Metro Toronto Home Price Forecast - Oct 2020
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
Metro Toronto prices have accelerated significantly in the past few months, which has pushed more potential home buyers out of the market.
People planning to sell their home will take heart because home values are near all-time highs. Given the current recession and pandemic, sellers may want to push ahead and sell during the pandemic because there is no guarantee that home prices will regain the recent highs any time soon.
The Coronavirus Pandemic, the resulting recession, and the potential for a second or third wave of infection are now the primary source of uncertainty for home values.
GTA Detached House Prices
House price growth in Metro Toronto has accelerated through 2020. The “soft landing” that government policymakers were targeting has not materialized, nor have promises of a ‘market crash.’
We believe politicians are hoping to guide the market toward a typical annual real estate cycle with price growth in the range of 1 to 3% annually – in line with income growth.
An examination of the five factors driving home prices (see the section below) makes us believe it is unlikely that record house prices will be sustained through the next 12 months.
House price growth in Toronto has been very high. Overall, according to the CMHC, there is a moderate risk of a price correction in Toronto.
Metro Toronto Condo Apartment Prices
Metro Toronto apartment prices have been falling recently. They appear to be falling out of favour as people seek larger living spaces where they can work-from-home.
We expect developers will shift toward larger (i.e., 2 and 3 bedrooms) apartments to meet buyer preferences. As the supply of more generous floorplans comes to the market, it may depress the values for small floorplan condos.
At Mortgage Sandbox, we would like to see developers building more 4 and 5 bedroom condos because:
Not everyone can afford to buy a house for their family.
Many parents who work-from-home and have taken on child-minding find it challenging to stay on top of necessary house upkeep (i.e., mowing lawns, clearing eaves, shovelling sidewalks).
Many people prefer to live in higher-density neighbourhoods with all the essential amenities within walking distance.
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 not possible.
What about the rest of Canada?
Read the Ottawa Forecast, Montreal Forecast, Hamilton Forecast, and the Vancouver Forecast.
2021 Metro Toronto House Price Forecast
Looking forward, some forecasters expect prices to continue rising while others expect prices to drop.
For example, Central 1, the economists for the credit unions, predicts Toronto prices will rise 7% in 2021.
The highest forecast in a September Reuters poll of 16 economists was price growth of 16% in 2021, while the lowest prediction called for an 11% drop.
Moody’s Analytics, who develop mortgage risk software for Canadian banks, predicts a 7% drop in Toronto. CMCH, the government housing agency, predicts a ‘peak-to-trough’ drop of between 6% and 19%.
There is no consensus among economists. Market sentiment and government stimulus have led to price acceleration and record home purchases even though most economic fundamentals have faltered.
Our advice to homebuyers embarking on the most expensive purchase of their lifetime, and sellers who want to get as much equity as possible out of their homes, is to place a little more weight on CMHC and Moody’s Analytics. They may be projecting lower values in the future, but:
CMHC sells insurance to banks that limits their losses if a mortgage goes bad.
Moody’s Analytics sells software to banks that helps them assess the risk of their mortgage portfolios.
Both organizations are unique to see market conditions across the regions and all the banks.
In the next section, we examine the five factors that drive these forecasts. They will help explain why some several forecasters are anticipating price drops.
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 many real estate risks can impact prices. Risks are events that may or may not happen. As a result, we review various 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:
2. What factors drive the price forecast?
Mortgage Sandbox 5 Forces 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 core demand, non-core demand, government policy, supply, and popular sentiment.
In the long-run, the market is fundamentally driven by economic forces, but sentiment can drive prices beyond economically sustainable levels in the short-run.
Core Demand
Core demand is a function of:
Population Growth: The pace at which people are moving to an area. An average of roughly 2.5 people live in one household.
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).
Population Growth
Ontario’s population is almost always growing, but the rate of growth is important for our analysis.
If population growth is the same or lower than in the past, then there is less upward pressure on prices.
At the moment, population growth is lower in Ontario. As a result of ongoing COVID-19 related travel restrictions, we may observe lower growth through to the end of 2020 and into 2021.
READ: Fewer People = Less Demand : Easing Population Growth to Weigh on Housing, TD Bank
Home Price Changes
House prices are near records across Metro Toronto. Prices growth reduces affordability and reduces the pool of qualified potential buyers. In an ironic twist, this means rising prices create downward pressure on prices.
As a rule-of-thumb, homeownership costs are considered unaffordable when they exceed 40% of household income.
