Depending on who you ask, it seems Ontario, or more specifically Toronto, has been in the throws of a housing bubble for as long as we can remember. Some experts predict a devastating market correction is long overdue. Others claim real estate prices will only continue to climb. Today we’re taking a closer look at the problem to draw a stronger conclusion.
WHAT IS A HOUSING BUBBLE?
First, let’s define the term ‘housing bubble.’ A housing or real estate bubble is a dramatic rise in real estate prices driven by demand, speculation, or extreme spending. A bubble typically starts with a spike in housing demand, then is exacerbated by stagnant supply. And unlike many other sectors that follow Econ 101’s laws of supply and demand, the real estate market often creates supply at a glacial pace. This can be due to lack of land, ineffective or inefficient government, outdate zoning laws, a run-on material, a lack of labour, supply chain issues, or a wealth of other issues. As supply remains inert and demand grows, so too does the bubble. If and when new supply suddenly becomes available, demand will plummet, and POP! that’s when the bubble bursts.
Some may remember the housing bubble of the late 1980s. Nearly thirty years ago, the average Greater Toronto Area house price more than doubled in just three years. Then 1989 hit. After that, prices tumbled for seven consecutive years. The market didn’t fully recover until 2002.
THE CURRENT SITUATION (AND WHY IT’S NOT A BUBBLE)
The last decade has seen explosive growth in real estate across the GTA and its surrounding cities. However, the rise in sticker price is not a 1980s rerun, but rather a culmination of cultural, social, and industry factors. Interest rates dropped to unheard of levels, people fled en-masse for more space to accommodate their new work-from-anywhere lifestyles, and others accelerated life plans to leave the city. Whatever the reason, it created a surge in demand and if we look to the Toronto Regional Real Estate Board (TREB), the numbers don’t lie.
TRREB DECEMBER DATA
- Total Residential Transactions are up 3% year-over-year
- Average home sale price is up 7% vs. 2020
- Total new listings are down 2% vs. 202
SMART THINKING
A recent Smart Prosperity Institute report highlights the critical housing supply issues facing Ontarians and driving homes to record prices. The document points to a dramatic uptick in demand as ‘Ontario’s population grew by nearly one million in the five years between July 1, 2016, and June 30, 2021.’ Growth at this rate is significant for a number of reasons but it’s particularly concerning because Ontario grew by just over 600,000 persons in the previous five years.
BUILDING ISSUES
Despite this increased strain on the housing supply, new homes continue to be built at virtually that same 600,000 persons growth-rate. Thanks to that lack of building, the white paper estimates Ontario is short nearly 65,000 households to properly satisfy our population’s needs. This supply gap between available and necessary housing has a negative knock-on effect throughout society.
Things like young adults remaining with parents well into their 30s. Couples delaying starting families. And HENRYs, a demographic categorized as High Earners, Not Rich Yet are fleeing the 416 for a more price-friendly area code to pursue their passions and projects. Based on previous growth and immigration rates, researchers forecast Ontario will welcome 2.27 million people by 2031. In order to accommodate all those new bodies, Canada’s largest province will need a staggering 900,000-plus households over that decade.
While pandemic policy will eventually subside. And interest rates may rise. One thing that seems all but certain is housing demand outweighing supply.
