The Canadian real estate correction has produced a glimmer of hope in young adults. In a worst case scenario, Desjardins sees home prices falling as much as 30% in a deep recession. It still won’t be enough to restore affordability—especially in Greater Toronto. The institution warns that housing is costing Ontario its edge, as its young adults flee to other provinces for more affordable digs.
Greater Toronto Home Prices Are Firmly Out of Reach For Most
Canada’s largest city, and its surrounding regions, are firmly out of reach now. The average price of a home across Greater Toronto reached $1.15 million in July 2023. That’s not in the City of Toronto, where it’s much higher. The Greater Toronto region is an expansive region including distant suburbs.
A base case is when things go exactly as planned, based on current conditions and forecasts. In this event, Desjardins’ sees home prices climbing another 9.3% higher to $1.26 million by the end of 2025. If wages fail to grow faster that would mean a further erosion of affordability.
Canadian Real Estate Affordability Needs A Recession To Improve
Recessions are less-than-ideal scenarios, but mean a purge of inefficiencies. One is expected in the coming months, even in the institution’s base case. “While our base case economic and Toronto housing market forecasts already assume there will be a recession in Ontario, it’s projected to be mild by historical standards,” says Jimmy Jean, chief economist at Desjardins.
In the event of a more serious recession, prices are expected to see a much deeper decline. An average recession means a larger hit to economic growth, driving prices lower. In this scenario, prices are forecast to fall 3.2% to an average of $1.12 million. Not even close to affordable, but it’s a start. Falling interest rates and rising wages can help even further.
Even A Large, 90s-Style Recession Won’t Make Greater Toronto Affordable
Any meaningful impact on affordability would require an “improbable,” 90s-style recession. In the 90s, a population boom still occurred, but home prices fell. They fell so much that it was peak affordability for a number of generations. Investors burnt by losses, and a poor job market prevented prices from re-inflating.
Of course, the rise of the internet left investors with more constructive places to put their money after. However, that’s another discussion for another day.
In this scenario, Desjardins’ sees the average Greater Toronto home price falling 29.6% to $0.81 million by Q4 2025. Accompanying the price decline, a recession of this magnitude would result in Ontario losing about 500,000 jobs. It might sound like a lot, but it’s significantly smaller than the losses due to AI, that former Bank of Canada (BoC) Governor Stephen Poloz warned are coming.
Even at that price, Jean doesn’t see affordability improving very much. “After years of being priced out of the market, many prospective Toronto homebuyers now sense an opening with a recession looming. But even in the direst of economic scenarios, we don’t see affordability returning to Canada’s largest city anytime soon,” he warns.
Adding, “…even if that improbable outcome were to materialize within the next three years, it would only bring Toronto’s home price‑to‑per capita disposable income ratio back to still‑stretched, late‑2015 levels.”
Young adults in Southern Ontario may not share his skepticism. Back in 2015, the share of income a median household would require to service a mortgage was 37.5% lower. It wasn’t exactly affordable, but it wasn’t impossible.
Greater Toronto Home Prices Could Still Climb
The financial institution didn’t give its upside scenario much air, but here it is anyway. If new listings fail to materialize and population growth remains strong, home prices could rip higher. In this scenario, they see home prices rising 1`4.8% to $1.32 million by Q4 2025. The bank uses this to emphasize the importance of keeping inventory flowing.
Though circling back to the early 90s, higher prices would also require incentive. Investors have been chasing lofty home price gains, becoming the majority buyer of new homes. This has helped to fuel even higher home prices, but higher interest rates destroy much of that incentive. If the cost of money is significant enough that rental yields fail to compete, home prices won’t necessarily rise.
Ontario Is Losing Its Edge As Young Adults Flee To Affordable Cities
The Desjardins’ analysis reveals Ontario is losing its edge. Jean points to his institutions’ previous look at the speed at which young adults are leaving Ontario. The trend is emphasized in the Greater Toronto area, as they seek more affordable accommodations.
“Thus, despite near‑record population growth, Ontario risks eventually losing the entrepreneurship and economic dynamism that young people bring,” warns Jean.
While the picture is bleak, it doesn’t have to be catastrophic. They believe the takeaway is the importance of continuing to boost housing supply. Restoring affordability is a long process, and that was already clear, according to the institution.
A fair assessment, considering affordability didn’t erode overnight. It occurred over nearly a year of negligence and stimulus. The market just went into hyperdrive when a record amount of stimulus was injected in 2020, and policymakers saw housing as the pillar to hold the economy higher.
However, the damage may be done. Even young adults with substantial incomes have struggled with housing affordability in Ontario—especially in Greater Toronto. After struggling for a decade with an affordable housing carrot dangled in front of them, they’re being told it’ll just be a few more years until they get it. With the oldest Millennials now over 40, they would have to be masochists to hold out for a best case scenario where they land their first home close to 50—with a mortgage term that goes well past retirement.
