Prices have gone Parabolic…What’s Next?

Betting against the Toronto housing market has been a bad decision in recent history. We’ve come to expect that prices will steadily rise for what seems like the rest of eternity.  However, this upward trend has recently shifted to an all-out parabolic blast-off. It’s as if the market has no limits. Buyers have been fuelled by record low interest rates and kicked into competitive high-gear due to the record-low inventory levels, among other new factors brought into play as a result of the pandemic.  

In tandem with this recent blast-off, we have settled into a new decade that has turned out to be an era of increased volatility in just about every aspect of life - a global pandemic, skyrocketing costs of goods and services, labour market shortages, stock market roller coasters, the emerging impact of disruptive tech, not to mention a spike in natural disasters and unprecedented global political instability.  

So with all of these variables at play, where do I see the Toronto housing market going this year?  Well, here is what we know is on the horizon (with a reasonable level of certainty) and what is most likely to have a direct near-term impact on the Toronto housing market: 

• DOWNWARD PRICING PRESSURE: 

  • Multiple interest rate hikes throughout 2022

  • Increased global economic uncertainty (e.g. inflation, Russia’s invasion of Ukraine)

• UPWARD PRICING PRESSURE: 

  • Continued under-supply of new housing.

  • Population growth in the GTA is projected to be the highest since the 1980’s in 2022 and beyond (https://www.ontario.ca/page/ontario-population-projections).

Check out the TRREB average home price graph below. The last time we went parabolic (around January 2016-January 2017) there was a fairly dramatic cooling off period in the two years that followed. Back then, the rapid price appreciation was spurred on by historically low interest rates and the looming threat of the new mortgage stress test that threatened to reign in the purchasing power of buyers.  Fast-forward to 2020-2022 and we find ourselves once again in a record-low interest rate environment with the promise of increases on the way. However, there is even more fuel for the fire this time - historically low levels of active listings on the market, padded savings accounts built up over the pandemic, continued appetite to purchase investment properties, and a desire for larger “work-from-home-friendly” properties.  This began in January 2020 and is still going strong.  So this begs the question - are we on track for a correction? And when? 

Toronto average housing prices 1994-2022, highlighting recent periods of particularly steep average price trends…

I have to say it sure feels like we SHOULD be in store for a correction - prices have gone way off the historical trend-line, climbing so quickly and so dramatically that it can’t continue at this rate without buyer exhaustion hitting a breaking point and a large enough segment of the market being “priced out,” subsequently causing demand to temporarily plummet.  However, with such significant upward pricing pressures mentioned above not going away anytime soon, and continued strong fundamentals that have underpinned the Toronto housing market for decades, I am expecting something that resembles more of an extended luke-warm bath versus a polar-bear dip quick and dramatic correction; prices that cool off throughout the rest of the year as interest rate increases come into effect.  

If prices started to trade sideways for a period of time, more sellers who prefer to sell first then buy will feel confident coming to market as they worry less about losing equity during the gap between selling and buying where prices continue to rise rapidly while they search for their next home. This will help to boost the number of active listings, and I think it will be especially true for the large cohort of downsizing boomers who are ready to cash-out of their large suburban homes that have become increasingly misaligned with their evolving lifestyle desires and changing home ownership considerations that come with age. 

Overall, I do hope we see this much needed break from parabolic increases and a return to a more balanced and sustainable market dynamic in the months and years to come. But I’m not going to count on it; so far the 20’s haven’t given us a whole lot of reason to believe that stability is the new normal. 

-Steve