Housing affordability in Toronto would remain strained even in the event of a deep economic recession, a new Desjardins analysis has found, highlighting the challenge ahead in addressing the housing crisis.
“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,” the report, authored by Desjardins chief economist Jimmy Jean and principal economist Marc Desormeaux, said.
“Our analysis underscores the extremely difficult starting position for both first‑time home buyers and policymakers seeking to improve housing affordability. Consequently, plans to boost the supply of affordable housing can’t fall short. It’s just not an option.”
In their report, the Desjardins economists projected future Toronto house prices under three different scenarios: a severe 1990s-style recession with strong construction rates, a moderate recession, and one featuring weak listing levels and strong population growth.
The scenario featuring a 1990s-style recession would see the average Toronto price fall 16 per cent, or $185,000, from July 2023 levels by the end of 2024, and drop a total of 30 per cent, or $340,000, by the end of 2025. The average price of a home in the Greater Toronto Area according to the Toronto Regional Real Estate Board (TRREB) was $1,118,374 in July.
Still, the economists noted that such a fall in prices would bring the home-price-to-disposable-income level back to what it was in late 2015, when the ratio was "still-stretched" and prices began to surge in the GTA.
They also wrote that “the costs of this worst-case scenario would be enormous.”
“Compared to our base‑case economic forecast for Ontario, a 1990s‑style recession would result in net total provincial job losses approaching 500,000 by (the fourth quarter of) 2025. By that time, province‑wide employee compensation would sit more than $35 billion lower than in our baseline projections,” the economists wrote.
In a moderate recession scenario, Toronto home prices would bottom out by the end of 2024 at about 5 per cent below July 2023 levels, returning the home-price-to-per-capita-disposable-income level back to early 2021.
In the third scenario the economists assumed population growth remains at current record rates, while new home listings in the Toronto market remain tight. Under this situation, which the economists said is “the most optimistic for current homeowners," they estimate that prices would rise past the peak reached in February 2022 by early 2025.
“Although this would be great news for property owners, it is the least positive of our scenarios for prospective buyers,” the economists wrote.
“The sales price‑to‑disposable income ratio per working aged person would exceed its pandemic‑era peak by mid‑decade.”
The economists wrote that the analysis shows improving housing affordability "is particularly daunting in Canada's largest city."
“Striking as these results may be, we’ve always known that restoring housing affordability was a long‑run process. Our analysis reinforces that view, as well as the need to successfully implement ambitious plans to boost the housing supply," the economists wrote.
“Considering the depth of the current crisis and the significant amount of time and effort needed to remedy it, we can’t waste time on blame or partisan attacks. Instead, we need all levels of government and the private sector to work together to address the herculean challenge ahead. Toronto’s — and indeed our country’s — status as a welcoming and prosperous place to live depends on it.”
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Even a sharp recession is unlikely to restore affordability to Toronto’s housing market, according to a new study from Desjardins that should give pause to those looking for a chance to buy in.
The report by chief economist and strategist Jimmy Jean and principal economist Marc Desormeaux found that in a “worst-case scenario” recession akin to the 1990s, Toronto’s average home values would decline by $185,000 (16 per cent) by the end of 2024. This reduction could potentially deepen to $340,000 (30 per cent) below the July 2023 benchmark of $1,161,200 by the close of 2025.
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However, even if that nightmarish scenario unfolds over the next few years, Toronto’s home price-to-per capita disposable income ratio would merely return to the elevated levels seen in late 2015.
“That (2015) was considered to be a record level of unaffordability at that time,” the Sept. 5 report said. “And the ensuing froth in 2016 and early 2017 prompted the provincial government to enact a suite of measures to cool the housing market down.”
Though a drop in housing prices might seem like a silver lining for potential buyers, the report points out the substantial economic and social costs associated.
“A 1990s‑style recession would result in a more than $35-billion reduction in employment income and almost half a million total job losses by Q4 2025,” the report said.
The economists pointed out that any recession is not likely to hit as hard as the one in the early 1990s.
They also assessed other potential scenarios, including one in which sustained population growth and limited new listings drove house prices above their February 2022 peak by six per cent come early 2025. While this trajectory would be advantageous for existing property owners, it would exacerbate problems for those looking to buy.
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Desormeaux said in an interview housing has increasingly become a dominant force in Canada’s economy. The growing share of housing in GDP is a primary reason for the anticipated recession in Canada.
“Our view is that the significant increases in interest rates that we’ve seen over the last year will increasingly weigh down the Canadian economy,” Desormeaux said. “The most debt sensitive — consumers, households, businesses — will result in contracting GDP in the coming quarters. All of that speaks to the outsized role that housing does play in the Canadian economy.”
But it’s not just interest rates that concern him.
Desormeaux said the long-term implications of the persistent lack of affordability in housing brings risks as well.
“Our reputation as a welcoming and affordable jurisdiction and
prosperous place to live is at risk if we can’t get housing
affordability into more normal levels,” he said.
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