Toronto’s housing market has cooled. Should you celebrate, or be scared?
In 2007, Toronto renter Jeremy Martin was working in a mailroom and checking out the east end of Toronto as a place to put down roots. Back then there was a three-bedroom house for sale for about $250,000. He figures he probably could have stretched and bought the place. But he didn't.
Since that time, I've gone to law school, worked really hard, graduated, got into a great firm, made partner, all that good stuff - and I'm looking around, and you know what I can afford?
That house."
Recently Martin came across what he swears is that same house online. It sold for $1.43 million in February.
I don't really care what kind of cabinets you put in, it is still the same house in the same location," he said. What was the point of all that (hard work)? If that's the payoff what have I been doing for the last 17 years of my life?"
His frustration is shared by many, as ever-soaring prices have pushed home ownership further out of reach. But this spring, there's been a shift. For the first time in a long time, there are signs of softening in the GTA housing market. With the average price of a house or condo declining for two months in a row, realtors are reporting fewer showings, bully offers and bidding wars.
It's what many exhausted and priced-out home-hunters have been quietly hoping would happen. No one wants to see families underwater, with mortgages valued at more than their homes. But for those who've been shut out of the market, there's some simmering animosity toward the speculators, flippers and investors who've gotten rich while ordinary families languish on the sidelines.
The recent softening raises the question of what happens if home prices slide into more affordable territory - or even further? Who profits and who gets hurt when prices fall, and what are the parallels to previous downturns in the housing market?
Experts who spoke with the Star said even the most significant downturns in the GTA housing market tend to be short-lived. They note the mortgage delinquency rate in Canada is exceedingly low, suggesting homeowners will sacrifice a great deal to hang on to their homes. CMHC's website shows the rate of delinquency in the fourth quarter of 2021 was .19 per cent in Canada; .08 per cent in Ontario and .07 per cent in Toronto.
Royal LePage CEO Phil Soper expects sales and prices will be lower than the 10-year average in the second half of this year. There will be a higher-than-typical proportion of distress sales, people who are getting a divorce, relocating or have to sell for some other urgent reason.
Although he expects prices will drop later this year on an annual basis, it's likely that with the first part of 2022 being so hot, this year's average selling price will still come out higher than last year's.
For about the last 10 years, Martin and his wife, Beth, have been renting a house and raising two daughters in the neighbourhood they were exploring 15 years ago. But their landlord needs to move in and that means they're on the hunt for a new home. He stresses they are better off than many people but they are torn about whether to rent again or buy.
There is no guarantee of long-term stability for tenants and that's something they want for their family. But paying today's rising interest rates and inflated home prices doesn't seem reasonable, he said.
It killed us to pay off $130,000 of student debt after university. Do we really want to work ourselves to the bone paying off a debt 10 times that size just for the privilege of owning a house that would have been considered downright undesirable 10 years ago?"
After watching another house in his area go for about $1 million last September, and then be relisted for $1.25 million two months later, Martin admits to feeling a little old-fashioned spite."
I'm not going to be the chump that validates that insane level of speculation," he said. I don't want to be the reason why your get-rich-quick scheme was a good idea. It was a bad idea and I'm not going to make it pay off."
While it's too soon to know what's ahead in the GTA's consistently buoyant market, Soper points out there have been three major downturns in the last 25 years, where Toronto area prices have fallen or stalled: the early days of the pandemic in 2020; post-policy changes of early 2017; and the financial crisis of 2008-9.
The most recent episode followed the first pandemic lockdown, in March and April 2020. Soper says some prices fell as much as 6 per cent. But by May, home sales took flight again as city dwellers looked for more space in which to work, study and isolate.
Before that, there had been a market correction in early 2017, in response to the Ontario Liberal government's Fair Housing Plan that included a foreign buyers tax. Aimed at slowing a frothy real estate market that was making double-digit gains month after month in 2016 and early 2017, the policy worked almost overnight - stranding investors who had been buying multiple homes, as well as some ordinary families who had bought pre-construction or resale homes ahead of selling their existing places.
Soper calls that correction a soft landing," with impacts that didn't last. By 2019 - the last year before the pandemic hit - bidding wars were back, and prices and sales were on track to soar in 2020.
But when many people think of a housing crash, they conjure memories of the global financial crisis of 2008 and 2009, and the U.S. subprime mortgage scandal that played a large part in forcing millions of families underwater. What followed south of the border was a tsunami of home foreclosures.
Eric Stein, senior vice-president of the Centre for Responsible Lending, an advocacy group that opposes predatory loan practices, remembers seeing home prices in some parts of the U.S. cut down by half. Before the crash, prices had been soaring because of how mortgages were being handed out, Stein said. The rules and checks were looser, and many families ended up with loans they couldn't afford
When prices were on the rise, if a family ran into trouble paying their bills, they could bank on their home equity - either selling that home for more than they bought it for, or refinancing. But when home values were suddenly collapsing, those options were no longer available - in many cases, meaning families lost their homes altogether.
