Where are House Prices Headed in 2023? Experts Predict Stabilization and Increased Supply

Where are house prices headed in 2023?

In the 40 years I’ve been building, one of the most often heard comments from our homeowners goes something like “ Well, I know we were spending a bit more than we originally planned but we’re doing it for the family and not for an ROI.” Then I’ll often cross paths with some of our homeowners’ months or years down the road and the story invariably recounts something along the lines of ” ….Well, we sold and got way more for it than we expected.” This story persisted through the 1980’s inflation battles with 15% mortgages through the DOT.COM bubble in 2008 and into today’s post pandemic market. Perhaps real estate is taking a breather but as many realtors report. “We are now back to a normal market with decent inventory. Listings sitting for a few weeks if not into months and successful offers coming in around 95% of the listing.” The naysayers have been announcing a market crash for some time, however a look at the underlying numbers would tell a different story.

Zillow put out their predictions for 2023 in early December. Granted it dwells largely on our neighbours to the south but as the US goes, to some extent, so does Canada. Zillow sees more shared homes to combat the affordability crisis. This is echoed in Ontario’s recent legislation which mandates municipalities to allow second dwellings, in most cases, to be annexed to a single-family dwelling. The European model of multi-generational homes is being transplanted here in our own backyard. Toronto has seen a renovation boom in laneway housing. Old garages are converted so either kids or grandparents can share their home at a comfortable distance.

Given the shortage of rentals across the board, Zillow also predicts that people with the extra cash available will take the opportunity and buy to become landlords . More supply on the market may usher in more reasonable rents. Furthermore, they see lower cost markets enjoying an uptick in sales. Satellite communities around Toronto have already witnessed this surge with more affordable homes attracting first time buyers who are dealing with 5% plus mortgages, the likes of which we haven’t seen in nearly 20 years. Land is being swallowed up in places like Brantford, Hamilton and Stoney Creek and with the pandemic accelerating the acceptance of a remote workplace, some are happily doing their 9-5 by simply walking from the breakfast table to the couch.

Based on that same survey 1 in 5 people have already teamed up with a non-partner to buy a home citing rising mortgage costs as the catalyst that made this solution a good option. This trend is reinforced as a persistent trend with a further 19% planning to buy a home with a friend, relative or non- partner in the next 12 months. With the cost of home ownership at more than a third of median household income, creative solutions are expected to continue. People need a place to live and simply put there aren’t enough places to live!

Zillow sees the affordability crisis improving in 2023 as prices and inflation stabilize enabling families to budget appropriately and plan for future housing decisions. Rents actually fell in October signaling a return to typical seasonal market patterns. Many of the large builders are working on supply of rental property which should provide further supply and help rent moderate increases.

EEBA, a North America wide high performance builders group, predicts moderation in housing inflation due to moderate, lower demand. They see the tables turning where trades will relinquish the “high ground” of simply making demands for higher prices… and getting them. Some sense of normalcy may come into the market in 2023 with regular negotiation of contracts being closer to a two-way street putting downward pressure on trade prices. 

These comments and predictions are handy to give us a picture of what’s happening across the board nationally but looking closer to our immediate market is more helpful in trying to plan our own decisions. A mentor once gave me a tip to never use the macro to make decisions about the micro. The specifics in a particular market are unique to that market and general trends across the board may or may not manifest in a particular place and time . When I look back, that has turned out to be good advice!

Housing inflation is predicted to moderate in 2023

So what do we expect for the GTA?

With the recent passage of Bill 23 there has been a major “push back” by the provincial government to restrict the powers of the cities and municipalities. Probably the single most significant change in our local market is the ability to have up to 3 dwelling units on a single residential lot. This “As of right” zoning will be largely unassailable by the local authorities, with specific limits on the additional conditions that can be put on each property that could otherwise prevent these additional dwelling units. Any back door approaches to curtail this increase in density is being closed off by this legislation. (see the chart below extracted from an article by Chris Barnett et al of the Toronto law firm Osler).

Parts of the bill are still to be passed into law, but the general tenor and intention of the bill is to accelerate approvals, reduce red tape, push back on overweening and tardy municipalities, and provide more affordable housing. As the newly minted bill is still being digested by the many stakeholders, the result is yet to be seen but one can imagine the consternation that could result from converting from one to three units in a quiet upscale residential neighbourhood. This plan for intensification is coupled with other public transportation legislation which sees less cars per household and more public transit.

