Toronto Metro Real Estate Market is Priced to Perfection

An in-depth analysis of key risks and fundamentals and their impact on the sustainability of current real estate prices in Toronto. Created in 2023, it remains relevant in 2024.

Note: While initially distributed to a limited audience back in March 2023(link), the insights presented in this study remain relevant even a year later. It is published here exactly as it was originally created, with the only exception being a reorganization of the structure to improve readability. Additionally, a "2024 Update" section has been included to provide further context. The estimated read time is quite long at about 20 minutes, however, this is one of the most comprehensive analyses I've ever produced, delving deeply into crucial fundamentals and risks. Furthermore, it introduces a novel valuation methodology that justifies Toronto real estate prices until 2022.

Contents

• Summary

• Fundamental Level for Mortgage Rates

• Toronto Real Estate Valuation

  • Housing Affordability

  • Investment Attractiveness

  • Overall Picture

  • Toronto Valuation

• Rental Market

• Population Growth

  • Toronto Population Growth

• Housing Shortages

  • Future Outlook

• Final Thoughts

• 2024 Update

• APPENDIX A: Fundamental Level for 10-year Bond Yields

• APPENDIX B: Fundamental Level for Mortgage Rates

Summary

There are four key assumptions already priced in for the Toronto Metro¹ housing market:

1. Mortgage rates close to 2%.

2. 10% annual rent price increase for the next 4 years.

3. Booming population growth.

4. Strong labour market.

However, there are significant uncertainties surrounding these assumptions:

1. Fundamental mortgage rate is estimated to be in the 4-4.5% range.

2. Rental affordability is currently the worst in 30 years.

3. The record number and churn of non-permanent residents coupled with the population outflow from Toronto may hinder population growth despite strong immigration levels.

4. The current unemployment rate is the lowest in 40 years significantly deviating from the mean.

Therefore, the Toronto housing market is priced to perfection and will require a combination of highly favourable factors to materialize simultaneously in order to meet the market expectations and support current valuations.

If at least some of those assumptions fail to come true, a negative price adjustment is expected with labour market weakness being the biggest downside risk. Significant and prolonged labour market weakness will also affect the rental market and population growth.

The research presented below provides a comprehensive analysis of these assumptions, explains the risks associated with them, and establishes baselines, leading to the previously outlined conclusions.