Could This Recession Lead to Higher Home Prices in Toronto?

Technically speaking, Canada is in a mild recession. We're not talking 2008 here. The money systems of the world are not at stake. It's more of an embarrassing surprise, like discovering you had your fly open all day. You may not have been truly aware that something was happening until someone presents the data.

To believe that Canada is in a recession right now, may make you a traditionalist of sorts. If you define a recession as two consecutive quarters of negative growth, then yes, we are in a recession. Some consider a recession to be a pronounced negative change in the economy for a sustained period of time. And if you accept that definition of a recession, then we're likely not it one since the change we are seeing is not so pronounced. So, for the sake of argument, let's define it the first, traditional way - a recession is two consecutive quarters of negative growth. I think this may be how the Federal Government is looking at it.

Usually, when the word "recession" is talked about, mediated and printed enough times, home prices start to fall. People may lose their jobs or fear they will lose their jobs. Consumer spending slows down, unemployment goes up, and Canadians feel they need to be more careful with their money.

I don't think that's going to be the case in this so called recession from the perspective of Toronto. In fact, this recession may cause home prices in Toronto to go up even more.

How you ask? Doesn't this defy the logic of what recessions do? Well, I think there are some good reasons why this recession would put upward pressure on property prices, instead of downward.

1.  LOWER INTEREST RATES: When the fear of a recession starts, and folks start to feel more careful with their money, the government tries to stimulate their desire to buy. The Canadian government has lowered interest rates yet again to help boost us out of the recession. So, for those buyers who are looking now, they will be paying less in interest, and they will be able to afford even more.  This leads to more buying and more competition with buying houses.

2. THE CAUSE OF THE RECESSION IN NOT IN ONTARIO

Alberta and its abundant resources seems to be the biggest reason why we're heading into a recession. And prices of homes have fallen there. Oil and other resources in Alberta and in other provinces like Saskatchewan and Newfoundland are not as successful as its been in the past few years. Though there is a good possibility that Alberta will come roaring back to life, Ontario does not seem to be as damaged by the resource slump. If Alberta continues to slump, there is a good chance we may see some net migration out of Alberta to Ontario just like in 1986 to 1988. Back then, when the oil prices fell, many Albertans moved to Ontario to send home prices higher here in central Canada. If Albertans return again, we'll see more competition with new migrants from the prairies competing for our housing stock.

3. A LOW DOLLAR IS NOT BAD FOR ONTARIO

Lastly, the falling dollar caused largely by falling oil prices in 2015 have made manufacturing-loving Ontario a lot more appealing. Now, businesses in Ontario and BC could sell their products abroad more cheaply. Now that the Feds have lowered our interest rates, the dollar will go down in value again. It makes for a more expensive trip to Hawaii or New York, but it makes the Ontario economy happy. It will also make foreign investors more interested in buying real estate in Canada while the dollar is so cheap.

So yes, we may be technically in a recession, but this recession is different from the last one. If you live in Toronto and most of Ontario, it will trigger more demand for housing and higher prices instead of the usual sad slip in prices. This may be a good or a bad thing, depending on how you look at it. Some feel consumer debt is already too high in this country. Adding to it could only put more stress on the debt levels of Canadians. If you are a buyer, it's both a good and bad thing. You will have less interest on your mortgage and you may be able to qualify for a higher amount, but home prices will be more competitive and higher. For sellers and homeowners, it will be good. Sellers will have a better chance of making more money off of their assets and homeowners will, once again, see gains in the value of their home and their net worth.

Have the Government's Good Intentions Led to Higher Prices in Toronto?

It made a lot of sense ten years ago. It appeareded as though the government was acting responsibly, but good intentions may have led to some negative consequences for those looking to buy real estate in Toronto.

If you recall, around 2004 the provincial government put in a policy that would discourage sprawl and encourage density. This provincial policy claimed that there can be no more development in the greenbelt surrounding the GTA. All development would need to be done inside the GTA or outside of it. Such policies had very good intentions behind them. A greenbelt would protect the farmland around the city and the surrounding area. So, if there were ever a failure in an external food supply from an outside country or another part of Canada, Toronto could still grow their own food to feed their population. Furthermore, it pushed developers to take up land that was previously a parking lot or an industrial land site, clean it up, and make it useful again.

From an environmental point of view, densification made the city more efficient. A better use of space and a protected greenbelt.  From a money point of view, the new policy allowed the city to collect more tax dollars. If an area that has 10,000 Torontonians had a number of new condos that added another 10,000 residents, then you would double your tax dollar revenues. There's no guarantee the province or city would spend the money wisely, but it would be there. It would put more stress on existing infrastructure, but it would be less expensive than building new roads and new water supplies in a brand new area. Simply put, it would not be cost effective to build more low rise housing.

It all sounds good and noble, but one of the results of this policy has led to a very distintive housing trend, partially a result of the greenbelt policy and partially policies of densification at the city level. Because the province and city encourage densification, developers build more high rise condos. The low rise supply of homes, like  houses or condo townhouses, are built less because developers make more money selling high rise condominiums (more units on a smaller piece of land).

So, if we look at the average price of high rise condo at the end of 2014, it would be $454,406. For a low rise condo or freehold house at the end of 2014, the price has shot up to $705,813. That's a $251,337 gap. It's the largest gap there has ever been between high rise and low rise homes, and that gap will continue to grow. In the late nineties, 40 % of the new construction was condominium. Now, it is over 80%. The supply of high rises keeps on growing. The supply of houses and low rise condos grows very little, far below the demand for it.

So, what does that mean? It means houses and low rise condos will likely become more valuable as time marches on. It also means for those folks who buy a condo in a high rise as a starter home will have a tougher time moving up.

It would appear the solution would be to get rid of the green belt policy implemented by the Ontario government, and let the developers build on the green belt. They will have more land to build low rise homes. The cost of losing the green belt would allow for lower Toronto home prices, at least for the short term. Of course, this would be poor urban planning. We still need to protect our food supply, and densification still allows for better uses of space and a fiscally responsible approach to city building.

I believe there are two solutions needed for the government to help remedy this situation. First, the government may need to insist that developers build more units that are suitable to growing families. Currently, we see condos getting smaller and built for couples or singles. There's little room to move up. If you want to keep families in the city, then you need to have more three bedroom condo units with amenities that appeal to children or couples or singles who want bigger spaces as they age and make more money. Second, we need better transit from Oshawa to Hamilton. If there is a desire for low rise homes, then we need to be able to move people to where the stock of houses and low rise condos are affordable to many people. We need a regional transit system like they have in big cites like Paris and London and New York that will take you from downtown Toronto quickly to Hamilton and Durham region. We can't keep thinking that Toronto functions as a separate entity from it's neigbhouring cities and town.  Some of this is happening already with improved GO transit coming to Hamilton, but it has to take place a lot faster and a lot more extensively. 

Transit will be the key thing all levels of government will need to focus on for the decades ahead. Toronto will very likely be an expensive city to live, where the downtown core will be pricey, but we need access to a wide variety of home price points and options that will accomodate the city we are becoming, not one that we were twenty years ago.