Five Forces Driving Ontario Home Prices
Last Updated February 5, 2025.
House prices are influenced by supply and demand, which operate at the highest level; other factors influence supply or demand. Mortgage Sandbox uses a five-factor framework to collect information and conduct our market analysis. The key factors are core demand, non-core demand, government policy, supply, and popular sentiment.
In the long run, economic forces fundamentally drive the market, but in the short run, sentiment can push prices above or below economic fundamentals.
Summary
Core and non-core demand in Ontario were poised for a recovery in 2025, fueled by rapid population growth, declining mortgage rates, and heightened investor activity. These factors had sustained upward pressure on property values, creating a highly competitive housing market. However, the recent migration policy pivot and the threatened imposition of tariffs by the Trump administration threaten to disrupt this momentum, introducing new economic uncertainty.
Supply has been accelerating, with record-high construction levels helping to ease constraints. While the market remains relatively balanced, conditions are shifting in favour of buyers, with inventory levels rising to between five and nine months of supply. If this trend continues, prices may continue to slide, derailing the recovery that had appeared to be taking shape.
1. Core Demand
Core demand is a function of:
Population Growth: The pace at which people are moving to an area. An average of roughly 2.5 people live in one household.
Home Price Growth: Changes in the market value of the desired home.
Savings-Equity: How much disposable after-tax income you’ve been able to squirrel away plus any equity you have in your existing home.
Financing: Your maximum mortgage is calculated using income, monthly expenses, and interest rates.
Population Growth
Ontario’s population has long been on an upward trajectory, but the rate of growth is what truly matters for housing markets. If population expansion merely keeps pace with historical trends, it exerts little additional pressure on property prices. A sharp acceleration fuels demand and drives valuations higher, while a slowdown—or outright contraction—could have the opposite effect.
After stalling in 2020, Ontario’s population growth rebounded, making up for lost ground during the pandemic, but it also caused housing availability challenges.The federal government’s recent pivot on immigration policy, which aims to curb overall inflows, raises the prospect of a population decline in 2025. A shrinking population could weigh on economic growth and housing demand, challenging the market dynamics that have driven prices upward in recent years.
Home Price Changes
Price growth reduces affordability and reduces the pool of qualified potential buyers. In an ironic twist, rising prices create downward pressure on prices. This is a factor for first-time homebuyers trying to buy an entry-level apartment.
As a rule of thumb, homeownership costs are considered unaffordable when they exceed 40% of household income.
According to RBC Royal Bank, homeownership costs in the GTA stood at 75% of the median household income, whereas in Ottawa, ownership costs were 47%. In other words, the GTA was beyond economic fundamentals, while Ottawa’s home prices reached the economic limit.
Savings-Equity
Equity
Existing homeowners benefited from price appreciation, so they have more home equity to use when buying another home.
A recent softening in the market has eroded some of this equity, but not enough to have a significant impact.
Condo-to-House Price Gap
A large gap means more savings and mortgage financing are needed for condo owners to upsize to a house.
Ontario's house values rose more quickly during the pandemic than those of apartments; the gap between house and condo prices in the past few months plateaued.
A narrowing price gap helps to make upsizing more accessible for condo owners.
Savings
With inflation rising faster than incomes, everyday items are becoming more expensive while paychecks are unchanged. If this trend continues, Canadians will run out of savings (including nest eggs for buying a home) and begin taking on debt to cover everyday expenses.
Financing
Mortgage Interest Rates
Since 2023, mortgage rates have been falling. They are nowhere near as low as they were during the pandemic, but there is relief for homeowners with mortgage renewals coming due in 2025.
Mortgage rates move in parallel with bond rates.
Lower rates also boost property buying budgets.
Employment and Incomes
While the employment picture has improved significantly, you must hold a job for 3 to 6 months before applying for a mortgage. Also, full-time employment in Ontario appears to have softened since the summer of 2022.
Job growth is critical because high population growth will not put upward pressure on home values if those new arrivals don't have meaningful work.
