Housing Affordability in Toronto

Housing Affordability in Toronto

Demand for homes in Toronto continues to consistently increase, despite escalating prices. The question being raised by many analysts and observers is whether or not the real estate market in the city is reaching “risky” levels. What are the risks that they speak of? And what are the possible consequences of the current trajectory of home sales in the nation’s hottest market?

As Realty Today  reports, the Toronto real estate market has “exuded a low interest count over this second quarter,” in comparison to other major Canadian markets like Vancouver. The article also anticipates that the price of detached homes will undoubtedly rise, considering the supply for such a home dwindles every month.

According to CBC, it is housing affordability in Toronto that is becoming too risky. Realty Today believes this has everything to do with the declining price of the Canadian dollar, which is luring foreign investors into the city, making it much harder for locals to purchase homes.

“With a strong labor market, a stagnant inflow of migrants and low interest rates affordable to home buyers in the region, it might not take too long before the affordability of the Toronto real estate overturn and affect the steadiness of the market because the prices are 35% overvalued.”

Amy Grief of BlogTO, talks about a housing affordability report recently published by RBC, which illustrates quarterly housing trends. To RBC, affordability is measured by the amount of median pre-tax household income needed to cover mortgage payments, properties taxes and utilities at current market prices. To give an example, in order to afford a detached bungalow in Toronto, approximately 60% of a person’s income is required to be able to afford paying for the home. For a two-storey detached house, this number is closer to 67.5%, with condos being, understandably, the most affordable housing option at around 30% (condo supply is very healthy is Toronto, as many know). Here’s a quote from the report:

“In fact, affordability in Toronto is moving ever closer to the historically poor levels that prevailed in 1990, which may signal that risks are mounting because those were associated with a housing bubble at the time.”

Toronto’s condo boom, at one point earlier this year, was deemed to be a detriment to the housing market. But condo sales have been relatively steady this year, creating what some analysts, particularly from BMO, are calling an equilibrium, where the additional units are needed to compensate for the lack of single-detached homes. As Susan Pigg of The Toronto Star explains, evidence of this equilibrium is evidenced by the fact that, despite the moderate rise in condo prices, sales of resale condos hit a new record in the second quarter of this year. According to BMO’s senior economist Sal Guatieri, the biggest risk to the housing market is not affordability, but a “sharp increase in unemployment or interest rates that erodes demand.”