Toronto Home Price Forecast for 2019
Highlights
2019 will likely see a balanced market in Toronto with prices dropping slightly
There will be more opportunities for buyers to find good deals, but with uncertainty on the rise, they may hold-off hoping to get a better real in the future
There is still a chronic long-term undersupply of housing in Metro Toronto and more family-oriented condos are needed
Foreign and speculative capital flows appear to be abating
2019 House Price Forecast
Forecasts from analysts predict a range of house price outcomes in 2019, as well Mortgage Sandbox has reviewed the various forecasts and performed its own analysis to arrive at the conclusion that house prices will drop in 2019. A softening market will benefit young home buyers and families trying to get into the market, since bidding wars would become rare.
Before going further, we need to make it clear that forecasts are simply intelligent guesses and history has often proven forecasters wrong. For example, in 2016 Royal LePage (a major real estate brokerage) and the BC Real Estate Association both predicted that house prices would drop 8% in 2017, but instead the benchmark detached home price rose $100,000 from $1.5 million to $1.6 million.
If you hear of a forecast this year that sounds too good to be true and unbelievably accurate (e.g., estimating to the dollar), then likely it is.
To formulate our forecast, we first evaluated other forecasts from well respected sources and then analyzed what we believe are the 5 key factors influencing housing markets to arrive at the most likely outcomes.
Evaluation of Forecasts
2019 forecasts for Metro Toronto range from a 5% rise to a 2% drop, and while most economists expect prices will continue to rise, we expect prices to remain flat or drop slightly.
On the chart would will see that CMHC and Reuters provide a high and a low growth scenario but the consensus for most analysts is that prices will increase rather than decline.
Analysis of 5 Factors Driving Prices
To help you understand why Mortgage Sandbox is predicting prices to drop, we will walk you through the five factors driving prices and why we believe they will not provide enough support to keep prices at the current levels.
Affordability
Affordability is focused on Canadian home buyers in the traditional sense. These are people who buy a home to live in it and they’re relying on their own income to pay the mortgage. This type of home buying is grounded in the world of classical economics. Some economics argue that historically low interest rates, very low unemployment and good incomes will continue to support home prices. They also argue that the current slowdown is caused by higher interest rates and government rules that reduce the size of mortgages people can get. In Toronto, this argument doesn’t hold water. The Canada Mortgage Housing Corporation (CMHC) has repeatedly declared that house prices in Toronto, Vancouver, Hamilton and Victoria are not supported by economic fundamentals.
To illustrate the point, a family today with a combined income of $200,000 may qualify for a $770,000 mortgage that, with significant savings, will allow them to buy a house priced at $950,000. The benchmark house price in Greater Toronto is $910,000 and that means current prices are achievable for motivated wealthy citizens, but the other 90% are undoubtedly out of the market. The bottom 62% of households can’t even buy a benchmark condo priced at $505,000. Population growth, local income growth, interest rates, mortgage financing, and economic stability did not bring prices to their current heights, so they can not be blamed for any price declines. As well, the Affordability leg of the stool holding up house prices is much too short to be of help.
Capital Flows
Sales are down from their peaks and this suggests there has been a drop in the capital flows into Toronto real estate. As a comparison, Vancouver house sales peaked in 2015 and condo sales peaked in in 2016 and have dropped 55% and 32% from the peak respectively. If Toronto is following a similar pattern to Vancouver then sales could drop significantly in 2019, CMHC concurs with this assessment. CMHC’s Toronto real estate forecast predicts sales volumes could drop as much as 30% by 2020.
There is a global slow down in real estate investment, and Toronto is likely caught in this slow down which means less foreign direct investment. China imposed foreign real estate investment controls in 2017, and there are reports that these have been effective. On that note, some Chinese property investors may shift their investments to Europe or Australia in light of the recent arrest of a Huawei executive in Canada.
Dark money was a big problem in Vancouver and has likely migrated from Vancouver to Toronto and Montreal with a recent crack-down by the British Columbian government. Ontario hasn’t gone as far as the BC government which recently began tracking pre-sale reassignments and requiring full disclosure of beneficial ownership to reduce tax evasion. Effective federal government measures, such as sharing tax information with China, may be effective in redirecting dark money to other countries with less stringent regulations and less focus on preserving the rule of law.
In summary, capital flows to Toronto residential real estate have dropped significantly and just as a rising tide raises all ships, a receding tide will likely pull prices down.
Government
The government has been tightening mortgage rules for years. Ten years ago, Canadians has access to government insured mortgages that could be repaid over 40 years. Today, government backed mortgages must be repaid within 25 years and they’re only available for homes occupied by owners. Below is a list of the government’s ongoing tinkering with mortgage financing:
2008: Reduced the maximum lifespan of a mortgage from 40 years to 35 years.
2010: Applied a stress test against the 5-year contract rate for mortgages with a down payment of less than 20%.
2011: Reduced the maximum lifespan of a mortgage from 35 years to 30 years.
2012: Reduced the maximum lifespan of a mortgage from 30 years to 25 years on mortgages with a down payment of less than 20%.
2016: Applied a stress test against the 5-year posted rate for mortgages with a down payment of less than 20%.
2016: Banned default insurance on refinances, mortgages greater than 25 years, and single-unit rentals.
2018: Applied a 2% stress test to mortgages with a down payment of greater than 20% to ensure borrowers can handle an interest rate increase.
The City of Toronto has also begun to implement restrictions on short-term rentals and added rent controls. As well, the Ontario government created a 15% non-resident speculation tax along with a collection of other measures.