Recently, full-time employment has failed to keep pace with population growth. Ontario cannot sustainably accept hundreds of thousands of new immigrants without enough jobs to absorb them. This explains the federal government’s immigration policy pivot.
Homeownership Costs
The cost of utilities (heating oil, natural gas, and power) has risen. In many cases, heating costs alone have increased by $100 per month. Add the rising cost of groceries and gasoline to the equation, and it is clear that homebuyers have less disposable income to put toward mortgage payments.
Overall Core Demand
While Ontario's population has been growing at higher rates, full-time employment has not kept pace.
The biggest driver on the core demand side is rising interest rates. A household that would have qualified for a $600,000 mortgage in 2021 will now only qualify for $450,000. This and record home prices show why home purchases have dwindled.
Many people in Ontario want to own their first home or upsize. However, fewer households have the financial capacity to make their desired purchase compared to six months ago.
Find out how much you can afford to buy!
2. Non-core Demand
This represents both short-term and short-term investments, and recreational demand (i.e., homes not occupied full-time by the owner). Here is where foreign capital, real estate flippers, and dark money come into play. It also includes short-term rentals, long-term rentals, and recreational property purchases.
Since non-core demand is ‘optional’ (i.e., not used to shelter your family), it is more volatile than core demand.
Foreign Capital
The Federal Government, using its housing agency, has announced a temporary ban on home purchases by non-Canadians from January 1, 2023, to January 1, 2027. The foreign-buyer ban won’t apply to students, foreign workers, or foreign citizens who are permanent residents of Canada; however, the additional hurdles will reduce the flow of capital to Canadian real estate compared to previous years.
Long-term Rental Investors
Rental investments are a significant driver of home prices. Nearly 40 per cent of Toronto’s condos are not owner-occupied, so rental investments are an important driver of home prices. Similar trends are reflected across Ontario.
There are new risks in the rental market due to planned reductions in study permits, higher mortgage costs, and rising property taxes.
The Minister of Immigration, Refugees and Citizenship announced that the Government of Canada will set a study permit intake cap for two years. For 2024, the cap is expected to result in approximately 360,000 approved study permits, a decrease of 35% from 2023. It is unclear what impact this will have on rent rates.
As well, borrowing costs have more than doubled. For many owners, condo maintenance fees have also been driven up by insurance and energy costs.
Rent rates have been dropping recently, and this could be enough to move many potential investors to the sidelines until rents stabilize.
Short-term Rentals
Airbnbs were huge in Ontario before the pandemic.
International travel has begun to recover. Perhaps aspiring Airbnb entrepreneurs will pour back into the market.
In October 2022, according to Airdna.co, short-term rentals were:
Toronto: 10,000 rentals with 78% occupancy.
Ottawa: 1,600 rentals with 73% occupancy.
An occupancy rate between 70% and 95% is typically considered a supportive investment environment.
Tourism is finally on track to match or exceed pre-pandemic levels! This bodes well for short-term rentals.
House Flippers
When house prices rose consistently, it was easier for house flippers to make money. The market has softened, and house flipping is beginning to look risky.
The market has softened everywhere except in Alberta, and house flipping is beginning to look risky.
Note: The flaw with the chart below is that most flippers will "live in the property" for at least 1 year before selling so they can claim it as their principal residence and avoid capital gains tax on the sale. The regulators don’t count flips that occur within 18 months. The rate of flipping could be much higher.
Dark Money
Dark money is the crime proceeds or money transferred to Canada illegally. This includes money earned legitimately and illegally transferred from countries with capital controls (e.g., China) and legitimate earnings moved from nations subject to international sanctions (e.g., Iran, Russia, and North Korea).
It is laundered in the real estate market to hide the illegal nature of the funds. Sometimes, the property's true owner is hidden by using a Straw Buyer, and other times, a shell company owns the property.
Sometimes a real estate agent or lawyer will accept the illegal cash to help the nefarious individuals hide its true origins. In 2015, a B.C. realtor was caught with hundreds of thousands of dollars in her closet at home.
We see no evidence of a diminished role for dark money in Ontario real estate. A recent report suggests mortgage fraud actually increased during the pandemic.
