By Nick Krewen
Ontario Housing Market is on the Rebound
In January 2018, the federal Liberal government introduced the Office of the Superintendent of Financial Institutions (OSFI) Mortgage Stress Test to cool down an overheated housing market. With household debt increasing drastically, the test required homebuyers to place a 20% down payment to cover their payments at 2% above their actual mortgage rate. Combined with former Premier Kathleen Wynne’s Fair Housing Plan that included a 15% Foreign Buyers Tax, the measures proved effective. Starts on single-detached homes, according to the Canadian Mortgage and Housing Corporation’s Housing Market Outlook/Ontario 2019, housing starts dropped an estimated 4,386 units from the year previous, while multiple housing unit starts fell by an estimated 9,656 units.
But as a new decade kicks off, there’s optimism in the air. “We’re actually forecasting somewhat of a rebound in activity, particularly for 2020 and somewhat towards 2021,” says Dana Senagama, Managing Economist of the Canadian Mortgage and Housing Corporation (CMHC).
“There are encouraging signs where we’re actually picking up in the largest centres in Ontario, particularly Toronto and Hamilton, where there’s renewed interest or buying activity in multi-unit housing, in condo apartments and in townhouses. They tend to be affordable and the demand has been very strong.”
With CMHC forecasting an expected hike of as many as 1,500 single-detached homes and 3,600 multi-units in 2020, Benjamin Tal, Deputy Chief Economist of CIBC World Markets Inc., describes the current Ontario housing market stature as a “correction and convergence.”
Because of the Mortgage Stress Test, Tal says many builders stopped construction in 2017 and 2018 and “were simply sitting on their inventories.”
Claiming that sales in the detached housing market were off by 20%-22%, he says that things have evened out due to government policies.
“Now if you look at the price of condos, row-housing and semi-detached, they’re all more or less the same—they’re all converging and in equilibrium relative to time and relative to price,” Tal says. “To me, that’s a very healthy situation.”
Douglas Porter, BMO’s Chief Economist and Managing Director, is also bullish on the Ontario market.
“If I had to summarize it, Toronto specifically, but Ontario more generally, went through a bit of a challenging period for a couple of years, but then stabilized and began to improve through 2019.
We see the momentum gradually improving further in 2020.” Porter says the main drivers leading to this conclusion include interest rates, which were initially expected to be raised by the Bank of Canada a few times in 2019 to 2.5%, but instead veered the other direction, sitting at 1.75% as of early December.
“We’ve seen long-term interest rates tumble over the past year. It looks as if they’ve bottomed out and started coming back a bit, but I think the main message is that the rates are not a headwind for the market anymore.”
CMHC’s Senagama echoes Porter’s sentiment, despite global political uncertainty and an impending U.S. election.
“Given their volatile nature, interest rates are determined by what’s going on around us and outside of Canada as well,” she explains. “We’re living in precarious times. There’s so much uncertainty with the U.S. election, Brexit—so many other geopolitical situations or issues that would necessitate for interest rates to stay low and not increase at any rapid pace. (So) we don’t anticipate rates to increase—perhaps a few basis points, maybe a quarter-point, maybe half a point, but nothing major to have a dampening impact on (new-home sales).”
The optimism shared by the trio of experts is also reflected by consumers, according to the recently published 2019 CMHC Mortgage Consumer Survey, which revealed the mindset of 1,385 first-time and repeat homebuyers across Canada. Nine out of 10 buyers were “happy” (47%) or “excited” (39%) about purchasing a home, while 87% of the those surveyed were confident in the long-term financial prospects of homeownership.
Among the factors contributing to the health of the market is unprecedented population growth.
“Very strong population flow is a Canada-wide story, but it applies even more in Ontario,” says Porter. “We’ve had some of the strongest growth rates and raw numbers that we’ve seen in decades. We’ve actually not seen these kind of increases before in Canada’s population.”
According to CMHC’s Fall 2019 Housing Market Outlook, Ontario’s population will have added 133,000 to its 2019 total in 2020, followed by another 134,000 in 2021.
