Always stick to the fundamentals – The relationship between the Toronto economy and real estate demand and prices

The downfalls of the coronavirus pandemic have been copious and persistent. Many Canadians have experienced job loss, stocks and interest rates have plunged, and recession talk is in the air. With most Canadian markets either frozen or bleeding, maintaining an optimistic outlook about the economy almost seems remiss. But there is an upshot: demand within Toronto’s real estate market is alive and well.

We are in the midst of a housing supply shortage in the Greater Toronto Area, but this bodes well for the industry in the long-term. Toronto’s market is overheated, with sales data showing inflationary prices for the latter half of 2019. In other words: people are in the market to buy, but there is currently a lack of properties for sale.

Understanding the GTA’s housing supply shortage

Like any industry, real estate is contingent on supply and demand. Right now, there is plenty of demand, but supply is continually falling short. Below, we get into a few reasons as to why this imbalance has transpired.

  1. Cost of land is on the rise. This steady increase is a result of a decade of inadequate land supply and a demand that’s driven up by steady population growth.
  2. There is a shortage of skilled labour and trades within the land development industry. As workers age into retirement, there is an uptick in the demand for construction workers in Canada.
  3. Spending is lacking for institutional real estate. The institutional side of the construction sector, (which is funded by the government), is the currently weakest—compared to the industrial, commercial and residential sides. Investment in the institutional side would ensue affordable housing, tax revenue, and job opportunities.
  4. Barriers to new housing supply are faced at a bureaucratic level. On average, it can take two or more years for site plans to be approved. And it takes approximately 5-10 years to build apartments in the GTA, due to lengthy approvals and high costs.

These barriers are set to lessen in 2020, as policies are updated under the Ontario government’s Housing Supply Action Plan. The takeaway here is that there is a broad emphasis on the importance and timeliness of supply expanding to meet demand.

The challenges faced by the GTA’s housing supply shortage is reminiscent of 2017, when a supply shortfall resulted in a property fever, causing housing prices to surge beyond general affordability. In 2020, we’re dealing with a similar inequality between supply and demand—however, this time around, Canada’s central bank has lowered interest rates in a move meant to increase affordability to Canadians. This is in conjunction with Toronto’s surtax on foreign home buyers. All around, these moves have made Toronto’s real estate market approachable for buyers and investors.

The GTA’s housing supply shortage is just one of many challenges posed to the Canadian economy. That said, in spite of signs that the Canadian economy is slowing, there’s plenty of evidence to suggest that those invested in Toronto’s real estate market should remain hopeful. This is thanks to a series of strong fundamentals, which put Toronto in a better position than its counterpart municipalities.

How the fundamentals of the Toronto economy tie into real estate demand and prices

Though the Canadian economy is facing a number of challenges, Toronto is driven by strong fundamentals, which pose opportunity to remedy the housing supply shortage and maintain the strength of Toronto’s real estate market.

Population growth fuelled by immigration

Toronto boasts strong immigration levels, contributing to population growth and boosting the demand for housing. The GTA alone welcomes more than 100,000 immigrants a year in need of housing. The population of the Toronto area is forecasted to hit eight million in the next 10 years.

Steady job creation

Toronto has earned repute for attracting and retaining strong talent at competitive rates. This encourages job creation, which in turn, creates a low vacancy rates. The Toronto Employment Survey reported 1,569,800 jobs in 2019. That’s an increase of 46,920 jobs (or 3.1 percent) from 2018.

Price appreciation

Price appreciation refers to the increase in the value of a real estate property over a period of time. In Toronto, high rents coupled with low supply equates to healthy price appreciation. Toronto housing prices are expected to increase by nearly 10 percent this year, while renters can expect to see above-inflation rent increases for one- and two-bedroom condos.

Wealth redistribution

Given the inflated state of Toronto’s real estate market, many can’t afford to own without a helping hand. This is where wealth distribution comes in, typically in the form of parents helping their kids afford big investments like home ownership. This transfer of wealth plays a part in increasing demand and encouraging the flow of investments within Toronto’s real estate market.

Lowered interest rates

The Bank of Canada has kept interest rates low, in a move that was meant to increase the affordability of the housing market. In March, the central bank lowered rates again, this time in response to the COVID-19 pandemic. Lowered interest rates mean low borrowing costs, helping ease the financial barrier to entry for prospective buyers.

Multi-family apartment assets

Multi-family assets—including mid-to-high rise buildings, senior apartments and mixed-use buildings—are one of the strongest asset classes, boasting more resilience and less risk in comparison to office, retail and industrial assets. In the GTA, Hamilton and Niagara the multi-family apartment market is thriving, exhibiting low vacancy rates and high rental rates on a nation-wide scale.

The GTA’s real estate market: by the numbers

  • As of mid-2019, 9.3 million square feet of new supply was under construction throughout the GTA. (Source)
  • Canada’s construction and maintenance industry will need to recruit more than 307,000 workers over the course of a decade to keep pace with demand. (Source)
  • The GTA’s residential real estate sales over $1 million more than doubled in the first two months of 2019, while luxury sales over $4 million increased by 75 percent during this time. (Source)
  • The average selling price for homes in March 2020 was $902,680. That’s up 14.5 percent compared to March 2019. (Source)
  • Demand for office leasing is up from 2017 and 2018. Sales of $1.9 billion were recorded in just the first half of 2019. (Source)
  • In the Niagara region, the average selling price for homes in April 2020 was $452,300. That’s up 11.7 percent compared to April 2019. (Source)
  • In the Hamilton-Burlington region, residential property sales are up 25.5 percent from the previous year. The average selling price for homes increased to $646,667, which is up 15.5 per cent from the previous year. (Source)
By |2020-05-06T16:03:22-04:00May 6th, 2020|Real Estate|0 Comments