Metro Toronto Home Price Forecast
HIGHLIGHTS
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This article covers:
Where are Metro Toronto prices headed?
What factors drive the price forecast?
Should investors sell?
Is this a good time to buy?
1. Where are Metro Toronto home prices headed?
Home Price Overview
Unfortunately for home buyers, prices have accelerated significantly in the past few months.
People planning to sell their home will take heart in the fact that home values in many areas are at an all-time high. Given the global recession and pandemic, sellers may want to push ahead and sell now.
There is no guarantee that home prices will regain the current highs any time soon because a Coronavirus induced recession may inflict long-term economic damage.
Coronavirus is now the primary source of uncertainty for home values.
Metro Area Detached House Prices
House price growth in Metro Toronto was accelerating in early 2020. The “soft landing” that government policymakers were targeting had become more elusive. We believe politicians were hoping to guide the market toward a typical seasonal real estate cycle with price growth in the range of 1 to 3% annually – in line with income growth.
Although the benchmark house price for Metro Toronto is rising, the median has dropped significantly. The drop in the median shows that the wealthiest buyers have left the market.
Metro Toronto Condo Apartment Prices
Metro Toronto apartment prices have been rising consistently at unprecedented rates.
Today, the benchmark Metro Toronto condo is unaffordable without help from family, and benchmark Toronto apartment is more expensive than whole house in Calgary!
Interest has been shifting down-market. The proportion of apartments purchased at prices below $600K has risen, while interest has waned for apartments above that price.
A benchmark GTA apartment is still more expensive than a single-detached house in Calgary.
Entering the Coronavirus Recession, there is very little condo supply. When enough supply comes to market, the more expensive, higher quality, and larger (i.e., 2 and 3 bedrooms) apartments will drop in price, and this will depress the values downward for more modest condos.
At Mortgage Sandbox, we would like to see developers building more 4 and 5 bedroom condos. Not everyone can afford to put their family in a house, and for many parents work-related travel makes it difficult to stay on top of basic upkeep (i.e., mowing lawns, clearing eaves, shovelling sidewalks).
Still a challenge for first-time homebuyers
Toronto home prices are not affordable.
A first-time homebuyer household earning $78,000 (the median Metro Toronto household before-tax income) can only get a $320,000 mortgage. For them to buy a condo apartment valued at the benchmark price of $590,000, a homebuyer needs to save a little more than $270,000 cash for a down payment and closing costs, or receive a very generous gift from family. For most people, that is just not possible.
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2021 Metro Toronto House Price Forecast
At the beginning of 2019, RE/MAX predicted house prices in Metro Toronto would rise only 2% while Royal LePage offered a conservative 1%. In the end, a benchmark Metro Toronto house price rose by 6%!!
For 2020, the average of the forecasts used in our analysis predicted a modest rise of 4% in 2020 and 3% in 2021. The Coronavirus has shredded these forecasts.
Our forecast adjustment for COVID-19
None of our primary forecast sources have issued revised forecasts that incorporate the impact of a Coronavirus Recession, so we have adjusted the range of projections based on a rule of thumb provided by Moody’s Analytics. Moody’s Analytics specializes in products to help banks analyze loan and mortgage risks.
In a recent interview, Brendan LaCerda, a Senior Economist with Moody’s Analytics, estimates that each 1% rise in unemployment results in a 4% drop in home prices. Using this ratio, if Canadian unemployment reaches a sustained 11% (a 5% increase), then home prices could drop by 20%.
We have taken a conservative approach and adjusted the 2020 forecasts down by 10% (a prolonged 2.5% rise in unemployment) for the optimistic scenario and down 20% for the pessimistic scenario (an extended 5% rise in unemployment).
How realistic are these unemployment forecasts? On April 9th, the Canadian Parliamentary Budget Officer (PBO) projects Canadian unemployment will reach 15% by June 2020, and that stay as high as 13% by the end of the year.
The PBO may be underestimating the levels of unemployment.
The U.S. Fed projects unemployment in the United States is likely to reach a peak of 30%.
A recent research paper by Alex Bick, “Real Time Labor Market Estimates During the 2020 Coronavirus Outbreak” estimates that U.S. unemployment has already reached 20% and 21% of those who still have their jobs report a decline in earnings.
