Navigating Ontario’s Housing Market in Summer 2023

Ontario’s housing market is one of the world’s most exciting, and this has important implications for local investors. Whether its soaring construction costs or unexpected interest rate hikes by the Bank of Canada. As an investor, its imperative to put market drivers into context. This post delves into the recent developments in the Ontario housing market in summer 2023 and offers insights for investors navigating these changing tides.

Surge in Construction Costs

Construction costs in Canada have seen an unprecedented surge, with a 51% increase in residential construction prices since the first quarter of 2020. This sharp uptick has been driven by a combination of factors, including significant price increases for concrete, structural steel, and lumber. Additionally, labour costs in construction have soared due to a high job vacancy rate within the building industry. Extreme weather conditions, including heavy rains, flooding, and wildfires, have further strained the supply of critical building materials.

Toronto Housing Market Scenario

Toronto, Canada’s financial capital and a key market in Ontario, witnessed a slowdown in transaction volume in June 2023. The number of homes sold dropped by 6.9% compared to May. This slowdown can be partly attributed to an unexpected interest rate hike by the Bank of Canada aimed at curbing excess demand. However, a shortage of homes for sale has contributed to a continued climb in prices.

Impact of Interest Rate Hikes

The Bank of Canada’s decision to increase interest rates came as a surprise and serves as a reminder to investors to be prepared for volatility. Further rate hikes are anticipated, which could put additional upward pressure on mortgage rates. This development is crucial for investors as it could impact borrowing costs and potentially alter the dynamics of demand in the housing market.

Population Boom

Another critical factor to consider is the record population growth driven by immigration. This has been a significant driving force behind the high housing prices and rents in Ontario, as demand continues to outpace supply. Ontario has one of the fastest growing populations in the world because of a large inflow of international immigrants.

Ontario’s Housing Market: Response

Investors who own their own home in Ontario should rest easy. The main challenge for young families is withstanding the rise of interest rates which makes monthly mortgage payments more expensive.

For residential landlords in Ontario, the rising price for real estate will make the current cashflow situation more extreme. Most residential landlords in Ontario with 1 to 5 units are cashflow negative each month. This means most are banking on a rise of property values to compensate for their short-term losses. But, with prices near all-time highs, its tougher to stomach the risks.

Alternatively, investors can only receive about 3% yield from residential REITs like Canadian Apartment Properties. So, considering the alternatives, maybe accepting the risks of being a residential landlord is still worth it in 2023? But maybe not, depending on your preference for work. Since owning a REIT won’t take up any of your valuable time.

However, as an investor its also important to step back and consider the wider investment landscape. Even if residential real estate might offer negative cashflow in the short-term, other parts of your investment portfolio should be picking up the cashflow slack. For example, the yield on high interest savings accounts, bonds, and stocks are all near multi-decade highs. So, by taking a portfolio perspective, investors can better withstand any short term risks in the Ontario housing market by holding a larger portfolio of other unrelated investments. And, holding a mix of investments will balance out your risks regardless of the current market environment for any one asset class.

Conclusion

Ontario’s housing market, as observed in Summer 2023, is undeniably dynamic, shaped by soaring construction costs, interest rate fluctuations, and a burgeoning population. While the residential real estate landscape poses challenges with climbing costs and potential negative cash flows, it is essential not to view it in isolation. The investment ecosystem is multifaceted and adopting a diversified portfolio approach can help mitigate risks. Capitalizing on high yields in cash, bonds, and stocks could offset the short-term tribulations in the housing market.

Each week, we send out a free newsletter to our subscribers that provides a market update including valuable rates that investors can use.