By Tracy Hanes
While the demand-versus-affordability battle plays out in the GTA, other areas of Ontario are prospering
Here’s the good news for the province’s housing market as we head into 2019: The recovery that started slowly in 2018 will continue, at least for the first half of the year. But expect an easing in the market later in 2019 and into 2020.
We asked a trio of experts—the Royal Bank of Canada’s Senior Economist for Economics Research Robert Hogue, BMO Chief Economist and Managing Director of Economic Research Douglas Porter and CMHC’s Ontario Regional Economist Ted Tsiakopoulos—for their thoughts on what to expect in the year ahead.
“I expect activity in Ontario to be pretty flat overall,” says Hogue. “There will be very small increases, due in a large part to the affordability issue. When we look at demographics and fundamentals, there is strong demand going forward, but in large centres, the prospect of further interest rate increases makes affordability even harder and will cause quite a bit of headwind. At the end of the day, we might see a little increase overall, but it will stay fairly flat.”
Porter’s take is this: “We are seeing a real weakness in most of western Canadian, but the market is still firm in Ontario, and Toronto is a very special market from the rest of the province. Outside of the GTA, the rest of Ontario is seeing the most impressive strength in the country. The GTA suffered a big hit through the second half of 2017, but it stabilized and has come back a bit. I expect to see modest gains in Ontario (in 2019) in terms of sales and prices.”
The “very mild recovery” seen in the second half of 2018 will continue into the spring of 2019, says Tsiakopoulos, because the labour market is robust and the province is experiencing strong immigration. According to CMHC’s Fall 2018 Housing Market Outlook/Ontario Region Highlights, the condominium and rental construction will remain elevated before slowing in 2020. Existing home sales and prices will grow moderately. Buyers should enjoy more choice by 2020, while owners and investors will have to adjust their price and return expectations.
Porter expects 2018 final housing starts in Ontario to be around 75,000 (down from 80,000 in 2017), with 70,000 in 2019. Canada-wide, CMHC predicts housing starts for single and multi-unit starts will fall to between 193,700 and 204,500 in 2019, while sales are anticipated to be between 478,400 and 497,400 units. Prices are anticipated to average between $501,400 and $521,600.
Housing prognosticating, though, might be as challenging as long-term weather forecasting in the coming year. “You have two currents going against each other,” Hogue explains. “There are rising interest rates, but there is a pretty strong economy and an unemployment rate of just 5 to 5.5%.”
Hogue points out that the positive economic story isn’t limited to the Toronto area—85% of regions in Ontario have unemployment rates below 6%. And in areas that didn’t have the GTA real estate rollercoaster ride, the strong economy bodes well for the housing market.
However, CMHC sees global trade as a risk to the Canadian economy and the housing market, despite the recent trade agreement reached between Canada, the U.S. and Mexico.
Interest rate hikes pose another threat, observes Porter in the wake of an October 2018 increase from the Bank of Canada rate to 1.75%. “There are interest rate increases ahead and our best estimate is the Bank of Canada will increase its rate three times next year to take their rate up to 2.5%,” he notes. “That filters through to mortgage rates and will act as a bit of a limiter.”
Hogue, however, doesn’t expect this year’s interest rate hikes (he predicts two) to make much difference. “The increase we’ve seen in 2018 has been 125 basis points (1.25%). That’s not significant, and it takes a while to filter through to consumers and borrowers.”
The Office of the Superintendent of Financial Institutions stress test that came into effect January 1, 2018, pushed buyers to the side, but didn’t disqualify them, Hogue says. “It reduced their budget and created an interesting dynamic. There are still buyers out there, but a lot more people are going to a lower price point and are turning to the condo segment. This will lead to a change in expectations in buyers. For most, their ideal property is single detached, but the reality is that prices are out of their reach and if they still want to buy, condos are much more realistic.”
Immigration also continues to be a big story. International migration into Canada continues at unprecedented levels. The country’s population grew by 168,687 in 2018’s second quarter; 82% of which was due to international migration, according to Statistics Canada. Most immigrants choose to settle in Ontario. In-migration from other provinces is another factor: In the second quarter of 2018, Ontario had a net inflow of 3,274 people from other provinces and territories. And all those people need places to live.
“I do think rates will go a bit higher and I would not expect prices to recede in a meaningful way,” says Porter. “It’s almost a by-product of strong population growth. There is relentless pressure on demand and it’s going to make things less affordable for everyone. It’s very difficult for supply to respond to this demand.”
THE AFFORDABILITY ISSUE
There is no question that affordability will continue to be an issue, particularly in the Greater Toronto Area, the experts predict. Vancouver is a leading indicator for Toronto—but not a carbon copy, advises Porter—and how people are dealing with affordability there, such as doubling up in housing or renting out basement apartments in their homes—may become more commonplace in the GTA.
“We do have close to record homeownership levels and I think that might start to drift down now, given the affordability pressure,” Porter says. With many, especially first-time buyers, priced out of the detached market, there will continue to be demand for condos, Porter echoes. Congestion is also an increasing issue and many may purchase condos to escape having to deal with traffic.
“There is no questions the 416 condo market, in terms of prices and balances between sales and listings is expected to remain relatively firm,” says Porter. “What’s happening is the polar opposite of what analysts were saying five to 10 years ago. They said there would be a shortage of single detached homes and an over-supply of condos and the price gains would be in the single detached market. Now, we’re seeing the opposite.”
HOT MARKETS IN ONTARIO
If there’s one area our experts are universally enthusiastic about, it’s eastern Ontario. “Ottawa has had strong price growth—not in terms of prices shooting through the roof, but it’s very robust,” says Hogue. “The Fair Housing Plan targeted the GTA and wasn’t a big deal in Ottawa. The market has good momentum there and it’s gone from having a lot of inventory to a very tight market. Prices have accelerated by about 7% to 8% (annually). It would say it’s fairly hot, but not overheating.”