Overall Non-core Demand
Given the foreign buyer restrictions and volatility in the rental market, we assess that capital inflows toward residential real estate for non-core uses will soften at least until mid-2025. This adds some downward pressure on B.C. home prices.
3. Government Policy
Foreign Buyer Restrictions
The Federal Government, using its housing agency, has announced a temporary ban on home purchases by non-Canadians from January 1, 2023, to January 1, 2027. Some exceptions are made for those with temporary work permits, refugee claimants, and international students.
The ban was implemented to allow the government to study whether it reduces speculation and commoditization in the property market.
Overall Government Influence
Overall, the government unwound many programs supporting home values through the pandemic and subsequently implemented restrictions on foreign investment. Compared to a year ago, there is significantly less support from the government to maintain home values.
4. Supply
Supply comes from two sources.
Existing sales: Existing home sales are sales of ‘used homes.’ They are homes owned by individuals who sell them to upgrade, move for work, or for other reasons. The Toronto Real Estate Board only reports existing home sales and listings.
Pre-Sales and Construction Completions: Most new homes are sold via pre-sales before the construction has started. These are predominantly apartments and townhomes. Data on pre-sales is private and difficult to find, but construction starts (reported by the government) are a very accurate lagging indicator of pre-sale activity.
Rising supply releases the upward pressure on prices caused by demand.
Months of Supply of Existing Homes
While the total number of homes for sale is a key supply metric, shown below, the ratio of listings to purchases expressed in months of supply better indicates where prices are headed. This is because months of supply show the relationship between supply and demand. If supply and demand drop together, the market balance is maintained, and price pressures remain unchanged.
Supply has been surprisingly tight throughout the pandemic and is now trending upward.
High Debt, Mortgage Delinquencies and Forced Sales
Canada has very high consumer debt levels, and people are struggling with higher interest rates.
According to MNP, following recent interest rate cuts, 49 percent of Ontarians remain concerned about their ability to repay their debt, even if interest rates continue to decline. Fifty-two percent would be in financial trouble if interest rates were to go up.
Financial distress leads to rushed or forced sales - more supply.
Pre-sales and Completions
New Construction:
Across Ontario many more homes are under construction than was typical a few years ago.
As these projects are completed in the next 18 months, they might come onto a soft market. While many of the homes under construction are pre-sold, their new occupants will be vacating or selling their current residences.
Pre-sales:
Pre-sales are purchases of unbuilt and completed brand-new homes from developers. Typically, a developer must sell 70% of homes in a building before they can start construction, so housing starts are a good indicator of successful pre-sales.
Pre-sales are purchases of brand-new homes from developers. Pre-sales have moderated significantly in the current weaker market.
The chart below provides good data for Toronto, where the market appears to be cooling. Based on housing starts, pre-sales in other Ontario markets appear to be stalled.
Popular Sentiment
Popular sentiment can be volatile and easily influenced by the latest headlines. Sentiment can shift quickly, as witnessed in the past two years.
Canadian Consumer Confidence
The Ipsos-Reid and Nanos Canadian Confidence Index shows that Canadian consumer confidence has improved significantly, and confidence in real estate values has improved. Roughly 45 per cent of Canadians believe home prices in their neighbourhood will rise over the next six months.
Although consumer sentiment is a key factor contributing to real estate price trends, sentiment on its own is not an accurate predictor of future prices.
Conclusion
Here is a quick summary:
Core demand is weaker because of higher mortgage rates and weak job creation. It is at risk of deteriorating further because of Canada’s plans to freeze or shrink population growth and the potential impacts of Trump’s tariffs on the economy and jobs.
Non-core demand is weaker due to a ban on foreign buyers and falling rents.
Existing supply is rising, and there are record numbers of homes under construction, many of which will be completed in the next 18 months.
Consumer confidence in real estate is mildly negative, indicating that prices are weakening.
While it is not guaranteed, the current conditions dramatically increase the risk of a significant market correction.
See our Ontario Home Price Forecasts
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