Joseph Brusuelas, the Chief Economist at audit firm RSM believes the U.S. is almost certainly facing a 20% unemployment rate now.
For a more thorough comparison of the Coronavirus Recession to the Great Recession and the Great Depression and their impacts on property prices, check out our recent article: “Should I sell my home today?”
At Mortgage Sandbox, we provide a price range rather than attempting a single prediction because there are many risks in real estate that can impact prices. Risks are events that may or may not happen. As a result, we review a variety of forecasts from leading lenders and real estate firms, and we then present the most optimistic estimates, the most pessimistic prediction, and the average forecast. Do you want to learn more about real estate risk? We've written a comprehensive report that explains the level of uncertainty in the Canadian real estate market.
Our forecast inputs:
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2. What factors drive the price forecast?
Mortgage Sandbox 5 Factor Framework
At the highest level, supply and demand set house prices and all other factors simply drive supply or demand. At Mortgage Sandbox, we have created a five-factor framework for gathering information and performing our market analysis. The five key factors are affordability, capital flows, government policy, supply, and popular sentiment.
Affordability
Affordability is a function of:
Home Price Changes: Changes in the market value of the desired home.
Savings-Equity: How much disposable after-tax income you’ve been able to squirrel away plus any equity you have in your existing home.
Financing: Your maximum mortgage is calculated using income (i.e., how much money you can put toward mortgage payments) and interest rates (how big are the mortgage payments).
Increased affordability raises buyer purchasing capacity and puts upward pressure on prices while dropping affordability has the opposite effect.
How have these changed lately?
Home Price Changes
Prices are rising across the Greater Toronto Area. Price growth reduces affordability and creates downward pressure on prices. As a rule-of-thumb, home ownership costs are considered unaffordable when they exceed 40% of household income.
In March 2020, Toronto home ownership costs were 68% of the median household income. In other words, Toronto home prices had exceeded economic fundamentals, in a low interest rate environment, before the impact of the Coronavirus.
However, given that prices are already very high, the current price increases will not make homes significantly less affordable.
Savings-Equity
Rents were rising faster than incomes, so first-time buyers struggled to come up with down payments.
To add insult to injury, the stock market has dropped dramatically because of the pandemic. Anyone who managed to save a down payment and invested it in ‘blue chip stocks’ may now find that they’ll need to save for a few more years.
Existing homeowners benefited from price appreciation, so they had more home equity to use when buying a bigger home. That price gain may be short-lived as the Coronavirus is likely to depress prices.
With the Coronavirus containment efforts, the banning of evictions, the conversion of Airbnbs into long-term rentals, and a halt to immigration, we believe rents will drop. That will allow renters to save more toward a future purchase when the market thaws.
Financing
Median Metro Toronto incomes have not changed materially, but employment levels are dropping.
A U.S. Federal Reserve economist predicts unemployment in the United States could reach over 30%. Canadian unemployment was roughly 6% at the beginning of 2020, and according to an April 21st article in Maclean’s Magazine, Canada’s unemployment rate rose to 22 percent. Apart from layoffs, many salaried employees who have not been laid-off have been asked to take pay cuts.
To mitigate the impact of job losses, the Bank of Canada has reduced rates dramatically, but mortgage qualifying interest rates have not fallen nearly as much.
Job losses from Coronavirus containment efforts are a more powerful force than low mortgage rates because without income you can not qualify for a mortgage.
Overall Affordability
Coronavirus containment efforts will reduce housing affordability because many people will lose their jobs, temporarily close their businesses, or accept pay cuts.
Even before Coronavirus, GTA prices were beyond the reach of a median Metro Toronto household with an income of $78,000 (before taxes).
Capital Flows
These represent short-term investment, long-term investment, and recreational demand (i.e., homes not occupied full-time by the owner). Here is where foreign capital, real estate flippers, and dark money come into play. It also includes short-term rentals, long-term rentals, and recreational property purchases.
Capital inflows raise demand and put upward pressure on prices while capital outflows have the opposite effect. If capital sits invested in real estate nothing is bought or sold, it has no effect on the direction of prices.
