of Toronto and Vancouver, where strict greenbelt rules and limited transit beyond protected land hamper development.

While Canada has plenty of land and not that many people, most of its 36 million population lives along the U.S. border, and 81 percent live in an urban area.

Immigration has centered on the big cities, with the dream being to own a house and garden.

"Culturally and socially, the detached house with some land is both what most homeowners have, and what most people's notion of homeownership is," said Tsur Somerville, a University of British Columbia business professor.

"The cultural social norm is something that is really hard to provide in Vancouver and Toronto."

Prices have soared 205 percent in Toronto and 249 percent in Vancouver over the past decade. In the last 12 months, house prices are up 14.6 percent in Toronto and 25.8 percent in Vancouver, according to the Teranet-National Bank price index.

"Everyone has the goal of wanting to be more green and more sustainable ... but the problem from a housing perspective is if you constrain housing supply, you're going to drive up prices within that boundary," said Ben Myers, senior vice president at Fortress Real Developments in Toronto.

Toronto is ringed by a protected belt of green space, farmland and forests, set aside in 2005, while Vancouver has an agricultural land reserve, established in 1973 - both designed to prevent urban development from eating into arable land.

Moving far beyond the greenbelts is not ideal because of limited reliable transit access into the cities where many work.


Canada's Liberal government announced new rules on Monday, tightening mortgage and foreign tax rules. [L2N1C90GZ]

It has pledged C$11.9 billion ($9 billion) on infrastructure over five years, including upgrading public transit.

Meantime, homebuilders are increasing density with condominiums, betting Canadians will come around to the idea of living vertically. Eighty percent of new construction in Vancouver is multi-unit while just 20 percent are detached homes, said Cameron Muir, chief economist at the Real Estate Board of Greater Vancouver.

Growth in multi-unit construction, typically condos, has outstripped construction of the coveted single family home by a two-to-one margin nationally in the last two years.

"Instead of tearing down a house and building another house, we need to start looking at something like a three-story multi-family," said Vancouver realtor Andrew Peck. "That's where you're going to achieve more supply and relieve pressure on demand."

With foreign investment also fueling price gains, more high-end condos may not solve the supply issue entirely.

"The industry says: 'We can solve the problem, just let us create supply.' But the supply they are creating is not affordable, and that is the real problem," said David Ley, a Vancouver-based geographer and author of the book "Millionaire Migrants."

Vancouver's average home price was C$931,900 in September, according to the Vancouver Real Estate Board, with detached homes up 33.7 percent from a year earlier to C$1.579 million. Five years ago, the average home price in Vancouver was $627,994.

In early August, British Columbia introduced a 15 percent tax on foreign home buyers - a tactic that cooled Vancouver home sales in that month and September.

Meanwhile, developers are pressing city governments to cut red tape so more homes can be built faster.

"The zoning and approval process is absolutely ridiculous," said real estate agent Rob Zwick. "I have clients tied up in permitting process for 10 to 12 months."

(Reporting by Andrea Hopkins; Editing by Bill Rigby)

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