Toronto Housing Market

Expect Housing Market Activity to Moderate in 2019 and 2020

 

As we bid farewell to 2018, many of us are eager to see what the new year will bring to both the national and regional housing markets. Though none of us have a crystal ball, after an eventful two-year period, Canada’s housing markets should see a moderation in both housing starts and sales. House prices are expected to reach levels more in line with economic fundamentals such as income, job and population growth. This forecast for 2019 and 2020 is drawn from the 2018 housing market outlook released by Canada Mortgage and Housing Corporation (CMHC).

 

“Our key takeaway from this year’s outlook is moderation in Canada’s housing markets for 2019 into 2020,” said Bob Dugan, CMHC’s Chief Economist. Housing starts are expected to decline from the higher levels we’ve seen recently. We expect resales in 2019 and 2020 to remain below recent peaks, while prices should reach levels that are more in line with economic fundamentals such as income, job and population growth.”

 

Nationally, CMHC’s outlook for 2019 projects total housing starts to edge down and range between 193,700 to 204,500 with the downward trend expected for both single and multi-unit starts. MLS sales are expected to be between 478,400 and 497,400 units annually, while average MLS prices should lie between $501,400 and $521,600.

 

Apartment starts will remain elevated while row starts will dominate longer term

Ontario residential starts will remain elevated later this year and into the first half of 2019. Less choice in the resale market, good job growth and stronger than expected growth in new households formed in recent years will support housing starts. By 2020, weaker full time job growth, rising interest rates and more choice in the resale market will dampen total housing starts. Multi-unit starts will continue to command a larger share of construction activity in the short run. A relatively more affordable apartment segment and less choice in the apartment resale and rental markets will support high-rise construction.

 

However, weaker investor and first-time buyer demand – owing to slower condominium price growth, rising interest rates and more high density options – will dampen condominium starts longer term. This combined with the need among repeat buyers for more ground oriented, affordable housing options will mean townhome construction will outpace both apartment and single detached starts activity by 2020.

 

“We remain bullish on Eastern Ontario construction markets,” said Ted Tsiakopoulos, CMHC’s Ontario Regional Economist.  A combination of relatively affordable markets, fewer market imbalances and stronger local economies bode well for these housing markets. Alternatively, relatively more expensive markets in the GTA and surrounding communities will experience cooler market conditions.”

 

Risks to the construction outlook are tilted to the downside. More pronounced increases in interest rates, rising construction costs and fewer serviced single detached lots available for residential development could pull starts below the forecast range. Alternatively, stronger household formation, a better than expected job market (due to stronger exports and business spending) could support stronger than expected starts activity.

 

Ontario rental vacancy rate will remain near historic lows

Ontario rental vacancy rates will remain near historic lows, while rents will continue to grow at rates above inflation. Growing rental demand will be addressed by rising completions of condominium and purpose-built rentals, particularly in 2020. Rising mortgage carrying costs, strong renter household formation and an aging population will support growth in rental demand across the province.

 

Condominium apartment starts will remain high

New home starts in the Greater Toronto Area (GTA) are expected to slow considerably throughout the forecast horizon, mainly due to fewer single-detached home starts. Low rise new home sales (particularly single-detached homes) have trended lower in recent years and townhomes have begun to fill the void created through a lack of single-detached home starts. Higher house prices, a policy shift towards high density construction, and shortages of serviceable land are key reasons behind fewer site openings in the recent past. Condominium apartment starts will be lower in 2019 and 2020 than in 2018, but will remain strong and continue to dominate construction, given strong sales of pre-construction units.

 

Typically, sales of new condominium apartment units convert to starts within a 24 month period. Strong pre-construction condominium sales in 2016 and 2017 have led to elevated condominium apartment starts so far this year, and this momentum will continue into 2019 (year-to-date 2018 condominium apartment starts are the second highest observed since 1990).

 

As of late, however, pre-construction sales have been trending downwards. Increasing price gaps with newer resale market alternatives, a better supplied resale market, less investor demand, and a declining number of site openings will contribute to lower pre-construction sales activity throughout the forecast period, ultimately leading to fewer starts. Expect to see heightened construction activity continue in urban 416 areas which typically lend themselves to high- rise projects.

 

Given that fewer single-detached starts are expected over the forecast horizon, suburban 905 areas, which are popular neighbourhoods for low rise subdivisions, will see less construction activity over the next two years.

 

More balanced market conditions to ensue in the resale home market

Sales of resale homes are expected to recover in 2019 as buyers and sellers adjust to new market conditions as a result of rising borrowing costs which have curbed housing market activity. This growth in sales is expected to slow down slightly in 2020, driven by potentially lower employment growth and rising interest rates.

 

GTA home prices will grow more in line with inflation over the forecast horizon due to more balanced market conditions. A shift in the composition of sales towards relatively affordable higher density homes will also weigh down average price appreciation. The condominium market, which is currently in sellers’ market territory, is likely to experience above average price growth. The City of Toronto and downtown cores of some 905 areas, such as Markham and Mississauga, will continue to see stronger average price appreciation given their higher concentration of condominium apartment sales. More suburban areas such as York, Durham and Peel will likely see lower average price appreciation, owing to higher concentrations of sales in single-detached homes.

 

GTA vacancy rates to stay low

The lack of a significant increase in purpose-built rental unit completions, rising costs of homeownership, and a growing renter population (comprised of millennials and new immigrants) will fuel strong rental demand and keep vacancy rates low over the forecast horizon. Rising costs of homeownership will force more renters to delay their entry into the homeownership market.

 

“With vacancy rates expected to remain at historically low levels, landlords will continue to have an upper hand in dictating rents,” said Dana Senagama, Market Analysis Manager for the GTA. Therefore, expect rent levels to be high over the forecast horizon.”

 

More rental completions are expected to materialize over the next two years and provide some relief to the GTA’s supply-strapped rental market, and a slight easing of the vacancy rate is expected as a result in 2020. However, given the propensity of building activity to be strongly skewed towards condominium apartments, it is unlikely that a substantial amount of purpose-built rental units will start construction and reach completion to significantly increase the average vacancy rate over the forecast horizon. Additionally, higher than expected immigration and further eroding affordability could accentuate the downside risk to the forecast.

 

CMHC helps Canadians meet their housing needs. As Canada’s authority on housing, we contribute to the stability of the housing market and financial system, provide support for Canadians in housing need, and offer objective housing research and advice to Canadian governments, consumers and the housing industry. Prudent risk management, strong corporate governance and transparency are cornerstones of our operations. For more information, visit www.cmhc-schl.gc.ca