A recent report commissioned by the Home Builders Association points out that the GTA suffers from a severe undersupply of housing which, in their view, is caused by a faulty growth forecasting system. According to their estimates there has been a deficit in the 1000’s of units annually, resulting in the current estimated under supply of approximately 15,000 units. This is echoed by a ScotiaBank Study that points to Canada having the lowest housing supply per capita in the G7.

While 30 year average housing starts are just under 70,000 annually, the government is targetting double that number with a goal of 1.5 million homes to be built in the next 10 years!

The long held Golden Horseshoe development plan has been to build homes in a defined east west corridor bordered by undevelopable green space alongits outer edge. Bill 23 purports to open up some of that green space and accelerate timelines for developers to get land to market. This is obviously very controversial, however, even with land slotted to be developed, the current shortfall is estimated to continue for years into the future putting upward pressure on housing prices. 

Canada has historically welcomed about 250,000 immigrants annually. With baby boomers moving into retirement the ratio of people working to those in retirement and for the most part living longer, has increased. Current projections put those working and paying into the system vs those in retirement to be around a 3:1 ratio by 2035. Compare that to approx. 8:1 in the 1970’s!

The Canadian government, to assuage this demographic collapse and bolster the tax base, plans to double the amount of immigrants to around 500,000 annually by 2025. Successful immigrants are regularly distributed to the hinterland via the government immigration policies, however a good percentage trickle back to urban centres such as Toronto, Vancouver and Montreal. This influx will put further pressure on the housing supply into the foreseeable future. The law of supply and demand still applies. The housing supply is chasing the demand and hence higher prices are inevitable.

On January 1, 2023, the Ontario government introduced a province wide ban on foreign buyers buying homes. We have had foreign buyers’ taxes for the last few years but this would be an all-out ban for 2 years with multiple exceptions of course.  It is unclear what impact the ban might have on Canada’s housing market and when the CBC News repeatedly asked the federal government whether it had conducted any modeling on the ban’s potential impact on house prices the Canada Mortgage and Housing Corporation indicated the government had not carried out any such analysis. This may prove to be grandstanding politics and is like many of the government’s plans: more of a band aid than a solution.

We would be remiss to not mention Bank of Canada monetary policy. Even though most of us with grey hair recall 8% and 9% mortgages as “normal” today’s 5% and 6% mortgages are prohibitive for many new buyers just getting into the housing market. To make accurate predictions about the housing market, it is necessary to consider the Bank of Canada’s interest rates. However, many experts believe that the rates will stabilize as inflation subsides and government debt service payments may become unsustainable if rates continue to increase.

Getting closer to home, when discussing with our homeowners options in a new build and what having a high performance “green” home means in terms of investing hard earned dollars, the value of ROI is a hot topic. Besides energy savings and lower utility bills, the market indicators, according to a handful of surveys across North America, point to a “green built” home commanding anywhere from a 3-12% increase in selling price. Once you do the math, an energy efficient home or even a NET ZERO home makes sense from an investment viewpoint.

Not to mention you will be enjoying a healthier and more comfortable and energy saving home in the interim. As with any principal residence these savings are additional to the tax shelter aspect of a home, a great inflation hedge in uncertain times. In our view energy efficient, green built homes are here to stay. Building codes are already prepared and poised for stricter requirements on insulation and higher efficiencies of all heating and air conditioning systems in a home. So building a green home just makes sense.

To summarize how 2023 is shaping up in our crystal ball.

  • Expect the market to moderate and homes to return to normal days on market and bid and ask back to the pre-pandemic levels.
  • Homes continue to be a solid investment and hedge against inflation.
  • Disruptive legislation promises to change the cross section of the market and even perhaps intrude into the character of neighbourhoods bringing increased density.
  • Greater supply of rentals to come on the market.
  • Shorter approval periods for permits with streamlined processes.
  • Market stabilization with normal listing periods and bid/ ask negotiations.

In our view, real estate remains a strong investment and if implemented properly the government measures may help to bring more affordable housing onto the market in 2023 and beyond and provide relief for new buyers who haven’t been able to “catch ” the market so far!

Looks like an inviting setting for scrabble!

I can’t leave you without mentioning that while we surely have to be careful with how we invest our hard earned dollars, it’s only a recent phenomena that housing was viewed as an appreciating asset and something we consider as part of our investment portfolio. Perhaps it’s good to pause at the beginning of the year and remember, regardless of the ebbs and flows of markets, for most of us, our home is a place of respite. A private and safe area where we can relax and be with loved ones. A place where memories are made as we are carried along in the busyness of life and relationships are strengthened and perhaps family bonds renewed.

Happy 2023