It might be hard to believe, considering how the province is suffering through the worst public health crisis in its history, but the Ontario real estate market is booming. From the major urban centres of Toronto and Ottawa, to the rural communities of Renfrew County and Prince Edward County, close to every housing market in Ontario has been posting record-setting gains. This, in the midst of the coronavirus pandemic and tepid economic recovery.
Due to historical growth, many real estate industry observers and market analysts have been discussing a broad array of topics and trends, such as bubbles, crashes and evolving consumer behaviours. But with the Ontario real estate market booming, it’s understandable that some are anticipating an imminent correction, downturn or downright collapse. In Toronto, the average semi-detached house is selling for $1.7 million. In Simcoe County, the average price of a home has spiked 33 per cent year-to-date, to $600,000.
Some housing experts have forecasted easing price growth this year, while others present the case that under current conditions, the real estate market could continue on an upward trajectory. Could a crash happen? Before answering this question, it’s necessary to first understand what it would take for a steep downturn in the province’s housing sector.
Will the Ontario Real Estate Market Crash Soon?
The Bank of Canada (BoC) hosted its April policy meeting, where it left its benchmark interest rate unchanged at 0.25 per cent. The central bank announced that it would be trimming its bond-buying efforts from $4 billion to $3 billion, expressing its optimism over the current economic recovery. But while it refrained from pulling the trigger on a rate hike, the BoC signalled that it would raise rates next year, potentially making Canada the first G7 country to tighten monetary policy.
Interest rates have been critical to the housing boom for both the Ontario and the Canadian real estate market. With rates as low as they are, borrowing has never been as affordable. When the economy is experiencing near-zero rates, consumers can borrow more, giving homebuyers more options. This is perhaps the reason why the Office of the Superintendent of Financial Institutions, the chief banking regulator, tightened lending standards that would increase stress test rates and reduce by approximately 4% the size of mortgages that Canadian households will be eligible to take.
The BoC even noted in its quarterly Monetary Policy Report that the current housing market strength could pose a threat to an economic downturn. BoC Governor Tiff Macklem also warned that “it would be a mistake” for Canadians to treat housing as an investment opportunity, assuming that the real estate market would continue to rise with no ceiling.
“This poses several risks. High prices could result in stretched borrowing and lending, leaving some households and financial institutions more financially vulnerable to an economic downturn,” the BoC wrote.
Should Ottawa do more? The opinion is split within the industry and the media landscape. Scotiabank recently argued in a report that the Canadian real estate market would cool later this year, and there is “no urgency” for measures. Rita Trichur wrote in an op-ed in The Globe and Mail that the government should force financial institutions to take on more risk. But Christopher Alexander, Chief Strategy Officer and Executive Vice President at RE/MAX of Ontario-Atlantic Canada, and Elton Ash, Regional Executive Vice President at RE/MAX of Western Canada, have other proposals:
- Add a mandatory condition to every offer, making the purchase conditional on financing.
- Create an industry watchdog to review transactions where homes are sold well over asking price.
- Introduce more housing supply.
Increasing housing supply, says Alexander, is the real and only solution to Canada’s housing affordability crisis.
One of the reasons why it could be challenging to envision a real estate crash in Ontario is because demand is soaring and housing inventory is down. Should new supply come online, it could ease the monumental growth in prices. But are inventories beginning to increase again amid the typically busy spring season? The early indicators point to positive trends in this area.
According to the Canada Mortgage and Housing Corporation (CMHC), national housing starts surged at an all-time high of 21.6 per cent in March to a seasonally-adjusted annualized rate of 335,200 units. Most of the gains were for multiple urban starts, climbing 33.8 per cent, followed by a 3.6-per-cent jump in single-detached urban starts. In Ontario, housing starts advanced 80,660 in March, nearly double from the same time a year ago. In the first three months of 2021, housing starts have topped 200,000.
Royce Mendes, the senior economist at CIBC Economics, said in a research note to clients that this is a step in the right direction for cooling off the impressive numbers.
“The big acceleration came as weather was unseasonably warm in many parts of the country,” Mendes stated. “Red-hot demand for real estate propelled a record month for housing starts in March. While the market will need a long stretch of supply growth to have a meaningful effect on prices, the March numbers are a solid start.”
With the current trends unfolding in both the province and the rest of the country, the key question is: is this the new normal for Canadian real estate? The answer to that question could also forge the path for how the real estate market performs moving forward.
Changing Homebuyer Needs
Since the financial crisis more than a decade ago, Canada’s largest cities witnessed an epic real estate boom. Condominium valuations were skyrocketing, detached and semi-detached homes were being sold for premiums, and the skylines of Toronto and Vancouver were dotted with cranes. Then the coronavirus pandemic shook up the housing industry.
Rather quickly, city slickers were ditching the lights and glamour of metropolitan hubs, seeking greener pastures in small towns, suburban areas and rural communities. Now that they required more space at home to accommodate work, school, entertainment, and fitness amid a nation-wide lockdown, a 700-sq.-ft. box in the sky was no longer a viable option for a three-person-plus-dog household. With a massive windfall in hand, these former urban dwellers took their home equity to cottage country, where they outbid other hopeful homebuyers, resulting in record average price growth on recreational properties, from humble bunkies to luxury waterfront homes.
Is this a permanent change in the Ontario real estate market, or is it a temporary adjustment until the COVID-19 pandemic is over? Moreover, could a return to some semblance of normalcy lead to a correction in the nation’s and province’s housing market? While the future remains uncertain, our eyes are glued to the data as we watch history unfold during this unprecedented time.