Ontario Housing: The 90s Downturn and Now – TD Economics

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In October, Ontario’s sales-to-new listings ratio dropped to its lowest level since the depths of the 2008-09 financial crisis (Chart 1). This is noteworthy, as this ratio measures the supply/demand balance in housing markets and is a key predictor of future price changes. What’s also remarkable is that this ratio dropped to this level without the need for a deep recession, which was a condition in previous cycles. And, with elevated interest rates likely to keep near-term downward pressure on demand (and potentially upward pressure on supply), the ratio could fall even further in the near-term.

Such an outcome would leave Ontario’s market balance on par with where it was during the deep and prolonged housing market downturn experienced during the late 80’s through mid-90s. Back then, inflation-adjusted home prices plunged by 32% over 7 years across Ontario, with an even steeper 38% decline taking pace in the GTA. Ontario’s ratio approaching where it was during these depths certainly raises our eyebrows and warrants closer attention. What’s more, prices are only down 3% from their near-term peak in June through October, suggesting scope for further substantial downside. In this regard, this note provides a comparison between that period of weakness and the current cycle across several relevant variables.


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Starting Point: Usually the spotlight is on absolute sales levels, but in per capita terms, sales are already running at lows reached well into the 90s cycle (Chart 2). This highlights the extent to which sales have already adjusted to the high-rate backdrop since early 2022, leaving less scope for demand and price adjustment going forward.  

On the supply side, scaling listings to the population reveals that they were nearly 20% higher heading into the 90s downturn than they are now, even with the run-up Ontario’s experienced over the past several months. 

GDP/Employment: The economic backdrop is one of the most important differences between the earlier period and now. Canada’s economy suffered a deep recession from March 1990 through May 1992, as it dealt with the fallout from tight monetary policy (forced through high inflation), a lagging response to technological change from Canadian firms, and fiscal belt tightening amid very large budget deficits2. In Ontario, GDP and employment dropped 6% on a peak-to-trough basis, while real personal disposable income plunged 4%. In contrast, employment and GDP have yet to meaningfully decline in Ontario, while real personal disposable income was up 2% year-on-year in the second quarter. Moving forward, we are expecting a flat economic performance for Ontario, but are not expecting a deep recession to manifest. Accordingly, only a mild dip in employment is expected for the province on a peak-to-trough basis (Chart 3). 

Chart 2 shows home sales per 1000 workers in Ontario, from 1988 to 2023. In October 2023, this value was 1.5, even lower than what was observed during the Global Financial Crisis, and in line with values observe during the mid-90s housing downturn. However, during the first wave of the pandemic in April 2020, the ratio was the lowest on record at 1 home / worker. The highest value on record is 3.7, hit in March 2021.
Chart 3 shows the peak-to-trough change in Ontario employment during the 90s recession, and what is expected through 2024. During the 90s recession, employment fell 6% by this score, while it's expected to dip 0.3% peak-to-trough through 2024.

Interest Rates: From February 1989 (just before Ontario’s sales-to-new listings ratio started to deteriorate) through May of 1990, the Bank Rate (which was the Bank of Canada’s key interest rate during that period) increased by about 240 bps from 11.7% to 14.1%. So, rates were moving higher for more than a year in a situation where both housing and the economy were beginning to sour. In the current period, the Bank of Canada has held their policy rate as is for two straight meetings, and we think they’re done their hiking cycle, thereby helping the economy avoid a deeper downturn. In fact, our forecast expects cuts starting in the second quarter of next year (Chart 4).

Chart 4 shows the Bank of Canada's overnight rate from 2021 to 2024. The policy rate ended 2023Q3 at 5%, we expect it to remain there until 2024Q2, where it will fall to 4.75%. By the end of 2024, the rate is expected to be 3.5%. in 2021, the policy rate was 0.25% where it stayed until the first quarter of 2022.
Chart 5 shows the share of the population aged 25-39 in Ontario from 1985 to 2022. This share peaked at 34% in 1991 and then trended downwards all the way to 26.5% by 2016. Since then, it has risen to 28% as of 2022. The average of the entire sample is 30.2%

Demographics/Population Growth: Population growth is much stronger now than it was back then, suggesting more fundamental support to housing demand. And in fact, Ontario has a housing shortage, which could grow even more over the next few years if population growth continues to be robust. In comparison, builders were having an easier time keeping up with population growth in the late 80s/early 90s. 

Back then, the demographics of the country would’ve pointed to a robust demand for ownership housing, as about a third of Canada’s population was aged between 25 and 39. This is the age cohort where demand this type of housing has historically risen the most. In contrast, that share was 28% in 2022 (Chart 5). However, one could argue that these demographics played a role in the 90s downturn, with demographically driven demand for housing creating the fuel necessary to drive the speculative activity that took place.   

Chart 6 shows completed and unabsorbed new housing units in the GTA from 1992 to 2023. In October 2023, there were 695 completed and unabsorbed new units, up from a low of 530 in December 2022, but well below the sample average of 1,222 units. The highest mark on record came in 3053 in August 1992, and the lowest on record came in February 2019 at 418 units.

Investor Activity: In terms of comparing the 90s housing downturn to now, data limitations make this a major grey area.  According to the Bank of Canada, during the 1970s and 1980s, many Canadians wanted to protect themselves from high inflation in part through investing in real estate, while others sought to benefit from it through speculating in real estate2. Investor activity was therefore crucial in inflating the real estate bubble that existed at the time. The surge in homebuilding accompanying this activity, coupled with a steep economic downturn meant that the level of completed units left sold was historically elevated for several years, downwardly pressuring prices. 

An elevated investor presence is also a hallmark of the current cycle, accounting for 30% of home purchases across Canada in the first quarter of this year (a record spanning back to 2014). Unfortunately, data on investor activity in the earlier period is lacking, so a direct comparison is not possible. Anecdotally, we do know that higher interest rates have brought difficulties to the pre-construction market during this cycle by making it more tough for buyers to close on properties they’ve previously purchased. Data we do have on hand for the new home market suggests that the level of completed and unsold inventories is nowhere near as high as it was during the 90s housing downturn (Chart 6). The relatively low level of this inventory measure does offer some comfort against the notion of sustained weakness in housing. However, this data could be understating the difficulties in the pre-construction space because it counts pre-sold units as “absorbed” and these are precisely the type of units which are facing some difficulties now.

Bottom Line

In coming months, conditions in Ontario’s housing market could loosen to those last seen during the depths of the severe and prolonged 90s housing downturn. Fortunately, there are good reasons to believe that a repeat of this extreme outcome is improbable, including the likelihood that Ontario will avoid a steep recession and the potential for a more favourable path for interest rates. What’s more, Ontario is in the grips of a housing shortage and population growth continues to be robust. Finally, the market likely has considerable pent-up demand, with per capita sales levels hanging around historical lows. 

In terms of comparing now to then, how the investor story plays out is the major wildcard. In the 90s downturn, speculative activity played an important role in fueling a real estate bubble that eventually popped. Data limitations prevent a direct comparison between the current and earlier period, although anecdotal information is troubling.

Even though a 90s’ style outcome is unlikely, Ontario’s home prices likely have further downside in coming months. Indeed, prices could fall around 10% from their third quarter level through the first half of next year. Elevated borrowing costs are pressuring demand and straining homeowners who are renewing their mortgages, likely pushing up supply to some degree. Homeowners will continue to face this pressure through at least 2025/26, when those that took out mortgages at ultra-cheap rates face a notable payment shock.  

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