Toronto Real Estate continues to defy gravity – mostly as a result of high immigration, all time low interest rates, limited supply, and a strong job market. After  20+ years of consecutive price growth, housing prices continue to be on an upwards trend, as seen in the recent July Prices. 

There’s an ongoing debate about the skyrocketing prices. Some claim that the housing market is booming, whereas others believe there will be a crash. Recently, Justin Trudeau mentioned that the housing market is a very significant crisis and that it is a drag on the Canadian economy.

As indicated in the recent Toronto Real Estate Board (TREB) report, the average selling price rose to $709,825 for all home types combined – a 16.6% increase year over year in July. With prices outstripping the 1.5% inflation rate – is the heated Toronto Housing Market overheated? Is it possible that there would be a Toronto wide ‘housing market crash,’ where prices would drop more than 10%?

1. Foreign Investment

A foreign investor in real estate can considered as someone owning a property overseas, with the objective of renting it, and/or selling it for a profit. There have been many claims about foreign investors driving most of the price growth in the Greater Toronto Area (GTA).

The one problem is that there is lack of clear data on the foreign ownership numbers. This prompted the Trudeau Government to allocate $500,000 towards StatsCan to find more data on foreign property owners.

A CMHC report stated that foreign ownership for buildings completed before 1990 is less than 2%, and 7% for newer constructions completed since 2010. Are these numbers significant enough to justify the escalation in prices? The Trudeau Government continues to dig deeper into getting more clear data in regards to the foreign ownership within the Canadian Housing Market.

2. Immigration

GTA continues to be a desirable place to live in among immigrants, adding to the demand for housing. Toronto is home to TTC, Canada’s top public transportation system. GTA also offers many great benefits – which includes entertainment, green spaces (such as Rouge Valley), and top education institutions, such as University of Toronto.

Toronto continues to be a growing city – the Ontario government has announced an infrastructure plan to keep up with the growing population. In general, Toronto and Vancouver have a millennial population growing faster than the Canadian average (BMO Economics). Aside from these factors – Toronto has one of Canada’s hottest job markets, which also adds on to the inflow of immigrants within the GTA. 

3. Low Interest Rates & Affordability

Interest rates have been at an all time low – making it easier for prospective buyers to enter the housing market, or move into a larger home. Currently, the Bank of Canada rate is 0.5%. About a decade ago, before the financial crisis, the Bank of Canada rate was around 3.5%

source: tradingeconomics.comAmid lower interest rates, the Federal government has made several attempts to cool down the housing markets. At the beginning of the year, the Trudeau Government passed a new regulation – requiring buyers to have an additional 10% down payment for the purchase price above $500,000. Despite this new regulation, housing prices in Toronto and Vancouver continued to skyrocket.

Contrary to popular belief, Toronto Real Estate is still significantly cheaper than other cities around the world, such as Hong Kong, London, and New York City. As seen in the graph below, the price to income ratio of a 970 square feet condo is 9.4, which is 3 times cheaper than London, Beijing, and Hong Kong.

4. Employment Growth

As indicated in economics reports, the Toronto job market continues to outperform other regions in Canada, amid weaker oil prices. The hot job market is evident in the Toronto office vacancy rates – which are amongst the lowest in North America.

According to a commercial real estate agent, CBRE, Toronto’s downtown office vacancy rate is below 5% – tied with San Francisco, which is also the lowest in North America. Despite over 8 million square feet of new office space built in downtown Toronto, vacancy rates continue to be lower than other major cities, such as New York City (CBC). Toronto and Vancouver’s share of Canadian Employment increased 4% since 2009 (BMO Economics), adding on to the demand for office space.

Calgary on the other hand has office vacancy rates of almost 25%, the highest since the economic downturn in the 1980s. Amid all time low office vacancy rates, the Calgary housing market continues to take a toll – with housing sales down 12%. Office vacancy rates can be a strong indicator of the job market strength – which is indirectly connected to the strength of the housing market.

5. Supply

Toronto is mostly developed – there’s minimal vacant land left to build low-rise homes. Ontario’s Greenbelt (partially lies in the GTA) includes almost 2 million acres of land. There’s regulation in place to protect the Greenbelt, encouraging Toronto to move upwards (in high rise buildings), instead of outwards.

As a result, developers are shifting towards higher density developments, such as high rise condos, or condo stack townhouses – an increasingly popular trend. The decrease in supply of low rise homes have lead to larger gains for detached homes, semi detached homes, and townhouses.

July 2016 Sales and Average Price

In June 2016, there were 1,002 new detached homes available in the GTA region, at the average price of $1,061,388. In 2006, there were 10,823 detached homes available, going for the average price of $442,420 (BuzzBuzzNews).

It’s simple economics – low supply and increasing demand leads to higher price growth. The demand for housing is mostly derived from population growth, and immigration. Land restrictions continue to be a major factor towards the rapid price increases of the low rise segment.

Conclusion

Yes, the average detached home in Toronto has reached the $1,000,000 mark. However, as Toronto’s population continues to grow, owning a detached (or low rise single family home) home is becoming a luxury – there’s not enough land to accommodate the majority of Toronto’s population in low rise homes.

This trend can be seen in other cities around the world, such as New York City, Bombay, and Hong Kong. There are more affordable options in Toronto, such as semi-detached homes, townhouses, stacked townhouses, and condos. Some families (especially millennials) are moving further away from the city, in order to afford a larger home. This has been an increasing trend over the past decade – more and more families are moving outwards to bigger homes, and commuting to work (usually downtown Toronto).

After 20+ years of consecutive price growth, there continues to be a debate over the housing prices. A sudden spike in interest rates, decrease in immigration, or an economic shock (i.e. weak job growth) would have a huge impact on demand. At this point, a sudden spike in interest rates is unlikely. Given the all time low vacancy rates, a decline in employment within Toronto is unlikely, unless there is a major economic shock.

With a high inflow of immigrants into the Toronto area, all time low interest rates, and strong job markets – is the Toronto Housing Market really in a bubble?

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Writer: Jelani Smith 

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