Those comprising the jump in numbers will also include students. As Porter notes, “students have to live somewhere and that does help support the housing market at the very least.”
Although he predicts a conservative number of starts in 2020, he remains hopeful that builders may exceed expectations in meeting the increasing demand.
“When all is said and done, we’re going to have seen about an 11% decline in the Ontario housing starts in 2019,” Porter admits. “It looks like it’s going to come in at just over 70,000 this year and we actually see it holding around that level in 2020.
“Back in ’17 and ’18, it was closer to 80,000, so we have taken a step back. If there’s a ‘restore order’ in the forecast, I would actually shade it to the high side. I think we’re more likely to be surprised to the positive rather than the negative on that call for 2020.”
DELAYED REACTION
Porter says the reasons for his optimism are based on how housing starts tend to be delayed in correlation with whatever activity is occurring on the resale side.
“The resale market tends to be a bit of an early indicator,” Porter explains. “If resales are strong, it tends to lift prices, and if resale prices are strong, buyers will tend to consider other options like new homes or condos, and builders will tend to be encouraged to build more units.
“Looking at Canada-wide resale activity in 2019, sales were up a bit more than 5% and average prices are up a bit less than 2% for the full year, which I would describe as modest gains for both,” he continues. “If we look at resale activity in Ontario alone, sales were up almost 9% and average prices were up about 6% for all of 2019. And, if we zoom in on just the increase from the lows earlier this year, sales in Ontario are up 15-20%, an upswing late in the year.”
Porter says that the “relentless shift” towards Ontario housing starts being dominated by multi-family units and condos is overshadowing the construction of single-family homes by a wide margin.
“The single-family home has become a much smaller share of overall starts,” he notes. “I don’t see that shifting anytime soon.”
In its 2019 Housing Market Outlook/Ontario Forecast Summary, CMHC is in line with Porter’s 2020 assessment, looking at a range between 66,200 and 69,800 Ontario overall housing starts (19,700-20,900 single-detached homes and 46,500-48,900 multiple units) for this coming year. In 2021, the growth will continue with a range of total housing starts predicted between 65,800 and 74,700. According to CMHC’s Senagama, there has been one significant trend that could assist buyers worried about affordability.
“The positive side in all of this is that there has been a construction shift in demand for multi-unit housing sectors,” Senagama explains. “Row houses have become the substitute for single-family homes. So from that perspective, there will be product that’s affordable, but it’s all subjective.
“In Toronto, even a townhouse, on average, is $800,000 to $900,000. That’s not really affordable for the first-time homebuyer trying to get in on the market, whereas if you’re in St. Catharines, or Kitchener-Waterloo, we’re looking at different price points.”
On the mortgage rate front, five-year rates are expected to remain somewhat consistent, according to CMHC stats, rising from 5.3% in 2019 to 5.4% and 5.5% this year and capping at 5.6% for 2021.
JOBS DRIVING THE MARKET
Labour, particularly the information technology sector, will continue to drive housing activity in Ontario’s most sizzling markets: Toronto, Kitchener-Waterloo and Ottawa.
“One of the biggest, positive surprises has been the professional scientific and technical category,” says BMO’s Porter, who also identifies Windsor as a hot market. “It’s a pretty broad category, but that one has seen growth of over 7% in terms of the number of jobs over the past year, which by far and away is the fastest growing sector.
“Education, health care and the public sectors in general have been strong as well. Even things like construction and manufacturing have seen moderate job gains in the past year, so it’s been relatively broadly based. But definitely the big pleasant surprise—and this is an Ontario story—has been the tech sector.”
Porter also likes the fact that Kitchener-Waterloo and Windsor are so reasonably valued and that they have been “attracting a lot of new retirees from Toronto and even investors.”
The employment picture isn’t ideal everywhere, however. Work stoppages, resumptions and a possible plant closure at GM Oshawa, which employs about 4,000 people, has Senagama’s attention.
“Employment is a direct driver of housing demand. If you’re going to have a high unemployment rate—if fewer people are working—they can’t afford to pay for their homes and that will result in demand coming down.