Foreign Capital
Ontario implemented a 15% foreign buyer tax to reduce the distorting effect of Foreign Capital flows on local real estate.
Now with newly introduced travel bans that are part of Coronavirus containment efforts, we can expect there will be very little foreign investment in Canadian real estate.
Long-term Rentals
Nearly 40% of Toronto’s condos are not owner-occupied, so rental investments are a significant driver of home prices. As it relates to our analysis, we expect domestic interest in long-term rental income properties will dry up so long as Coronavirus eviction bans are in place. The government has not developed an exit strategy for landlords with rent arrears when social isolation policies are lifted. How will tenants repay three to six months of rent arrears?
Rental investors will simply try to time any future property purchases for the end of Coronavirus containment period, and they will avoid properties with tenants who have outstanding rent arrears.
Short-term Rentals
We are watching short-term rentals closely because travel bans will effectively shut down short-term rentals for the next few months (Canada’s tourist high season).
The short-term rentals that survive the Coronavirus slow-down will then face new bylaws, restricting short-term rentals to Torontonians’ principal residence. These rules will likely be enforced with the help of condominium boards and neighbours (We explain these rules further down in the regulation section).
House Flipping
With Coronavirus containment efforts underway, house flipping will be very risky so we expect serial flippers will stay out of the market until they see a bottom to the market.
It may be 6 months to a year before the market finds bottom and the flippers emerge to pick up some bargains.
Dark Money
Dark money is proceeds of crime or money that is transferred to Canada illegally. This includes money earned legitimately that is illegally transferred from countries with capital controls (e.g., China) and legitimate earnings moved from countries who are the subject of international sanctions (e.g., Iran, Russia, and North Korea).
In order to hide the illegal nature of the funds, it is laundered in the real estate market. Sometimes the true owner of the property is hidden by using property is bought by a Straw Buyer and other times the property is owned by a shell company.
Sometimes a real estate agent or lawyer will accept the illegal cash to help the nefarious individuals hide its true origins. In 2015, a B.C. realtor was caught with hundreds of thousands of dollars in her closet, at home.
We see no evidence of a diminished role for dark money in local real estate.
Overall Capital Flows
The net effect of all the recent changes to Capital Flows will be to reduce inflows of capital toward Metro Toronto residential real estate, and this will put downward pressure on home prices.
Government Policy
Governments were trying to engineer a ‘soft landing’, but now they are trying to protect against a housing crash by encouraging banks to allow borrowers to defer their mortgage payments up to six months.
COVID-19 Support Measures
Mortgage Payment Deferral
A typical mortgage deferral is an agreement between the borrower and the lender to pause or suspend mortgage payments for one or two months. For the Coronavirus, they have extended this for up to 6 months.
After the agreement ends, your mortgage payments return to normal. The mortgage payment deferral does not cancel, erase, or eliminate the amount owed on your mortgage. The borrower still accrues interest that will have to be paid.
A Canadian with a $250,000 mortgage who defers their mortgage by six months adds approximately $4,000 in accrued interest to their mortgage balance.
Eviction Bans and Suspensions
The Ontario government has suspended the enforcement of evictions indefinitely and Tribunals Ontario will not issue any new eviction orders until further notice. Sheriff's offices have been asked to postpone any scheduled enforcement of eviction orders.
Short-term Rental Regulation
At the end of 2019, the City of Toronto laid plans for regulating short-term rentals. Here are the highlights:
Short-term rentals are allowed in principal residence only. As of Mid-March, roughly 15,000 GTA short-term rentals listed on Airbnb were offering to rent an entire home.
The maximum stay is 28 days per stay and the home can be rented a maximum of 180 nights per year.
Applicants will be required to pay a one-time licence application fee of $5,000.
People renting their homes on a short-term basis will be required to pay $50 per year and a 4 percent Municipal Accommodation Tax (MAT) on all rentals that are less than 28 consecutive days.
Short-term rental companies like Airbnb will be required to provide a procedure for dealing with problematic operators and responding to complaints.
Higher Property Taxes
The City of Toronto mayor and councillors approved slightly higher taxes and are debating new and higher taxes. City staff are studying the possibilities, and there are some of the ideas.
