Will real estate prices drop in Ontario?

by Corben Grant on 10 Nov 2021

The last year has been unpredictable in many ways and that's never good for investments. After years of a real estate frenzy in Ontario, many are worrying that the high house prices can't hold and a housing crash is on the horizon.

Housing prices continue a years-long trend upwards

Besides the usual peaks and dips that real estate markets are subject to, the prices of homes in Ontario have been on an upwards trend for over ten years now. In the last two years, the rate of price increases has shot up even more drastically.

According to the Ontario Real Estate Association (OREA), year-over-year prices in Ontario are up almost 20% in 2021. 2020 saw similarly large increases in prices. The average sale price of a residential home in Ontario in September of 2021 was nearly $890,000. In the Greater Toronto Area specifically, the average is even higher at around $1,155,000.

Why are housing prices so high?

There are many interacting factors that work together to influence the average price of homes in Ontario. The most commonly cited cause for the current price trends comes down to lack of supply and consistently high demand.

High Demand

The demand for houses in Ontario is huge. As Canada's most populated province and the location of many of Canada's largest cities, Ontario has no shortage of interested home buyers. And, every year more Ontarians are coming of age and looking to buy. Young families of millennials now make up the largest percentage of first-time homebuyers by a large margin. In addition, Ontario is the country's most popular destination for immigrants, fueling population growth with over 100,000 newcomers every year, many of whom are going to be looking to buy real estate as well.

Low Supply

What Ontario does have a shortage of is homes. The supply of homes in the province has not been able to keep up with the massive demands, leading to an increase in prices as the seller's market drives competition among buyers.

The pandemic hasn't helped

Most recently, price increases have been driven by pandemic conditions. One effect of the pandemic was an increase in demand for people looking to upsize or relocate. We have also been seeing historically low interest and mortgage rates, which can contribute to rising prices as expensive mortgages become more affordable.

Finally, strains on the labour force and the supply chain have made new home development harder and more expensive while demand rose. Even with record-high housing starts in the past year, the strong demand for homes is simply far too high for a new supply to cut prices.

What can we expect in the future of the housing market?

There are some mixed feelings when it comes to the future of the housing market. For those who already own real estate, especially those who bought at recent highs, the preferable outcome is a continued increase in home values. New homebuyers on the other hand are hoping for a reduction in price and more affordable property.

Ultimately, no one can predict the course of the future. Just look at the forecasts from Canadian housing markets from the end of 2019 and the beginning of 2020 if you need any proof that surprises can alter the way we think things should go. The Canadian Real Estate Association quarterly reports sum up well in saying that the “Canadian housing market remains historically imbalanced, which could have unprecedented implications for, and presents unprecedented risks in forecasting, both the number of sales and the price of those sales."

That being said, there are some very knowledgeable institutions that have some ideas on where we can expect things to go, barring any major shakeups.

So far Canada's housing market has avoided catastrophe

In the first two quarters of 2021, the Canadian housing market peaked to record highs. It became clear that things could not keep going at that pace. At that point, analysts began touting their headline-worthy worst-case scenarios of home prices plunging by up to 30%. Even at the time, they admitted this was unlikely and time has proven that correct.

Market slowing, but still hot

Instead, the big trend that is being witnessed in markets right now is what most describe as a levelling off. The last two years have been completely unprecedented and luckily it seems we are coming to the end of this unpredictable period. The Canada Mortgage and Housing Corporation (CMHC) says that the Canadian market is currently "levelling off at a cruising altitude somewhere in between pre- and peak-pandemic levels" though monthly inventory remains low.

With inventory remaining low, the seller's market conditions do not seem to be disappearing any time soon. Prices, however, are beginning to settle into a slower and more gradual increase, rather than a rapid expansion.

The CMHC also cites factors that should continue to push demand in the coming years. One important example is the reopening of the society as the pandemic gradually ends and with it the reinvigoration of the Canadian economy. Another factor that we can expect as the pandemic closes out is the return of large amounts of immigrants to Ontario, meaning further increases in population and housing demand.

On the supply side of things, there doesn't seem to be much improved. Available months of inventory have been trending downwards and were at just one month at the end of September. The long-run average for months of inventory in this time of year is 3.1.

As we get further from the depths of the pandemic, it may become easier for new homes to be built. The high price of materials means these homes still will not be significantly cheaper than the resale market until the supply of building materials levels out. Already lumber prices have come down from the peak of their high prices, but other materials are still experiencing supply issues.

Ultimately, the CMHC predicts prices in Canada to continue to rise about 5% in 2022.

RBC economics points to a market that "still has more in the tank" when it comes to growth. The fuel in the tank, according to RBC, is pent up by demand from lack of supply, even with prices continuing upwards. As long as there are enough people willing to pay the high prices, values won't go down very quickly. Revising an earlier prediction, they now call for home prices to flatten no sooner than late 2022.

One potential shakeup will be the increase in interest rates. Canadians have been enjoying record low-interest rates during the pandemic, but are now predicted to rise through next year. Higher mortgage rates will drive some buyers away and could draw down demand. However, the actual impacts of increased rates are hard to predict. Remember, prices were on their way up even before the pandemic era interest rates.

Despite signs that the real estate market should remain strong for now, that doesn't mean that it is entirely healthy. The CMHC also reports in their Housing Market Assessment that markets across Ontario were vulnerable to instability. Market's surveyed include Hamilton, Toronto, and Ottawa, all of which received a rating of high vulnerability. So, though forecasts are looking good, unexpected circumstances could cause a downturn much more easily than with more balanced conditions.

In a similar vein, Toronto was recently named as one of the largest potential housing bubbles in the world. Again, while this means that the market is at risk for a turnaround, it does not guarantee its inevitability. It’s worth remembering that the so-called "housing bubble" has been a topic in Canada for almost a decade now, and yet, no catastrophe has hit.

Price changes aren't everything

It’s also worth remembering that average prices are not the only indicator of changing conditions. Also, provincial averages do not always reflect actual property values, especially as differences between municipalities can be stark.

Other factors worth keeping an eye on are the number of sales, and the related statistics of number of new and active listings. These can indicate the level of demand and how tight the market is. If home sales go down or active listings go up, it could mean a lightening load on the market.

Another good indicator is the available months of supply. This figure is a measure of how long it would take for all available housing stock to be sold at the current monthly sales volume. Commonly, anything below four months is considered a seller's market. The less inventory available, the more competition and demand there will be. The more inventory, the more competitive seller's will have to be to get their homes sold.

The final outlook

Overall, real estate prices in Ontario seem to be safe from a major downturn anytime soon. While the state of things is certainly far from ideal, Ontario is also the largest market in Canadian real estate and has immense momentum behind it. For now it seems the most likely scenario is a continued gradual increase in prices for the next few years.

If you are already invested in real estate, you can sleep a little easier at night knowing a crash is unlikely. If you are holding out on a crash for an opportunity to get into real estate, you may be waiting for a while longer yet.



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