In March 2020, Toronto homeownership costs were 68% of the median household income. In other words, Toronto's home prices had exceeded economic fundamentals in a low interest rate environment before the Coronavirus impact.
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.
The stock market has dropped because of the pandemic, so anyone who managed to save a down payment and invested it in ‘blue-chip stocks’ may now find out they’ll need to save for a few more months, or years.
Existing homeowners benefited from price appreciation, so they had more home equity, which they could use to buy a bigger home.
Financing
Mortgage Interest Rates
The Bank of Canada has reduced rates dramatically, but mortgage qualifying interest rates have not fallen nearly as much. Also, lenders have tightened their rules so that the lower rates result in interest savings, but rates haven’t resulted in a large lift in home-buying budgets.
Employment and Incomes
Median GTA incomes have not changed materially, but employment levels are dropping. Job losses from Coronavirus containment efforts are a more powerful force than low mortgage rates. Without income, you can not qualify for a mortgage.
Brendan LaCerda, a Senior Economist with Moody’s Analytics, estimates that each 1% rise in unemployment results in a 4% drop in home prices. Until now, the impact of unemployment has been delayed by the CERB and mortgage payment deferral program.
Using this ratio, a prolonged 2.5% rise in Ontario unemployment to 7.5% would result in a 10% price drop, and a 5% rise in Ontario unemployment to 10% would lead to a 20% fall in values.
The ‘official’ unemployment figures do not include unemployed people who are not looking for work (e.g., people who work in industries that have not fully reopened like tourism or hospitality). The true ‘effective’ levels of unemployment are higher.
Even after people get re-hired, they will need to be on the job for three months before they qualify for a mortgage pre-approval. Small businesses and commission salesforce have to show 2 years of consistent income to be eligible for a mortgage. Unless banks change their lending policies, 2020 will drag down their mortgage qualifying income until mid-2023 (when they file their 2022 taxes).
Homeownership Costs
City revenues have been hit hard by the pandemic, and while the provincial and federal governments may provide support, homeowners will likely be expected to help as well. Residents should expect property taxes increases or reduced services to make up for the pandemic revenue shortfalls. If cities put off infrastructure and capital spending, then the deferred costs will eventually result in higher taxes.
Property taxes are factored into your mortgage affordability calculations, so an increase in taxes lowers home-buying budgets.
Overall Core Demand
Despite lower interest rates, due to the Coronavirus' impacts, short-term core demand for homes will likely be much lower as we head into 2021.
Non-Core Demand
This represents 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.
Since non-core demand is ‘optional’ (i.e., not used to shelter your own family), it is more volatile than core demand.
Foreign Capital
Ontario implemented a 15% foreign buyer tax to reduce the distorting effect of Foreign Capital flows on local real estate.
With the international travel restrictions that are part of Coronavirus containment efforts, we can expect 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 home price driver.
The Ontario government suspended the enforcement of evictions earlier in the year, but some advocates now fear that there will be mass evictions and homelessness. How will tenants repay three to six months of rent arrears?
On the other side of the coin, if there are mass evictions, will landlords now struggle to find new qualified tenants?
As well, recent reports of rents falling across Canada will discourage new rental investment until rental rates stabilize.
Rental investors will try to time any future property purchases for the end of the Coronavirus containment period. They will avoid properties with tenants who have outstanding rent arrears.
Short-term Rentals
We are watching short-term rentals closely because even though the Ontario government began allowing short-term rentals to reopen on June 5th, international travel bans will effectively shut down many short-term rentals.
Statistics show that since the travel restrictions were put in place, international travel to Canada has dropped 98 percent.
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 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 the bottom, and the flippers emerge to pick up some bargains.
Dark Money
Dark money is the proceeds of crime or money that are 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 subject to international sanctions (e.g., Iran, Russia, and North Korea).
To hide the illegal nature of the funds, it is laundered in the real estate market. Sometimes, the property's true owner is hidden by using 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 Non-core Demand
The net effect of all the recent changes will reduce inflows of capital toward residential real estate for non-core uses, putting downward pressure on Metro Toronto home prices.
Government Policy
Governments have shielded Canadians and the housing market from the impacts of the pandemic induced recession using the CERB program, mortgage payment deferrals, and suspending tenant evictions. Most of these measures have now expired.
Mortgage and Housing Agency Tightens Mortgage Rules
Effective July 1st, CMHC has made changes to their mortgage rules that disqualify roughly 10 percent of potential homebuyers with Fair-Poor credit. The remaining buyers who qualify for a mortgage will qualify for 10 to 8 percent less money.