In December, the Toronto council voted to increase property taxes by 8 percent over 6 years. It will pay for transit and infrastructure, and its slow introduction will likely have little impact on the market.
In January, Councillor Ana Bailao pitched the idea of including an empty home tax in the city's 2020 budget, along with an increase to the municipal land transfer tax charged on luxury homes.
Releasing Provincial Lands for Development
The provincial government is going to work with municipalities to reduce red tape and plans to sell up to 243 underutilized properties for redevelopment into housing. However, progress is slow. In January 2019 they sold some land in London. In April 2019, they sold a property in downtown Toronto that may create 700 homes.
Overall Government Influence
Overall, the government is now doing everything in its power to save lives while avoiding a property price crash. In a year or two, once the COVID crisis has receded, they will still be trying to bring affordability to the property market.
Supply
Supply comes from two sources.
Existing sales: Existing home sales are sales of ‘used homes’. They are homes owned by individuals who sell them to upgrade, to move for work, or some other reason. The Toronto Real Estate Board only reports existing home sales and listings.
Pre-Sales and Construction Completions: Most new homes are sold via pre-sales before the construction has started. These are predominantly apartments and townhomes. Data on pre-sales is private and difficult to find, but construction starts (reported by the government) are a very accurate lagging indicator of pre-sale activity.
Months of Supply of Existing Homes
At the beginning of 2020, sales were higher than in previous years but now the Ontario Real Estate Association has cancelled all open houses to comply with the pandemic containment laws.
Spring is traditionally the busy season for real estate activity; however, this year, it will be more challenging to buy or sell homes during a pandemic. Only motivated sellers will sell during a pandemic, while a majority of willing buyers will be sidelined by employment and savings concerns.
In the past, a lack of active listings was driving the seller’s market. During the Coronavirus Recession, a lack of willing buyers has shifted the market in favour of buyers. Although it is not technically a buyer’s market, supply has risen to 2017 levels and in that year house prices dropped significantly.
Coronavirus mortality rates (short-term impact)
We know that older Canadians are more vulnerable, and the fatality rates follow a pretty clear trend:
People aged 80 and up have an expected 14.8 percent mortality rate
8 percent of those 70 to 79 succumb to it
3.5 percent of 60 to 69 year-olds are likely to pass away
In 2020, 45% of baby boomers will be over 65 years old. In the GTA, roughly 15% of the population is over 65 years old, but in St. Catharines and Collingwood, more than 20% of residents are in their golden years.
Obesity is also a COVID-19 risk factor and 26% of Ontario residents are obese.
The Coronavirus could cause an unusually large number of homes to come to market in areas favoured by retirees. Real estate prices in these areas may be particularly vulnerable.
Coronavirus short-term rentals sold or converted (short-term impact)
Travel bans will effectively shut down short-term rentals for the next few months (Canada’s tourist high season). The drop in bookings may force many owners of apartments primarily used as short-term rentals to sell their condo or repurpose it for long-term rentals adding up to 15,000 homes to the market in the next six months.
We surveyed over 50 Canadian real estate agents and 50% had observed a majority of short-term rentals being listed as long-term furnished apartment rentals and 25% expected AirBnBs owners would sell their homes to cash in the capital gains.
Mortgage Delinquencies and Foreclosures
The most recent data indicates that more Canadians are missing their monthly payments, and job growth has been healthy. Some economists have been warning of a recession, and even without a recession, it appears more Canadians are over-extending themselves. Surprisingly, the increases in delinquencies are led by Ontario and British Columbia, and not Alberta.
According to Equifax, the credit bureau company:
“Mortgage delinquencies have also been on the rise. The 90-day-plus delinquency rate for mortgages rose to 0.18 percent, an increase of 6.7 percent from last year. Ontario (17.6%) led the increases in mortgage delinquency followed by British Columbia (15.6%) and Alberta (14.8%). The most recent rise in mortgage delinquency extends the streak to four straight quarters.”
