As we leave 2023 behind, it's become a yearly tradition to highlight the important developments and trends of the year. Here's my list for 2023, with a particular focus on Toronto Metro.
Record Population Growth in Canada
Let's begin with a trend that's familiar to everyone: Canada experienced record population growth, reaching 1.25 million in the last four quarters. This surge was primarily driven by an unprecedented increase in non-permanent residents, including international students and their spouses, temporary workers, refugees, and Ukrainians arriving under the CUAET program.
This level of growth likely represents a peak, as such a significant boost from non-permanent residents is unlikely to happen again in the future.
Good Bye Ontario, Hello Alberta
A notable migration trend within Canada involved the movement of people from Ontario to Alberta.
While the number of individuals relocating isn't unprecedented, it's essential to monitor this trend due to the affordability challenges in the Toronto Metro area.
Largest Housing Correction Since the 1990s
Although prices in Toronto Metro remained relatively stable in 2023, they represented a significant correction compared to peak prices, especially when adjusted for inflation.
The future outlook for housing prices remains unclear, with some analysts predicting a return to growth in 2024, while others anticipate further declines. There is a lot of uncertainty, but in my view, risks are skewed to the downside.
Worst Housing Affordability on Record
Despite significant price declines, housing unaffordability set a new record in 2023, primarily due to continued increases in mortgage rates.
However, housing affordability is expected to improve in the future, leaving the peak behind.
Unattractive Real Estate Investment Landscape
The cap rate is a traditional metric used to assess real estate investment returns. It's calculated by dividing the annual net rental income by the property purchase price. The cap rate is then compared to the Canada 10-year bond yield, which serves as a 'risk-free' rate for valuing returns of all asset classes.
Similarly to housing affordability, investment attractiveness in Toronto Metro declined in 2023, reaching a record-low level since at least 2003.
Investors are expected to remain cautious until the investment environment improves.
Lowest Housing Sales Since 1991
Record-low housing affordability and investment attractiveness naturally led to the lowest sales in Toronto Metro since 1991 when adjusted for population.
A low number of sales persisted throughout 2023 in both the resale and new construction segments.
The Most Restrictive Monetary Policy Since the 1990s
Interest rates in Canada surged from 0.25% to 5% within 18 months, placing monetary policy in the restrictive zone to combat inflation. The policy's restrictiveness can be gauged by subtracting interest rates from Canada's 10-year bond yields. The latest reading is the lowest since the 1990s.
It's important to note that the record tightening in the 1990s was followed by a severe recession lasting over two years, as indicated by the shaded area on the chart.
Record Financial Pressure on Canadian Households
The recent tightening of the financial conditions led to a record-high debt service ratio for Canadian households in 2023. It is calculated as a percentage of monthly household income spent on all monthly debt payments.
As interest rate increases work their way through the economy, this ratio is expected to rise further in the near term.
Unprecedented Construction Activity in Toronto
For the past three decades, the number of housing units under construction in Toronto Metro has been steadily increasing, with 2023 setting a new record.
The number of housing units both started and completed last year was exceptionally high as well. Construction was initiated on over 47,000 units, the second-highest number in the last 30 years, and over 43,000 were completed, ranking third-highest within the same period.
Surprise Weakening of the Toronto Rental Market
Despite record population growth, the rental market in Toronto Metro weakened in 2023, marked by a substantial increase in active condo listings.
Moreover, the overall market balance weakened, causing annual rent price growth to decrease from 12% at the beginning of 2023 to 3% by year-end.
While housing completions in Toronto were high in 2023, they fell significantly short of meeting the demands of the population boom. The surplus of housing units compared to the historical average would theoretically accommodate about 22,000 extra people. However, population growth increased by hundreds of thousands.
Additionally, the rental market dynamics in Toronto stand in stark contrast to the Canada-wide trend, where the rental market tightened in 2023 and annual rent price growth accelerated to 8%, as would typically be expected during a population boom period.