The purpose of the change is to protect taxpayers from having to cover the costs of bad loans.
These changes effectively offset any benefit that lower qualifying mortgage rates provide.
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.
IMPORTANT: Statistics in August, show that 12 percent of GTA mortgage were unable to make their regular mortgage payments. Mortgage deferrals expire after 6 months and that means by October many of these deferrals will have expired. Unless these borrowers have found new jobs, they will fall into default.
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 offered 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 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 will work with municipalities to reduce red tape and plans to sell up to 243 underutilized properties for redevelopment into housing, but 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.
With the pandemic, it appears that the government has lost focus on this initiative.
Overall Government Influence
Overall, the government is now unwinding many of the programs supporting home values through the recession. Compared to three months ago, there is now much less support from the government to maintain home values.
If prices continue to rise aggressively or suddenly drop dramatically, we should expect policy interventions to moderate the market. Unfortunately, our inability to predict government actions adds uncertainty to future home valuations.
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, move for work, or some other reason. The local Realtor’s Association only reports existing home sales.
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
There is half as much house supply today as there was in September 2019, and condo supply has doubled since 2019. This makes condo buying conditions significantly more favourable for buyers.
There are a record number of condo apartments for sale, and active listings are trending higher at an alarming rate. A flood of listings could cause an acceleration of price declines.
Coronavirus short-term rentals sold or converted (medium-term impact)
Except for cottage country, international travel bans will effectively shut down many short-term rentals for the next few months (Canada’s tourist high season). The drop in bookings may force many owners of downtown apartments primarily used as short-term rentals to sell their condo or repurpose it for long-term rentals adding a significant number of 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
Data indicates that more Canadians are missing their monthly payments, and 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 survey by MNP reported a staggering number of Canadians are stretched to their limits:
“Over 30 percent 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.”
Although the CMHC can help Canadians via Canadian lenders by refinancing mortgages, it will not help overextended 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.
Nationally, 86% of Boomers want to live in their home forever, but only 25% are on track with their retirement savings. If their home is their greatest asset, many will need to unlock the cash from their homes to make ends meet.
An RBC survey 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, compressing prices for townhomes and condo apartments.
In the near-term, supply is tight, but there are risks of excess housing supply in the medium-term.
Pre-sales and Completions
New Construction
There is a record number of homes under construction in Toronto, most of them are condos, 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 market's pressure.
Pre-sales
Metro Toronto pre-sales are purchases of brand-new homes from developers. Typically, a developer must sell 70% of homes in a building before they can starts construction, so housing starts are a good indicator of successful pre-sales.
Pre-sales were breaking records at the beginning of 2020, they trended down as showrooms closed during the lockdown, and now they are back on track.
Popular Sentiment
There's no way of predicting popular sentiment, but sentiment can shift quickly, as witnessed in the past two years.
Canadian Consumer Confidence
The Ipsos-Reid and Nanos Canadian Confidence Index has shown a noticeable drop in confidence. “Consumer confidence among Canadians has improved significantly, buoyed by positive views on real estate. Confidence has recovered remarkably well when compared to the 2008 Great Recession. It would appear that sentiment is the primary driver of real estate market activity because the other four drivers are materially weaker.
Coronavirus Containment
If Ontario cannot contain the second wave, we expect localized restrictions and lockdowns that will depress sentiment.
In a nationally broadcast address, Prime Minister Trudeau has clearly stated that the second wave of Covid-19 is already happening across Canada. Chief Public Health Officer Dr. Theresa Tam has said that "Unless public health and individual protective measures are strengthened, and we work together to slow the spread of the virus, the situation is on track for a big resurgence in a number of provinces."
A study headed by Dr. Kristine A. Moore, medical director at the University of Minnesota Center for Infectious Disease Research and Policy, warns that the pandemic will not be over soon and that people need to prepare for possible periodic resurgences of disease. Optimistically, a vaccine will not be widely available until mid-2021, and 70% of the population would need to be infected to provide herd immunity. Unfortunately, more than 30% of the population have conditions that make them vulnerable.
3. Should Investors Sell?
From a seller’s perspective, more market changes influence prices downward, so now may be a better time to sell than in two years, and the annual 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.
Planning to Sell? Check our our Complete Home Seller’s Guide.
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. Prices will likely be lower in 2021. Keep in mind that the annual 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, 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.
Planning to Buy? Check our our Complete Home Buyer’s Guide so we can walk you through the end-to-end process and get you ready to buy your new home!
