One of the significant benefits of investing in real estate is the opportunity for rapid and consistent appreciation in price. However, appreciation, like any investment growth, is never guaranteed. The values of homes and how rapidly they grow or fall can change a lot from year to year.
Among cities in Canada, the Toronto housing market is undoubtedly one of the most popular for investors and price appreciation is a big part of that popularity. Though Toronto Toronto's prices are very high, there is also a lot of potential for appreciation and this growth has been consistent for many years.
With prices in Toronto going up for so long, this can also make investors somewhat anxious. How can you know prices won't fall tomorrow if you buy now? If you choose to wait, could you miss out on possible huge gains? Is it a good idea to wait for the market to be more affordable?
This article will look at how real estate prices have changed in Toronto over time. We will look at prices over the long term and more recent trends. We will also cover what potential growth will look like for the future and how investors should use these predictions to influence their investment decisions.
What is the current value of homes in Toronto?
To appreciate the increasing prices of homes in Toronto, you should first understand where the current average values are. According to the Toronto Regional Real Estate Board (TRREB), the average price for a detached home in February 2022 was $2,073,989 in Toronto and $1,727,963 in the GTA regions outside of Toronto. Semi-detached home prices were $1,499,489 and $1,282,386 in the two regions, and condos went for $822,090 in Toronto and $756,146 outside of Toronto.
Over the last year, detached homes in Toronto saw an average increase of about 23%. Townhomes and condos saw slightly lower increases at 22.8% and 21.5% respectively, and semi-detached dwellings saw the lowest growth in the city at just 14%. In the areas outside of Toronto, prices grew even faster over the last year with detached homes seeing an almost 33% increase, townhouses grew by 32.3%, and condos increased up to 34.2%. As opposed to the low growth in Toronto, semi-detached homes outside of Toronto grew by 37.5% year over year.
How has the average price grown in the past?
The long term view
The last time Toronto house prices saw a significant downturn was around 1989-1996. In 1989, the average house price in Toronto cost $273,698. Over the next seven years, prices fell to $198,150, returning to housing prices of about a decade earlier. Home prices continued to rise from there, though they did not reach their previous peak until about 13 years after the crash in 2002. The causes of this downturn are multitude, but it seems to have been caused by a combination of a general economic recession, speculative investing, and excess supply, particularly in the condo market.
Again, there was a slight downturn in 2017 due to factors like the newly instated foreign buyer’s tax and mortgage stress test, though prices quickly recovered and have grown ever since.
The recent past
It’s easy enough to say that the average home price in Toronto has continued up for about the last 20 years and that the last few years are simply part of that trend. However, it’s notable that in the previous few years, the prices of homes in Toronto have been increasing even faster.
From the years 1998-2021, homes grew in price from around $200,000 to over $1 million, with an average pace of about 17% per year. However, when we look at growth in the short term, we find that much of that average is skewed towards recent times. From 1998-2010, the average was closer to 8%. From 2011-2021, the average was around 13% per year, and in the last two years alone, home prices have grown by over 20% a year.
The question now is: Is this growth sustainable and here to stay, or is another correction in-store to cool off the market?
What drives price growth in the Toronto housing market?
Price growth in Toronto is not very surprising when you consider the popularity of the city. Not only is it Canada's largest city, but it is also the capital of the most populous province and the province with the highest GDP. This means that on top of many people looking to live in the city and the surrounding areas, it’s also a critical area for commerce and business. In addition, Toronto and the GTA are also some of the most popular destinations for immigration into the country, adding to the already significant amount of population growth coming from new births and migration from within the country.
Furthermore, due to its well-established economy, the City of Toronto is considered a pretty safe bet for investors. As the brief look at pricing history above can demonstrate, housing prices have seen pretty consistent performance in the city. When it did falter, the crashes were not so catastrophic and the recovery was quick to come. This makes real estate assets in Toronto an appealing product. Yes, prices are high, but the returns are too.
Adding to this, the city also draws many people for jobs, education and quality of life who may not be able to afford the high asking prices for real estate. This makes rental demand pretty consistent in the city and rents are some of the highest in the country.
While desirability drives demand, it’s not the only component of rising prices. The other factor to consider is supply. The City of Toronto has essentially grown as far as it can, meaning there is a set amount of real estate in the city. Though developers are building up, they need to justify the cost of development on expensive land and similarly charge high prices.
Though the GTA has more room to grow, they are experiencing supply issues. With many unable to buy in Toronto plus new population growth and pressure from investors, the demand for houses is too high for builders to keep up. Looking at the housing downturns in the past, a significant component was a rise in homes on the market, allowing prices to fall. Without a large amount of housing supply increase, the market will remain tight and prices will continue to stay strong.
In the last two years especially, the real estate market has exploded due to a combination of low borrowing rates, increased disposable income, continued low supply, among other factors.
Where are prices going to go in the future?
This is the big question that all investors and real estate professionals want to know, and unfortunately, we can not give you a definite answer.
On the other hand, the fundamentals of the market are strong. The city continues to see GDP and job growth and the demand for housing keeps growing as well. For such a large and important city in Canada, it’s safe to say that Toronto will not suddenly crash entirely.
Concerns have been raised, however, as people see the rapid growth in the past two years as not sustainable and worries about another downturn are growing. Most analysts looking at the potential future would agree that continued growth at the pace we have seen is not going to last forever. There are different views on to what degree the market will shift.
On one side are predictions for a continued but slow increase in prices. In this scenario, home prices would continue to rise. A recent report from RE/MAX predicts growth of up to 10% in Toronto for 2022. Similarly, the Canadian Real Estate Association (CREA) forecasts a 14.3% price increase in home values nationally in 2022.
On the other side, some are predicting a downturn in prices. This includes a prediction from Oxford Economics which, in a recent forecast, predicted home prices in Canada to fall 24% to 40% over the next two years. Note that the market across Canada does not always align with conditions in Toronto as a city. However, as one of Canada's largest real estate markets, it would surely see some of the impacts in this scenario. Also, keep in mind that a 40% drop in prices would still only leave us with home values seen around 2020, so it wouldn't be an all-out collapse. This would not be great for investors, especially those who bought recently.
In the middle of the road, you have predictions for a price stagnation, which is neither great for investors nor necessarily for those hoping to get into the market.
Is now a good time to invest?
In choosing to invest in real estate now, you should think about what you want your strategy to be. If you plan to profit on a home's equity in the short term, you should be prepared for returns lower than seen in recent years with the potential for negative returns in the coming five years or so.
On the other hand, if you plan to buy a rental, now may be as good a time as any to consider. Rental demand is still steady in the city as life returns to pre-pandemic conditions, which will mean only more demand in the market. For the time being, mortgage rates are still near historically low, though they are set to rise soon.
Overall, Toronto is generally seen as a good investment if you can afford it, however, you should be aware of the potential instability in the short term. As usual, it will come down to the individual investor to evaluate their own risk and returns preferences in deciding where they want to put their money.