Toronto’s red hot real estate market is not showing any signs of cooling. And for young people, in particular, the increasing scarcity of affordable housing means the dream of owning a home is slipping away fast. Rental prices are just as high too, which means merely finding an affordable place to live has become a big challenge.
The income level needed to cover the homeownership costs and absorb mortgage repayments keeps rising. To put a figure on it, homeownership costs in Toronto are currently 66.1 percent of average household income.
Homeownership costs only become a concern if you qualify for a mortgage. Many young people face a battle building their credit to just qualify. Young professionals with low incomes and very little in the way of savings have essentially been priced out of Toronto’s overheated housing market.
Different reasons, and not many solutions, have been offered for the soaring home prices in Toronto. And with Canada’s friendly immigration policies, Toronto’s status as one of the best cities to emigrate to, and with thousands of young people entering the job market every year, merely increasing interest rates doesn’t seem like the fix many have touted it to be.
The big question is whether this ‘real estate bubble’ will burst, resulting in a correction of prices. We will look at the prospects of a correction (or market crash) later. First, let’s consider the reasons why home prices in Toronto can’t seem to stabilize.
Why Home Prices In Toronto Keep Soaring
Home prices in the Greater Toronto Area have risen more than 450 percent since 1996, which is much faster than most prospective homeowners can build up their savings.
While the rising property prices are good news for investors, it’s made Toronto one of the most unaffordable cities in the world. It’s become such a contentious issue that it has become a major campaign topic for the 2022 election.
Here’s are some of the factors that have been cited for Toronto’s overheated housing market:
1. The Influx of Foreign Buyers
The high returns offered by the real estate market in Toronto have attracted the interest of foreign buyers. Many of these are wealthy businesspeople looking for assets to hedge against risks in their own countries.
Because they have more disposable incomes, these foreign buyers aren’t put off by the high prices in Toronto. And as home prices rise as a result, it’s young Canadians that are eventually pushed to the fringes of the market.
2. The Impact of Immigration
To a lesser extent, the influx of immigrants has also led to a shortage of affordable housing. Canada is among the most immigrant-friendly countries in the developed world, welcoming deep-pocketed investors, skilled professionals, and refugees from across the world every year. A lot of these arrivals prefer to settle in Toronto.
Many immigrants eventually qualify for permanent residence. And among their first biggest purchases will be a family home. This boosts demand and drives up house prices for everyone, making accommodation less affordable for young Canadians still looking to clear student debts before building up their credit.
3. Growing Interest From Property Lnvestors
The rich pickings from Toronto’s booming housing market continue to draw the attention of investors. By some estimates, up to 25 percent of buyers in Ontario are people who own more than one property.
Just 10 years ago, investors were the smallest segment of the housing market. Now they are the largest – a grim reality new homeowners must confront. For those saving up to buy their first home, it’s a perpetual catch-up game with soaring prices. As soon as one has enough to buy a home, prices rise again.
Even where a first-time homeowner has saved up what should be enough for a home, when forced into a bidding war with an investor, they typically don’t stand a chance.
By many people’s summation, the Toronto housing market has become a speculators’ paradise. And where speculators play, prices are never stable, which means housing affordability is quickly morphing into a full-blown crisis.
4. Historically Low Interest Rates
Interest rates are the lowest they have been in a long time in Canada. The Bank Of Canada cut interest rates in 2020 to help the economy recover from the stresses caused by the Covid-19 pandemic.
With lower interest rates, it was suddenly much cheaper to borrow. It meant that many first-time homeowners could now afford a mortgage. And with the immense returns offered by the Canadian housing market, it wasn’t long before investors flooded the market.
All that interest from buyers was, unfortunately, not met by the same level of supply. There simply wasn’t enough stock of housing units, especially the coveted detached family homes, to go around. Prices soon went through the roof and have barely slowed.
5. Low Stock And Supply Of Family Size Housing Units
It is no secret that the most desired type of housing is detached family units. They are the preferred option for young couples looking for a forever home to raise a family.
While detached family-sized units make up the bulk of the available stock, they are in desperately short supply, with very few older owners choosing to downsize to smaller units. And even if more of these came on to the market, they are the most expensive, which means young buyers wouldn’t be able to afford them anyway.
Because developers prefer multi-unit urban condo projects that offer better returns, detached family-sized units will remain in short supply. That means, for the foreseeable future at least, prices will continue to rise.
6. Shortage (or hoarding) Of Land
Forget the curious fact that Canada is the second-largest country in the world, the country is running out of land for new housing development. At least that’s what the developers say.
Some researchers, however, are of a completely different view, opining that there’s enough land to build two new Torontos. The Greater Toronto Horseshoe region has 125,600 hectares of land available for development, which is twice the size of Toronto.
As noted in this article, Canada actually ‘runs out of land’ every time there’s a housing shortage. The real culprit in this are developers who sit on undeveloped land and only allow a small number of new housing units to drip onto the market, which drives up prices.
7. The Influx of Dirty Money
According to an investigative report by the Toronto Star, as much as $20 billion worth of anonymous money was invested in Toronto’s housing market in 2019. This is money whose source can’t be traced.
Toronto’s real estate market and Canada’s laws, in general, do not make it difficult enough for criminals to invest their money. The market has therefore become a haven for money launderers, and this laxity in regulation and surveillance has begun to attract international criminal syndicates too.
As long as they can launder their dirty money without problems, crime syndicates will not be put off by the rising house prices. The net effect is prices will keep soaring, pushing clean, harder-to-get money out of the city altogether.
Will House Prices Drop in Toronto?
Canada’s skyrocketing home prices are causing inflationary pressures, so much that the Bank of Canada has hinted at a rate increase soon. Will that cool the real estate market in Toronto?
In Toronto, it is tough to conclude that an interest rate hike alone will slow soaring house prices. There are just so many factors at play that it will take a cocktail of measures for home prices to stabilize.
An equally red-hot job market will continue to attract new talent from within and outside Canada. Millions more people are forecast to move to Canada, with Toronto the most preferred destination. A growing population means more demand for housing.
The more effective solution will be to fix the supply-side issues. The City of Toronto will do well to speed up the development of low-cost multi-unit townhouse projects that can close the supply gap faster. They can do this by approving projects faster.
Another measure that has been proffered by the NDP party is an annual speculation and vacancy tax on residential property that would apply to owners who neither live in the home nor pay taxes in Ontario. The tax would drive away investors who buy homes in Toronto for purely speculative purposes. It would also encourage investors to rent out their properties, helping reduce the housing shortage.
Experienced Local Realtors Have Never Been In Higher Demand
The sad reality for many young people in Toronto is that the housing market is unlikely to crash any time soon. At least as long as the demand for new houses continues to outstrip supply. A rate hike and all the measures being suggested may help stabilize prices, but housing will continue to be out of reach for many people in Toronto.
Should you stop chasing the dream of owning your own house in Toronto? We think not. Not with all the opportunities and dynamism this great city offers.
What we suggest is working with a savvy local realtor that has their ear to the ground all the time, listening and sniffing for every affordable property that becomes available for sale. And Souqh is where you can find a connected local realtor you can trust with your house search.
Search Souqh for a local real estate broker here and take the time to browse through the many storefronts. The realtors on our real estate and home services marketplace all come with different levels of experience and focus, so you should be able to find one that fits your needs.