In 1989, after Toronto house prices had enjoyed a long run of appreciation, economist Jeff Rubin predicted they would drop by 25 per cent. The real estate industry laughed at him and other economists disagreed with his prediction – but he was right. During the next two years, prices dropped by 33 per cent and it took several years for them to recover.

Fast forward to today, where the city’s benchmark price has risen by 33 per cent during the past year. For the first time, Toronto’s benchmark price of $1.260 million has surpassed Vancouver’s $1.255 million, making Toronto the most expensive housing market in Canada. 

Are these prices sustainable? Taking the role of Jeff Rubin this time around is Peter Routledge, superintendent of the Office of the Superintendent of Financial Institutions. He told The Herle Burly podcast, “In some markets, where you had really rapid increases in prices, you could see a fall of 10 per cent, 20 per cent.”
Higher interest rates are on the way, which will slow the “speculative fever” in the market, Routledge said.

No one is laughing this time, but most other real estate observers don’t believe prices are set to drop this year, even with the looming rate hikes.

The Toronto Regional Real Estate Board says the average selling price for all types of homes will rise by about 12 per cent this year. 

“Immigration into Canada and the GTA is expected to be at or near record levels in 2022. All of these people will require a place to live. On top of this, job creation in average to above-average income sectors is expected to remain strong, further buoying consumer confidence to make a large-ticket purchase of a home. Unfortunately, the supply of listings will remain constrained, sustaining strong competition between buyers and double-digit growth in selling prices,” says TRREB president Kevin Crigger.

The board partnered with Ipsos to survey homeowners about their intentions to sell in 2022. The results show fewer homeowners plan to list this year than last year. “There still exists a vicious circle where homeowners will decide not to list because they fear they will not be able to find another home that meets their needs,” says TRREB in a recent forecast. 

The board says that while higher borrowing costs will result in fewer home sales, the OSFI mortgage stress test “means that contracted rates are not the qualifying standard, but rather the higher of the contract rate plus two percentage points or 5.25 per cent. With average contract rates still hovering well below three per cent, the qualification standard will likely remain the same for much of 2022, even with rising rates in the second half of the year,” says TRREB.

Keeping the housing market humming, in addition to the increase in immigration and solid employment situation in Toronto, is that “households are holding significant excess savings, some of which could be funnelled into down payments,” says a report by TD Economics. “What’s more, a large chunk of the Canadian population has aged into what has historically been prime homebuying years, offering demographic support to demand. Finally, expectations of future price gains may continue to stoke demand, by causing potential buyers to act now rather than later.”

The TD report says, “We are not convinced that higher rates will be enough to prevent another year of elevated sales activity and home price increases in 2022. There is a commonly held perception that higher prices equate to increased interest rate sensitivity. Yet our modelling work showed little evidence that this was the case during the several years of eroding affordability and rising yields prior to the pandemic.

“In addition, interest rates are not the only factor in the demand question. Indeed, other key factors that drive demand, including savings and demographics, remain important offsets to rising borrowing costs,” says TD Economics.

“In the near-term, the outlook for prices remains super strong” in Canada, says Robert Hogue, senior economist at RBC Economics. In markets in Ontario, B.C., Quebec and Atlantic Canada, “we wouldn’t be surprised to see prices accelerate even further” this year, he says. “We expect demand-supply conditions to become much less favourable – though still broadly positive – for sellers” by the second half of the year, which will reduce the pressure on prices, says Hogue. RBC is predicting that Canada’s benchmark price will rise by 6.2 per cent in 2022, a third of the record rate of 17.8 per cent last year.

The public also believes prices will continue to rise, according to a survey conducted by Nanos Research Group for Bloomberg News. It says 64 per cent of Canadians expect the value in their neighbourhoods to increase during the next six months.

As mentioned above, house prices in Canada have not always continued to rise without interruption. In addition to the dip that started in 1989, prices in Canada came down by 9.5 per cent in 2008 – a reaction to the 2007 U.S. housing crash. In Ontario in 2017, prices in some places dropped after the government introduced a number of measures to cool the market, including a foreign buyer tax.

However, prices recovered quickly in both 2008 and 2017.

This year, RBC’s Hogue says, “Competition between buyers will remain fierce beyond the always-hot Toronto and Vancouver markets….many smaller markets saw bidding wars for the first time. We expect this to continue in the near term.”