There is a consensus that the government has enacted many changes with the intention to bring down prices. It appears the government is succeeding and anyone betting against the government should proceed with caution. This may be frustrating for home buyers and homeowners however the government is trying to tell Canadians that homes shouldn’t cost what they do today, they’re not worth the current prices, and they intend to correct the problem.
Supply
House supply in Toronto is still tight but it is no tighter than it was in mid-2017 when Toronto home prices dropped from their peak $975,000 benchmark price to settle at $910,000 today. If more homes hit the market in Spring 2019 pulling the market into balanced territory then it is uncertain there will be enough buyers who can afford current prices, and that would put further downward pressure on prices. Notice in the chart above that supply jumped upward in mid-2017 and the chart below shows prices dropped around the same time.
Metro Toronto Benchmark Detached House Price
Condo listings have been very tight in 2018 providing sellers all the leverage in price negotiations. Here is the broader supply picture:
In 2018, only 23,000 condos were bought on MLS® and this means that in 2019 Toronto may temporarily have excess supply and the market may become balanced. Studies have shown that blind auctions (bidding wars) always lead to a higher end price than a one-to-one negotiation and a balanced market will do away with bidding wars. If more than half of homes under construction are completed in 2019 then it may release the price pressure valve. Homes will still sell, but buyers will have the opportunity to negotiate on a level playing field.
By no means does this imply that the city can’t support further densification. The Toronto metro area has been chronically short of housing and with population growth any excess supply will be absorbed within a year or two, but in 2019 supply shortages are unlikely to provide support for weakening prices.
Popular Sentiment
Sentiment is the key to prices. People often fall in love with a home and make an offer before they look at the other four factors to ask, “Is it worth it?” The final decision to buy or sell sits in the realm of behavioural economics rather than rational classical economics. People make purchase decisions with their hearts and gut feelings and no one wants to be caught paying too much or selling too cheaply. Here are some key principles of behavioural economics to watch for in 2019.
Uncertainty aversion is the tendency to favour known risks over unknown risks. For example, when choosing between buying or renting, we are more likely to choose the option that provides more certainty. Lately there has been a lot of uncertainty in the Calgary real estate market and that may cause people to choose renting until the market stabilizes and home prices become more certain.
Endowment effect is a bias where we tend to overvalue something that we own, regardless of its objective market value. This has come into play this year with sellers anchoring to the peak prices and only reluctantly lowering their asking prices as the market softened. This has led to unsold houses piling up on the market.
Herd behavior is evident when people do what others are doing instead of using their own information or making independent decisions. This was evident when people stretched themselves to “get into the property ladder” when the market was headed upward. In a down market, baby boomers who intend to cash in their real estate to fund their retirement may stampede to sell their homes and it could accelerate a decline in prices beyond what the forecasts are expecting.
Confirmation bias occurs when people seek out or place higher value on information that fits with their existing beliefs and preconceptions. When most people believed real estate would climb “up and up” forever they only read news that confirmed this. If there is a tipping point where people come to believe that a major correction is underway, then people will reinforce their belief by ignoring news to the contrary and this will prolong any downturn making it a self-fulfilling prophecy.
Anchoring happens when people fixate on a number like the price at the market peak and use this as a reference point to judge current values. It’s a subconscious process and it’s frightening how easily we are influenced. An experiment asked people to write down the last three digits of their phone number multiplied by one thousand (e.g. 678 = 678,000). Results showed that people’s subsequent estimate of house prices were significantly influenced by the arbitrary anchor, even though they were given a 10-minute presentation on facts and figures from the housing market at the beginning of the study. In practice, anchoring effects are often less arbitrary. For example, the list price of the first house shown to us by a real estate agent may serve as an anchor and influence perceptions of houses subsequently presented to us (as relatively cheap or expensive). In 2019, anchoring will most likely be observed when sellers reject offers that are lower than the peak price from 2017, or they simply take their home off the market expecting that prices will rise to the 2017 peaks in the near future.
It’s difficult to ignore sentiment and behavioural economics in a digital age when Google and Facebook will curate your news to reinforce your existing beliefs. Could social media’s content filtering negatively reinforce consumer behaviour and lead to worse recessions and more profound swings in asset prices? It’s clear that social media contributed to the stratospheric rise in the price cryptocurrencies like Bitcoin. Time will reveal if real assets are vulnerable to social media bias too.
Advice for Buyers
In Metro Toronto buyers of homes have very little negotiating power but supply of homes and buyer negotiating power is rising and 2018 had better supply than the prior four years. So long as you aren’t taking on an uncomfortable amount of debt and this is your “forever home”, 2019 will be a good time to buy but 2020 may be even better.
At the end of the day, a home is a place to live more than it is an investment. If you feel you need a home to have the lifestyle you’ve always wanted, then now is the best time since 2008 to be a buyer. Just be sure to drive a hard bargain and keep in mind that prices may drop after you buy your home. It’s impossible for everyone to perfectly time the peaks and troughs of the market.
We recommend also you also read this article on the current risks present in the real estate market.
Advice for Sellers
Real estate holds more uncertainty for sellers. Current forecasts would indicate that the longer you wait the less you’ll get for your home. In the early 1990s, Toronto saw a dramatic real estate correction and it took almost 20 years for prices to match their previous peak. It seems unlikely that that would happen again; however, there are some respected economists that have been warning of risk in the market for some time and Royal Bank recently reported that affordability hasn’t been this bad since 1990. If you don’t like risk and you know you need to sell in the next 5 years, it may be prudent to list earlier than later.
For the latest market information for Metro Toronto bookmark our Metro Toronto Real Estate Insights page.
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