A recent survey by MNP reported a staggering number of Canadians are stretched to their limits:
“Over 30 per cent of Canadians say they’re concerned that rising interest rates could push them close to bankruptcy, according to a nationwide survey conducted by Ipsos on behalf of MNP, one of the largest personal insolvency practices in the country.”
Job losses from Coronavirus containment will worsen this situation. Although the CMHC can help Canadians via Canadian lenders offering options to defer payments, re-amortize mortgages, add interest arrears to your mortgage balances. It will not help overextended Canadians from their credit card debt nor will it protect Canadians who chose to finance their homes with private mortgage lenders. According to the provincial regulator, private lending accounted for around eight percent, or $10.6 billion of all Ontario mortgage transactions reported in 2017 by brokerages.
Baby Boomers Downsizing?
According to a recent survey, almost half (49 percent) of all Ontario Boomers respondents said they plan to move into a smaller home as they near or enter their golden years, the highest rate among all provinces surveyed. Another survey from RBC says, “Over the coming decade, we expect baby boomers to ‘release’ half a million homes they currently own—the result of the natural shrinking of their ranks, and their shift to rental forms of housing, such as seniors’ homes, for health or lifestyle reasons.”
As baby boomers begin downsizing and list their million-dollar homes for sale, they will add supply in what is considered the luxury market. If not enough Gen-X and millennial buyers can buy these expensive homes, there is a risk that this may depress prices at the top of the market, which will then compress prices for townhomes and condo apartments.
In the near-term, supply is tight, but in the medium-term, there are risks of excess housing supply.
Pre-sales and Completions
New Construction
There is a record number of homes under construction in Toronto, and many are nearing completion. As these buildings complete in 2021 and 2022, and people move out of their rental or sell their current home, this new supply should alleviate some of the pressure in the market.
Pre-sales
Metro Toronto pre-sales, which are purchases of brand-new homes from developers.
Pre-sales were strong at the beginning of 2020 but we expect they will trend down as showrooms close during the pandemic. When social distancing measures are lifted developers will likely try to entice buyers with price discounts, move-in allowances, and cool amenities!
Popular Sentiment
Wait-and-See Strategy: There's no way of predicting popular sentiment, but as witnessed in the past two years, sentiment can shift quickly.
Nanos Canadian Confidence Index showed a noticeable drop in confidence mid-March before a state of emergency was announced. Future index announcements will likely be worse.
How much home can you afford?
Our mortgage calculator takes uses up-to-date mortgage rates and calculates the price of a home you could afford.
3. Should Investors Sell?
From a seller’s perspective, there are more changes in the market that influence prices downward so now may be a better time to sell than in two years and the seasonal real estate cycle usually favours sellers in the first half of the year.
With Coronavirus containment efforts, open houses may be impossible. However, you can get a Realtor to help you plan small repairs and improvements to your home so that it will be ready when the real estate market thaws.
Sellers should always consult a mortgage broker early to prioritize flexible loan conditions and reduce the risk of mortgage cancellation penalties. Find out more about the benefits of a mortgage broker.
4. Is this a good time to buy?
With accelerating prices, some homebuyers who took a cautious wait-and-see approach in 2019 may have been priced out of the market.
Prices are still trending upward, but Coronavirus containment efforts pull prices down. It is likely that prices will be lower in 2021. Keep in mind that the seasonal real estate cycle usually favours buyers in late summer.
The wild card is the Coronavirus. At this stage, it's difficult to determine how much it will impact the market.
If you are thinking of buying, just be sure to drive a hard bargain and pay as close to market value as you can. As well, when it comes to financing, don't bite off more than you can chew.
Buying a home is a big decision, so check out Mortgage Sandbox's Canadian Homebuyer Guide so we can walk you through the end-to-end process and get you ready to buy your new home!
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Here are some recent headlines you might be interested in:
Landlords among most vulnerable homeowners during COVID-19 pandemic (Global, Apr 21)
COVID-19 and the Toronto real estate market (The Star, Apr 17)
Virus-driven rate cut could add kerosene to housing market (BNN Bloomberg, Mar 3)
Canada must expose hidden company owners to end 'snow washing,' inquiry hears (CTV, Feb 26)
Assessing whether 2020 will bring a Canadian property tumble (CBC, Dec 19)
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