If you’re worried about new home prices going down

I’ve been employed doing real estate research on the Toronto market since 2002. In almost every year during that stretch, the average new home price has increased year-over-year. However, according to official data from BILD, the local home builders’ association, single-family house prices have declined year-over-year, and condominium apartment prices have softened from the rapid growth in 2017 and 2018.

Despite the softening, unless you’ve won Lotto 649, new home prices in Toronto are still very expensive. With prices so high, it’s natural to ask, 'is there a major correction coming?' No one wants to buy something and immediately see the value of the item drop.

The government has taken steps to cool housing demand by implementing a mortgage stress test that has reduced many buyer’s access to credit, which lowers ownership demand. The government also instituted rent control, which they expected might reduce investor demand, as returns on hold-and-rent properties would be lower. They were right, and both new and resale transactions dropped noticeably in 2018. However, the decrease in ownership demand resulted in increased rental demand, which caused a spike in rental rates for vacated properties last year. For 2019, Rentals.ca has forecast another 10 per cent increase in average rents in the former City of Toronto.

To further combat the rising cost of living, the provincial government wants to improve affordability for both ownership and rental housing by helping increase housing supply via changes to planning policies in their proposed Bill 108. The reaction to the bill has not been positive, especially from the Toronto planning department.

Some of the government fees and charges on new developments are used to improve local parks, build community recreation centres, and improve transit. Bill 108 could alter and potentially reduce those fees. These are needed services and community benefits, but the costs are often passed directly to new-home buyers or tenants in new developments. Municipalities are faced with the conundrum of underfunding services, or contributing to worsening the housing affordability crisis. Tough one, eh?

Unfortunately, people much smarter than I have predicted that even if Bill 108 goes through, housing supply will not increase. In other words, more of the same: More demand than supply, and higher prices.

I believe more rigourous analysis is needed before a definitive conclusion as to the amount of future housing supply we might get under Bill 108. The level of analysis has been shallow, and lacking hard data. A more meticulous analysis would look at the impact on a developer’s revenue and costs, while considering planning, land values, financing, construction, and other strains on capacity.

However, if I was a betting man, I’d say the underfunding of services won’t be allowed to happen, and house prices will continue to go up, as new homebuyers and tenants bear this cost. This may not make you feel great about buying in the short-term, but if you’re buying for the long-term, demand will continue to be strong as high immigration, job growth, and high post-secondary enrollment attract more people to the region, while no changes are made to increase supply.

Before buying, make sure to surround yourself with a team of experts, including a realtor that specializes in the new-home market, a mortgage broker, and a lawyer. Lastly, buy what you can afford, and do a lot of research. Good luck

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