Is inflation killing inflation? This appears to be the case in the Ontario real estate market.

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. In 2023, conditions have come to a standstill, and the latest data point to a slowing and potentially more balanced housing market for buyers and sellers.

Of course, the Ontario housing industry has not returned to its pre-pandemic levels, even as the Bank of Canada (BoC) has raised interest rates to their highest levels since before the global financial crisis, and the average five-year mortgage rate exceeds six per cent. But conditions have eased toward the end of 2023.

According to the Ontario Real Estate Association (OREA), residential property sales plummeted nearly eight per cent year-over-year in October, totalling 11,544 units. Home sales were also more than 36 per cent below the five- and 10-year average for this time of the year. In the first ten months of 2023, home sales have declined by 13.4 per cent compared to the same span a year ago.

The average resale price of residential properties edged up nearly three per cent year-over-year to $855,990. However, the more comprehensive year-to-date average price slumped seven per cent to below $877,000.

By comparison, national home sales rose one per cent year-over-year, and the national average price jumped close to two per cent year-over-year to just under $657,000.

Is the Ontario Real Estate Market Crashing?

Let’s take a look at the summary of existing home transactions in the Ontario regions and see how they performed in October:

Halton

  • Home Sales: 425 units
  • Average Price: $1,199,254

Peel

  • Home Sales: 807 units
  • Average Price: $1,080,216

York

  • Home Sales: 848 units
  • Average Price: $1,293,179

Durham

  • Home Sales: 588 units
  • Average Price: $931,548

Dufferin County

  • Home Sales: 22 units
  • Average Price: $816,291

Simcoe County

  • Home Sales: 120 units
  • Average Price: $974,831

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 five per cent. The move seems to be cooling hot Canadian housing markets when compared to the crisis-era climate, with Toronto showing signs of normalization. The BoC has been clear that it would use its monetary policy tools to ease inflation, which is coming down, but still sits above the Bank’s two-per-cent target.

In response to interest rate hikes easing mortgage and housing demands, Canadian housing markets have cooled in the last 18 months, with the most significant 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.

Could the Ontario real estate market endure a crash next year?

Ontario Housing Crash Averted

Early estimates for 2024 suggest that conditions could be mixed: robust sales activity and flatlining price growth.

According to an updated Canadian Real Estate Association (CREA) forecast, the Ontario housing market is forecast to see a 10.8 per cent increase in sales activity and a 0.2 per cent boost in home prices.

“Prices in Alberta are expected to outperform the rest of Canada in 2024, with a forecast gain of 4.8% compared to 2023. In contrast, Ontario is forecast to see virtually no growth in prices next year (+0.2%). Modest price growth in the 1% to 2.5% range is forecast for other provinces in 2024,” the national real estate association said in the report.

TD Economics also expects a more sideways trend in the Ontario real estate sector next year. Home sales are anticipated to rise three per cent, while home prices are expected to slide 0.5 per cent.

“Regionally, the steepest near-term sales and price drops should occur in B.C. and Ontario, mirroring what we’ve already seen take place since the Bank of Canada resumed hiking rates in June,” said TD economist Rishi Sondhi in a research note.

A September 2023 RE/MAX report suggests that the real estate market could be busy to kick off the new year, says Christoper Alexander, the president of RE/MAX Canada.

“If the fall market is an early indicator for 2024 activity, we may see a very active first quarter as buyers and sellers take advantage of easing prices into the earlier part of next year,” he said in a statement.

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 2023.

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.

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 is finished raising interest rates, but rates could be higher for longer. The demand side is expected to be further exacerbated by increasing immigration targets heading into 2024.

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.

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