“There are pockets of concern, but overall, as a region, Ontario is the largest recipient of net migrants into Canada—not just Toronto, but also Kitchener-Waterloo and some other areas as well. And the more people that come and settle, (the more it) generates jobs,” Senagama notes. “That’s really been the positive driving force behind the kind of growth we’ve seen economically in this region. In Toronto alone, we get close to 100,000 people coming in every year. They need a place to live and the services to keep up with them.”
As the housing market improves, however, affordability—which CMHC survey responders listed as one of their three priorities when considering a home purchase: price/affordability (80%), number of rooms (73%) and the proximity to public transit (67%)—will continue to be a concern in 2020 and 2021.
“Prices are expected to increase at a steady pace,” says Senagama. “We’re not going to see the kind of growth we saw three years ago, but we’re still going to see growth, nevertheless. You’re still going to pay higher than what you were accustomed to five or 10 years ago.”
In Ontario, those looking for affordability, especially when it comes to single homes, won’t find too many opportunities in Toronto, Senagama says.
“The trend has been that the markets that border the GTA have seen the highes
t activity. High house prices in Toronto tend to drive demand for homes in those neighbouring communities, so the further you move away from the GTA but the closer you are to the border, the higher the demand. And if the housing market heats up, there is always a possibility for policymakers to take measures to balance the market.”
“We’re also dealing with a lot of big question marks on economic outlook,” Porter concedes. “Let’s face it—we’ve got a very volatile character in the White House (and if he’s not impeached), one never knows if he’s going to do something rash, especially on the trade front. We also don’t know exactly which direction the federal government is going to take (after our recent election), although I think we all have a pretty good idea. But there could be some policy surprises over the next year with a minority government.”
Porter says an economic downturn would also be dangerous, and if things stabilize, interest rates could rise again. “I think we’re a long way away from the Bank of Canada raising interest rates, but there is the possibility that long-term interest rates could start forging higher again if the conventional view is that the global landscape is much more positive.
“The main point is that there’s a lot of uncertainty in this economic environment, especially as we head into the U.S. election.”
The recent re-election of Justin Trudeau’s Liberals—as the dominant federal party, albeit in a minority capacity—seems to indicate that government policies concerning the housing industry will hold, with the exception of the First-Time Homebuyers’ Incentive.
There are whispers that the Liberals might favour an increase to a couple of thresholds, namely family income to $150,000 and the maximum value of the home that could qualify for the program rise to $800,000 in Toronto, Vancouver and Victoria.
Even though the 2019 CMHC Mortgage Survey revealed that the highest proportion of first-time homebuyers live in Ontario and are aged between 18-34 years old, CIBC’s Benjamin Tal thinks the incentive program itself has little bearing on the housing scene.
“The bottom line is that it’s so small that it’s hardly a game-changer by any stretch of the imagination,” he explains. “It’s roughly $420 million a year for the entire country. That’s 0.03% of new mortgage originations.”
Tal sees more impact in the Ontario provincial election’s majority victory for Doug Ford’s Conservatives.
“We see more initiative toward releasing land more quickly—which is good for the market—and the removal of rent control on new construction, which is extremely beneficial to the purpose-built segment of the market,” Tal explains. “We need to see an alternative to ownership and I think that’s the direction we are going with rising build activity. We’re not building even close to enough rental units. We have to monitor it all very closely.”
Tal predicts the rental market, when it comes to Ontario housing, is the wave of the future. “With immigrants, non-residents and foreign students being a huge factor, there’s major, major demand for rental activity,” he notes.
“I think we’re seeing more and more builds geared towards rental units and it’s going to be the most important trend over the next 10 years. We are at the peak of ownership and you’ll see a lot more rental activity: that’s the big story when it comes to the housing market in Toronto and Ontario.”
THE NATIONAL OUTLOOK
While the Ontario housing market is showing vigour, the rest of Canada isn’t doing so badly either.
“It’s looking like a pretty good year for housing, both on the demand and supply side,” observes TD Economist Rishi Sodhi. “We’re forecasting housing starts to remain at about 200K in 2020, so fairly solid home building is certainly expected.”
