Since the onset of the pandemic, the Ontario real estate market has been booming. From the major urban centres of Toronto and Ottawa to the rural communities of Renfrew and Prince Edward County, close to every Ontario housing market has been posting record-setting gains. Only in the past few months has the market shifted back to pre-pandemic levels and a more balanced market for buyers and sellers.

Recent price adjustments have yet to be broken. While the moderation of property values is widespread across the country, its magnitude varies considerably, with properties in Ontario seeing some of the largest losses, after experiencing some of the largest gains during the pandemic. In Ontario, Cambridge has seen the greatest drop so far (-22%), followed by London (-18%), Brantford (-18%), Kitchener-Waterloo (-17%), Kawartha Lakes (-17%), and Hamilton-Burlington (-17%). The Greater Toronto Area has seen a decline of about 11%.

After the historical growth that occurred in 2021, many real estate industry observers and market analysts have discussed various topics and trends, such as bubbles, crashes and evolving consumer behaviours. As the Bank of Canada raises interest rates, it has resulted in a decline in average real estate prices, which is expected to continue as we prepare to kick off 2023. As a result, one question stands forefront on everyone’s minds: Could an Ontario housing market crash happen?

Will the Ontario Housing Market Crash Soon?

With high inflation around the globe, and various central banks raising interest rates, the current overnight rate at the Bank of Canada (BoC) sits at 4.25 per cent. The move seems to be cooling hot Canadian housing markets, with Toronto showing signs of normalization. The Bank said it would use its monetary policy tools to ease inflation, which reached 8.1 per cent at its peak in July – well above the Bank’s forecasted 5.8 per cent and exceeding its target of two per cent. The move to increase interest rates has already impacted the market.

In response to interest rate hikes easing mortgage and housing demands, Canadian housing markets have cooled in the past six months or so, with the largest decline seen in Ontario and British Columbia. While this seems like a good thing, it is unlikely that the decrease in home prices will increase affordability since high mortgage rates make it harder for buyers to qualify for a mortgage.

Increasing Ontario Housing Supply

One method of alleviating rising prices is to increase supply. The Progressive Conservative Party of Ontario took a step to address the critical supply shortage in the province by establishing the Ontario Housing Affordability Task Force in December of last year.

The nine-member Task Force consulted with municipal leaders, planners, unions, builders, developers, the financial industry, academics, think tanks and housing advocates. It released its “radical” recommendations to cool the overheating Ontario real estate market by increasing the supply levels. They also noted that the policy-based measures of the past have been unsuccessful.

The Task Force proposed a goal of 1.5 million homes in 10 years. To put that number into perspective, historical housing starts data showed 1.5 million homes were built in Ontario in the last 20 years – half of what is proposed for the foreseeable future. Ontario housing starts in 2021 hit a high of almost 100,000 new units. To meet that 1.5-million milestone, we’d need to achieve 150,000 starts each year, every year for the next decade.

Changing Homebuyer Needs

Since the financial crisis more than a decade ago, Canada’s largest cities have witnessed an epic real estate boom. Condominium valuations were skyrocketing, detached and semi-detached homes were being sold for premiums, and the skylines of Toronto and Vancouver were dotted with cranes. Then the coronavirus pandemic shook up the housing industry.

Rather quickly, city slickers were ditching the lights and glamour of metropolitan hubs, seeking greener pastures in small towns, suburban areas and rural communities. Now that they require more space at home to accommodate work, school, entertainment, and fitness amid a nationwide lockdown, a 600-sq.-ft. box in the sky was no longer a viable option for a three-person-plus-dog household. With a massive windfall in hand, these former urban dwellers took their home equity to cottage country, where they outbid other hopeful homebuyers, resulting in record average price growth on recreational properties, from humble bunkies to luxury waterfront homes.

As a result, Canada’s housing market is changing. A recent report by TD Bank indicates that real estate prices could fall 20 to 25 per cent by the end of 2022 and likely continue into 2023, making it the steepest decline since data collection started in the 1980s. TD also predicts the volume of sales to decline by up to 35 per cent, falling just short of the drops experienced during the 2008 recession.

Although personal incomes are slowly rising, these increases were overshadowed by skyrocketing real estate prices during the pandemic. It’s possible that the Bank of Canada may continue raising interest rates, keeping mortgage rates higher despite prices coming down. The demand side is expected to be further exacerbated by increasing immigration targets through 2023 and 2024.

A recent RE/MAX Canada survey finds that “small” real estate markets continue to attract new residents and homebuyers primarily for the liveability factors, such as green spaces and neighbourhood dynamism. Many of these regions, including Oshawa, Carleton Place, and Arnprior, already have the infrastructure and public transportation, offering residents an easy commute to work in the city.

In its latest market outlook report, RE/MAX Canada expects that, in addition to the Greater Toronto Area, Durham Region, London, Kitchener-Waterloo, Barrie, and the Georgian Bay area are expected to see average prices decline from two to 15 per cent in 2023. The luxury real estate market is also expected to cool in these areas due to economic pressure. However, Hamilton, Burlington, Oakville, Brampton, Mississauga, Niagara, and Peterborough are among the regions where sale prices could increase by two to eight per cent.

The moderating market is an opportunity for homebuyers to take the time to consider their needs in a home and make a wise investment instead of making hasty decisions or engaging in bidding wars.

Is this a permanent change in the Ontario real estate market? While the future remains uncertain, our eyes are glued to the data as we watch history unfold during these unprecedented times.