Toronto real estate market in on fire with the property prices skyrocketing uncontrollably even during the pandemic. It was a bubble which never burst. But not any longer, experts are expecting a collapse of Toronto real estate market sooner than expected.
Where many associate homeownerships with a sense of security and stability, owning a house has become a distant dream for those residing in Toronto. At the onset of the COVID pandemic, many were speculating an ease in the real estate prices. However, in the past one year, despite facing the worst public health crisis that the city has ever witnessed, the Toronto real estate market is on a boom.
Toronto-area real estate broker John Pasalis is warning that home affordability in the nation’s largest city is reaching a “crisis point” in the wake of the massive run-up in home prices throughout the course of the pandemic. The housing market has remained extremely tight in all key cities in Canada. In GTA the average home price rose 12.6 % year-over-year to $1,062,256, while active listings plunged 35.2 %.
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The big question that arises here is that what is next in store for the Toronto Real Estate market? Will it keep on booming or will the growth become unsustainable and the market will collapse as many speculate? In order to answer this question, we must first understand the factors which are responsible for this spike. Let us discuss the key contributors for the crisis.
Affordability
The COVID brought with it a nationwide lockdown and the closing of the borders. With the decreased immigration rates, the demand in the rental market saw a decline. This led to an increase in the property available for purchase, especially in major cities such as Toronto.
This means that buying a house became more affordable during the pandemic. This surged the demand in the Toronto real estate market. With more and more people investing in houses, the prices soon picked pace and went sky-high.
Cheap Money
Having known historically for its low mortgage rates, the near-zero interest for loans are the primary reason for the boom in the housing market. The Bank of Canada in its annual review of financial institutions has observed that the Toronto real estate market is driven by the record-low mortgage rates as well as the subsequent rise in the mortgage debt. The bank has further accepted that the rising mortgage debts and the imbalances in the real estate sector are the biggest threats to the country’s economy.
With a lending rate of 0.25%, borrowing has become so affordable, opening newer avenues for the consumers. The low mortgage rates have made debt cheaper but has also kept the demand high in the housing sector.
While the Office of Superintendent of Financial Institutions recommend a tight monetary policy, experts are concerned that it will lead to stretched borrowing, putting financial institutions and thus, in turn, economy at an even higher risk.
Limited Supply
The high immigration rates and the ease of getting permanent residency in Canada has pulled forward the demand for housing properties, boosting the real estate industry, especially in the cities of Montreal, Toronto and Vancouver.
Even if the migration rates have been low during the pandemic, the demand for space has still been high. This is due to the fact that the lockdown has led to a rise in the demand for bigger houses with more space for backyards.
Furthermore, the high student pool that the country attracts every year is fuelling this demand for houses, creating an even bigger space crunch.
All these demographic factors are cumulatively pushing the prices of the Toronto real estate higher and higher. The need of the hour is to ensure that there is enough housing for everyone. However, the disparity in the space available is a big limiting factor in this respect.
Buying homes for investment and leaving vacant
With the hopes of seeing the end of pandemic soon, the country is set to open its borders to migrants. Canada aims at getting 411,000 permanent residencies in 2022 and 421,000 in 2023, which is equivalent to 1% of the country’s population in those years.
With a hope that this number will lead to a surge in the demand for housing property, both in rental and buying sectors, the Toronto real estate market is on a hike.
Furthermore, amidst the lockdown, people have started buying vacation homes, away from the hustles and bustles of the city life. There is a tremendous rise in the number of people looking for a second or a third house.
This has led to a large number of houses being left vacant for investment and vacation purposes, spiking the demand for property due to lower availability of space.
Money laundering
Many reports indicate that the real estate industry has become a magnet for money laundering. A number of people invest in property for the sole purpose of snow-washing their money. This is evident from the number of anonymous property owners in the country.
Canada’s lack of transparency of ownership transparency has been the primary factor in making the Toronto Real Estate industry a hub for money laundering. Most of these property transactions are carried by means of cash, thus bypassing the anti-money laundering laws.
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What’s Next for the Toronto Real Estate Market? Will It Collapse?
Senior Economist Dana Petramala has observed that currently a bubble-like state has been developed in the real estate sector that is largely demographically driven. She went on to comment that in the past, the economic bubbles in the sector have been characterized by two digit growth in the property prices for five consecutive years. In the last six years, Canada has witnessed double digit growth for five years.
Therefore, it is a matter of great concern for the country’s economy. What becomes important here is how this bubble will burst. Will it be a slow and steady change or a catastrophic fall altogether
On one hand, there is a chance of decrease in demand with the recent announcement of rise in interest rate by the Bank of Canada. On the other hand, the speculated rise in the number of immigrants in the next years will act as a catalyst for the demand in property especially in the city of Toronto.
However, many experts have also pointed out that during the initial years of settlement, most immigrants do not prefer to buy property, they rather rent it. This can cool down the real estate sector to some extent.
Some economists like Mike Moffatt are also of the view that there will not be a crash at all as the population growth in the post-pandemic period will be quiet robust. Therefore, the hunt for selling the multiple properties that people have acquired during the lockdown will be balanced by the large influx of migrants planning to settle in Canada.
Predicting the future is never easy, that too when we are standing at the crossroads. As of now nothing can be said for certain except for the fact that we are living in a world full of uncertainties and the Toronto real estate sector can take any turn in the future.
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Real Estate Prices Dropping in Toronto?
The average price of a property in the country's most populous city declined 3 percent in June to C$1.14 million (about $875,000) on a seasonally-adjusted basis, bringing the overall fall since February to more than 11 percent.
The Toronto Real Estate Board said on Wednesday that sales of single-family houses in June decreased by just over 41% compared to the same month last year, as a result of rising borrowing rates.
The Toronto Regional Real Estate Board reported that 6,474 properties were sold in June, a decrease from 11,055 in June of the previous year. June sales were similarly lower than May sales.
Toronto Real Estate Collapse: Takeaway
For a long time now, the Toronto real estate market in on a boom with the prices of property spiking robustly. Despite the pandemic the housing sector in Canada is in great demand and a number of people are investing in houses.
There are a number of factors responsible for this trend such as the affordability of houses due to the pandemic, the low mortgage rates in the country, the crunch in the availability for space and the demand for larger houses, the expectation of a large migrant pool in the near future and the lack in transparency in the home ownership in Canada.
All these factors have together contributed to the rapidly rising rates of property, making the dreams of owning a house nearly impossible for many people. Many experts are of the view that the economic bubble that has been developed will soon burst as the country has witnessed double-digit growth for a long period now.
However, the expectant migrant pool and the lack of availability of space make seem unlikely to happen. Many economists have argued that the number of people looking to buy their houses will het balanced by the incoming migrants who will be looking to buy a house.
Therefore, we can conclude that there is going to be a lot of uncertainty with respect to the future of the Toronto real estate industry.
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Real Estate Prices Dropping in Toronto