The Canadian Mortgage and Housing Corporation 2019 Housing Market Outlook offers the numbers to back him up, with projected new starts across the country moving from a high of 196,000 for 2019 to a predicted 204,300 this year, with a modest increase to 206,300 pegged for 2021.
Although our other experts expect interest rates to hold their ground, with only fractional increases possible, Sodhi believes the cost of money might actually see further decline this year. That, coupled with strong population growth—influxes averaging 356,000 new citizens annually over the next two years, according to CMHC—are the primary drivers for his rosy forecast.
While the Ontario, B.C. and Quebec markets have generally been on fire of late, there are also signs of recovery from flat provinces like Alberta and Saskatchewan, notes Sodhi. “Part of it is continued economic growth, which will translate into continued job growth and continued income growth. And in recent years, Canada has seen extremely robust population growth. Overall, we think that builds are more likely to go up than down in 2020 based on the healthy fundamentals.” 
Still, affordability remains a challenge: Only 60% of homebuyers bought the highest-priced home they could afford, according to the 2019 CMHC Mortgage Consumer Survey—down from 78% in 2018.
“The affordability constraints kind of place a natural limit on the rate of growth that can be experienced in sales and different prices in markets in Ontario and B.C., so that will restrain the rate of growth and housing demand that we see and report,” says Sodhi. “But overall, we should see some positive growth in housing markets across the country.”
Sodhi sees home prices on an annual average basis increasing 6% in Ontario alone in 2020. For B.C.., he’s looking at an average price increase of 5%, 4% in Quebec and only 1% in Alberta.
“In Alberta, we’ve got price growth that’s very modest, but at least we think it will be positive, after a couple years of declines,” Sodhi explains. “In terms of Quebec, we have a steady 4% gain forecast amid ongoing economic growth.”
Aside from population contraction in Newfoundland and Labrador, Sodhi notes that the Atlantic Region has seen “pretty strong gains” in terms of sales and that Prince Edward Island, Nova Scotia and New Brunswick have enjoyed strong population growth for the past four years, “which has pushed up home sales by quite a bit. It has coincided with the federal government raising their immigration targets, and that has put upward pressure to help support housing demand and prices from a supply/demand perspective.”
The Mindset of Future Buyers
While the very concept of homeownership in the GTA is going the way of the dinosaur for many young Canadians, given the myriad of affordability obstacles, what is the mindset of immigrants?
“It depends on where they’re coming from and what they’re used to,” explains André Kutyan, sales representative for Toronto-based Harvey Kalles Real Estate Ltd. “If I look at the Asian community, in China, if you look at the ratio of homeowners versus renters, 90% own their homes—they’re programmed to buy a house.
“Eastern Europeans may have grown up in places where there have been generations of renters, (so) it might be more normal for them to rent.”
With regard to potential foreign owners, who are subject to former Premier Wynne’s 15% non-resident tax under the Provincial Liberal Fair Housing Plan, Kutyan wants to clear up a misconception.
“More than 95% of ‘foreign’ people who are purchasing a property here have permanent resident status or a student visa or a work permit,” he notes. “They’re not just walking off an airplane and purchasing a property without any status in Canada. That was never the case.”
Complicating matters is the fact that countries like China and Iran are limiting the amount of money that emigrants can take out of the country. “That’s had a big effect on the market here in Toronto,” Kutyan says.
On the domestic front, the 2019 CMHC Mortgage Consumer Survey revealed that the highest proportion of first-time homebuyers live in Ontario and are in between 18-34 years old, while the percentage of first-time homebuyers who had rented a home with family and friends before buying a home vaulted from 28% in 2018 to 44% in 2019.
Kutyan feels that millennials in particular may be losing out in their choices. “Freehold homeownership in the traditional sense in Toronto proper has become a pipe dream for many millennials,” he says. “If they are not getting help from the bank of mom and dad, they will either be permanent tenants, live in condos instead of homes in the city or purchase homes in the outlying cities surrounding the GTA (e.g. London, Hamilton, Barrie, etc.). They’ll rely on regional transit to work in Toronto.”
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