Understanding Real Estate Demand in Toronto
If you have any interest at all in buying or selling real estate in Toronto or the GTA, you’re probably trying to figure out what's going to happen when we actually get finished with this pandemic.
In order to get away from opinion and closer to fact, when trying to answer this question, lets take a look at the two criteria most important to real estate forecasting. Access to credit is usually ranked as the number one factor that drives the real estate market upward. Good access to credit is a great stimulus for real estate transactions. In close second is the actual demand for Real Estate.
For the purpose of this article let’s look a little deeper into the data points that affect the level of demand for real estate in Toronto and Canada in general. The first data point is population growth. Ontario which is normally very conservative with its population growth estimates is pretty bullish on what's going to happen over the next few years. Obviously population growth is highly determined by immigration and no one knows what's going to happen over the next few months with immigration. Some people think immigration is going to come to a complete standstill due to this pandemic, but it’s also important to note that just a couple weeks ago the federal government announced that they have increased there overall immigration targets for the next 5 years. Even if this is new target is not met, the importance here is to note that it does show us the overall intent of the federal government, which seems to be keeping the immigration flow going strong.
Also, when looking at population growth another key data point to consider is what is know as "family formations" It's ultimately this family formations number that relates more accurately to over all housing demand. Why? It's simple really. Not every person in the population growth stats actually buys their own home. Think of family formations really as a subset of the population growth data. Population growth to family formation on average is about 2.3 people. In the GTA in 2011 there was 6.2 million people and at the projection for 2021 is 7.4 million people. If we look forward from 2018 at 6.72 Million to 2041 at 9.6 million, that's 3 million people projected for overall growth. To put that in perspective that's more than the current size of the city of Toronto.
So if we get back to family formations and focus back on the 6.2 million in 2011 and the 7.4 million projected for the end of 2021, we can see that from 2011 to 2021 we're going to have a population growth of approximately 1.5 million people. If we also consider the family formation number of about 2.3 we can divide to determine the family formation projections, which come to about 50,000 family formations a year for the city of Toronto.
If we also look at the Toronto CMA data and the housing starts over the last 10 years and compare that to family formations to be able to show demand levels for real estate. To look at this data for yourself feel free to check out https://constructconnect.com
So what does the data say. In Toronto over the last 10 years the housing start average has been 36,000 units. Again over the last 10 years as we just mentioned, family formations are in the range of about 50,000. So it's very easy to see there is a huge demand gap occuring.
There has been a consistently massive shortfall every single year for a decade which is the main reason we are seeing numbers from TREB like this past February where prices are up on average 10.2%...historical norms are just over 6%. Again a huge gap increase.
Housing starts simply have never kept up with demand. Throw in low interest rates and you have had the perfect storm for huge increases in real estate prices.
So now knowing all this, what’s a good forecast for real estate in Toronto coming out of the COVID-19 pandemic?
Our best guess really gets back to the data. 50,000 family formations a year for the last 10 years but there's only been 36,000 housing units, which means we're short over the last 10 years by about 133,000 units. As a result we simply don't see a complete collapse of the real estate market. There is simply way to much demand already built into the system and that is not going to dispensary when the pandemic ends.
The only other real issue that is important to consider for this outcome is whether or not the Banks will lend out as fast and as easily as the federal government wants them to. More information on this topic is coming shortly.