Why Is Toronto Real Estate So Expensive?
The Toronto real estate market has become one of the most exciting markets to watch, if you’re into that sort of thing. Although Toronto real estate saw a sharp spike in 2016/2017 which had buyers shouting “foul” because they were getting priced out of the market, Toronto continues to keep rebounding and not really seeing the bubble burst.
While 2018 saw dips and a slowdown in purchases in the early months, spring saw a return to the natural rhythm of the real estate market and now Toronto is being called one of the most overvalued cities in the world. So why is Toronto real estate so expensive? There are many things contributing to the city’s high housing prices.
2017: A Review
Unless you were living under a rock back in 2017, even those not interested in the real estate market would have heard that the real estate market at that time was beyond crazy. In fact, in April 2017 a Financial Post article reported that the average sale price skyrocketed with a record increase of 33 per cent from the previous year, and the average cost for a detached home reaching a startling $1.6 million in downtown’s most desirable neighbourhoods.
Those prices weren’t limited to the downtown core but reached the surrounding suburbs as well, where they too increase by a third across all categories. Despite these prices, demand continued to rise and the number of listings declined. So, across the entire GTA prices rose from an average of $688,011 a year earlier to $916,567. At the time, the increases were attributed to a lack of land for development, but in reality that wasn’t the case. Now, as we enter 2020 we are still seeing high prices, with the average GTA home priced at $839,363, as reported by the Toronto Regional Real Estate Board (TRREB) in January.
2020 Price Drivers
Today as we head into the final month of the first quarter of 2020, Jason Mercer, TRREB’s Director of Market Analysis and Service Channels has some insights to share. “A key difference in the price growth story in January 2020 compared to January 2019 was in the low-rise market segments, particularly with regard to detached houses,” he says. “A year seems to have made a big difference. It is clear that many buyers who were on the sidelines due to the OSFI mortgage stress test are moving back into the market, driving very strong year-over-year sales growth in the detached segment.” He also says that Toronto’s constrained housing supply is a major factor that will continue to prompt rising prices.
“We started 2020 where 2019 left off, with very strong growth in the number of sales up against a continued dip in the number of new and available listings,” explains TRREB President Michael Collins. “Tighter market conditions compared to a year ago resulted in much stronger growth in average selling prices.”
As well, Collins says there are three things underpinning competition between buyers:
- Steady population growth
- Low unemployment
- Low borrowing costs
This is contributing to the price increase.
Low Interest Rates
Low interest rates are a good thing for consumers, but what about the real estate market? A recent Financial Post article notes that Bank of Canada governor Stephen Poloz said it might consider another interest rate cut due to a weakening Canadian economy. However, this could open the market up to even more buyers which will allow Toronto prices to continue to rise. Why? More buyers means less inventory. So, to answer the question “are lower rates good to the real estate market?” the answer is no, if you are a buyer.
The big five banks have already lowered mortgage rates which will start to entice more buyers. But this is not good. “The last thing the market needs right now is any policy move that would tighten things up even more — be it by restricting supply, or more importantly, by stimulating demand,” reports RBC senior economist Robert Hogue.
Low Inventory Contributors
There are a number of things that are contributing to a lower inventory on Toronto real estate right now. First, as mentioned population growth is bringing new buyers into the GTA. Second, a low unemployment rate is bringing more buyers to the table because incomes are improving for many households. Third, low interest rates make mortgage payments less-imposing for many potential buyers. One other factor causing a rift, is a reboot of the natural life patterns that has changed home-ownership habits.
One of the biggest contributors to real estate inventory has always been the changing housing needs of the aging population. As parents and grandparents sold their homes to downsize in retirement or passed away, their homes were added to the inventory. However, today’s baby boomers and their parents live longer. Longer life means a longer stay in their homes.
But there’s more to it than that. Another growing trend is the choice to “age in place.” This term was coined to describe the decision for those in their late 40s and early 50s to look at how they can adapt their homes for a number of eventualities including:
- Making room for their aging parents by investing in in-law suites in their homes
- Adapting their homes to meet the changing needs of potential mobility and health issues
These decisions are keeping older people in their homes, and younger people out of the housing market as there are fewer homes available.
Real Estate Investors
More people are deciding to invest in real estate as they try to benefit from a shortage of rental properties in the city. Condos are being bought up to provide rental homes for GTA tenants desperate to find a home.
According to Statistics Canada, 37.9 per cent of Toronto condos are not owner-occupied. More people are viewing condos as an investment property which is a problem according to Andy Yan, the director of the City Program at Simon Fraser University in Vancouver. This is because the purpose of condos has changed. As well, Toronto has failed to create purpose-built rental housing over several decades which has led to a shortage of rental inventory.
The lack of purpose-built rentals has forced Torontonians to seek secondary housing market rentals, hence the boost in condo purchases by new investors. This in hand with limited inventory, to begin with, will continue to inflate condo prices. Further proof this is the case, a report showed condo rents rose by 30 per cent between 2006 and 2018.
A Few More Issues for GTA Real Estate
Other potential contributors to price growth in GTA area housing markets include:
- Money laundering from foreign and domestic buyers
- More businesses being attracted to Toronto’s thriving economy and talent pool
- Control of inventory by housing developers limiting the number of new homes and types of homes available
- A focus on building more small bachelor and one-bedroom units over family-sized condos
So, there you have it. Toronto housing price growth will continue as long as:
- Interest rates remain low
- More businesses move to the city to provide more jobs
- More boomers and zoomers age in place
- More amateur investors continue to buy up condos AND (drum roll please…)
- All of these factors combine to keep inventory numbers low, low, low
“Some of Canada’s housing markets are facing serious challenges,” says Christopher Alexander, Executive Vice President and Regional Director, RE/MAX of Ontario-Atlantic Canada. “We won’t see significant change unless inventory levels are addressed in hot markets like Toronto, and in many of Canada’s urban centres. We need to continue to push for housing affordability, as well as an increase in housing supply for buyers and renters, but we have yet to see a comprehensive national housing strategy to help facilitate this shift.”
If you would like more information on Toronto real estate, reach out to a RE/MAX agent today.
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