Ontario’s housing crisis is riskier than you think
Housing market trends in Ontario should concern everyone – not just those looking to buy or rent. The market’s high prices threaten Ontario’s competitiveness by making it difficult to attract and retain workers. Affordability must be addressed by policy makers. Yet, housing is a crucial ingredient in the province’s economic growth and any drastic changes to the sector could cause serious economic damage.
The provincial government recently announced 16 measures to cool the housing market. These policies are a good step toward making housing more affordable, without triggering major market disruptions.
What is driving the surge in Ontario housing prices?
Since 2005, home sale prices have increased by 181 percent in Oakville, 157 percent in Hamilton, and 153 percent in Toronto (meanwhile, Vancouver saw growth of 141 percent). The increase in rental rates—28 percent across Ontario— has not been as dramatic, but still grew at 1.5 times the cost of living. Home prices in Toronto and Hamilton are outpacing their traditional drivers such as income and population growth.
The causes of these trends are well debated. Some blame a shortage of housing suitable land in Toronto, Hamilton, and nearby cities. Others argue there is an ample supply of land and that the price growth is due to domestic and foreign speculators’ investment in housing, propelled by expectations of prices continuing to soar. The answer depends in part on whether families are willing to live in the growing number of townhouses and condos, rather than traditional detached homes.
In any case, the booming housing market has caused an affordability crisis that threatens Ontario’s competitiveness. Young and talented workers, crucial to growing the economy, are unlikely to establish their career where they cannot buy a house or rent an apartment. Similarly, businesses in Ontario, especially in the Greater Toronto and Hamilton Area, have a difficult time attracting talent that faces such a high cost of living. In 2016, the median house price-to-income ratio in Toronto exceeded the major cities in six of Ontario’s eight peer jurisdictions.
Real estate has grown Ontario’s economy, but could now crash it
Policy makers have been smart to act carefully on the housing file. A sudden decline in prices could endanger Ontario’s prosperity, which is considerably dependent on real estate. Twenty-one percent of Ontario’s economic growth since the 2008-2009 recession is directly attributable to residential construction and real estate services. The number of Ontarians employed in real estate services increased by 24 percent during this period.
Many real estate agents, construction workers, and others in ancillary industries would be laid off if the demand for houses decreased. A decline in prices would mean a substantial drop in wealth for homeowners since real estate makes up 54.1 percent of total assets held by all Ontarians.
Ontario’s reliance on real estate poses serious economic risks because all of the above scenarios would lead to lower consumer spending across the economy. Compounding the problem, too many Ontarians are at risk of defaulting on their mortgages. Forty-nine percent of Torontonians categorized as high-ratio borrowers (whose down payments were less than 20 percent) have a mortgage over 4.5 times the size of their income. Only 18 percent of Canadians are in a similar position. Although Canadian banks are better positioned than their American counterparts were in 2007 and are insured against most defaults, their exposure to “elevated housing prices” was part of the rationale for their recent credit rating downgrade.
Finally, a price decline would hurt provincial finances. A 20 percent decrease in home prices over four years means the Ontario government would collect $2.2 billion less by 2020 from proceeds from the Land Transfer Tax and Harmonized Sales Tax. This would weaken the government’s ability to stimulate the economy in the face of a housing-caused slowdown.
Government must ensure housing affordability through cautious measures
Policy measures must cool down the market to make housing more affordable, without triggering major market disruptions. The measures recently announced in the Ontario Budget fit these constraints. The three main policies—(1) a tax on foreign residential purchases in the Greater Golden Horseshoe, (2) expanding Ontario’s rent control to units built after 1991 and (3) allowing cities to tax vacant homes—should dampen price growth enough for income growth to shrink their disparity. The government has avoided extreme measures such as drastically increasing the housing supply by allowing construction in the greenbelt or further inflating prices with a homebuyers’ subsidy. Another important factor in the housing market’s health—the Bank of Canada’s expected interest rates increases—is entirely out of the government’s hands.
It is too early to tell if Ontario’s measures have been successful. The British Columbia housing market cooled down after its housing measures were announced in 2016, but saw prices rise again after investors realized the policies’ limited scope. Assuming the Ontario housing market has similar dynamics, prices are likely to continue growing in Toronto despite recent increases in the number of homes listed for sale.
For the foreseeable future, Ontario should continue with cautious measures that make housing more affordable while protecting against risks to the province’s prosperity.
 Canada Mortgage and Housing Corporation. Housing Market Assessment, Canada, Second Quarter 2017.
 These cities include: Montréal, Quebec; Detroit, Michigan; Cleveland and Cincinnati, Ohio; Milwaukee, Wisconsin; Indianapolis, Indiana; and Nashville, Tennessee. The exceptions are Vancouver, British Columbia and Sydney and Melbourne, Australia.
 Total Assets excluding life insurance and pensions. Statistics Canada Annual Household Distribution Tables (AHDT), 2016.
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