Why are the surrounding suburbs of Toronto so expensive?

The GTA suburbs have become expensive because of 2 factors that have nothing to do with the attractiveness or commute time of the specific suburb.

1. Deficit of Family Sized Homes

According to the City of Toronto, GTA housing stock contains a higher proportion of one and two bedroom units than three and four bedroom units but millennials are building families and need space. At the last census 48% of GTA households had 3 or more people:

• 12% had 3 persons

• 18% has 4 persons

• 17% had 5 or more persons!

If the GTA were building 3, 4 and 5 bedroom condos there would be less demand for houses in the burbs. Even most new homes in the burbs are the result of tearing down an old home (no net new supply).

2. Low Mortgage Rates

Low mortgage rates allow people to qualify for bigger mortgages and therefore have a bigger home buying budget given a fixed down payment. However, EVERYONE has a bigger budget because low rates don't discriminate. No individual buyer gains an advantage from this extra debt capacity.

Overview

More people want family-sized homes than there are homes available so everyone uses their maximum budget. The maximum budget keeps rising because rates keep dropping lower. So prices of family-sized homes everywhere in the GTA keep rising.

Why prices may plateau or drop

Three factors could cause prices to plateau or drop.

Rates are at Rock Bottom

Mortgage rate may not be able to go much lower. At it's September 2020 announcement, The Bank of Canada confirmed that rates are at their 'lower bound' so that might mean home prices are at their 'upper bound.' This assumes incomes and savings remain the same.

Incomes/Employment May Drop

Incomes, employment, and savings may drop because of the Coronavirus Recession. This may pull down prices if it removes enough prospective buyers from the market.

New Supply May Close the Housing Deficit

Developers haven't been able to keep up with demand because of high immigration, but 2020 and 2021 will likely have low immigration and this may allow supply to catch-up to the current population requirements (currently there is a housing stock deficit). If we close the deficit or maybe build a slight surplus in the next 18 months it would allow buyers to negotiate rather than spending their full maximum budget.

Ongoing Uncertainty

All forecasters are pointing out the high levels of uncertainty in the market.

What if the Bank of Canada lowers it 'lower-bound.' What if the pandemic is resolved in 3 months because of a revolutionary medical breakthrough? What if 79,000 homes currently under construction in the GTA are insufficient to close the housing stock deficit.

A more detailed analysis is available at Mortgage Sandbox - Metro Toronto Real Estate Trends and Price Forecast.