The economic environment for the housing market in Ontario is in transition.  There are many indicators that point to potential trouble ahead, while other indicators appear to suggest that a recovery is underway.  How do you interpret the mixed signals and feel confident in your investment outlook?

On the positive side, I will point to the fundamentals in the Ontario economy and housing market:

• Employment continues to expand keeping unemployment levels low, despite the growth in the labour force and population.
• Inflation is slowing aside from the brief pause in April. Many different CPI measures are available, and the key measures used by Bank of Canada remain headed in the right direction.
• Population growth is strong built on the strong international immigration to Ontario centered in the Greater GTA
• Prices of homes on MLS have rebounded in the past few months, although this would be correlated to the low supply numbers rather than strong demand. The price levels at the end of 2022 would be equivalent to the summer of 2021 and well above the levels in 2020, which provide a healthy equity cushion for owners and investors.
• Existing condo investors see much better prospects due to higher rent revenues.
• Arrears rates are at historically low levels (0.12%) but are starting to climb. Debt secured by a mortgage or HELOC are the most secure loan categories.
• Bill 23 has been proclaimed (More Homes Built Faster Act, 2022), which will facilitate speedier development (see comments below)

On the negative side, I would outline the growing affordability problem in both ownership and rental housing:

• Rents are increasing at a double digit pace, and existing tenants will not be vacating their units for another rental without a sizeable increase to their rent.
• Investor units have been providing relief and a cushion to the market, but new investors will have to qualify under much stricter criteria which could lead to less demand for the condos.
• House prices have increased in the last two months but are still well below the February 2022 peak. The lack of supply would be a key factor in the price increases rather than resurgent demand to previous levels.
• Mortgage qualification is more difficult, and with OSFI considering even stiffer tests for borrowers, demand may be reduced even further.
• Those who want to buy are competing for a dwindling inventory of homes on the market. Many sellers have been reluctant to put their house on the market, as then they would have to find another home in a tight market where mortgage qualification is increasingly difficult.
• Inflation is stable and will fall throughout 2023, but interest rates will remain constant until the Bank of Canada firmly believes that inflation will reach the 2% target.
• The economy is slowing as indicated by less pressure in filling job vacancies.
• The slowdown in construction and renovation and related suppliers’ activities is evident throughout Ontario.
• Household spending is being directed to essentials for many households as they cope with rising mortgage or rising rent costs. Consumer spending was a large driver in the economic expansion, so this reduction will affect retail spending in all non-essential areas.  Not all consumers are affected, but those younger households with high debt levels who are susceptible to interest rate increases are clearly economizing their spending.

The bottom line is that Ontario is still staring at a recession, or at least a protracted flat line on the economy.  The effect of interest rate increases tends to be fully impacted in 4-6 quarters and we are just entering the 5^th quarter after the rate increase cycle began.  According to Bank of Canada, 35% of borrowers have now experienced mortgage payment increases on their last rollover.  It will be 47% by the end of 2023 and 65% by the end of 2024.  Despite seeing wage or salary gains recently, the elevated mortgage expenses will eat into household savings or investments, or for households without these two categories, their discretionary spending.  All three alternatives point to reduced economic activity.

Bill 23 – More Homes Built Faster Act, 2022

The title says it all.  This comprehensive piece of legislation facilitates quicker approvals, expedites the planning process and costs for affordable housing, reduces the involvement of conservation authorities in the planning approvals, removes or reduces Development Charges for non-profit, affordable and attainable housing, and encourages greater density in existing communities.

Density will be encouraged by permitting up to 3 units in place of 1 unit, where the square footage and height remain the same.  This will accelerate infill creation of rental units.  Purpose built rental will receive reduced Development Charges based on the number of bedrooms.  The land use planning role at senior tier governments is eliminated (Region of Peel, York, Niagara, Waterloo and others), and now will be the responsibility of lower tier municipalities.  Home construction licensing will be strengthened and the power of the Registrar to deal with violations will be enhanced.  Conservation Authorities reviews and commenting roles will be restricted to their core mandate and permit approval authorities will be narrowed.

What all this means to developers of housing is a more streamlined approach to planning and approvals, less bureaucracy with the involvement of other agencies, reduced costs and time in the process, reduced fees and charges (especially for affordable and attainable housing, and rental) and more certainty in their development plans.

What this means for Investors in land and construction lending is more certainty in timelines of development, stronger and more rigorous oversight of builders, and more secure loans.