It was really awful," said Cyleste Collins, an associate professor at Cleveland State University who researched the human toll of the mass foreclosures. It represented, for the people that we interviewed, who they were in the world and what they could offer their families - safety, stability, something that they could put a stamp on."
It was a different scene in Canada. Home prices fell in Toronto in the fall of October 2008 and they kept falling through January, before stabilizing and finally rising later in 2009.
It's similar to the beginning of COVID-19, says economist Will Dunning.
Central banks saw the dangers and acted very aggressively to reduce interest rates. In both periods there was an initial sharp drop in sales and prices fell. The big improvements in affordability meant that sales rebounded and a dip in pricing was short-lived," he said.
The flip side - and what Dunning thinks is the current story - is that the Bank of Canada has been slower to respond in a period of upside risk, a hot economy and rapid growth in asset values (housing and stocks)." He thinks the central bank should have raised rates last summer rather than waiting for March.
When Canadian home sales drop, as they have this spring, buyers and sellers typically step back to absorb the changing climate. The current situation in the GTA is being attributed to rising interest rates and a rise in inventory, although the number of homes on the market is still considered low.
In the GTA, periods of stagnant or falling home prices tend to last for months, said Soper. In the U.S., in 2008, months of distress turned into years, resulting in what he says was an actual reset" of housing values.
The financial system collapsed, and banks were unable or unwilling to lend to people, even qualified people with jobs," said Soper, who was working in real estate in both countries at the time.
Arizona realtor Deems Dickinson, president of Russ Lyon Sotheby's International Realty, remembers there were signs of the impending disaster years before the 2008 crash. By 2006, he noticed agents were buying up homes for themselves as investments, instead of selling them.
To me that said something's wrong with this market," he said. They were buying for a short, quick turnaround because they thought they could make more in an equity appreciation than they could in a commission."
Today, Stein describes the housing woes plaguing American cities as similar to those seen in Toronto over recent years, with fevered demand for reasonably priced housing outstripping supply, and pushing prices higher. He says today's surging home values are unsustainable, making a market correction inevitable. But he doesn't expect the kind of devastation the U.S. saw in 2008-09.
A drop in prices doesn't affect all households equally, Stein says. A family that bought a home decades ago, took out a smaller loan and sat on the property building equity would be in a better place to weather a decline.
If they have a lot of equity in their house already, then they may be just losing some paper wealth," he said.
But a young family that took out a larger loan more recently, to crack into a white-hot housing market, may be in a more precarious position. They wouldn't necessarily feel the impacts of a price drop on its own, he cautioned - but if another shock like a job loss or a divorce made it harder to make their mortgage payments, it could put them on shaky ground.
For many struggling homebuyers, a price drop might look like an opportunity. But experts say rising rates will likely make up any difference in home prices. Soper says there's no question this downturn will push first-time buyers to the sidelines. That happens after every period of irrational exuberance. But the research shows they are also the first back in," he said.
The upside is that prices have already flattened, and the average buyer can put conditions in their offers again. And for those who bought at market peak in February, Soper says if they are living in the home for years, the downturn likely won't matter in the longer run.
Investors, who are often landlords and whose fortunes are tied to their tenants, will likely only be impacted if employment falls, taking tenants out of the market as it did at the beginning of COVID-19.
It's the flippers who take a hit in this type of downturn, according to Soper, who distinguishes flippers from renovators, who add value to a property. A flipper, who has bought a home to sit on for as little time as possible waiting for a payoff in appreciation, has nothing to gain in this circumstance, said Soper.
But at the end of the day, he said, there is still more demand than homes in the GTA. I just see no scenario where home prices won't appreciate and any short-term drop will be made up again."
Stein looks at home prices as a double-edged sword. There's just a direct conflict between the benefits that you want to see for existing homeowners and their families and their financial futures, and the ability for the next generation of homeowners to get those benefits and get in the door.
You want to see both sides win, but math says they can't both always win," he said.
Toronto X-ray technician Fahad Patel is currently in the camp of housing have-nots. He feels he's done all the right things but is trapped in a rigged system. After graduating from McMaster University in 2011, Patel moved to Vancouver Island to find work, moving back to Toronto in 2016 to be near family and friends.
That, he says, is when he realized he would never be able to afford a house. He can't imagine qualifying for a mortgage in Scarborough, where prices average well above $1 million, and yet homes continue to sell. The housing market, to my understanding, is not going down, no matter what is happening here," he said. The population was growing, Patel noted, while home inventory didn't seem to keep pace.
He feels fortunate, for now, to no longer live in a basement apartment. The divorced father of two currently lives with his children in a co-op townhouse, where he pays about $1,300 plus utilities.
The year after Patel graduated, his brother bought a house for about $447,786. Patel told him he was crazy to spend so much money.
Now, compared to 2012, there's like almost a $1 million increase."
Tess Kalinowski is a Toronto-based reporter covering real estate for the Star. Follow her on Twitter: @tesskalinowski
Victoria Gibson is a Toronto-based reporter for the Star covering affordable housing. Reach her via email: victoriagibson@thestar.ca