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What’s Driving Soaring Prices in Toronto Housing Market & How Are Governments Responding?

May 3, 2017 By Hatch Mortgages
Soaring Prices in GTA Housing Market

For the last couple of months, headlines in Ontario have been dominated by the risks posed with the current housing bubble in the GTA and the economic impact the bursting of such a bubble could have, not only for the Ontario economy, but nationally as well. On April 20th, the Ontario government unveiled new measures to curtail soaring home prices in the GTA and affected nearby communities. The cornerstone of these measures is a new 15% foreign buyers tax, similar to what was implemented in B.C., last summer, to put the brakes on the red-hot Vancouver housing market. So what are some of the factors driving the huge price increases we’re seeing, and the subsequent government reactions? Will the measures implemented in Ontario see the same kind of success they had in B.C.? Hatch dives in.

Home Prices in the GTA are Skyrocketing

Many home buyers are currently finding themselves in a bidding war for their dream nest in Toronto and the surrounding markets, while many other Canadians, especially first-time buyers, can’t even contemplate making a bid right now, as prices continue to soar at a far greater pace than incomes:

The average price of a detached house in the GTA surpassed $1.21-million last month, a level beyond the financial means of many families looking to buy their first home. Prices in surrounding regions have also jumped as families are priced out of the Toronto market. – Globe and Mail

In the Toronto area, average home prices have risen by more than 30% in the last year. For Brampton, it’s 35%, and for Barrie… there’s been an astounding 39% increase for the average price of a home in the first quarter of this year compared to last year. – Toronto Star

So What’s Drivings Up Home Prices in Toronto?

Several factors are creating a kind of perfect storm, driving up housing prices at a hyper-accelerated rate. Wealthy foreign investors are searching the globe continually seeking places to park their money, especially in attractive economic hubs like Vancouver and Toronto, in one of the most stable and promising national economies in the world – Go Canada! We want to attract foreign investment into Canada, but not to point of over-saturation in key housing markets like Vancouver and Toronto.

Job growth in these two cities is outpacing the rest of the country and a huge increase in the working age population is placing significant upward demand on these housing markets:

“The working age population is growing about 70 per cent faster than the national average in Vancouver and Toronto,” National Bank economist Stefane Marion noted [in April]. These two cities now account for an enormous share of Canada’s economic growth. While nationwide job growth amounted to 0.9 per cent over the past year, Toronto added 5.5 per cent new jobs and Vancouver added 4.4 per cent new jobs, Marion noted. – Huffington Post

Record low mortgage rates in Canada, limited housing supply in Toronto and the increasing draw for speculators, with easy access to capital and who are looking to make a quick flip, are also fueling soaring prices in the GTA.

Governments Respond To Soaring Home Prices

The situation is making home ownership, especially for young people entering the market, a steep uphill climb at best, and has clearly caught the attention of governments of all three levels for the GTA, which met on April 18 in a coordinated effort curtail the situation:

The politicians are reacting to growing political pressure to make home ownership less of a pipe dream for young people in the GTA, where the average home now costs more than 12 times the average household’s gross annual income. – CBC

Response To Soaring House Prices at the Federal Level

Over the past year, the federal government has tightened mortgage rules, with new CMCH regulations aimed at slowing housing prices including a new stress test for mortgage applicants, making it harder, especially for first-time homebuyers, to purchase a home. At Hatch, we feel your pain on this one.

Taming the Vancouver Housing Market

Last summer, the municipal government in Vancouver added a “Vacancy Tax” on residential properties to help deter a trend of foreign real estate investment that saw many homes sitting empty or occupied for only short periods during the year. The B.C. government also implemented at 15% foreign buyers tax and the two measures have indeed had the intended effect of slowing housing price increases in Vancouver: “Vancouver’s average sale price for detached homes is down seven per cent since last July.” – Financial Post

City of Toronto Preparing for Action to Combat Soaring Housing Prices

At the Municipal level in Toronto, Mayor John Tory is taking steps to speed up the housing approval process and looking into the idea of taxing vacant homes, similar to what Vancouver has done:

Toronto Mayor John Tory is asking city staff to investigate the impact of taxing homes that sit vacant as a way of making more homes available and cooling the city’s red-hot real estate market — an idea the provincial finance minister seems open to as well. – CBC

Ontario Government Hits the Pause Button on Housing Market

The biggest splash in government intervention was an announcement by the Wynne Liberals on April 20th, introducing measures to make housing more affordable and announcing a new foreign buyers tax of 15%. Although many experts agree that foreign ownership is not as large of a factor in the GTA housing market as it is in Vancouver, they also assert that this measure will be a shock to the market and likely to at least create a pause in the intense bidding wars for a choice spot to call home.

Bank of Canada Holding Steady on Interest Rates

On the plus side for anyone looking to get a new mortgage or refinance or renew your existing mortgage, the Bank of Canada has signaled a wait-and-see attitude to the recent round of government measures. Addressing the issue with reporters in Washington, on April 22nd, Bank of Canada Governor, Stephen Poloz weighed in:

He said he believed the issue of controlling runaway prices was a matter of psychology, more than market fundamentals. He said the right way to deal with that was policy tools — not increasing interest rates. – CBC

Hatch Online Mortgages Can Help

At Hatch, we get behind our clients out there in the trenches looking to purchase their dream nest, navigating today’s aggressive housing markets, by offering some of the most competitive mortgage rates across Canada. We also make things a bit easier, by allowing you to conveniently apply for your mortgage online. Hatch also offers the backing and professional guidance of a seasoned mortgage broker with over 30 years experience… Papa bird, Dan Martel.