On New Ground: Average Toronto Home Price Breaks $1M Barrier for First Time

Investor Backgrounder

On New Ground: Average Toronto Home Price Breaks $1M Barrier for First Time

 

The Toronto Real Estate Board recently reported that the aver- age price of a detached home in the City of Toronto has moved above $1 million for the first time in a calendar month.1.    This record price is largely being attributed to the low supply of de- tached homes in the area while demand remains high. After the provin- cial government’s introduction of the Greenbelt legislation a decade ago, this fostered greater urban intensification leading to more condominium development as well as limited supply of detached homes in Toronto.2. This spike in detached home prices has also led to a widening price gap between high-rise and low-rise housing.

 The record-setting million dollar – plus price for a single family home in Toronto is a factor of low supply and high demand

Through this sustained increase in the price of detached homes, home ownership has become increasingly unaffordable. A recent RBC report noted that the Toronto market stood out as affordability measures have deteriorated significantly in single family detached homes. Specifically, RBC’s Standard Housing Affordability Measure, which captures the pro- portion of median pre-tax household income to service the cost of home ownership or the difficulty of affording a house, is around 50% for de- tached homes in Toronto.3. This means that a household making the me- dian household income living in an average priced detached home would need to pay half of their income solely on home ownership costs. As a result, Toronto is the second most unaffordable city for detached homes only behind Vancouver. While the Bank of Canada’s recent rate cut will help reduce the strain on affordability by reducing interest payments, it is thought that the rate cut by also further spur demand for homes leading to increased prices.

 As a result of increased home prices, people are turning to renting again.

While the increase in Toronto detached home prices has been straining home affordability, this should act as a positive growth driver for purpose built rental.5. As a 20% down payment for the average detached home in To- ronto is now over $200,000, many people simply cannot afford home own- ership costs. Although condominiums have become the de facto rental mar- ket, representing the majority of new construction, people looking to rent see strong merit in the benefits of purpose built rental. In particular, they are provided with a professionally managed living space and no concern of the unit being sold or the owner taking possession and having to relocate. Toronto has also seen developers change their plans for construction of con- do towers into purpose built rental in an effort to meet this demand

 April 1, 2015

References:
1. TREB Market Watch, February 2015
2. http://urbantoronto.ca/news/2015/01/gta-housing-market-sets-several-new-records– 2014
3. RBC Economics, Housing Trends and Affordability, March 2015
4. http://business.financialpost.com/2015/03/05/torontos-million-dollar-homes-reveal– risks-of-bank-of-canadas-flirtation-with-lower-rates/
5. http://business.financialpost.com/2015/02/26/torontos-rental-market-reborn-as– housing-prices-surge-out-of-reach-for-many/
6. http://news.nationalpost.com/2015/03/01/for-rent-in-toronto-swank-new-apartments -and-surprise-theyre-not-investors-condo-units/