By Ilan Joseph, Broker, ABR®, e-PRO®, AMP® | © All rights reserved
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Home Prices in the GTA may soon soften
It’s no secret that Toronto and the GTA have seen a surge in home prices since the early 2000’s, with over 50% of that growth coming after 2009. Just about everyone is talking about how Toronto real estate prices are mind-numbingly high, which begs the question, how much higher can they go?
No matter what low-rise property type you look at, whether it’s a detached, semi-detached or townhouse, buyer demand is high and low-rise inventory is low. The lack of inventory, coupled with historically low interest rates are the two main culprits for driving greater Toronto real estate prices up so much – or is it?
Yes, it’s certainly true that interest rates have allowed many more home buyers into the market - especially in the under 1 Million dollar segment - and of course you don’t need me to tell you prices have increased because there are a lot more buyers than there are sellers, but what you may not know is that the underlying reason is something most people in the GTA have never even heard about; the Green Belt Act.
The Greenbelt Act is a land protection measure signed into law in 2005 which was aimed at stopping “urban sprawl” from Niagara Falls, across the Greater Toronto Area to Peterborough. The Act declared huge amounts of land – including parts of northeast and northwest Vaughan — off limits to development.
The unintended result of this was the artificial inflation of greater Toronto real estate prices due to the inability for developers to build new communities outside of the GTA.
For the past few years, many of you have heard me speaking about the Greenbelt Act as being one of the main catalysts for prices having climbed so quickly in the GTA, including a blog post I wrote about why Toronto real estate prices were actually low for what greater Toronto would be facing in the years ahead.
Not only was I right, but that analysis will continue to hold true for the short term - I’m guessing another 2-3 years - before the Toronto real estate market will enter a slowdown, and with it, a softening of prices across the board.
Here are the 4 reasons I believe home prices in the greater Toronto area will soften in the midterm, 3-5 years:
- When the Greenbelt Act was signed into law a decade ago, it had a clause in it that required the Provincial government to conduct a mandatory review of the Acts successes and failures. The Act will be up for review this year and the panel may deliver a report that recommends the Provincial government open some of that land back up for development. This would allow developers to build more low-rise homes.
- Unrestricting swaths of land will help alleviate the price developers’ pay for raw land, which means they'll be able to pass on some of that savings to home buyers.
- Although interest rates remain at all-time lows now, it will eventually have to start moving upwards. With the gradual increase in interest rates, more and more homeowners will find they are unable to afford to maintain their existing mortgages and will be forced to say goodbye to home ownership.
- Not only will higher interest rates drive existing homeowners out of the market, they will also stop many from ever entering it to begin with. This means fewer home buyers competing for homes, especially in the under 1 million dollar market.
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