Housing Market Dips in 2023, Recovery Expected in 2024 and 2025
Toronto’s housing market will see a decrease in starts in 2023 before rebounding in the following years, as various factors combine to impact construction and sales. A decline in pre-construction sales of ground-oriented homes in 2022 signals fewer units breaking ground in 2023, while other factors like rising construction costs, labor shortages, and high-interest rates will also contribute to fewer apartment starts this year. A construction backlog of 101,000 units further exacerbates the problem as existing projects must be completed before resources can be allocated to new units.
The Greater Toronto Area’s (GTA) average MLS® price is also expected to decline in 2023, due to continued high mortgage rates, before increasing again in 2024 and 2025. The average household required approximately 22% more disposable income to qualify for a mortgage in the last quarter of 2022, and this trend may continue in 2023. As a result, home prices are expected to decline, and sales will likely shift towards lower-priced homes.
However, the housing market should see gradual improvement in 2024 and 2025 due to declining mortgage rates, the large millennial demographic entering prime homebuying years, and strong population growth through immigration. New listings are not expected to increase significantly due to the sluggish economy in 2023, but they will be outpaced by sales in the following years, resulting in upward pressure on the GTA’s average price. Decreased ground-oriented housing starts in 2023 will also contribute to rising prices in 2024 and 2025.
There remain downside risks to these resale market forecasts; an extensive economic recession in 2023 could result in more extensive job losses and new listings than anticipated. Additionally, if mortgage rates remain high for an extended period, heavily indebted households may be forced to sell, leading to a greater supply of new listings and lower prices.
Rental market conditions in Toronto are expected to remain tight, with the average vacancy rate for purpose-built rental apartments predicted to decline between 2023 and 2025. High immigration levels, the high cost of homeownership in the GTA, and a tight labor market with increasing wages will contribute to a higher demand for rental properties.
However, the construction of rental housing in Toronto has become less tenable, given the rising construction costs, interest rates, and land prices. As rental apartment starts have fallen in recent years, fewer completions in the second half of our forecast horizon could keep rent growth elevated due to strong demand.
In conclusion, the Toronto housing market is expected to face challenges in 2023, with fewer housing starts and a dip in average prices. Recovery is anticipated in 2024 and 2025, with a rebound in sales and demand for housing. However, risks in the form of economic recession, high mortgage rates, and housing supply challenges persist and could impact the future trajectory of the market.