Ontario—home to the nation’s largest city (Toronto) and its capital (Ottawa)—has played an important role throughout Canada’s history. Currently, with an estimated population of just above 15 million people, Ontario accounts for nearly half of Canada’s total population.
And with about 415,000 square miles of land, of which about 100,000 square miles can easily be populated, Ontario still has plenty of room to grow. Unsurprisingly, the Ontario housing market has fared relatively well over the past few years, largely supported by heavy levels of direct investment and a growing population from around the world.
In the face of economic uncertainties, it can be difficult to maintain confidence in the Ontario housing market‘s ability to rally. Nevertheless, as we will further elaborate throughout this article, there are quite a few reasons to remain optimistic about property markets within the heartland province, including their high potential to grow in value over the next few years with massive demand and not enough supply.
GETTING TO KNOW ONTARIO
To understand the current state of the Ontario housing market, it is essential to understand Ontario as a whole. Ontario is Canada’s most populated province and is also home to a large share of Canada’s cultural, economic, and developmental activity.
Beyond the main population centres, including the more than six-million-person Greater Toronto Area, Ontario also contains vast bounties of natural resources, provincial parks, lakes, and waterways that help further reinforce Ontario’s important role in Canada and North America. Its proximity to the United States and connectedness to other countries help contribute to Ontario’s status as the most-visited province in Canada.
Ontario is home to many of Canada’s key industries, including tech, banking, and services. The province has a diverse, fast-growing population and is a favorite destination for immigrants worldwide. The population of Ontario has increased in every census ever taken, including a 5.8% growth rate between 2016 and 2021 and a more than 10% growth rate between 2011 and 2021.
Over the past two decades, the population of Ontario has become considerably more urban, which usually correlates with a more stable market. With a 6.2% growth rate, the Toronto Metro area has grown faster than the rest of the province. Some of the faster-growing smaller cities include Brampton, Kitchener, and Markham.
THE DEMAND IMBALANCE
A major contributing factor to the spike in demand for Ontario housing is likely due to the lack of supply. However, there are major demand dynamics that are at play that is keeping the Ontario real estate one of the hottest commodities around. For example, Canada is expected to see over 500,000 new immigrants welcomed in this summer alone, many of which will land in Ontario. Those new Canadians will likely be seeking new homes, whether it be for their time during their studies or work visas, or longer-term. We have discussed at length the lack of supply in the market, and adding additional demand in the form of swathes of people looking for homes will only increase that imbalance.
In addition, there is huge pent up demand from buyers who are on the outside looking in. 57% of Ontarians believe they will not be able to afford a home where they live, according to Right at Home Realty. In reality, that likely puts a floor on prices, any sort of drop in real estate prices would likely be snapped up by those waiting to get into the market. A whole generation of millennials are trying to get into the real estate market in Ontario, and if a drop happens, that’s exactly what they will do.
Taking a Look at the Ontario Housing Market
The biggest recent news about Canadian equity markets, without a doubt, has been the Bank of Canada’s (BoC) decision to increase its target interest rate by 1%, representing a rise from 1.5% to 2.5%. This hike, which follows a 0.5% hike earlier in the year, represents the largest rate increase in recent history (since 1998).
The BoC, which issued the decision in mid-July and will continue to plan throughout the remainder of the month, cited inflation as a primary reason for raising rates. Like many other countries in the world, including the United States, Canada has notably struggled with inflation over the course of the past year. As of May 2022, the Canadian inflation rate is hovering around 8%, which has created a wide range of economic concerns.
Naturally, high levels of inflation and increasing interest rates make it somewhat difficult to be optimistic about the future of the Canadian housing market. High inflation means that the Canadian Dollar (CAD) isn’t going as far as it used to, meaning that many Canadians with significant savings might now be pushed out of the housing market. Additionally, rising interest rates will increase the cost of borrowing, making it even more difficult to afford a home at a reasonable price.
However, there are still quite a few reasons to remain optimistic about the market. First, it is important to note that much of today’s economic uncertainties are not structural as we saw in 2008, but instead are created by isolated abnormalities. The still-lingering effects of the COVID-19 pandemic have significantly contributed to inflation and, eventually, these effects can be expected to subside.
Another reason that homeowners and property investors in Ontario can expect their properties to maintain their value is there is currently a genuine housing shortage that persists throughout Ontario. As of July 2022, Ontario has the widest gap between available homes and prospective buyers of any province in the country. People want to live in Ontario and the population has been growing faster than new houses can be built (especially due to current supply chain challenges).
One way that Ontario has tried to combat its current housing shortage is by limiting the amount of properties that foreign investors can purchase. This policy, passed earlier this year, has helped limit the spike in housing prices. But even after this policy has passed, homes in Canada are still relatively expensive, with the median home selling around $800,000.
CONCLUSION: REMAINING BULLISH AMID BANK OF CANADA RATE HIKES
It is pretty easy to look at many of Ontario’s housing figures and assume that the current rising prices will need to abate. However, the status quo is not caused by mis-pricing of assets, but as a general outcome of supply and demand.
The case for being bullish on Ontario’s housing market is simple economics. As long as there is a limited supply of housing in Ontario, something that will persist into the foreseeable future, then the value of housing will continue to rise. And as long as there is growing demand to live within Ontario, from abroad or otherwise, an investment in an Ontario property is more likely than not to increase in value.