7 factors that will affect GTA housing in 2019 – and 5 reasons to consider buying NOW
By Wayne Karl
GTA homebuyers, we have some good news and some bad news.
First, the good news: You live in one of the most desirable areas and housing markets in Canada – maybe even the world.
The bad news? That affordability challenge we’re all facing.
“The affordability issue is not going away,” PricewaterhouseCoopers says plainly, in its Emerging Trends in Real Estate 2019 report.
Why? See point number one.
“Potential homebuyers will need to alter their expectations and possibly delay entry into homeownership,” Dana Senagama, manager, market analysis for Canada Mortgage and Housing Corp. (CMHC), told Homes Publishing.
Not exactly the most hopeful outlook for those – especially first-timers – looking to buy a home in and around the GTA.
But it’s not all bad. Let’s look at what’s going on in the market, and what would-be buyers can do to help their cause.
1 Return to price growth
Following the introduction of the Ontario Fair Housing Plan in April 2017, recent interest rate hikes and other changes, sales and prices in the GTA have seen some moderation.
But the slowing will be short-lived, Senagama says. Key economic fundamentals such as population and employment growth will continue to drive housing market demand, but the supply of new homes is not being addressed. The result? A return to price growth.
“CMHC is working on data gaps like supply with many industry stakeholders and partners,” she says. “Currently, we are participating in a working group with the province of Ontario to find solutions and best practices.”
PwC says the region is feeling the effects of demographic shifts. Millennials have begun to compete with Baby Boomers for real estate, and over the next decade, almost 700,000 first-time buyers will target the GTA or Hamilton markets, according to a May 2018 report from the Ontario Real Estate Association.
2 Risk of overvaluation
Senagama cautions, however, that the Toronto market is still showing signs of overvaluation.
“This happens when house price growth is surpassing the population and income growth. So, despite some of the moderation you’re seeing, we’re still calling for a high degree of vulnerability in Toronto in the foreseeable future.”
3 Inelastic supply
The GTA housing market is characterized by inelastic supply. “Supply is slow to respond to any change in price, and we’re seeing that time and time again,” she says.
Recent research from CMHC and Altus Group, in fact, shows that of the lowrise new home projects that were started in 2016 and 2017, it took 15 years for those developments to go from the initial land purchase to product hitting the market.
“We have a problem, in terms of supply.”
With very limited new home supply hitting the market, once buyers get used to temporary shocks to the system brought on by policy issues and rising interest rates, they return to buying homes, which in turn drives up prices.
4 Condo demand
With lowrise home prices enjoying spectacular growth in recent years, there was a compositional shift in demand toward less expensive product – namely condos – particular among first-time buyers.
But now, with price growth even in this category – with average condo prices rising 8.4 per cent year-over-year to $552,269 in the third quarter this year – and pre-construction units in the $700,000 range…
“These are not price points for first-time buyers,” Senagama says, “so we’re still looking at very high prices across the GTA.”
5 Mortgage rates
The Bank of Canada has already raised its influential overnight rate target three times since July 2017, to 1.5 per cent from 0.75 per cent. Experts expect at least one more increase this year, possibly as early as the next rate announcement on Oct. 24.
A more moderate pace of rate increases could impact the market, but not significantly since the majority of mortgage holders are on fixed-rate mortgages, CMHC research shows.
6 Rental market
Any discussion about affordability needs to include the rental market, Senagama says. “Much like the ownership segment, supply is a huge constraint in the Toronto rental market.”
With the average vacancy rate in the GTA 1.1 per cent, and 0.7 per cent for condo rentals, rental rate increases are picking up steam. “Because we have a supply problem. And because we don’t have enough supply of the purpose-built rental units, the gap has been filled in by the condo market.”
About 33 per cent of all condos in Toronto are being rented out by investors, according to CMHC. This results in renters paying a much higher premium to rent a condo versus a purpose-built apartment – on average 50 per cent more, for a two-bedroom unit.
“We talk about affordability, and this raises so many other concerns, especially in a market that is supply-strapped,” Senagama says.
7 Catch 22
investors are buying into the condo market to rent out their units, taking advantage of the tight rental market. But first-time buyers – who typically aren’t equity-rich or wealthy – have to compete for available condo product, which again drives up prices.
5 REASONS TO BUY A HOME NOW (OR AS SOON AS YOU CAN)
More supply of new homes is a big part of the solution. But despite ongoing lobbying from the housing industry, and apparent increasing awareness of new elected municipal leaders, this problem won’t be solved overnight. It will take time. Lots of it. In the meantime, as PricewaterhouseCoopers says: The affordability issue is not going away. It might even get worse before it gets better.
2 Market moderation waning
With little relief on the supply side expected, price growth will continue to be strong, even if somewhat muted compared to the double-digit increases seen over the last few years. In short, the longer buyers wait, the more it could cost you.
3 Interest rates
Experts expect at least one more increase this year, possibly as early as the next rate announcement on Oct. 24. To protect yourself against a more moderate pace of rate increases, consider a fixed-rate mortgage product.
4 Pent-up demand
Buyers believe prices are going to increase, but not to the same degree we’ve seen in recent years. This will lead to pent-up demand, which when released over the next year, will contribute to increasing buying activity and rising prices. So, if you’re able to buy before then, you could beat the rush.
5 Rental market
If you’re a Millennial planning to move out of home and into the rental market, consider this: Toronto is the most expensive Canadian rental market, with average rates for one-bedroom units at slightly more than $1,900 per month (up 2.8 per cent from August to September); $2,374 for two-bedrooms (up 7.1 per cent). Try saving up for a down payment at those rates; maybe staying at home a little longer isn’t so bad after all.
Wayne Karl is Senior Digital Editor at Homes Publishing. firstname.lastname@example.org