“I’m bullish on eastern Ontario, including Ottawa and Kingston, where a lot of the strength has been,” says Tsiakopoulos. “Ottawa is more affordable than the average market in Ontario and didn’t have the same price run-up and is a more stable market. There’s probably more value in that market and it is not as vulnerable when rates move up.”
He says there is a lot of government spending occurring in Ottawa and its Information Technology (IT) sector is booming. Given that it’s business investment, including in IT, that’s driving the economy rather than consumer spending, Tsiakopoulos says the Kitchener-Waterloo area is also poised for more activity.
Porter agrees that the nation’s capital will continue to thrive: “It’s tough to poke holes in its story.” He also cites communities along the 401 corridor from Windsor to Kitchener and from Belleville to Kingston as enjoying healthy real estate markets, thanks to the manufacturing sector improving, tourism dollars and early retirees looking to move out of Toronto.
“These people are basically looking 100 kilometres away and seeing prices at half or less than Toronto and cashing in their chips if it makes sense,” says Porter. “They are drifting outside the GTA, and cities like London and Peterborough are benefitting.”
This drift will continue, Hogue predicts. “Look at the vibrancy of the market in Hamilton and in many other centres in southern Ontario. The hot Toronto market did push away younger buyers who were unable to get a toehold in Toronto. And there are people who did well in the Toronto market and are moving to other markets in southern Ontario.”
However, he says this is not a huge trend yet. “People still love property in the GTA.”
THE QUIET NORTH
In the Greater Sudbury CMA (Census Metropolitan Area), due to a comparatively affordable resale market, soft economic fundamentals and rising interest rates, starts of new single-detached homes will be subdued through to 2020, according to CMHC. Semi-detached and townhome units, while more affordable and with appeal to a certain buyer segment, are not readily available in the resale market. However, due to limited availability of land zoned for these types of housing, there will be fewer units built in the coming years.
Greater Sudbury had the highest apartment vacancy rate of all Ontario CMAs in 2016 and 2017, which does not encourage construction of new rental apartments. Builders are shifting away from new-home construction to the renovation market, according to CMHC. The reno trend is due to limited options available to downsizers and a desire to age in place. Greater Sudbury has the lowest residential condominium ownership rate among Ontario CMAs.
In the Thunder Bay CMA, CMHC expects single-detached home starts to trend lower over the next two years. Demand will be constrained by moderating employment growth and a balanced existing home market, not to mention increasing construction and borrowing costs. Multi-unit starts, however, are expected to increase in 2019 due to more purpose-built rental apartments projects. Market data indicate this demand is supported by in-migration to the Thunder Bay Area, mainly by international students and members of surrounding First Nations’ communities. Seniors 65 years and older are also supporting the new rental market. That said, total housing starts are expected to fall below their 10-year average between 2018 and 2020.
WHERE ARE THE BUILDING OPPORTUNITIES?
Tsiakopoulos says as the number trends lower for first-time buyers, who are sensitive to rising interest rates, there will be a good repeat buyer market of 35- to 44-year-olds. “That’s where the opportunity is, whether you’re a realtor, builder or renovator,” he says. “This is your millennial generation who bought over the last five to 10 years and have some equity and are now moving. They are moving into their higher fertility years and need more space. There is stronger growth in households with kids over the next five to 10 years.”
Tsiakopoulos says that might translate into condo buildings with larger units, more mid-density or row housing. “We need to think about space a bit more. We are also seeing signs that aging households are staying put and kids are moving in with them,” he says. “With a multi-family situation, there is demand for more space. There is also a lot more immigration and immigrants have larger families than the average Canadian-born household.” More people are opting to stay in their homes and adapt them for their needs, rather than sell and move on, Tsiakopoulos says. Although 2018’s renovation forecast was down 7% from 2017 spending ($31.6 billion in Ontario), it’s still strong. And a May 2018 CIBC poll found that most (71%) of Canadian homeowners aged 55 and older preferred to renovate their current home rather than move.
THE RISE OF RENTAL PROPERTY
Rental units tend to be in hot demand, both for first-time buyers priced out of the market and members of the aging population who want to downsize but not own another house. Despite that demand, Porter says the “pretty tough rent controls” contained in the 2017 Fair Housing Plan is a detriment to construction of new purpose-built rental buildings. The GTA rental market is being largely supplied by investor-owned condo units.
However, Tsiakopoulos says that while there were 3,000 to 5,000 purpose-built starts a year prior to 2015, there are now 6,000 to 8,000 units being created annually. But rents are high ($3 to $4 per square foot) in new units and only about 18% of renter households are earning enough income to afford those kinds of rent.
“That’s one big reason the federal government has introduced a National Housing Strategy,” says Tsiakopoulos. The strategy strives to build new affordable housing and renew existing affordable stock, provide assistance and resources to the community housing sector, as well as support research and innovation.
A more balanced market lies ahead, growing around inflation, says Porter, with the days of double-digit house price growth likely behind us. “If I had to summarize, we will have relatively flat sales, small declines in home building and small price increases.”
CMHC predicts that less choice in the Ontario resale market, job growth and stronger-than-expected growth in new households formed in recent years will support housing starts into 2019. By 2020, weaker job growth, interest rate hikes and more resale choice will dampen total housing starts.
Even as the market slows, though, Porter says “it’s as close to a soft landing as you can expect.”
Originally published in Winter 2019 Ontario Home Builder.
The 2018 Forecast can be read here.